The insanely revealing sale of the Chicago Cubs

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Deadspin has a massive story today about the sale of the Chicago Cubs to the Ricketts family ten years ago. It’s sourced by leaked emails from family patriarch Joe Ricketts’ inbox. It contains deal points, presentations from bankers, lawyers and consultants and communications between and among members of the Ricketts family.

And boy oh boy it is a treasure trove of information about the state of modern baseball economics. It’s must-click material.

The two biggest takeaways:

Baseball ownership is idiot-proof

As the Ricketts were gearing up to bid on the Cubs they worked with financial consultants to give them the lay of the land. One of the Powerpoint slides given to the Ricketts family involved how the risks of baseball team ownership are mitigated by the unique benefits of baseball team ownership:

The short version: owners are basically insulated from the consequences of bad business. They have a legal monopoly and can get away with all manner of things other businesses can’t. They can cut payroll if they want to. Since franchises don’t depreciate in value, they can bail out by selling, even if they’re losing money. If things get really bad they can rely on local governments to grant them new revenue streams with tax dollars or, worst case scenario, the league will bail them out.

We’ve touched on all of these things here before. There’s always a group of readers, though, who say I’m just a flaming pinko lefty for bringing that up. Know, now, that it’s not just me, but actual Wall Street folks who consider this to be the defining feature of baseball ownership.

In light of that, I would ask those of you who like to go on about how much risk owners take on and how harrowing a financial path they are traveling in the uncertain, rough and tumble world of professional sports to print that slide out on adhesive paper and smack it to your foreheads.

 

Debt

Not that the business of baseball is guaranteed to be idiot-proof forever. One key component of the Cubs sale, and of all other recent team sales, is massive debt.

The Deadspin story does a great job of revealing just how dependent upon debt modern baseball ownership truly is. We know owners take on a lot of debt to purchase teams, but the size and structure of that debt is hard to get your brain around until you see it written out in black and white like it is here. Major League Baseball has rules about how much debt an ownership group can take on but, as the Ricketts case makes clear, they are easily circumvented and often ignored by MLB.

The reason for that debt is soaring franchise costs. Teams are expensive now! They are expensive because revenue streams, particularly from cable television, have spiraled upward. Despite the allegedly bad cash flow of big league clubs, Wall Street, eager to get a cut of that action, has freed up capital to give to would-be team owners. As more would-be team owners enter into bidding armed with billions, the sale prices go up and up.

The consequence of that debt: a lot of revenue goes to debt service, strapping the cash flow of ownership groups. At least theoretically. Since we have no access to most teams’ books we don’t know how strapped that cash flow is by the debt payments, but it would seem to me that either (a) debt service from owners is cutting into cash flow, thereby limiting what they can pay players; or (b) the reported debt provides a handy excuse for teams to say they can’t pay players more due to debt service. Those aren’t mutually-exclusive, of course. Could be a bit of both. I’ll also add that this could provide some insight into why Major League Baseball doesn’t seem all that concerned with policing its own debt limits. It’s better for owners if revenues go to debt service than to the players, right? Once it goes to the players its gone. If it goes to Wall Street, it keeps Wall Street happy which could benefit owners down the line.

Of course, a possible down-the-road consequence of all of this is something we’ve talked about a lot here before: what happens if the big TV deals which fuel this bubble dry up and causes it to burst? What if cable networks decide that it’s simply not worth paying a team $3 billion to broadcast games? What if a cable network declares bankruptcy to get out of an existing TV deal? What if, like every other media sector, the Internet finally outflanks legacy media in baseball broadcasting and causes its value to plummet?

That . . . would not be good! Stay tuned kids!

 

Other stuff

  • So much in the story involves the petty squabbling among the Ricketts family members about how they were portrayed in the media at the time of the sale. Tom Ricketts, who did end up becoming the control person of the Cubs, was out front and other members of the family chafed at that. Seeing them talk about it in faux high-minded businesspeak, all while circulating talking points and meeting with publicists and stuff, is kind of hilarious. I can’t imagine interacting with my family like this, but then again, my family doesn’t have many billionaires in it, so we tend to talk about different things;
  • Every time family patriarch Joe Ricketts makes the news for saying or writing or doing something insanely racist, the Cubs and/or Major League Baseball issue a statement about how he has no connection to the team. The financial documents here cut against that. Tom Ricketts does not become owner of the team and the Ricketts family does not gain its interest in the team without Joe’s money and active participation in its purchase. He may not do stuff on a day-to-day basis with the Cubs, but to cast him as some outsider is dishonest in the extreme;
  • There’s a memo in there about how the Ricketts met with the Red Sox owners as they were doing due diligence. It was a productive meeting. In addition to getting all kinds of insight into the lucrative Fenway Park renovations, which the Ricketts would largely ape over the next decade with Wrigley Field, John Henry and company gave them notes about how big market teams like the Red Sox have worked hard to make sure as much revenue is possible is classified as non-shareable with the other teams as opposed to shareable. The insight, no doubt, was given because that same strategy would benefit the Cubs. Keep that in mind the next time someone talks about a salary cap with the players getting a set percentage of baseball revenue. If the clubs are working that hard to classify income as non-shareable with other owners, you know damn well they will work extra hard to classify as much revenue as possible as “non-baseball revenue” to keep it out of the players’ pot as well. They do this informally already. Imagine if they had a stronger incentive to do so.

Anyway, a very revealing look at the business of baseball in general and the business of the Cubs in particular. Take some time today to give it a read.

 

 

Texas Rangers ink free-agent ace Jacob deGrom to 5-year deal

Jacob deGrom
USA Today
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ARLINGTON, Texas — Jacob deGrom is headed to the free-spending Texas Rangers, who believe the health risk is worth the potential reward in trying to end a six-year run of losing.

The two-time Cy Young Award winner agreed to a $185 million, five-year contract Friday, leaving the New York Mets after nine seasons – the past two shortened substantially by injuries.

“We acknowledge the risk, but we also acknowledge that in order to get great players, there is a risk and a cost associated with that,” Rangers general manager Chris Young said. “And one we feel like is worth taking with a player of Jacob’s caliber.”

Texas announced the signing after the 34-year-old deGrom passed his physical. A person with direct knowledge of the deal disclosed the financial terms to The Associated Press. The person spoke on condition of anonymity because the club did not announce those details.

The Rangers were also big spenders in free agency last offseason, signing shortstop Corey Seager ($325 million, 10 years) and second baseman Marcus Semien ($175 million, seven years).

The team said deGrom will be introduced in a news conference at Globe Life Field next week following the winter meetings in San Diego.

“It fits in so many ways in terms of what we need,” Young said. “He’s a tremendous person. I have a number of close friends and teammates who played with Jacob and love him. I think he’s going to be just a perfect fit for our clubhouse and our fans.”

Texas had modest expectations after adding Seager, Semien and starter Jon Gray ($56 million, four years) last offseason but still fell short of them.

The Rangers went 68-94, firing manager Chris Woodward during the season, and then hired Bruce Bochy, a three-time World Series champion with San Francisco. Texas’ six straight losing seasons are its worst skid since the franchise moved from Washington in 1972.

Rangers owner Ray Davis said the club wouldn’t hesitate to keep adding payroll. Including the $19.65 million qualifying offer accepted by Martin Perez, the team’s best pitcher last season, the Rangers have spent nearly $761 million in free agency over the past year.

“I hate losing, but I think there’s one person in our organization who hates losing worse than me, and I think it’s Ray Davis,” Young said. “He’s tired of losing. I’m tired of losing. Our organization is tired of losing.”

After making his first start in early August last season, deGrom went 5-4 with a 3.08 ERA in 11 outings. He helped the Mets reach the playoffs, then passed up a $30.5 million salary for 2023 and opted out of his contract to become a free agent for the first time.

That ended his deal with the Mets at $107 million over four years, and deGrom rejected their $19.65 million qualifying offer in November. New York will receive draft-pick compensation for losing him.

The fan favorite becomes the latest in a long line of ace pitchers to leave the Mets for one reason or another, including Nolan Ryan, Tom Seaver, Dwight Gooden and David Cone.

The Rangers visit Citi Field from Aug. 28-30.

When healthy, deGrom is perhaps baseball’s most dominant pitcher. His 2.52 career ERA ranks third in the expansion era (since 1961) behind Los Angeles Dodgers lefty Clayton Kershaw (2.48) and Hall of Famer Sandy Koufax (2.19) among those with at least 200 starts.

The right-hander is 4-1 with a 2.90 ERA in five career postseason starts, including a win over San Diego in the wild-card round this year that extended the Mets’ season. New York was eliminated the next night.

A four-time All-Star and the 2014 NL Rookie of the Year, deGrom was a ninth-round draft pick by the Mets in 2010 out of Stetson, where he played shortstop before moving to the mound. He was slowed by Tommy John surgery early in his career and didn’t reach the majors until age 26.

Once he arrived, though, he blossomed. He helped the Mets reach the 2015 World Series and earn a 2016 playoff berth before winning consecutive NL Cy Young Awards in 2018 and 2019.

But injuries to his elbow, forearm and shoulder blade have limited him to 26 starts over the past two seasons. He compiled a career-low 1.08 ERA over 92 innings in 2021, but did not pitch after July 7 that year because of arm trouble.

DeGrom is 82-57 with 1,607 strikeouts in 1,326 innings over nine big league seasons. He gets $30 million next year, $40 million in 2024 and 2025, $38 million in 2026 and $37 million in 2027. The deal includes a conditional option for 2028 with no guaranteed money.

The addition of deGrom gives the Rangers three proven starters along with Gray and Perez, who went 12-8 with a career-best 2.89 ERA in his return to the team that signed him as a teenager out of Venezuela. Young didn’t rule out the addition of another starter.

With several holes on their starting staff, the Mets have shown interest in free agents Justin Verlander and Carlos Rodon to pair with 38-year-old Max Scherzer atop the rotation.

Now, with deGrom gone, signing one of those two could become a much bigger priority.