Sunday, May 31, 2009

The Cubs on WGN: How much is that worth?

It's a bizarre little economic triangle the Cubs are in right now, no? You've got Sam Zell, the owner of the Cubs and the Tribune Company; the latter filed for bankruptcy protection in December while the former was excluded in hopes the billion-dollar sale would not be compromised. Apparently when you file for bankruptcy protection, it helps not to have too many easily liquidated assets sitting around.

Next you've got the Ricketts family, who are trying to buy the Cubs for $900 million—although they'd like to see that price go down.

And then you've got a somewhat silent third party looking on: the bankruptcy court, which has its eye on every move Zell and the Trib make. Don't forget about them, especially as the closing of the Cubs sale gets complicated by one little issue that complicates not only the sale of the team but also the future worth of the Trib as it reorganizes under Chapter 11: the broadcasts.

Up until now, the Trib has owned the Cubs, so who cares how much the broadcasting TV and radio contracts with Trib-owned WGN are worth? The other 29 teams in MLB, that's who. 

For those of you who have never sat next to a Steinbrenner at a party, there's this little agreement the owners of MLB teams have called revenue sharing. The more money the big-market, big-revenue teams make, the more they have to share with the little guys (somewhere Joe the Plumber is blowing a gasket). So here's where the money starts to get a little funny.

Obviously advertising is the biggest revenue stream for almost any media company. In the case of the Cubs, any advertising revenue credited to the team gets shared; any money credited to the Tribune Company proper is untouchable. So if you own the Trib, it would be in your best and greediest interests to put a cap on the amount of revenue that gets credited to the team.

So it should have come as no surprise in 2001 when, lo and behold, it was revealed that the White Sox ($30 million) actually make about $7 million more per year in local ad revenue than the Cubs ($23 mill). The Cubs contract (with themselves, essentially) is structured heavily in favor of the Tribune. The team and the company split actual ad dollars 50/50, but things like sales fees, commissions, and back-end client agreements divert a huge amount of revenue away from the team.

That approach was great when the Cubs wanted to avoid sharing their money with other teams. But when the Ricketts get involved, they'll want to stop sharing money with the Trib. A deal that limits their ad revenue (and their ability to shop broadcasts to other, non-bankrupt entities later) severely decreases the value of those contracts and the team on the whole.

Meanwhile, the bankruptcy court will be very interested to see A) how much earning power the Trib will have after the sale goes through, and B) how much value the company's current assets are really retain. It seems like the Trib wants to hold on to one of their surest money makers, hide its real value from the courts, and inflate the value those interests represent to the Cubs. 

So is anyone really surprised this is a sticking point? The other main interested party is the fans, and I think we'd all like to see the new owners keep as much cash as they can. Yeah?
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