On the day of their 2014 home opener, the Chicago Cubs made news when team owner Tom Ricketts announced his willingness to sell minority stakes in the team in order to finance Wrigley Field renovations. As the Cubs celebrate the 100th anniversary of Wrigley Field this year (noticeably absent from the highlights--a championship trophy), it's beneficial to analyze their financial status and the impact it might have on the team.
Forbes recently published their most recent valuations for MLB teams, with the Cubs ranked #4 at $1.2 billion with $266 million in total revenue for 2013, $27.3 million in operating income and a debt ratio of 35%. Bloomberg has an alternate and more detailed breakdown of the Cubs finances:
Forbes data does not appear to include revenue sharing in their calculations--remove that and the Other category (which may or may not include MLB broadcast revenue) and the numbers are essentially the same. I show the Bloomberg data to give a sense of the various sources of Cubs revenue.
Attendance per game has decreased since 2008 from 40,743 to 32,626, a drop of over 8,000 fans per game. This chart shows what this attendance drop can mean financially depending on the average expenditure per fan:
|Spending per Fan||Revenue|
Using $100 a fan, the loss in revenue is around $65 million a year. Put another way, this revenue existed when the Ricketts family purchased the team in 2009 and has disappeared but could be regained through a combination of a competitive team in a renovated facility, which would probably fill those empty seats in a hurry.
670 The Score in Chicago baseball expert Bruce Levine reported a Jumbrotron could generate around $15-25 million annually and that the Cubs receive around $10 million from Budweiser for the exclusive right to sell beer in the stands. Their local broadcast deals are up for renewal in 2015 and are currently valued at around $50 million between WGN and Comcast SportsNet Chicago. New deals will yield more revenue, but to expect a deal like the Dodgers might not be realistic, as Wendy Thurm's fantastic article from last year on team broadcast deals suggests.
As a major market club with a dedicated fan base, the Cubs issue isn't revenue but their debt load, which Forbes estimates at 35% of franchise value, or around $420 million. Assuming this debt is financed at five percent over 30 years (it's not), this represents around $27-28 million in debt service annually. Forbes includes stadium debt in this figure, and since the Cubs have none, all debt is from the purchase of the team. It is an improvement over last year, when Forbes estimated a 56% debt ratio on a franchise valued at $1 billion. If these numbers are accurate, the debt amount dropped around $140 million, of which around half is from the increased value of the team and not from repayment.
Wrigley Field improvements are estimated to cost around $300 million with another $200 million budgeted for neighborhood improvements such as a hotel, better parking, etc. A couple years ago Tom Rickets sought public financing for these projects, but the concept of public financing of stadiums is quickly falling out of favor. This leaves two options--pile on more debt or bring in minority partners for a cash infusion. Adding $500 million in debt could push debt service to around $60 million per year (close to the value of Mike Trout), which might place financial burdens on the team and impede their ability to sign and keep the young talent they have coming up like Javier Baez, Kris Bryant and Jorge Soler.
The $60+ million in lost revenue from the drop in attendance looms large, since the assumption at the time Tom Ricketts bought the team was that Cubs fans attended games no matter what. Whether this was ever true is open to speculation, but sets up this potential income statement (all values from Forbes figures):
(increase over current deal, which is already factored into current revenue)
(attendance rebounding to around 40,000/game)
|Increased Debt||$30,000,000||($60M total debt, $30M reflected in current expense)|
The Cubs have potential revenue gains as increased attendance, new broadcast deals and advertising opportunities come to fruition. Their current payroll is around $85 million, and as they get nearer to contention it will increase, as their bidding for Masahiro Tanaka demonstrated. They'll be able to stay on the low side of payroll as time will be on their side with the young talent, but as Jeff Samardzija (or someone like him, and hat tip to Score host Matt Spiegel for pointing this out) and others inch closer to arbitration and free agency, payroll costs will increase. Their stable of young talent doesn't include pitching, suggesting they'll have to go outside the organization to acquire it, but a brief look at the pitching free agent class of 2015 doesn't instill much hope.
The revenue assumptions also assume taking on additional debt as the Wrigley renovations begin--if the right stakeholders are brought aboard, this might not be necessary, which would free up even more cash flow. Finding minority shareholders willing to provide cash infusions while not demanding a say in how the team is run will be an interesting proposition to watch unfold. Using the Forbes values, each one percent of the Cubs is worth around $12 million, making a 10 percent stake worth $120 million and $500 million equivalent to around 42% of the Cubs franchise value. It's doubtful the Ricketts family is willing to give up that amount of control over the club and will be looking for partners willing to infuse cash in return for a small ownership stake--and even smaller voice.
The MBA in me sees the Cubs poised to become the cash flow generator Tom Ricketts thought he was purchasing in 2009, but several things must occur--the Wrigley renovations need to begin sooner rather than later, the work of Theo Epstein and Jed Hoyer needs to translate into a winning team and the future revenue stream projections need to be essentially correct. Every item is achievable--the last remaining obstacle to beginning Wrigley renovations are the rooftop owners, most baseball experts agree the Cubs young prospects are prepared to be major contributors as soon as next year, and the revenue streams will follow Wrigley Field renovations.
The wild card will be the debt load, since every penny of debt service is money that could be allocated to team operations. Tom Ricketts' public acknowledgment of seeking minority shareholders suggests the financial strain on the team may be real and why the drop in attendance could be placing constraints on the Cubs' ability to spend. If everything goes right, this strain could be short-lived--a successful team in a newly-renovated and beloved park could generate cash flow that would make Midas blush, but it's not guaranteed.
These are the factors that come into play when professional sports franchise values top $1 billion. The Mets illustrate what can happen when a highly leveraged franchise has a sustained run of bad luck--they're still working to get out from problems caused by ill-advised contracts combined with financial pressure on owner Fred Wilpon. This is probably not the Cubs fate, but any team at the mercy of unproven talent and Chicago politicians should always have a fallback position. If there's a flag flying over Wrigley Field on Opening Day 2017, their current financial issues will be remembered dimly at best. If any of the revenue buckets fall short, it could handcuff the Cubs for some time to come and Edwin Jackson's FIP-, Anthony Rizzo's wOBA or Starlin Castro's UZR/150 will be the least of their problems.
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