Pirate Finances – Gladwell’s Law

Malcolm Gladwell’s Law – Journalists need to have a better grasp of financial figures in order to truly understand some of their subjects.

A good place to analyze how a better understanding of finances could impact a journalist’s work is an article by Rob Biertempfel of the Pittsburgh Tribune-Review back in April 2008. As someone who was been scouring the web for clues about MLB finances for the past two years, I can tell you that this article represented a real opening in the secretive world of MLB finances. I wrote this post shortly afterwards. Mr. Biertempfel got the Pittsburgh Pirates President Frank Coonnelly to disclose the following items which few teams ever publicly admit or even discuss:

  • Amount expected to be received in Revenue Sharing for 2008 – $35 million.
  • Team had debts which exceeded $100 million and the interest payments were between $5 and $7 million yearly.
  • That the CBA language as to the use of revenue sharing monies — “to be used to improve on field performance” — would not preclude the Pirates from using those monies to pay down team debt.
  • Although Coonnelly states that the “Forbes numbers are never right,” Coonnelly does not take issue with Forbes estimate of the Pirates operating profits for 2006 [$25 million], given that he agrees that it was the “highest [operating] profit recent season” for the Pirates and that he “didn’t expect to be seeing $25 million in operating profits [in the future].”

How a financial background could have affected the questions or focus of this article.

  1. Coonelly states: “Team is paying down debt and reinvesting in the club, not spinning off money to ownership.” It matters greatly the source of the debt being paid down. If the debt being paid down was incurred as part of the purchase of the franchise, then paying down debt is an indirect way of enriching ownership.
  2. What does Mr. Coonnelly mean by ‘spinning off?’ Selling off interest in the franchise or the owners salary? What is the owners salary? Is it tied to performance [a little sarcastic in the case of the Pirates, but still a legitimate question]?
  3. Coonelly states: “When interest, taxes, depreciation and amortization are thrown into the mix, said the Pirates rank 27th in revenue.” Those non-operating expense items [interest, depreciation and amortization] would affect net income, but not revenues or even the operating profits. Forbes does not disclose net income.
  4. Given that Forbes employs the same methodology yearly, how likely is it for Forbes to have materially erred on determining operating profits in 2007, given that 2006 was accurate?
  5. The article glossed over the fact that the team purchased for $92 million in 1996 was now estimated to be worth $292 in 2008. The fact that their investment in the team had tripled in value — largely due to the fact that a new stadium was built for them with a minimal investment by the franchise [net of $14 million] — means that the team literally has been handed house [or PNC] money to play with.
  6. How reliable are Forbes estimates? The less complicated the finances of a franchise, the more accurate Forbes can be. Franchises who don’t own their RSN’s [like the Pirates and Marlins] are easier to calculate. Forbes estimate of the Marlins worth was 97% accurate when compared to the value ascribed to the franchise in the Marlins stadium agreement deal with local governments in early 2009.

OK, this is the fun part. $100 million in debt? From where?

Keep the following in mind:

  • Team purchased in 1996 for $92 million.
  • Team assumed debt from the URA totaling $29 million initially and an additional debt of $11.5 million in 2000. However, that is a debt which does not have to be repaid unless the team moves. The URA writes off roughly $2 million of that debt yearly.
  • Technically, the Pirates still have to disclose that debt on financial statements until it is actually written off, however it is clearly misleading to include that amount when disclosing debt, while ignoring the fact that the debt does not have to be repaid.
  • $100 million in debt and interest payments between $5 and $7 million would indicate that the team pays between 5 & 7% in interest rates, which is reasonable.
  • But if they are including the URA debt in the $100 million figure, then the reported $5 to $7 million in interest payments makes no sense, since the URA debt does not require interest payments. The interest is added to the principal and will be written off as well.
  • The Pirates operating profits since 1998 total $98 million. Only one year in that period showed an operating loss.
  • The Pirates net contribution towards the stadium was a net of $14 million, since naming rights were used to offset scheduled team contributions.

Bottom Line: The Pittsburgh Pirates use of revenue sharing monies to pay down team debt is very likely an indirect method of enriching ownership, when a part [or a majority] of the $100 million in debt could only have originated from the team’s purchase.

Pretend that a generous neighbor on your block gave you $10,000 yearly to “improve the look” of your home. Imagine further that you turned around and paid down the principal on your mortgage instead of fixing up your property. Could you convince that neighbor that his monies didn’t go into your pocket? If you could, you are ready to be a MLB executive.

Click on the spreadsheet to enlarge or print

The Biertempfel article referenced is copied in full at end of post.

Profitable Pirates to pay down huge debt
By Rob Biertempfel
Friday, April 18, 2008

The Pittsburgh Pirates turned a profit in 2007 — the franchise’s fourth consecutive year in the black — and will do so again this year, regardless of how many games they win or lose.

Team President Frank Coonelly said the profit will be used to pay down the franchise’s debt, which will help field a better team in the future. The Pirates have endured 15 consecutive losing seasons.

According to Forbes Magazine’s annual team valuations, the Pirates’ 2007 operating income was $17.6 million. That ranks 18th among the 30 major league clubs. Forbes estimated the team’s value at $292 million, putting it at No. 28 among the 30 major league clubs.

“Their numbers are never right,” Coonelly said Thursday. “But, we are profitable.”

Coonelly said the Pirates’ actual profit is much lower, taking into account annual interest payments of “over $5 million, maybe approaching $7 million” on the franchise’s $100 million-plus in debts.

When interest, taxes, depreciation and amortization are thrown into the mix, Coonelly said the Pirates rank 27th in revenue.

The Pirates expect to receive about $35 million this year through Major League Baseball’s revenue-sharing system, Coonelly said, adding that it’s incorrect to believe that money must be used only to increase player payroll.

“The revenue-sharing plan says you have to use those proceeds to improve your performance on the field,” Coonelly said. “That’s written extraordinarily broadly, and we did that on purpose. Paying down debt can help you improve on the field. You can’t get any better while you’re taking a (huge) interest hit on all the debt you have. You can’t be building an academy in the Dominican Republic. You can’t be improving Pirate City. You can’t be spending on major league payroll.”

This year, the Pirates broke ground on a $5 million baseball academy in the Dominican. The club contributed $2 million of the $30 million necessary to renovate its spring training complex in Bradenton, Fla.

Coonelly denied that principal owner Bob Nutting is pocketing the Pirates’ profits.

“We’re paying down debt and reinvesting in the club, not spinning off money to ownership,” Coonelly said. “If the Nutting family wanted to get into a business that would just spin off money, baseball would not be that business.”

The sport is not necessarily a loser for owners, though. According to Forbes, Major League Baseball’s profits increased 7.7 percent last year to $5.5 billion. The magazine estimates the average team is worth $472 million, a one-year hike of 9.5 percent.

The Forbes estimate means former owner Kevin McClatchy’s purchase price of $92 million in 1996 was $200 million below its current value.

Where is all that money going? Not necessarily to the players. According to Forbes, player costs in Major League Baseball (salaries, bonuses and benefits) have fallen over the past five years from 66 percent of revenue to 56 percent.

In 2003, 16 teams lost money. Last year, only Toronto, Boston and the New York Yankees posted operating losses. But, Boston and New York recouped their losses with the dividends from their cable television deals.

Last year, Forbes reported the Pirates made $25.3 million profit in 2006, the year PNC Park hosted the All-Star Game.

“It was the highest-profit season in the recent past for the Pirates,” Coonelly said. “I don’t expect us to be seeing $25 million operating profits. I expect (growth), although I don’t want to promise it.”

Rob Biertempfel can be reached at rbiertempfel@tribweb.com

About Jorge Costales

- Cuban Exile [veni] - Raised in Miami [vidi] - American Citizen [vici]
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