Will Bud Selig Change The Sports World Forever?

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Will Bud Selig Change The Sports World Forever?
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A drama is playing out in Texas involving Major League Baseball and the sale of the Texas Rangers that could have an impact on all sports.

The outcome of this drama could forever alter the landscape of financing sports franchises, not only in baseball, but in all sports leagues.

Tom Hicks owns the Texas Rangers and the Dallas Stars, and like many owners of sports franchises, used debt from multiple lenders to finance the purchase of those franchises.

There are 40 lenders that are involved in the financing of Hicks' sports teams, and the debt on the Rangers franchise is approximately $525 million.

Hicks is a businessman that has made his fortune by borrowing money to buy businesses, spruce them up, and sell them for, mostly, a significant profit.

He is a leveraged buyout specialist. One of his most famous deals was the purchase of Dr. Pepper and 7-Up for $646 million and selling those companies several years later for $2.5 billion.

Hicks has also made money—lots of it—by running leveraged buyout funds, funds that used debt to buy companies and sell them at appreciated prices in the future. These private equity funds would gather funds from investors, borrow more money from lenders, and buy companies using these proceeds.

The power of the leverage—debt from lenders—increased the buying power of the funds that Hicks ran. For example, he invested $2 million into Mark Cuban's Broadcast.com business and netted $55 million in less than a year when the company sold.

This is a great business when the economy is strong and growing. Leverage amplifies the positive return, making the profits to investors grow exponentially. Leverage is a fickle mistress, however, and when markets and the economy contract, leverage can be deadly.

No investor or investment manager gets every investment to work perfectly. One of Hicks' funds, named Fund 4, lost 30 percent for investors when the dot com bubble burst in 2000. Subsequent funds suffered losses, and in 2004, Hicks exited the fund management business.

This same business model has been used by Hicks in the acquisition of the Rangers and the Stars. As mentioned, the debt on the Rangers franchise is over $525 million.

The Rangers franchise does not generate enough revenue to service the debt, which has meant during the tenure of Hicks' ownership the losses have been covered by Hicks personally.

This is not a problem when revenue from other business ventures and investments is flowing in. However, when the economy turned and revenues from his other business interests waned, Hicks had to step up and cover the losses from personal funds.

In March of 2009, Hicks made a decision to stop covering these losses, and defaulted on an interest payment that was due to the lenders in the amount of $10 million.

Hicks further spent reserves that lenders required to be maintained for future interest payments to cover operating losses for the Rangers and the Stars. Those reserves were originally $17 million. It was obvious that Hicks Sports Group (HSG) was in dire financial condition.

Hicks undertook an effort to sell one or both of the franchises, and seemingly secured a buyer for the Rangers, a group that included Chuck Greenberg and Nolan Ryan, and settled on a sale price of $500 million.

Which brings us to the drama that is now playing out in Dallas, in the offices of Major League baseball, and in the offices of the creditors of the Rangers.

The lenders have balked at the sale price. They contend that the team could fetch a higher price and this sale will result in losses they should not have to absorb. Last week, lenders holding 95 percent of the debt on the Rangers franchise voted to block the sale through the exercise of their legal rights as creditors.

The rightful and legal exercise of the creditor's rights has caused the Commissioner of Major League Baseball, Bud Selig, to step in and threaten to revoke the rights of the creditors if they continue object to the sale.

He claims that he can do this using a little used rule that allows the Commissioner to act "in the best interests of baseball."

According to Daniel Kaplan, writing in the May 10 issue of Sports Business Journal, Selig notified the lenders via e-mail on April 30, that he could utilize the "best interests" rule to revoke their liens if the creditors attempted to block the sale.

The invocation of this rule is not without precedent, as it was used to facilitate the sale of the Montreal Expos.  While the "best interests" rule was initiated to relocate a failing franchise, this is the first time that the rule has been used to negate the rights of the lenders that have financed the purchase of a sports franchise.

This action is unprecedented and creates a negative new dynamic between a sports league and the lenders that finance the purchase of a franchise.

The creditors have indicated that they would pursue legal recourse if Selig initiates this action.

While it will be interesting to see how this plays out for professional baseball and the Rangers, the impact of this action could have amazing ramifications for the entire sports world.

The creditors, according to Kaplan, have warned Selig that if the Commissioner invalidates their rights, it will decimate sports financing in baseball.

One lender, who requested anonymity, said that this action could freeze up sales of franchises in baseball, since most sales are dependent upon financing from creditors.

The money quote (pardon the pun) in Kaplan's article is this, "Bud can forget any lender, which includes any hedge fund or anyone, lending a single nickel or dime into baseball again," said Joe Kosich, who owns Dornoch Capital Advisors and formerly ran sports lending for Wachovia Bank.

While this brouhaha is being played out in the confines of Major League Baseball, it is not a stretch to see the implications of this dispute for other sports.

The chilling effect of this type of action would certainly limit the pool of potential buyers for a sports franchise if financing is not available.

The question is—can a Commissioner in another sport, say a Gary Bettman, invoke a similar rule to limit the sale of a franchise by constraining creditors?

Funny that I should bring up Gary Bettman in this discussion.

In reading the Constitution and by-laws of the NHL, one does not find a specific "best interests" clause.

One does find verbiage that discuss the "promotion" of the game, operating for the "good of the game," and actions that should be done for "protecting the integrity of the game," The Commissioner has the right to to "establish policies and and procedures regarding the provisions of the Constitution and by-laws...and any determination made by the Commissioner...shall be final and binding and shall not be subject to any review."

Sounds like the NHL Commissioner has wide latitude to act in the "best interests" of the game.

Unlike Bud Selig, Gary Bettman has the precedent of the courts to back up his actions in the best interests of the game.

Remember Jim Balsillie's attempt to purchase the Coyotes?

The NHL negated the sale of the Coyotes to Balsillie because he did not abide by the rules of purchasing a franchise, and even though his offer price was higher than any other bid, it was not in the "best interests" of the NHL to have the purchase occur in the manner in which it was attempted.

So what does all this mean?

Should Major League baseball prevail in their forced sale, the effect will be to potentially dry up funds from lenders for the purchase of a sports franchise.

As a result, the price or value of a sports franchise will decline because the pool of potential buyers will shrink significantly if financing is not available. Buyers that can write a check for a franchise—think the aforementioned Jim Balsillie—will be in great demand by potential sellers.

Leagues may be forced to accept owners that at one time they would be unwilling to allow into their ranks.

As financial institutions have initiated stricter underwriting standards for loans, the potential of a sports league to invalidate their standing as a creditor has a severely chilling effect and makes it more difficult for potential buyers to get financing.

Simply put, should lenders pull back from financing sports franchises, the value of those franchise will fall and it will be more difficult for existing owners to sell those franchises to potential buyers.

This drama in Texas is speeding toward a resolution. The outcome can have impact on all of professional sports and the owners, and potential owners of a sports franchise.

We will see if the outcome is really in the "bests interests" of baseball—and perhaps of all sports.

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