HOW TO TURN DODGER BLUE TO DODGER GREEN - Did the investment limited partnership formed by Chicago based Guggenheim Partners overpay for the Dodgers and the surrounding land?
And how does Guggenheim Partners, a global financial services firm with over $125 billion under management, intend to make an adequate rate of return on its investment in the Dodgers and the surrounding land to satisfy the voracious appetite of its institutional investors?
The “enterprise value” of Guggenheim Partners offer for the Dodgers is $2.3 billion. This amount consists of the $2 billion price paid for the franchise plus $300 million that is the implied value of the real estate based on Guggenheim Partners’ purchase of 50% for $150 million.
Importantly, this $2.3 billion valuation does not include another $300 million or more needed to renovate 50 year old Dodger Stadium, to fund extra payroll expenses for top notch talent, and to rebuild the Dodgers’ farm system.
Guggenheim Partners’ $2.3 billion preemptive bid represents a premium of about 50% over the values proposed by the two other remaining bidders, Steve Cohen, a successful hedge fund operator with an estimated net worth of over $8 billion, and Stan Kroenke, the owner of the NFL’s St. Louis Rams, the Denver Nuggets, and the Colorado Avalanche.
Importantly, the offers by Cohen and Kroenke did allow for the continued participation by litigious Boston Frankie in the real estate and the $14 million of rental income for the land.
Guggenheim Partners’ valuation is not supported by a traditional earnings multiple since the Dodgers’ operating results have been spiraling downward and are essentially at breakeven level. And these results might be overstated since they do not reflect the rental payments that Boston Frankie has been skimming of the top to support the lifestyle of the Rich and Infamous.
As it is, the $2.3 valuation is over eight times revenue, a multiple that is in the stratosphere if not outer space.
So how does Guggenheim Partners intend to earn an attractive rate of return for the $1.5 billion investment partnership that is rumored to be funded with $1.2 billion from financial institutions such as insurance companies and pension plans and $300 million from private investors such as Mark Walter, the Chief Executive Office of Guggenheim Partners, and Magic Johnson?
Underlying the valuation of $2.3 billion is the increase in the media rights fees from less than $40 million to an estimated $200 million per year, a price that will be paid by Angelenos as this cost and the cable company’s 100% markup will be passed along to all cable TV subscribers as part of their basic service.
Alternatively, Guggenheim Partners may elect to form The Dodger Network or join forces with an existing regional sports network controlled by either Fox Sports, the current owner of the Dodgers’ media rights, or Time Warner Cable, the future home of the Lakers.
By forming The Dodger Network or by being an equity holder in one of the existing regional sports networks, Guggenheim Partners would be able to capitalize the earnings of the Dodgers’ media rights, just like the Yankees and Red Sox where their shares of the networks are worth more than the teams.
And do not be surprised if Guggenheim Partners enters into a transaction with Fox Sports since Fox has a $300 million advantage over the alternatives as a result of controlling the media rights for the next two years.
We can also expect that Guggenheim Partners will sell the naming rights to Dodger Stadium for an estimated $20 million, an amount that is consistent with the Farmers Field transaction in downtown Los Angeles.
Another major source of profit is the development of the real estate surrounding Dodger Stadium which may include a new NFL stadium, high end housing, and/or an upscale retail experience similar to The Grove.
The development of this real estate to its full profit potential will require billions in investment, a major change in the current open space zoning designation under the General Plan, and the need to reconfigure the streets and other infrastructure.
And this, in turn, requires the approval of City Hall, no doubt resulting in selling out the local communities in the name of progress, fueled by campaign contributions, the funding of pet projects, and other “dirty deeds” (a term coined by Steve Lopez of The Los Angeles Times to describe corruption in LA, the country’s second dirtiest city after Chicago).
Guggenheim Partners has made the claim that they are in this deal for the long haul. However, long term for institutional investors (who contributed 80% of the investment capital) is five to seven years at the most.
More than likely, Guggenheim Partners has a fee arrangement that is tied to generating an adequate rate of return for its institutional investors as well as management and transaction fees. And this will require financial wheeling and dealing involving the Dodgers, the real estate venture, and/or the regional sports network, including multiple debt financings or recapitalizations, the sale of equity, initial public offerings, or other convoluted schemes.
But most importantly, Guggenheim Partners needs to reestablish the Dodger brand by immediately devoting the resources to building a winning team, a perennial contender that fires the hopes of Dodger fans, where 4 million fans grace family friendly Dodger Stadium, and the Dodgers are once again the toast of the town.
If not, Guggenheim Partners will have overpaid for the Dodgers.
(Jack Humphreville writes LA Watchdog for CityWatch He is the President of the DWP Advocacy Committee and the Ratepayer Advocate for the Greater Wilshire Neighborhood Council. Humphreville is the publisher of the Recycler -- www.recycler.com. He can be reached at: [email protected]) –cw
Tags: Jack Humphreville, Dodgers, LA Dodgers, Dodger sale
CityWatch
Vol 10 Issue 27
Pub: Apr 3, 2012