Bill DeWitt made headlines last week when he told Frank Cusumano of 590TheFan that “the [baseball] industry isn’t very profitable.” From the outside, that’s almost impossible to believe. Team valuations of teams are sky high. Revenues have risen every year since at least 2001 and eclipsed $10 billion in 2019. Unfortunately, though, we can only guess that DeWitt is blowing smoke; the Cardinals full financials aren’t public, so we can’t truly evaluate his claim.
I wouldn’t be writing if that was all I was going to say, though. We can use the limited financial information made available by Forbes to assess DeWitt’s profitability comment. The Cardinals receive revenue from ticket sales, concessions, Ballpark Village, broadcast partnerships, and MLB revenue sharing, among other sources. They pay the players and have other stadium and corporate costs. Net of the puts and takes, Forbes estimated that the Cardinals made $72 million in 2019. Sounds profitable to me!
The owners, on the other hand, appear to be measuring profitability by the amount of cash they choose to pull out of the franchise. DeWitt echoed Cubs owner Tom Ricketts when he said the business of baseball is “a bit of a zero sum game” – after, of course, you deduct all the cash returns re-invested to increase the team’s value. For example, the Cardinals increased player expenses by about $50 million from 2015 to 2019. They also added $25 million in other annual operating expenses, including owner salaries, and increased their employee base from 240 to 400 in order to support the front office and player development. Consequently, despite revenue increasing from $294 million in 2015 to $383 million in 2019, the Cardinals’ operating profit has remained flat – at $70+ million. What did they do with the cash after four straight years of $70 million profits? $260 million Ballpark Village. After paying for BPV, the team isn’t “profitable” if your definition of profit depends on how much cash is hoarded.
Of course, as a business owner, it’s good for your baseball business to also own Ballpark Village. Maybe you don’t have more cash now than you did four years ago, but you have the team and Ballpark Village. Which leads us to the third way to measure profitability – asset appreciation. Over on FanGraphs, Ben Clemens illustrated how a hypothetical owner could create $750 million in value for themselves without hoarding cash. When that owner sells the team, they’ll profit!
For our example: DeWitt bought the St. Louis Cardinals in 1995 for $150 million, including $60 million of DeWitt’s money and a $90 million loan. Shortly thereafter, DeWitt sold the parking garage which came with the team for $101 million which meant, effectively, that he had purchased the St. Louis Cardinals for $49 million. Fast forward to April 2020, and Forbes estimated the equity value of the Cardinals at $2 billion ($2.2bn enterprise value net of ~$200 million in debt). Compared to DeWitt’s original $60 million investment, that’s a $1,940,000,000 gain. Not too shabby.
In fact, the parking garage sales reportedly netted the ownership group $75 million. If that payout is accurate, it would mean the ownership group turned a $15 million return and cashed out on their upfront investment within one year.
Despite the investment return the Cardinals are providing DeWitt, he and other owners appear to be focused on the short-term in 2020: dealing with the COVID pandemic and lack of baseball. While it might seem like billionaire owners and teams should be able to suck up one year of losses, we’ve seen before that one bad year can, in fact, ruin a business – look no further than the fallen giants following the 2009 crisis. When a company runs out of money, it’s over. It doesn’t matter what you made in the past or what you were worth last year. If you can’t pay the bills, the lights go out.
Unfortunately, this is where the financial discussion about the Cardinals ends. Their finances are private. We don’t know how much cash they have or what their true profit is. Maybe DeWitt is blowing smoke, maybe he’s running a breakeven business (ha).
The Braves, on the other hand, are a subsidiary of Liberty Media Corporation. As a result, the Braves financials are available within Liberty's reports. For fun, I reviewed Liberty’s latest annual report and a few quarterly reports to find out what I could about the Atlanta Braves. This exercise isn’t a novel one, having been performed by FanGraphs, SB Nation, Fansided, and many others. I wanted to work through the exercise myself to work out a high level summary of the numbers, and maybe identify near-term risks in light of COVID which may be driving the owners' motivations.
Profitability: Annual Earnings and Cash Flow
A summary of the Braves financials from 2017 to 2019 is presented below:
While the Braves have increased annual revenue by $90 million since 2017, they continue to operate at a net loss due an increase in team expenses, such as payroll and stadium operations. Accounting losses don’t always mean cash losses, though, and several charges included above are non-cash in nature. For example, depreciation and amortization (“D&A”) and stock compensation are both non-cash expenses which effectively serve to shield the business from paying taxes. Additionally, Inter-Group losses, which are incurred when the Braves lose money to another company owned by Liberty, are a net zero for the Braves’ parent company.
In fact, Liberty outright says operating income and net income aren’t the best measures of the Braves performance. Instead, they use “Adjusted OIBDA,” defined as “Operating Income Before Depreciation, Amortization, Litigation Settlements, Restructuring, Acquisition and Other Related Costs and Impairment Charges”. We’ll refer to it as Adjusted Operating Profit. Here’s how the Braves calculate it:
Behold the magic of accounting! The 2019 Braves went from $32 million losers to $49 million winners just like that. According to Liberty, their baseball business is profitable! In addition, you’ll note that the presented adjustments between Operating Income and Adjusted Operating Profit are almost entirely non-cash levers to hide cash earnings from the tax man. Everything between operating income and overall net income was excluded – more levers to hide Liberty’s cash from taxes.
Next up, the Braves actual reported cash flow for each year:
In 2017, the Braves borrowed $296 million to support their investment in The Battery – Atlanta and their baseball operations, which lost $42 million of cash. Since then, the team’s baseball operations (plus some development operations) generated $178 million of cash across 2018 and 2019. However, management’s choices to borrow money, invest, or pay back debt allowed the team to manipulate what the team’s cash profile looks like in aggregate. More assets owned by the owner, no new cash available for the baseball team.
The first three months of the year aren’t profitable times for a baseball team. The only baseball is spring training, and there’s still costs to prepare for the season. Obviously, COVID and the season’s postponement made times more complicated.
According to Liberty’s quarterly report, the Braves lost $25 million of Adjusted Operating Profit between January 1st and March 31st. For comparison’s sake, they lost $31 million of Adjusted Operating Profit in the first three months of 2019, and another $24 million in the last three months of 2019. Baseball teams make all of their money during the summer! For the Braves, even broadcast revenue is only earned when games are played.
Without baseball, we could reasonably guess that the Braves might lose another $25 million between April and June this year. That would be a $126 million dollar swing compared to last year, when they profited $81 million in the first three months of summer.
Maybe those losses seem manageable for a multi-billion dollar franchise. If that’s true, the team is likely still limited by the agreements entered to receive the $698 million of loans they hold. Lenders often require various conditions which companies must adhere to when they receive a loan. For example, a lender might request that Adjusted Operating Profit remains above some benchmark each quarter or in rolling 12-month periods. According to Liberty’s reports, the Braves agreed to various forms of financial covenants which include some form of debt service coverage ratio, fixed charge ratio, debt yield ratio, capital expenditures and liquidity requirements. In the quarterly report, Liberty essentially admitted that the Braves will default on their debt covenants in 2020. It’s not bankruptcy, but it’s not good for the owner.
Profitability: Team Valuation
In April, Forbes estimated the Atlanta Braves were worth $1.8 billion. As little as six years ago, they were only worth $730 million. While an increase in asset value isn’t the same as cash in hand, a billion dollar increase is nonetheless an impressive accumulation in wealth.
Today, the team’s $1.8 billion value is comprised of two parts: debt and equity (or stock). Imagine Liberty decides to sell the Braves and they receive $1.8 billion in cash. The lenders (e.g. the bank) have first claim to cash from the sale. Once they’ve been paid off, the balance goes to the stock holders. Luckily for us, the Braves report how much debt is owed by the team:
The Braves have piled on debt since 2018, including a $140 million draw on their line of credit / revolver in response to the COVID pandemic. According to Liberty’s report, the Braves and their affiliates had $321 million in cash as of March 31st, but debt now represented roughly 40% of the team’s $1.8 billion dollar value. In other words, if Liberty sold the Braves today for $1.8 billion, the first $698 million would go back to the bank, and “only” $1.1 billion would go to the owners.
As mentioned previously, the Braves are a subsidiary of Liberty Media Corporation. Fortunately for my purposes, Liberty issued separate public stock to track the economic performance of their main businesses. The Braves stock is listed as on the Nasdaq under the tickers BATRA and BATRK. Through June 14th, both classes of stock had declined between 24-30% since December 31st due to the stoppage of play, uncertainty of when fans will be free to return to sporting events, uncertain outlook regarding coronavirus, and a worsening reputation of MLB among fans during the stoppage. At one point this past March, the Braves stock was worth less than when it was issued – if you had bought Braves stock on April 18th, 2016 and sold on March 18th, 2020 you would have lost money! So much for asset appreciation!
Liberty’s ownership structure provides another unique view on the Braves value: Formula One, another Liberty company, owns 15% of the Braves. Consequently, they are required to publish an annual valuation of the Braves. According to the 2019 report, Formula One’s 15% equity interest was worth $268 million, implying a total equity valuation of $1.8 billion. Here’s a side-by-side of Formula One’s estimate of the Braves value vs. the more recent estimate from Forbes:
Yikes! That’s nearly $700 million of value down the drain in just three months thanks to COVID. The team’s value could recover in the future and likely will to some extent once play resumes. But a full recovery is going to take some time.
For an owner like DeWitt, that $700 million would be tied to his personal net worth. Losing $700 million of wealth would leaving anyone feeling hurt. And faced with drastic declines, it’s no wonder owners are showing their greedy side. Should we feel sorry for them? Of course not – they managed the team’s finances into this hole, and it’s up to them to figure it out.
Liberty Media’s archive of financial reports can be found here. Much of the Braves financial information presented above was aggregated from various reports which can be found in that archive. Thanks, as always, to @cardinalsgifs for the cover art.