ricketts-family-wrigley-fieldIn a piece that I would imagine he’s been working on for a while, and saving for Opening Day, Sun-Times writer Gordon Wittenmyer wrote an extremely long, very detailed take down of the Ricketts Family’s ownership of the Chicago Cubs. It’s been clear for some time that Wittenmyer isn’t buying the financial story the Ricketts are selling, and today, he made his case. According to Wittenmyer, the declining payroll in the Ricketts era has been less a factor of the rebuild plan than it is a factor of a complicated purchase structure, which put the Ricketts Family in a bind when it came to spending on the Cubs.

A very small selection from Wittenmyer’s piece:

For all the talk from Ricketts about the family’s “mission” to win, dozens of conversations with banking experts, attorneys, sports economists and baseball officials inside and outside the organization suggest that ownership’s focus since the purchase has been to climb out from under the heaviest debt load in the majors.

It explains almost every conspicuous move by the business operations since then, from the push for more concerts and football and hockey games at Wrigley Field to various efforts for public partnerships in achieving Wrigley renovations to the infamous (and since-departed) noodle in front of the ballpark ….

Even two years ago, a source with direct knowledge of the paperwork told the Sun-Times [the purchase structure] would prevent the Cubs from spending significantly on the big-league product for several years. That prediction has coincided with an austerity-based rebuilding program.

The family trust portion of the financing is the key, insiders say.

Experts in the area of family trusts say that an incentive for using that vehicle — which otherwise comes with one of the biggest tax bites in banking — is to shield personal assets from loan liability.

But that, in turn, comes with strict requirements for the business operation of those assets, including meeting bank “covenants” that often dictate revenue-to-spending and profit-to-cost relationships across periodic deadlines.

That could help explain why the Ricketts’ takeover of the Cubs coincided with immediate and continual budget cuts for the baseball operations, according to multiple front-office sources, including periodic midseason cuts that trimmed existing, promised budgets, such as amateur spending.

Wittenmyer’s report is dense, but if you’re even remotely interested in the financial side of baseball operations and the Chicago Cubs – and, given that the team’s finances have a continuing and important impact on the product on the field in the long-term, you should be interested – you should take the time to read it. Maybe not today, since it’s Opening Day and all, but tomorrow.

That said.

I’ve long thought it difficult to comment intelligently – and fairly – on the financial relationship between the Ricketts Family and the Chicago Cubs. Some of that is probably just fan-self-protectionism, but, having been a lawyer for a few years, I know what I don’t know. Large transactions are absurdly, hilariously complicated endeavors, and any attempt to reduce them into a sound byte (or even a 10,000 word article) will prove woefully inadequate. In some deals, it could simultaneously be true that “there’s too much debt!” and “there’s not enough debt!,” and the reality depends on the hundreds of pages of documentation that lies in between.

I don’t know enough about the details of the Ricketts Family’s purchase of the Cubs – and none of us will, short of a leak of all of the relevant documents – to speak to Wittenmyer’s report. He may have a great deal more visibility than I do, but his reliance on the Forbes estimates to call the Cubs the most profitable team in baseball in 2012 – the estimates were dismissed by a Ricketts Family spokesperson as “not accurate,” and which are widely considered just educated guesses – is a little troubling. And, if Wittenmyer were going to rely on Forbes, I would have thought he would have pointed out that, shortly after the Ricketts Family purchased the Cubs, Forbes reported that the debt they took on had an interest rate of less than 3%. At less than inflation, the Ricketts Family would be crazy to pay off any of that debt a day sooner than they absolutely had to. And, at that rate, rather than a crushing burden, the debt would actually be considered a good thing to have on your books.

I’m also troubled by a minor – but obvious – factual error in Wittenmyer’s piece, which error serves to further his point about the cost-saving ways of the new owners. Wittenmyer writes: “But the guy who outbid the field to land Japanese pitcher Daisuke Matsuzaka, a key to the Red Sox’ 2007 World Series championship, didn’t come close to beating the competition with his 2011 posting bid for Yu Darvish. The Texas Rangers’ winning bid was less than Epstein’s $51.1 million bid for Dice-K five years earlier.” In fact, Darvish’s posting fee was $51.7 million, slightly higher than the bid for Matsuzaka. It’s a minor error, and the numbers are very close. But when the error serves to further a writer’s argument, it bothers me, and it makes me question other factual assertions that, unlike a posting fee, I am not able to verify. How closely were those other factual assertions checked if this one slipped through the cracks?

All of this is not to simply carry water for the Ricketts Family. Wittenmyer’s ultimate point, as I take it, is not necessarily to suggest the Ricketts are bad people or bad owners. Instead, he attempts to raise the issue that, perhaps, because of the original deal structure, the Ricketts are forced to operate the Cubs more as a “profitable business” right now than as a fan-driven trophy, hell-bent on winning.

Wittenmyer may be onto something here, and it’s not as if anyone outside of Forbes has even seriously attempted to dig into the private financial issues of the Ricketts and the Cubs. Obviously the Ricketts’ ability and willingness to spend on the Cubs is of paramount importance – particularly when set against the backdrop of a badly needed renovation of Wrigley Field, a renovation the Ricketts are unwilling to begin until certain funding requirements are in place – and I applaud any writer willing to take on a very difficult, dense, and obscured topic. Getting private financial documents is difficult enough; deconstructing them thereafter for readers is another thing entirely. What Wittenmyer is doing is important, even if I’m not sure I agree with some of his apparent conclusions.

In the end, I fall back to what I think I know. Tom Ricketts has repeatedly said that every dollar that comes in the door is ultimately repurposed into the organization, and I have not yet been handed any reason not to believe him. Ricketts went out and hired one of the most expensive baseball-driven front offices in baseball when hiring a couple up-and-comers would have been plenty sufficient to satisfy fans (I know – I was there). I believe there is a plan in place.

And if, in service of that plan, money is saved from 2012 to 2013 – which will eventually make its way back into the organization – what beef have I got with it?

  • Bilbo161

    The finances will always have some kind of impact in decision making. I would not want the team to try to do everything at once like the Dodgers. That model is doomed to at best boom and bust it’s way into the future. The only sustainable way is from within. That’s not to say free agents are a bad idea. But I’d say its better if say 90%? Of the roster is home grown. That’s the plan I’m seeing unfold. That means more sustainable success for the team and fans as well as more money to pay down debt. Keep it going Mr. Epstein.

    • brickhouse

      No team is 90% homegrown –

    • Dave

      I would be shocked if the roster aproached 90% home grown.

      I would highly doubt the Cubs could became competitive with a roster made up of so many home grown players. It’s not realistic to think a farm system could provide the talent needed to compete under those circumstances.

      I understand trying to stay away from long term bad contracts but this would be going to a extreme.

    • Dave

      Why do you care about Ricketts paying down his debt?

      • Rebuilding

        Because it reduces money actually put into the team

  • cls

    I guess my thought to this article is a big “WHO CARES?”

    My point is this: If some special financial issues that the Ricketts did to buy the Cubs means they have to run the team lean and mean for a few years, and it also happens to coinside with this “Rebuilding the Right Way” that Theo and company are preaching, than do we really care? I don’t. I’m happy with how the team is being rebuilt. So as long as this doesn’t affect things, then it’s a non-issue to me.

    If Theo came to Tom and said “Hey, I need a bag-o-cash to go get _______” and Tom said no, and it was because of some of the reasons in this article, then I’d be concerned. I just don’t think this team is there yet or that this has happened. Maybe in 2014 or 2015, but I’ll bet good money Theo gets what he asks for.

    So as a Cubs fan, I appreciate the length of this article, but the story behind it really doesn’t matter to me because I don’t think it affects what is being done with this team by leadership.

  • TaxCat

    From what I have read regaridng the purchase contract, the main reason behind the level of debt and the continued Tribune owenership interest has to do with the deferral of the amount of income taxes the Tribune would owe on their capital gain.

    • TNN2

      This is exactly right and the fact that Wittenmeyer didn’t include it in his article calls everything he wrote into question.

      Basically there is a $300 million capital gains tax bill that somebody will owe at some point. Zell didn’t want to pay it so he didn’t sell the team. He entered into a partnership with the Ricketts with all kinds of financial devices in order to shield him from ever having to pay. This is an incredibly important point that the Chicago media ignores.

      • Die hard

        MLB had to have approved deal and maybe there’s a guarantee from other owners that Cubs will be helped so franchise survives

  • DCF

    I think Wittenmeyer is way off base because he really misses to explain 2 points:
    1. Even saving $50 millon isn’t going to make the loan disappear whtin a handfull of years. So is he suggesting that the Ricketts will run the time like the Pirates for 10 yrs to come to pay off some big ass loan. The team would be worthless by then, so where’s the profit in that?
    2. If cutting costs right now is somehow wrong, on what should the FO spent and why? If he thinks paying big bucks for free agents now is the way to go, he’s pretty alone in that.

    The only thing where he might be up to something is the fact, that a $175 million portion is up for refinancing. Maybe they used the savings in payroll to pay off as much of it as possible rather than refiance the whole lot. But I fail to see what is wrong with that.

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