From baseballthinkfactory.org -
I’m bad at explaining financial/money type stuff, so I have taken this question and answer from a poster who is a finance person who calls himself “Value Arbitrageur”
Question: It’s unclear if the $300 million in debt applies only to the team sale ($680 million) or to the payment for both the team and buying out McLane’s interest in the Astros’ regional broadcast network ($770 million). If it is the latter, than the debt percentage is around 38%, which might seem more reasonable.
Answer: Again, the percentage doesn’t matter, cash flow matters.
Imagine you are a bank officer, and in walks a construction worker making $50k per year who wants to buy a new ferrari that retails for $250k. He’s actually saved $100k for the downpayment, and just wants you to okay a $150k car loan with $3,500 monthly payments higher than his after tax income. You gently decline, and while doing so happen to point out that he’s putting in his life savings and still only has 40% “equity”. The next day he returns all excited, the Ferrari dealer has agreed to raise the price of the Ferrari to $350k, but credit him a “rebate” of $100k (shades of Frank McCourt’s purchase of the Dodgers). Now he triumphantly tells you, between his $100k downpayment and the “rebate” he’ll have $200k in “equity”, over 60%!
The debt percentage simply doesn’t matter in either case, ability to repay does and that’s driven by cash flow (and the repo man for the Ferrari). So if the Astro’s regional network kicks in a substantial amount of additional cash flow it can make a difference. But if McLane’s selling it for about 14% of the price of the team, it doesn’t seem likely to add much more than 14% more in cash flow.
It’s possible the lenders will take a risk here because they think it will be easy to sell the team for $300M + whatever interest they are owed if Crane defaults on the loan, but I find it unlikely they’d be going into a large loan like this with that the most likely outcome. Somehow the cash flow forecast has to reasonably support the debt so that getting repaid directly is much more likely than having to become a Repo Man.
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Lisa — I have no doubt the Astros’ cash flow can support a $15 or $20 million per year debt load and wouldn’t be a problem from a strict banking sense. The problem is that the $15 or $20 million in annual debt load will mean substantially less spending on the major league team, minor league system, scouting, free agent signings (MLB and amateur), etc.
It’s one thing for a business to use debt for economic reasons (e.g., debt can be smart if the interest rate is low), but Crane & Co. are using debt because it’s their only option, and Crane made it clear on Monday that he and his partners won’t be writing big checks to cover losses over the next few years to accelerate any rebuilding process.
Below is a comment I posted at Maury Brown’s site yesterday in the comments section of the article titled, “Is Jim Crane the Astros Savior, or the Next Frank McCourt?” (If you want to post this over at Baseball Think Factory to see what people say, feel free. I’m sure BBTF place gets more traffic than Maury’s site.)
This is a strange deal with red flags galore.
Drayton McLane insists this deal will “sail through the approval process,” but I count at least six issues that could or should make the other 29 MLB owners think twice before voting “yes” on this deal:
1. $300 million in debt would be bad enough for a high-revenue team like the Cubs or Red Sox, but it could be an absolute killer for a last-place team like Houston that’s struggling at the gate and has a very weak farm system. This is not to say MLB should roll out the red carpet for Mark Cuban or some other big-spending billionaire, but this amount of debt for MLB’s weakest team is a recipe for both short-term and long-term disaster.
2. Jim Crane and his supporters/minions can say what they want about the EEOC discrimination case, but the quotes and allegations are damning. Sure, “only” 203 claims might have been paid, but that’s still a much higher number of people than even Marge Schott was alleged to have insulted or harmed. It’s also highly likely that a huge number of people with valid claims never knew about the claim pool. For one thing, Crane’s company was reportedly caught destroying records that might have led to other successful claims. For another, how many people search the business pages for news about discrimination settlements by companies to which they sent a resume 5 years ago? If even 10% of the EEOC claims are true, this could cause MLB endless bad publicity for years to come.
3. As if the EEOC situation wasn’t bad enough, Jim Crane was also alleged to have attempted the business equivalent of throwing the World Series: He was accused of tanking the value of his OWN (former) COMPANY — the same one involved in the EEOC case — in order to lower the cost of taking the company private. If you’re a rich MLB owner with a lot of your net worth sitting in a stock portfolio that’s dependent upon CEO performance, would you be happy with this type of guy or this type of business ethics? (See “The EGL debacle all comes down to Jim Crane” — http://www.chron.com/disp/story.mpl/business/steffy/4673467.html)
4. The similarities to Frank McCourt don’t end with the debt aspect of the deal. Jim Crane also went through a very nasty divorce, and he lives a lavish lifestyle replete with a private jet and mansions in at least three cities. He and his current wife are fixtures on the high-society circuit in Houston, Nantucket, and elsewhere. And, as with McCourt, Crane has faced allegations of using his companies as his personal piggy banks. (See “Transferring Assets” — http://www.houstonpress.com/2000-05-25/news/transferring-assets/)
5. Crane has a lot of prior MLB history that, at least at the time, rubbed a lot of people the wrong way. Crane reportedly blamed the economy for walking away from his handshake deal to buy the Astros from Drayton McLane in late 2008, but then he bid on the Cubs just a few months later in 2009. Crane then partnered with Mark Cuban, who himself is not Mr. Popularity among MLB owners, and almost killed the Greenberg/Ryan Rangers deal in 2010.
6. According to various FEC disclosures available online, Jim Crane is and has been a big contributor to left-wing politicians, and his investment group is full of left-leaning lawyers who made their money by suing big businesses. Meanwhile, MLB owners tend to be politically conservative, and aside from Peter Angelos and perhaps one or two other left-leaning lawyer-owners, MLB owners have always been averse to inviting litigious people into their exclusive club. MLB last strayed from this by approving the litigious Frank McCourt, and that now seems likely to blow up in MLB’s face within days, if the rumors of an impending McCourt v. MLB lawsuit are accurate.
MLB owners obviously want and like to see rising sale prices, but it’s hard to see how MLB can approve Crane at all, let alone in such a highly-leveraged fashion. It’s hard to imagine this owner and this deal being approved at the same time Frank McCourt is being forced out and Mark Cuban is being kept out.
Lisa — For some reason, the links I posted in #3 and #4 (above) are being formatted incorrectly and yield a “Not Found” when clicked. If possible, you might want to edit out the “)” at the end of each, so they will work properly. These are the correct links:
Anonymous…..you’re ALMOST as obsessed with Jim Crane, as I am about Bill Hall!! LOL!!!!!!!! Becky:):)
Becky – LOL. The Astros have had a lot of bad years under billionaire Drayton McLane. I knew we probably wouldn’t get Mark Cuban as the new owner, but I also don’t want to see 10 years of Pirates-style misery, which is what I expect to happen if Crane and his partners are approved. A last-place team with a weak farm system, low revenue (e.g., bad attendance), and $300,000,000 of debt is a recipe for disaster.
Anonymous…….As Roger Clemens used to say, “it is what it is”. I hope he’s not gonna be a bad owner, but since I haven’t won the lottery and I can’t buy the team, it looks like Jim Crane WILL be the new owner. Sorry
Becky – Not if Lisa and I can help it! LOL.
Jim Crane is probably having second thoughts after the last four games? 7 strikeouts and no walks today.
Ha ha. And baseball might be having second thoughts about Jim Crane after the slew of negative stories in the past two days.
Who gives a crap, i don’t.
well, looks like the EEOC story is gaining some national attention – which is good. people in houston seem resigned to our supposed fate. I’m not – and bud is very VERY sensitive to stuf like discrimination against Blacks and women – Crane makes marge schott look like pro-diversity.
we can HOPE that a group who HAS money, whose intention is NOT just to let the team rot in hell while they collect their 5 mill a year, will be able to buy the team. if not, i will join you in not giving a crap. i refuse to back a permanently losing team whose only reason for existence is to make 15 mill a year by losing
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