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And the beets go on

There’s no business like sports business

Allen And Company Annual Meeting Draws Top Business Leaders To Sun Valley, Idaho
Think BEETs aren’t going to want a tasty EBITDA? That’s a clown question, bro.
Photo by Scott Olson/Getty Images

There’s a common misconception that owning a sports team is a great business move. Actually, it’s a rotten one.

Until you sell, that is. Then — wow!

On a day-to-day basis, sports franchises are BEETs — Billionaires’ Expensive Ego Trips. They’re the corporate version of a trophy wife, without the prenup — something for really rich guys to show off to other really rich guys. They’re not a way to make money.

Take the Chicago White Sox — please.

Forbes’ annual list of MLB valuations has the White Sox pegged in the mid-range, at $1.5 billion. The New York Yankees are highest, at $4 billion, followed by the Los Angeles Dodgers at 3 and that other Chicago team at 2.9.

It’s easy to think that Forbes is just blowing smoke. Almost all MLB teams are privately held (the Toronto Blue Jays and Atlanta Braves are part of much larger public companies), so financial information is sketchy. As private firms, teams can legally move revenues and expenses among business units. Still, Forbes has shown through the years that it has excellent sources, and in the latest case of a sale in MLB, they had the Miami Marlins pegged at one billion and the sale was for 1.2, so they were low, not high.

Now, $1.5 billion is a whole lot more than the $19 million Jerry Reinsdorf and friends paid for the team in 1981. A whole lot. But the operating story is much different.

Forbes says for 2018, the Sox had revenues of $226 million and EBITDA — Earnings Before Interest, Taxes, Depreciation or Amortization, a common way to measure cash flow — of $30 million. That’s a tremendous return on investment, but a crummy return on equity (ROE) – just 2%.

In fact, it’s also one year of that Manny guy — though he would presumably have brought in much higher revenues as well.

No established business in any other industry would be happy with 2%. Sure, sports businesses get some special tax breaks, but pretty much all big business buys itself special tax privileges these days, so it doesn’t make much difference.

It’s not just the White Sox who are pitiful. The Yankees ROE is one-third of a percent, the Dodgers’ just more than 2%, that other Chicago team’s 3%, etc. Some team ROEs are negative.

New York University measures EBITDA among publicly traded companies by industry, and they show no industry has remotely as bad a return as sports franchises. Overall, the ratio is about 12-to-1. The highest category is real estate development, at 34-to-1 — another business where the payoff is in capital gains at the end, not operating profits. Sports come in twice that high.

If you like to delve into stats they don’t involve baseball itself, an analyst named Daniel Turney has a tremendous piece about owning a sports franchise. He uses the Portland Trail Blazers as an example, but the principles cross leagues. Turney won’t have you rushing out to raise a billion to buy a team.

(The rule of value being at sale of the team even applied to the brief period when the Cleveland Indians sold non-voting shares to the public in the late 1990s. The initial offering was at $15, some of us were lucky enough to buy in at half that, and the shares were bought back for about $23 less than two years later. Turned out to be a great investment in the end, though it didn’t look that way for a while for the initial buyers.)

Still, the BEETs go on. They don’t go on forever — the average MLB ownership tenure is just more than 13 years. But there’s no better form of enterprise for the employment of Greater Fool Theory: The idea that no matter how dumb your purchase was, you can find someone dumber to bail you out. Well, either dumber, or, more likely, so rich that your buyer can afford all the BEETs they want.

Reinsdorf, et al., have owned the Sox for three times longer than average. The question is why, since he no longer shows much of any interest in improving either the White Sox or the Chicago Bulls. (Yes, there was a puff piece in USA Today in 2017 where he claimed to care about fans and winning and all that good stuff. That puff piece is evidence-free.)

The answer just has to be taxes. That’s just a guess, but what else could it be? Reinsdorf is on record saying his heirs should sell the Sox when he dies, so why not sell now, hopefully to someone who cares? Taxes. Taxes. Taxes. Death and taxes.

One of the oddities of U.S. Tax Code (probably not promoted by poor folks) is that upon a property owner’s death, heirs get to reset the tax basis of the property to its value at time of death. In the case of the Sox, that means, were he to die today, the Reinsdorf family pays capital gains on any sale price over his share of $1.5 billion, not of $19 million. Heck of a difference.

The estate tax will be well into Estate Tax territory, but that applies whether it’s in the form of sports teams, cash or Van Goghs. And it just may be that a CPA/tax attorney/real estate mogul knows a way to put the nebulous valuation of sports franchises to his heirs’ advantage there as well.

So, if you’re just holding out for a huge tax break, why bother trying to be good? Why not just be tight-fisted Jerry?

And tight-fisted he is. The MLB average is for team payrolls to run just more than 50% of revenue. The White Sox in 2018, with the lowest payroll in MLB, came in at 29%. That was supposed to be an aberration, the nadir of the alleged rebuild, but it no longer looks that way.

Of course, there’s a way Jerry could prove us wrong, but I wouldn’t want to Harp on that.

Even with that pitiful payroll, though, the EBITDA came in it at 2%. Yet he holds on. Has to be for taxes.

Hey, it’s tax season. One more thing to blame the tax man for.

The IRS should give White Sox fans a big break. Just thinking of Reinsdorf owning the Sox is taxing enough.