League officials in all sports are salesmen for their product. As a result, they can’t tell you the truth, which is the following: paid attendance and TV revenue are going to fall across all sports. This is affecting different sports in different ways so far, with the strongest sports (ie the NFL) affected the least. But for the niche sports, it’s getting ugly. NASCAR, with its reliance on automaker sponsorship dollars, is cutting teams and possibly races. The NHL has at least three teams, and maybe as many as seven teams, in serious financial trouble. Arena Football has folded. Even MMA is having issues.
Also of note, though less relevant given the very different industry structure over there, many football clubs in Europe, especially in Spain and Italy, are in financial difficulty.
So what does all this mean for MLS? The good news is that, unlike NASCAR or the NHL, MLS has no television revenues to speak of, so there will be little decline in this area! But the gate is clearly in trouble. MLS already has an attendance issue and published figures are inflated. Most games in Chicago, Columbus, Colorado and Dallas last year, to name four struggling markets, had far fewer fans than was announced. This is before we ponder how many of the seats were freebies.
It has to be pointed out that the sale of new franchises is not going well. Whether it’s the sale of Houston, or the awarding of new expansion teams, MLS is seeing less interest than they had hoped for, and it’s taking a lot longer than they should to get these transactions done. Part of this is price - there has been rapid inflation in MLS franchise value (TFC got in for $10 million, the Wizard were sold for just over $20 million, the Fire traded for $33 million, and of course the asking price in this expansion round is $40 million). But given the state of public finances now, there will be no public funding for new stadiums anywhere for a long time, and this, combined with overall conditions, means that values will have to come back down, just as they have elsewhere.
Another possible indicator of tougher times is the MLS’ sudden propensity to loan out a group of its best players this winter (Beckham, Donovan, and possibly McBride). While there has been much nuanced speculation for the reasons for this, what if the reason they’re doing it is…..gasp….the money?
In 2009, ticket spending on sports entertainment overall will contract. Will MLS benefit from a “trading down” consumer? (ie someone who went to more expensive sports previously but will turn to MLS games as a cheaper alternative? This has long been the dream, but so far it hasn’t worked out. If this bigsoccer post is accurate, 2009 is not exactly seeing Dodgers or Lakers supporters busting down the gates at the Home Depot Center.
Which brings me to the real point. What is the ability of the MLS owners to fund losses?
Without belaboring the obvious, I’d just point out that a lot of seriously rich people are in more trouble than they ever thought they could be in. This recession/depression has fallen disproportionately on the very rich (so far).
It’s been 25 years since times were as tough as they are now. The NASL, having over-expanded and over-spent on players, could not cope with the hard times of the early 1980s. The situation for that league became terminal as teams relocated (and folded), which undermined the credibility of the league itself, which had some strong franchises. For this reason, and to suppress salaries (of course), a single entity system was developed by the MLS founders, many of whom (especially Lamar Hunt) saw this as the way to have a mechanism for the league to stop the bleeding if teams start failing, by having the league step in quickly to take teams over. In the 2001-2002 recession, when MLS was on the brink, the Anschutzs and Hunts together stepped up to own 8 MLS teams, although they have succeeded in reducing their interest to 4 teams over the course of the 2004-2008 bull market. The lesson of the single entity model is that the model works so long as there are strong partners who will bail out those having problems, which spares all the specter of a death spiral brought on by teams folding.
So how rich are the MLS owners now? Not how rich were they, but how rich are they? Most MLS owners, it turns out, are fanatically secretive about their finances. But this much is certain. Almost all of the MLS owners are heavily exposed to current real estate and financial problems, and many depend heavily on debt financing, which has been the kiss of death for many billionaire entrepreneurs in the financial crisis of 2008-2009.
My conclusion is that up to 4 of the franchises could be in trouble, and there are questions in my mind about the ability and willingness of a number of the other partners to fund losses at failing teams. Surprisingly, the only two teams that I am certain would invest in MLS to protect other money-losing franchises, no matter how bad things get, are the two most recent entrants, San Jose and Seattle.
For those of you hoping for big raises in the salary cap, a loosening of the roster rules, big increases in minimum salaries, or a restoration of reserve games….forget it. Too many owners have taken terrible financial hits. The name of the game is now survival.
Here is the analysis that supports this conclusion. I have looked at each team’s situation and ownership below. I did it alphabetically by team, but put the Hunts and Anschutz last, given their historic roles in the league.
Chicago Fire (owner Andrew Hauptmann)
Hauptmann bought the team in 2007 from AEG. He is a member of the Bronfman family who lives in Los Angeles. His investment firm, Andell Holdings, has almost certainly seen dramatic reversals, as its other major investments (in Vivendi Universal, Koor Industries, and SunOpta) have declined in value by 50-75% over the past year, and the portfolio of private equity investments must have declined by at least that much. I could not find any estimate of his net worth anywhere, but given the paucity of information on him, I doubt he was a billionaire to begin with. Nobody on the Fire boards seems to know much about him either.
It’s hard to be enthusiastic about Chicago’s situation. Like Dallas and Denver, the Fire are just not drawing well given the investment in the new SSS. Putting SSSs in remote locations has not worked out well. But the Fire do have a nice group of committed fans that trudge out to Bridgeview. There just aren’t enough of them.
Summary: The team is likely to lose money in the current environment. If Hauptmann’s personal reversals are serious enough, this team could become a problem for the league
Chivas USA (owner Jorge Vergara and Antonio Cue, Chivas of Guadalajara)
Vergara’s and Cue’s net worth are impossible to ascertain but Vergara, the face of the franchises made his money via the Herbalife franchise for Mexico. He bought Chivas of Guadalajara in 2002, and he is seen as a kind of Mark Cuban of Mexican football, at least on bigsoccer. It was rumoured that he was going to sell the club in 2006.
Chivas USA have only a few hundred season ticket holders. This franchise is widely viewed as a mistake, and Chivas is a failing franchise that has little value other than as a tenant of the Home Depot Center.
Summary: Mexico is being hit hard by the downturn. Hard to imagine that Chivas of Guadalajara will stick with this if their finances get ugly.
Colorado Rapids (owner Stan Kroenke)
Kroenke is very secretive, so nobody really knows what his financial situation is….but here goes. He was a Forbes 400 member (worth $2.7 billion recently), Kroenke also owns the Broncos and the Avalanche, so his other sports interests in Denver are very significant. But his fortune was made in shopping centers. The shopping center sector has been the epicenter of pain over the last 18 months. Many of Kroenke’s shopping center owner peers are now bankrupt or near bankrupt.
Even if Kroenke has lost billions, he’s probably OK given that he’s married to a Wal-Mart heiress. But he may decide not to continue funding losses in MLS given the terrible situation the Rapids are in.
Summary: This team is in trouble. Even after building their brand new stadium, nobody cares - the fan support just is not there. Unlike Chicago or Dallas, there isn’t even a strong supporters group to point to as a success.
DC United (owner Victor MacFarlane)
DCU is an on-field and off-field success, but don’t look to them to help bail out other failing MLS teams. MacFarlane Partners is heavily exposed to the real estate development business, as investors and managers in some of the flashiest new projects in the country. MacFarlane’s principal interest in DCU was to make it the cornerstone of a new large development in Virginia – this is unlikely to happen now, in the current environment.
Summary: Look for the owners here to, if anything, seek an exit, as opposed to putting more in. The good news is that this is a quality football situation and fan base.
KC Wizards (owner OnGoal LLC, lead by Neal Patterson, Cerner Corp CEO)
OnGoal was formed by 5 KC businessmen to buy the Wiz from the Hunts two years ago. Neal Patterson, the CEO of Cerner Corp (three of the five members of OnGoal are from Cerner, a KC-based health care IT provider), has a net worth of approx. $200 million, so they can probably weather the storm, especially if the Bannister mall redevelopment actually happens. Patterson et al are huge Ayn Rand acolytes, by the way.
Summary: This group is probably fine. But it would be interesting to see what an Ayn Rand true believer would say to a league-wide capital call.
New England (owner Robert Kraft)
Kraft has the wherewithal but does he actually care about MLS? It’s widely believed that the Revs’ main purpose in the Kraft empire is to be tenant at Gillette Stadium, where the Revs drew 5,000 for a playoff game last year. Outside of sports, Kraft has significant holdings in paper and packaging, and real estate, and both these sectors have gotten crushed this past year.
Summary: A high-quality football operation, but a potentially troubled situation. It’s easy to imagine Kraft stepping away, if either he or the league are taking significant losses.
New York (owner Red Bull Gmbh)
As long as there is an MLS, NY will be a desirable team, especially with a new stadium. But this is a tiny part of a large foreign corporation. Furthermore, Red Bull’s primary sports sponsorship arrangement is with Formula 1 in Europe, which is in some trouble, and into which Red Bull HQhave poured additional dollars this year.
Corporate ownership is notoriously fickle (this is why the NFL has never allowed corporate owners). This is doubly true for a company that makes a faddish soft drink and is secretive about its finances.
Summary: Like RSL, RBNY desperately needs to succeed at the gate, but is likely to have horrible attendance in 2009 given the delayed move to Harrison. Who knows how HQ in Austria will view this asset in a crunch?
Real Salt Lake (owner Sports Capital Partners Worldwide)
They have a beautiful new stadium, and Dave Checketts is well known in Utah, but make no mistake: SCP Worldwide is a hedge fund created to invest in sports properties (besides RSL they own the NHL’s St Louis Blues, another troubled franchise, and the arenas the two teams play in, as well as a motley collection of other non-related-to-each-other assets). It’s not clear who the backers of SCP are - Towerbrook Capital Partners, a large Private Equity firm, is their partner on the St Louis investments only.
Given the parlous state of affairs for almost every hedge fund or private equity firm on the planet, there is a real question in my mind as to whether SCP could come up with any money to support RSL, or other failing teams at this point (but don’t expect them, or anyone else in their situation, to admit it)
Summary: here’s hoping the attendance is strong in what is by all accounts a fantastic new stadium. If not, it could get ugly fast.
Toronto (owner Teachers/MLSE)
TFC are a moneymaking success, but would they keep selling out if the league starts having problems? Like RBNY, TFC have corporate ownership in the form of the Ontario Teachers Pension Plan, which own 58% of MLSE (whose primary asset is the Maple Leafs NHL team, the Raptors NBA team, and the ACC, with TFC more of an afterthought). The Teachers have had a $20 billion dollar hole blown in their portfolio last year, which will bring the bean counters out in force, no doubt. MLSE is a controversial investment for Teachers – it is one of the few that they directly control, as opposed to own a minority interest in, and the teachers unions have long believed that the Teachers Pension fund managers made this investment for reasons that were not strictly commercial, and may enjoy the life as Directors of MLSE rather more than they should.
Summary: MLSE may turn out to be an ornery partner for MLS. They may not be receptive to requests for investment spending that in the short run will look like taking cash flow from a successful operation (the Leafs) and using it to support a loser (MLS).
San Jose (owners Lew Wolff and John Fisher)
Anybody in the hotel and resort business in the US is probably going to be in deep trouble soon (because of the impact of advance bookings, it takes longer for recessions to show up in this segment than it does in, say, retail). Maritz Wolff is a private company so financials are not available, but most of hotel owners have significant debt obligations. It may not matter as, according to this, John Fisher, the son of the founder of the Gap retail chain, is the real money behind the A’s and the Quakes
The Oakland A’s, who does not produce much cash flow (read Moneyball by Michael Lewis for an in depth look at the year-to-year financial struggles of the A’s), will likely also face problems.
Summary: as long has Fisher has not suffered unimaginable losses, this team can make capital injections, for themselves or other teams, as required.
Seattle (owners Paul Allen, Drew Carey)
Paul Allen has probably seen his net worth decline by 40-50% in the last year, but so what? He doesn’t depend on borrowed money the way most of the other billionaires (or former billionaires) in MLS do, and he’s still plenty loaded.
Summary: Nothing to say. What a great partner.
Columbus and FC Dallas (owner Lamar Hunt family)
While the Hunt family net worth is huge (Texas oil and gas), this does not make the Lamar Hunt heirs, owner of the two MLS teams, billionaires. The founder of the Hunt Oil fortune was Clark’s grandfather, H.L. Hunt (who was reputed to be the inspiration for Dallas’ fictional J.R. Ewing). Larger-than-life, H.L. had 14 children by three women (one of whom may not have been his wife), the most famous of these being Nelson Bunker Hunt (who went bust trying to corner the silver market in 1980), Ray (the current CEO of Hunt Oil, the largest of the remaining Hunt Oil interests), and Lamar, whose passion was professional sports.
According to his obituary, Lamar had some interest in the oil business (he was a geologist), but it’s believed he lost most of his oil fortune in the 1980s. On the other hand, his investments in sports struck a gusher when he founded the AFL and the Kansas City Chiefs, named the Super Bowl. (His efforts as a founder of the NASL and World Team Tennis were less remarkable.) Plus, of course, Lamar helped found MLS. He left control of the sports team with his 4 children, who chose Clark Hunt, 43, to be Chairman of the teams.
The Lamar Hunt family’s net worth derives mainly from its ownership of the NFL’s KC Chiefs, which Forbes estimated to be worth US$1.0 billion last year, but there is discussion at chiefscrowd.com (you need to create an account to get in) that this asset may not produce as much cash flow as Forbes estimates, as the Chiefs are a notoriously unsuccessful franchise, they do not sell out (they would if they had a decent team), and they play in an older stadium that has very little luxury box revenue.
Clark and his siblings are unknowns (see chiefscrowd.com for endless discussion, but there are precious few facts there). Clark and his siblings, like Lamar before them, live in Dallas, which endlessly bugs Chiefs fans.
If cash flow from the Chiefs declines, the family may be faced with tough choices. Clark’s first love may be MLS – Clark played varsity soccer at SMU, and he went to see the Crew play in the MLS Cup on the same day the Chiefs were playing an NFL game. We do know that the Hunts have talked about “splitting up” the two teams amongst the brothers, and that they almost sold the Crew last year.
Summary: Neither the Crew or FC Dallas are very successful off the field, and Dallas, like Denver, is a huge disappointment, given the beautiful new stadium. Lamar would never have cut and run, but his death created a gigantic question mark for MLS. Who knows how Clark, or his siblings, really sees things?
Los Angeles and Houston (owner Phil Anschutz/AEG)
The most important owner in MLS has an estimated net worth of $7.8 billion according to Forbes. His sports entertainment company consists of, among other properties, the NHL Los Angeles Kings, the Staples Center and a huge related real estate project, LA Live, the Home Depot Center, the MLS’ Galaxy and 50% of the Houston Dynamo, 5 European hockey teams, 5 European sports arenas, and the Sprint Center in Kansas City. AEG is by far the largest owner of sports venues in the world. Note that Anschutz has major assets besides his sports properties. He has large stakes in the Union Pacific Railroad and Qwest Communications, which have declined 50% and 70%, respectively, in the last year and a half, but together are still worth close to $1 billion, and investments in newspapers, which are private but have certainly declined precipitously in value.
The real questions are, (i) did Anschutz use borrowed money to build his sprawling arena empire, and if he did, how much? and (ii) would Anschutz keep pouring money into AEG, in a crisis?
There is little information that I could find about the first question, but the answer is obviously, yes, AEG uses leverage, at least to some extent
The answer to the second question is not knowable (obviously), but it was yes in 2002, at a very difficult moment for Anschutz (MLS was failing at the same time as Anschutz’ Qwest investment declined in value from $7 billion to $1 billion, and Anschutz stepped up to own 5 MLS teams).
But a lot has changed since 2002. The league has SSSs in seven new markets, but attendance has not improved that much. Worse, the Beckham and Blanco investments (recall that AEG owned the Fire when Blanco was signed) appear to have been a bust in terms of generating revenue - Blanco has had no real impact on MLS attendance, and while Beckham has sold tickets and jerseys, it’s probably not enough to offset the $5 million+ p.a. that AEG is paying him. It’s not clear that, this time around, Anschutz would conclude that there is a lot that he can do to grow MLS significantly from here.
AEG has generally been a huge drain on Anschutz – beyond MLS, the Kings have lost at least $100 million dollars in 10 years, the Home Depot Center has not attracted tenants away from MLS, and the Sprint Center sits mostly empty (and even worse, AEG lost money in a bad loan to an minority investor in the Nashville Predators who was trying to move the team to Kansas City).
Anschutz is seriously secretive. The NY Times did a huge feature on him two years ago that managed to have almost no real information in it. So who knows what he is thinking?
Anschutz went from owning 5 teams in 2002 to owning 1.5 teams today. Would Anschutz step up again if needed? MLS fans everywhere had better hope so, but it’s no slam-dunk.
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