Even pro sports franchises feel the sting of the recession and credit crunch

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In late January 2010, Hicks and the Greenberg-Ryan group formally reached an agreement to sell the club for about $570-million. However, a dispute between Hicks and some of his principal lenders bogged down the transaction. Eventually, in late May of this year, the club filed for bankruptcy as a way to expedite the proposed sale of the club to Greenberg-Ryan by moving the whole affair into a bankruptcy court.

“The Rangers are like a microcosm of how so many companies have fared in this credit crisis,” said Daniel Rascher, president of SportsEconomics, a sports consulting firms. “Once the economy turned bad, their revenues flattened or declined and they realized they didn't have enough equity in their business.”

Now the saga surrounding the Rangers has become murkier and more complicated as Major League Baseball and other irate creditors have stepped into the fray. One of the Ranger's creditors is none other than New York Yankees third baseman Alex Rodriguez, who is still owed $24.9 million in deferred payments arising from his trade from the club to the Yankees in 2004.

Ahead of the August auction, one of the potential bidders for the Rangers is Mark Cuban, the billionaire owner of the Dallas Mavericks basketball club, who was himself thwarted in his attempt to acquire the Chicago Cubs baseball club last year.

Moreover, the Greenberg-Ryan consortium has warned that the financial deal they secured will expire in mid-August, putting their attempts to purchase the team in great jeopardy.

The Rangers team, which moved to Arlington, Tex. from Washington D.C. in 1972, have a fairly dreary history – they have never played in the post-season, and haven't even appeared in the playoffs since 1999.

However, they are now in the first place in the American League West Division and have recently acquired some pricey players in trades (including pitcher Cliff Lee from Seattle) to make a serious run for the World Series. The Rangers, who have a $65-million payroll, quite modest by major league standards, are somehow flourishing amidst all this turmoil and uncertainty.

“The team is probably able to operate fairly normally, i.e., making trades, etc., because they have not been taken over by Major League Baseball nor have they had their assets frozen,” Rascher said.
“This situation is quite different from when the league took over the ailing Montreal Expos and re-located them to Washington D.C. A few years back.”

The Rangers are certainly not the first baseball club to file for bankruptcy in order to get out of debt.

In late 2009, the fabled Chicago Cubs filed for bankruptcy, as part of a proposed sale by its former owner Tribune Co. (NYSE: TRB) which sought money to pay off lenders after the battered economy forced them into bankruptcy.

The Tribune (which owns various TV stations and newspapers) eventually unloaded the Cubs -- including legendary Wrigley Field -- for about $845-million to the Rickets family, the founder of TD Ameritrade, and decided to focus on their core media businesses.

The travails of the Tribune Co. and Hicks point to how the disastrous credit crunch has negatively affected pro sports, which had long been viewed as recession-proof.

From the perspective of ordinary fans, attendance has been dropping for many pro sports franchises, although TV ratings have generally been flat.
Major League Baseball attendance fell about 6.6% in the regular season in 2009, compared with the prior season.

“Regular fans slowed down their ticket purchases,” Rascher noted. “Many sports teams responded by lowering ticket prices or by offering financing to people seeking season ticket deals. As a result, while attendance dropped modestly, revenue dropped substantially.”

It is really at the corporate level where teams have endured significant losses. Companies have reduced expenditures on luxury suites, corporate sponsorships and season tickets.

“Since these big corporate sponsorship deals are signed on a mufti-year basis, sports clubs did not see an immediate loss of revenue at the onset of the recession,” Rascher noted.
“But once those deals expired, they either evaporated, or the companies sought to renegotiate their contracts at substantially lower terms.”

How have the sports franchises responded to the economic slump?

Aside from lowering some ticket prices and re-doing corporate agreements at cheaper rates, some teams have pushed out overpriced journeymen veterans and replaced them with cheaper, younger substitutes.

“This has happened a lot in the NFL,” Rascher stated. “A number of pro football clubs have reduced payroll.”

The superstars, however -- that is, the players the fans and corporations are most excited to see -- have not suffered salary losses at all.

“You saw the frenzy for LeBron James a few weeks ago,” Rascher said.

“The available superstars will always be the target of fierce bidding wars.”

Rascher said he believes the NFL is by far the most financially strong pro sports business. This has mostly to do with its cozy relationship with the TV networks.

“The national TV contract is what drives the success of the NFL,” he said.
“Unlike the other sports, attendance is not all the crucial. Because football is so appealing on television, it is guaranteed huge ratings, which translates into huge revenues.”

Attendance is important only to the extent that a football game has to be sold out locally in order for the game to be broadcast. This gives the team owners some incentive to heavily market the team – but, conceivably, NFL clubs could survive solely on their TV revenues.

In addition, NFL clubs have revenue-sharing, which means that even the losingest, weakest teams like the Detroit Lions receive a huge windfall every year, even if they don't win a game.

Rascher estimates that each team makes about $130- to $140-million annually just from the revenue-sharing pact – and that every NFL club is profitable.

In Major League Baseball, attendance is important, since the clubs depend a lot on ticket and merchandising sales. The sheer number of games played in a regular season (81 at home) means many games will not get big ratings. This is one reason why so many clubs have built shiny new state-of-the-art stadiums in safe, easily accessible venues to attract as many paying customers as possible.

Still, many baseball clubs cannot attract enough fans for a variety of reasons and are basically break-even. Rascher cites the clubs in Florida (Devil Rays and Marlins), the Arizona Diamondbacks, The Milwaukee Brewers and San Diego Padres as among the more economically vulnerable clubs.

The situation is particularly dire for many clubs in the National Hockey League, especially franchises in warm-weather American cities, like the Phoenix Coyotes where fan interest is very low and the local economies are suffering.