Chicago Cubs: The Implications of Selling the Cubs

This Article was originally posted in January, but the thought process still applies to the recent sale of the Cubs.

I would rather watch paint dry than watch a baseball game. Now, don’t hate me. I don’t hate you for not liking futbol (uh, wait. yes, I do). Let’s just agree to disagree. I love futbol, football, and basketball and I just don’t get into baseball, golf, and Nascar. Let’s move on.

However, I am interested in the whole Tribune selling the Cubs issue. I respect the tradition of baseball. I could see how people would get into the history of the ball park, its famous players and what the game means to Chicago and America. But, to me I’m more interested in the business side of the sport. So what does the Tribune Company’s intent to sell the team (and I assume the stadium) to a third party really mean?

Well let’s think about it like this. Assume we live in a rational world, with rational people. i.e. The type of people who are going to buy and sell a baseball team are likely pretty smart business people. They are not going to get ripped off. And the Cubs certainly won’t be selling for less (unless the current state of the Economy and lack of credit somehow hurts the buyer, but I doubt it). More likely, the Cubs will be sold for its full and fair price and maybe a little more if there are several bidders.

So what’s the fair price. I’m not an expert, but the person valuing the Cubs is likely going to look at the Cub’s cash flow historically and try to project it for each year into the future. Thus, they’ll figure out the Cubs expected future cash flow for each year from 2008 until infinity. Then, they’ll will discount each year’s cash flow to the present value and get some large number. Thus, the person buying the Cubs is going to be paying for the cash flow the Cubs will make from now until forever.

So what does this mean? Well it means that the guy paying for the Cubs is going to be paying a lot of money. But, if he’s paying exactly what the Cubs are worth (i.e. cash coming into the Cubs forever), he’s going to need to do something to make sure he makes a profit. Put another way, the new Cubs owner is going to need to find out a way to bring in more cash each year in the future (i.e. his profit/returns), then the Cubs were already going to make in the future (i.e. the amount he paid).

To belabor this point, say I sell you my lemonade stand. As smart people, we realize that in present value dollars my Lemonade stand will bring in $15 a year for 10 years (i.e. $150) dollars. You pay me the $150 and buy it. Now, in order for this to make sense you’ve got to figure out a way to make more than $15 a year for the next ten years. Basically, either you sell the lemonade for more or maybe you get cheaper lemons and thus increase your profits that way. But, if you can only manage $15 a year for ten years, well you’re an idiot. You’ve worked ten long years to make exactly zero profit.

So what does the buyer of the Cubs do to make his/her profit? You guessed it. He can increase ticket sales or somehow cut costs (i.e. pay for cheaper players). That’s probably too basic, but still pretty accurate I think. What else can they do?

1. Knock down Wrigley Field, and put up a state of the art stadium, with more seats, (likely Club), with tax payer money and fans putting up money for PSLs, all in an effort to…you guessed it make more money.

2. Start selling that $10 beer for $15 (i.e. concessions, merchandise, tickets, etc. all cost more).

3. Charge more for advertising in the stands. Most likely- corporate naming rights. Can you say “Boeing Field’?

4. Lower costs (fire some administrative people, reduce pay rolls, etc). Or you cut your highest expense- i.e. player salaries (trade your best players for cheap replacements).

You get the point. Unless the Cubs were wholly mismanaged (i.e. tons of unnecessary expenses), the new owner of the Cubs is going to need to make more money to obtain a return on his investment. Which really means that the average baseball fan will need to spend more money (tickets, PSL’s, taxes for new stadium, beer, jersey sales, etc). That, or attend games at Boeing Field, while watching less talented (hint: lost costly) players.

That’s all.