Last June I predicted the Cubs could afford to sign Bryce Harper. Since January I have been trying to learn why my prediction was so inaccurate. In Part I, I explained that I made a $40 million revenue error by failing to properly account for revenue-sharing.
There is more to the story, however.
Forbes reported that the Cubs earned $273 million in operating income from 2016-18, an average of over $90 million per year. Back in 2011, the Ricketts family pledged to reinvest all team profits back into the club. Yet this offseason, the Cubs did not spend any additional money in 2019 because, in the words of Tom Ricketts, there was no more. How is this possible and where did that $273 million go?
The short answer is that the $273 million was not profit. The “operating income” referred to by Forbes is actually something called EBITA, an acronym that stands for “Earnings Before Interest, Taxes, and Amortization.” The “before” part is fairly important. The Cubs need to pay taxes to assorted government entities, all of which comes out of that $90 million.
And as I have written in the past, the Cubs pay $28 million per year to service the debt they took on when they “purchased” the team in 2009. That $28 million comes out of the operating income as well. Suddenly, that $90 million is a lot smaller.
Furthermore, the Cubs self-funded a $700 million renovation and new building project in and around Wrigley Field. They did so without selling away the naming rights to the ballpark, which could have provided $20 million annually. They also did so without resorting to selling personal seat licenses (PSL), despite a recent Deadspin article revealing that their own financial advisers recommending such a tactic to finance the renovation.
For those who are curious, a PSL involves season ticket holders paying a large, one-time sum to the team for the right to purchase season tickets to a specific seat for a specific number of years. At the conclusion of those years, the team repays the license fee. In effect, a seat license is an interest-free loan from the fanbase to the team and is often used to finance stadium renovations, as the Bears did with Soldier Field.
The good news on the Wrigley front is that (1) most the renovation is complete and paid for and (2) the renovation added lots of permanent revenue streams that will continue to fund future payrolls.
Speaking of investments that would help future payroll, it has long been my hope that the Cubs would use that $273 million in operating income (along with the BAMTech profits) to pay off the $450 million in debt, as they were finally allowed to do this year. If the debt is paid off, suddenly $28 million in annual revenue appears and can be applied to future payrolls.
Unfortunately, ownership may have instead used the money to purchase the Tribune’s 5% ownership stake. When the Tribune originally “sold” the Cubs to the Ricketts, the retained a 5% stake as part of the legal fiction that the team was not being sold, but merely being added as an asset to a new partnership with the Ricketts family. Tax law required that this partnership last at least 10 years. Lo and behold, as I reported back in January, the Ricketts purchased the remaining 5% at about 10 years and 1 day.
Back in 2009, they “purchased” 95% of the Cubs for $844 million, making the 5% stake worth $44 million dollars. The Cubs’ current $3.1 billion valuation would put the same stake at $155 million, but the actual cost on the remaining sliver of the team was $107.5 million (a $2.15 billion valuation). So ownership probably used a lot of recent team profits buying that remaining 5% up.
While such a purchase technically meets the definition of reinvesting profits back into the team, this particular re-investment benefits ownership alone, not the on-field team or fans. So perhaps there is some validity to the notion that the Cubs pocketed some of the profits achieved by staying under the luxury cap the past two seasons.
Overall, I’m prepared to give the Ricketts family a pass for the moment, with the caveat that we’d better start seeing some payroll jumps the next few seasons as that new TV money starts flowing in. Which brings us to Part III, it is time to discuss Marquee.
- Part I: Learning From Past Mistakes
- Part II: Did The Ricketts Break The Pledge?
- Part III: What Will Marquee Sports Network Add?
- Part IV: The Four-Year Prediction