Financing in MLB

The financing of a baseball season is going under the microscope this offseason and potentially into next season.  There is no question that MLB lost several billion in revenues.

According to Forbes’ estimates from 2019, as gathered by the University of Michigan sports economist Rodney Fort, MLB teams made a total of $9.9 billion as follows:

	REVENUE (IN BILLIONS) UNDER…
CATEGORY	NORMAL SEASON	HALF-SEASON W/O FANS*
Gate receipts	$2.84B	$0.00B
Concessions/parking/etc.	1.65	0.00
National TV deals	1.70	1.70
Local TV deals	2.14	1.61
Licensing/sponsorships/etc.	0.56	0.42
Central fund	1.00	0.50
Total	9.90	4.23

*Assumes teams retain all of their national TV revenue, 75 percent of their local TV and licensing/sponsorship/etc. revenues and 50 percent of their central fund revenue. SOURCE: FORBES

The same Forbes numbers from above, estimated that teams spent a total of $8.7 billion in operating expenses in 2019, generating a net operating income of $1.2 billion. Of that expense, $4.6 billion went to paying player salaries, and $4.1 billion went to “other” expenses — which include front office and staff payrolls, minor league costs, stadium expenses and the cost of operating MLB’s central office.

If teams spent the same as last season but with the reduced revenue illustrated above, they’d be on the hook for a total loss of $4.5 billion. This is undoubtedly the logic used by owners in their estimation of operating losses in excess of $4B.  But paying the players a prorated version of their full salaries in a projected half-season would cut those losses by $2.3 billion.

Of course some of the “other expenses” would also be reduced, limiting the losses even more.  The cash losses were probably closer to $1.0B  to $1.5B.  Still significant even in a billionaire’s playground.  During a recent appearance on “Evolve,” Dodgers president and CEO Stan Kasten revealed that the organization lost more than $100 million this season and will look for ways to save money until things return to normal, via CNBC Events:

“Our cash loss this year were well north of $100 million, and there’s no way to predict that. Any team is prepared to have a downturn, lose $5 million, lose $10 million. No one can be prepared for an unexpected cash loss of $100 million or more a year. We have enough strength and depth in our organization that we’re going to get through this, but it’s going to take a while to catch up.

“It won’t happen overnight, and that is going to become a part of our mantra as we look for continuing economies. We’re looking at all areas on both sides of our house; on the baseball side and the business side. I can’t tell you all the techniques we’re going to use, but we’re going to look too save money wherever we can while we are trying to dig out of this hole. Hoping that a return to normal is right around the corner, because when it does return, the customer experience — which we focused on right from Day 1 — is going to be better at Dodger Stadium than it’s ever been.”

The Dodgers estimated to have reported revenues in the amount of $556MM with a net profit of $96MM.  Kasten was very careful in reporting cash loss well north of $100MM and not operating loss.  I would surmise that a very fair amount of those revenues would have been utilized to pay down any principal portion of their estimated $408MM debt.  It is also difficult to know how the major and minor capitalized improvements were financed.  If financed through operating revenues and not separate loans, those expenditures would be included as a component of the “cash loss”.

All national network TV revenues were paid pursuant to the contract calling for full payment even without a full season.  Ironically, this is something the owners chose to ignore with respect to the players’ salaries.  National network TV revenues are split evenly with each of the teams. 

Local revenues are also subject to revenue sharing; As defined by Article XXIV of the CBA, the basis for the revenue sharing plan is a percentage of each team’s “Net Local Revenue”, which is basically the money a team makes in its local market (mostly ballpark and media related receipts) minus the cost of stadium expenses, including debt service.  However, because of the lack of local revenues that were not sufficient to cover stadium expenses, there was no local revenue sharing for 2020. Thus, teams with very little local revenue lost their revenue sharing, and it could be further impacted in 2021.  Also teams like LAD and NYY with huge local revenues apparently lost quite a bit in this area.  Until the owners open their books for full audit review, neither MLBPA or the rest of the world will know what each of the teams actual losses were: operating and cash.

What does all this lead to for the 2020-2021 offseason?  Every year I like to monitor the FA signings and use the MLBTR top 50 FA as the standard.  For 2018-2019, there was one who accepted the QO (Ryu and LAD), 6 (including two top ten) signed before and during the Winter Meetings, 15 more after the Winter Meetings and before New Year’s.  For 2019-2020, 2 accepted QO, 12 signed before or during the Winter Meetings (including 3 top 10), and 21 signed between the Winter Meetings and New Year’s (including 5 top 10).  Eight of the top ten 2018/2019 FA signed before New Year’s.

Thus far in 2020-2021, two have accepted QO (both top ten), six signed before or during Winter Meetings (Trevor May top ranked at #28), and thus far 3 have signed subsequent to the Winter Meetings (James McCann top ranked at #16).  This excludes three free agents outside of the top 50 who signed one year deals.

Last year by December 16, not including the two qualifying offers, 22 free agents signed for a combined 73 years and $1.443B.  17 free agents signed for multi-year deals, including 11 for three or more years and 8 for four or more.  The nine free agents who have signed thus far in 2020, they signed for a cumulative 15 years and $133.75MM. Only four signed multi-year deals, and only 1 for more than 2 (James McCann – 4 years, $40MM).

Last year three players (Gerrit Cole, Anthony Rendon, and Stephen Strasburg) signed individually for more than all of the 2020/2021 free agents combined. 

There is obviously an evident slow pace to free agent signings this year, but there are other signs that present a very strange end to a very strange year. 

●While some teams may be able to cope with the loss of game day revenues for 2020, the unknown game day attendance situation for 2021 has many (if not most) teams more concerned with making large financial obligations.   

●Tampa Bay declined the $15MM option for Charlie Morton.

●NYY has listed DJLM as their #1 priority, but are a reported $25MM under DJLM’s contract “demands”.  Normally this would not raise an eyebrow, but the Yankees have stated they WILL be below the CBT, and they need starting pitching.  Many think NYY needs a SS more so that Gleyber Torres can move to 2B, where Brian Cashman thinks is his best position.  Do they sign Andrelton Simmons for one year and set themselves up for one of the mega-five next year?  Do they bring back Didi Gregorius?

●Cincinnati – Non-Tendered Archie Bradley and then trade Raisel Iglesias and his $9.125MM salary for Noe Ramirez and his $1.1MM salary as a salary dump.  They have told everyone that Sonny Gray is available for trade.  The Reds and Nats have discussed Eugenio Suarez.   If Suarez is available, the Dodgers might want to swoop in. While everyone was pushing for Arenado or Bryant, I brought up Suarez who is tied up through 2024 (7 years $66MM) with a very team favorable 2025 option ($15MM with no buyout). Former SS who transitioned very well to 3B. And he is another Venezuelan.

●Cleveland – Non Tendered Brad Hand.  Has told everyone that they will trade Francisco Lindor this winter. 

●The ChiSox needed a left hand hitting OF and signed Adam Eaton for one year.  Why not the more expensive but probably better fits with Michael Brantley?  Or even Joc? They will not be players for any of the top FA, but they are very much interested in Liam Hendriks.

●Philadelphia – Shows more signs of stepping back and regrouping rather than continuing to spend stupid.  Spending stupid got them Bryce Harper and no playoffs.  Now they need more starting pitching, much much much more relief pitching, a SS, and a catcher.  And without much of a farm system.  But they currently are not showing any signs of reaching out to JTR or Didi to re-sign.  Dombrowski loves to stir things up and I doubt that he would have accepted the position with Philadelphia without knowing he could spend.  So Phillies watch is on hold, but when rumors about Zach Wheeler being available, and knowing that Middleton’s money is primarily from the Phillies, questions about finances are   legitimately raised.  After selling his tobacco company and subsequent litigation, his secondary source of revenue has dried up.

●Atlanta has paid $26MM for two back of the rotation starters leaving them with holes at 3B and a LH hitting OF, and hope that Travis d’Arnaud can have another good year.

●San Diego seems ready to pounce on a pitcher, but they are focusing more on a trade because of their deep farm system.  I think they will be leaning on relievers in FA and not starting pitching.  Some have indicated that Yadi Molina is on their radar, which makes sense.  But it is probably more like them raising the cost for St. Louis. 

●Why aren’t Yadi Molina and Adam Wainwright re-signed with St. Louis?

●Nationals – Have denied talking with Cubs about Kris Bryant

●Two teams that appear that they could be in on FA in a big way are NYM and Toronto.  I know Mets fans are hoping for George Springer and Trevor Bauer, but all signs are that Cohen will authorize one.  Cohen has also said that most of the big deals for NYM will come via FA and not trades, so Lindor may not be wearing a Mets uniform next year.  Mets have made two good FA signings in Trevor May and James McCann, and did not have to overspend for JTR or Liam Hendriks.  They have enough available for Springer who they covet.  Will they also swallow hard and sign Trevor Bauer also?

●Toronto is supposedly a player for all of the FA including, Bauer, DJLM, JTR, Springer, JT, Hendriks… I think they will make a significant bid for one of the players, but which one, who knows.

●With Dave Dombrowski leaving Nashville and Billy Beane returning to Oakland (with David Forst and Billy Owens), it is clear that MLB expansion is not anywhere close to fruition.

The Giants got a good second tier starter in Anthony DeSclafani (1 year $6MM).  The Rays have replaced Morton with Michael Wacha (1 year $3.00MM).  Thirteen of the top fifteen FA are not signed, and the only two that have been, were accepted QO (Gausman and Stroman).  28 of the top 32 FA are still available, and the two that have signed (other than the two QO) were both signed by NYM (McCann and May).

When NYY and Boston and apparently LAD are out not heavily involved in FA bidding, then the market sort of dries up. All of the top FA will get signed, but undoubtedly not for what they expected.  A vast majority of teams will spend on peripheral talent like KC has.  KC has signed four FA: 1B/DH Carlos Santana (2 years $17.50MM), RHSP Mike Minor (2 years $18.00MM), RHRP Greg Holland (1 year $2.75MM), and OF Michael Taylor (1 year $1.75MM).

Way out guesses:

Dodgers will re-sign JT for no more than two years guaranteed, and one of Brad Hand, Trevor Rosenthal, and Kirby Yates. Dodgers will not initially go over CBT.

• Trevor Bauer – LA Angels
• JT Realmuto – Washington Nationals
• George Springer – NYM
• DJLM – NYY – He is a perfect fit for LAD, but Brian Cashman will not let AF outbid him.
• Marcell Ozuna – San Francisco Giants
• Masahiro Tanaka – NYY on a much smaller deal than anticipated. With Severino due back, NYY will have the offense to carry them, and they should be able to slide under the CBT with DJLM and Tanaka.
• Liam Hendriks – Chicago White Sox
• Ha-Seong Kim – Texas Rangers
• Corey Kluber – Boston
• Francisco Lindor – Toronto (along with second tier starting pitching)
• Nolan Arenado – Colorado
• Trevor Story – Colorado
• Kris Bryant – Atlanta

The owners are going to take a very slow step into FA without knowing when fans will be allowed back in the stands.  MLBPA will not trust MLB again, and they will show up for ST and be ready to play 162 games.  The owners will have to lock the players out if they want a delay in the season.  If the owners do that, look for Congress to remove the antitrust exemption for MLB.  They are already on thin ice when it comes to how they have treated MiLB, which is another story for another day. For now, FOLLOW THE MONEY.