Sam Zell Sells Cubs. Um, Sells Them Again, That Is

We found out yesterday that the Cubs may finally be free of the wretched talons of the comically underwealthy talons of owner Sam Zell, who has been trying to sell the team for almost as long as he’s had them, his cash flow nowhere near enough to cover bills for the franchise.

Sad Cubs fans
(It was probably bad news to hire a fan and his young son as team accountants to begin with, but yes, they’re very disappointed by this news.)

The new owners, the Ricketts family, were reportedly going to pay $900 million with $450 million up front and the rest in loans. Sounds fine, and the plan was set to be approved by the rest of MLB ownership. Now it turns out that Zell has found another buyer for the Cubs, coming to terms with Marc Utay and his investment group. The key to this deal is that it’s for a higher price, but with less money up front.

In other words, more disaster waiting to happen.

Let’s set aside the fact that Zell made that exact same mistake when he bought the Cubs, taking on way too much debt. These types of terms happen during franchise purchases, and Zell just happened to do so at the wrong time wiith regards to the economy.

No, the problem is that the Ricketts sale was itself flawed, as shown by this excellent (and disturbingly simple) post by Sachin Argawal (emphasis his, for once):

Based on the amortization table I’ve put together, that means that the Cubs would have debt service obligations of around $40 million annually.  I am reliably told that the Cubs do not make $40 million in free cash flow per year.  With their share of CSN Chicago, it might be doable, but it’s certainly tight.  As we’ve seen over the last few months, sports are not recession-proof, especially for the high value luxury suites, corporate sponsorships, and box seats.

So 1) the $450 million in debt is clearly in violation of MLB’s debt service rule and 2) there’s a pretty good chance that the Ricketts can’t afford the payments on the debt on the proposed 450/450 transaction.

Therefore, given that $450 million is both too much debt per the MLB’s rules and probably not payable (which is why the rule even exists to begin with), the news that the Utays intend to purchase the franchise for more money with even less put down up front means the debt figure is substantially higher than the $450 million that Argawal deemed untenable.

We’re not going to sit here and claim that Sam Zell doesn’t know how to do business, especially with a personal net worth somewhere around “Burger King Value Meal,” but the fact of the matter is that unless the Cubs substantially cut costs (oh, what’s that? Alfonso Soriano’s on contract for five and a half more seasons? Hmm, interesting), there is probably no way they can cut the Ricketts deal, and certainly no way the Utay deal will work better.

In other words, in one way or another, the MLB’s going to have to step in and fix this situation themselves, because the investors are wantonly flirting with disaster.