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A $2 Billion Bargain for New Dodger Owners?

The $2 billion winning bid the group headed by Guggenheim Financial CEO Mark Walter and Magic Johnson as PR owner raised many eyebrows.  It blows away the $1.5 billion paid by the Glazers for Man United or the $845 million paid for the Cubs in 2009.  Is this just another highly leveraged deal leaving owners cash-strapped in terms of baseball operations?

Matthew Futterham's piece in the Wall Street Journal lays out the driving force behind the deal -- local TV broadcast rights.  As he observes:

Recent rights deals for the Los Angeles Angels and Texas Rangers are valued at nearly $150 million a year, including equity in the sports networks. As the top baseball brand in such a large market, the Dodgers would likely command more than that, Lee Berke, a sports media consultant, said.

The lowly Padres inked a $75 million per year deal.  All of these rights deals run for about 20 years.  A simplistic present value estimates of the Rangers and Angels deals falls in the neighborhood of $1.8 billion at a 5% discount rate.  Of course, front-loading of any payments or different discount rates change this estimate.  Nonetheless, given that the new Dodger owners can sign their own new deal starting in 2014, their bid is roughly equal to the likely value of TV rights.  If they can turn a profit from other revenues (gate attendance, concessions, parking, league-shared revenues), then baseball operations should be fine.  Of course, the near term flow of cash and interest terms on their debt-financing matter.  The details of the deal are due to be publicly released in bankruptcy court April 6.

Ok, local TV rights provides the revenue stream, but doesn't this just push back the insanity one level?  Why would anyone bid these amounts for baseball -- America's dying pastime?  A funny thing happened on the way to the funeral -- baseball franchises discovered that a substitute was actually a complement.  Over the past several years, teams switched to televising most, if not all, of their games via local broadcast/cable/satellite.  Teams long resisted such TV saturation, thinking that televised games substitute for fans in the seats.  Texas drew almost 3 million fans last season in spite of extensive regional televising of their games.  Yes, a few fans, at the margin, will choose to attend fewer games and watch on TV.  However, many potential fans will attend very few games regardless.  Televising the games becomes a way of extending the stadium capacity to include these households.  The TV advertisers along with cable/satellite fees pay for these "at-home season ticket holders."  So instead of these households doing other things, they watch the Rangers.  My 70-something parents fit this description.

The televising of  Cubs and Braves games in the 1980s on WGN and TBS serve as a precursor for these recent developments.  Both teams expanded their fan bases and energized existing fans by putting every game on TV.  Even gate attendance increased.  Other teams hated it because they saw this as a siphoning of their fan bases.  It took a while, but other teams slowly caught on.  It also reflects the same views and experience with radio broadcasts, resisted by teams at first because they saw them as a threat to live gate.