(Reuters) - The Los Angeles Dodgers’ $2 billion sale creates a new game plan for loss-making sports teams hoping to command top dollar -- file for Chapter 11.
The deal, sealed on Tuesday, saw the team sold to a consortium including basketball legend Earvin “Magic” Johnson, came after months of bickering and side-step efforts by Major League Baseball (MLB) to control the process.
Bankruptcy lawyers say it offers an example of how floundering, debt-laden American clubs can turn themselves into multibillion dollar franchises.
By filing in bankruptcy court, the Dodgers were able to thwart efforts by the league to control the sale process, they say, and to increase the price they likely would have gotten if the league had assumed its traditional role of handpicking the winning bid.
Other teams -- and not just from baseball -- in difficult financial straits are now considering following the Dodgers’ lead, which resulted in a finalized agreement for the team despite last minute-objections from the MLB.
“We’re seeing a sea change in the sales of professional sports,” said Tom Salerno, a partner with the Phoenix law firm of Squire, Sanders (US) LLP, who represented the Phoenix Coyotes Hockey team during their 2009 bankruptcy.
Several pro-hockey franchises are losing money, said Martin Sosland, a partner with Weil, Gotschal & Manges, who represented the Texas Rangers in a 2010 bankruptcy that set the stage for the team’s $593 million sale to a group led by Hall of Fame pitcher Nolan Ryan.
The Ryan group ended up raising its offer by $100 million despite major league owners’ approving the initial deal. Bankruptcy Court Judge Michael Lynn ordered the bidders to redo the deal to satisfy the team’s lenders.
The Ranger deal was among the first in which a team’s league was forced to allow another party to dictate terms despite league constitutions that stipulate terms for buying a club or filing for bankruptcy, said Sosland.
“Chapter 11 is a place where you can neutralize league issues to allow auctions to go forward,” said Sosland.
Dodger owner Frank McCourt won court approval of the deal on April 13 even after the league objected to its final structure, which included a separate $150 million parking lot agreement between McCourt and private equity firm Guggenheim Partners, part of the Johnson consortium that is buying the team.
The MLB sought more information regarding the sale’s financials and said the new buyer had failed to fully disclose information about the parking lot deal.
Bankruptcy Judge Kevin Gross approved the deal over MLB’s objections and a court-appointed mediator met with MLB and the new owners in subsequent weeks to resolve these issues.
“In general, bankruptcy is bad for sports franchises,” said Greg Milmoe, a partner with New York-based Skadden, Arps, Slate, Meagher & Flom, who represents sports leagues. “Bankruptcy tends to squelch all the things that are the lifeblood of the franchise.”
In Chapter 11, fan loyalty tends to waiver, Milmoe said. TV revenues often fall, which prompts advertisers to scale back. Clubs often are restricted from spending the amounts required to land key free agents.
Winning a bankruptcy battle can also backfire on a league. A $242 million bid to buy the Phoenix Coyotes pro hockey team by former Research in Motion Businessman CEO Jim Balsillie was scuttled when the National Hockey League opposed Balsillie’s plan to move it to Ontario.
The team continued to lose an estimated $25 million a year. Two years later, the team finally appears to have found another buyer in former San Jose Sharks CEO Greg Jamison, whose deal is expected to be approved by the NHL on May 8 - for $150 million.
Additional reporting by Tom Hals in Wilmington, Delaware; Editing by Gerald E. McCormick and Leslie Gevirtz