Rogers and the Blue Jays, part 1: background and history

Earlier this year marked the 20th anniversary of Rogers Communications buying the Blue Jays, announced in September 1st, 2000 and formally closing in December. With 2021 representing the franchise’s 45th season, Rogers has owned the team for almost half of its history.

The merits and demerits of the team being run by a large publicly traded corporation have been hotly debated over the last 20 years. I remain of the view that the financial interests of Rogers are maximized from a consistently competitive and contending team the on the field, but everyone’s mileage will vary. In any event, it’s beside the point of these series of articles.

Rather, what I want to explore is the exact opposite question: does it still make sense for Rogers to own the Blue Jays? Given the massive run-up in team values, the increasing reality of sports ownership being a constellation of other businesses with a baseball team tied in, and an ever shifting media environment, at the very least it’s an open strategic question for company management when it comes to maximizing shareholder value.

It’s of even starker and significant import given reports last month that the Blue Jays and Rogers are considering potential transformational plans for Rogers Centre, potentially presenting huge opportunity but also even further away from the core Rogers business of regulated telecommunications operations. Today, I’m going to start with the history and background of how we got here, before turning to the present and the future.

The early years: 1977 to perennial contender

The group awarded the Blue Jays franchise in 1976 was comprised of Labatt (45%), Howard Webster/Imperial Trust (45%) and CIBC (10%). They and the Seattle group paid $7-million for an expansion team, though effectively more like $12-million since each team was obliged to draft 30 players at cost of US$175,000 paid to his former team. Some of those picks were more than worth that price, a number of others were simply filler where you’d rather have saved the cash; but, regardless, it was part of the price of admission to the big leagues.

Financially, the team did well initially with record attendance for an expansion team and very low payrolls. In press reports, they claimed losses in the mid-1980s as they started spending money amidst broader salary inflation despite on-field success, but other accounts suggest consistent if modest operating profits that accounting rules/tricks turned into paper losses.

The fluctuation of the Canadian dollar was always something of an issue. For most of the 1970s, the Canadian dollar traded slightly above par, and that was the case when the franchise began operations at the end of 1976. 10 days after the November 5, 1976 expansion draft, the election in Quebec brought Rene Levesque to power and precipitated a slide in the Canadian dollar.

That decline in the dollar continued for the next decade, with the loonie bottoming out around 70 cents in 1986. In 1982, buying US dollars cost the team about $1-million for a major league payroll of $3.8-million (and about $3-million more for the development system). By 1986, that would have been several million dollars with the payroll above $10-million.

SkyDome and the glory years: 1989-1993

From that point, the Canadian dollar increased in valuing, peaking out around 90 cents by 1991. The move into SkyDome further accelerated revenues with record attendance, and success meant record payrolls. Despite outspending all other teams with record payrolls, media reports suggest a record profit of about C$15-million in 1991, and smaller ones in 1992 and 1993.

Howard Webster died in 1990, and in November 1991 Labatt exercised its right of first refusal to buy the 45% interest in the team from his estate for C$67.5-million, valuing the team at C$150-million (about $135M USD). In 15 years, the team had increased in value more than tenfold, or a compound annual growth rate around 17.5%. Granted, inflation averaging above 6% ate away a fair bit of that, but the real return was still a touch over 10% annually.

From peak to trough: the bottom falls out, 1994-2001

If almost everything went right to drive a mutually reinforcing wave of prosperity over the previous decade, it all went 180 degrees in the opposite direction over the remainder of the century.

On the field, the collection of veterans that rode to two World Series got old fast, falling first to mediocrity in 1994 and the cellar in 1995. They lost their architect, as Pat Gillick saw the writing on the wall and got out before the bottom fell out with a complete rebuild ahead. That left Gord Ash in charge, who may have been a good right hand man, but proved to be completely out of his depth running the show. A big spending program after 1996 to propel the team back tot he top failed spectacularly, and there was little to no long term plan evident.

These were franchise specific problems, at least to some extent within their destiny to control. The front office failings were real and mattered, but in the background was a triple-whammy of external structural forces that were absolutely devastating. The simple truth is, almost no degree of managerial competence or excellence could likely have offset these headwinds.

First was the Canadian dollar. From the 1991 top around 90 cents, it slid back to the low-70s range by 1993, paused there for the mid-90s before collapsing further in the late-90s. It bottomed out in January 2002 below 62 cents, at which point foreign exchange was costing tens of millions a year on the net excess of US expenses over US revenues.

The second was the sale of Labatt to Interbrew in 1995. The Blue Jays went from being a strategic asset at the centre of a largely Canadian brand from whom winning market share, to a superfluous expense line of multinational giant focussed on building global economies of scale and squeezing costs. Moreover, while Interbrew initially planned on selling all non-beer Labatt assets, the process with the Blue Jays and their share of SkyDome ended up a five year saga of fits and starts leaving the team strategically in limbo.

Third was the realignment and revenue divergences of the late-1990s. There had always been haves and have-nots, but in most cases when a team was successful on-field, it was able to run payrolls near the top of the league as attendance and revenues surged. In the late 1980s, Oakland and Kansas City were right there with the biggest markets in payroll.

But it was the emergence of cable and local TV revenues that fundamentally changed the structure and decoupled revenues between markets. When monthly fees per subscriber are the major revenue drivers, the size of the market (and the average disposable income of the market) are the fundamental determining factor. And the Blue Jays found themselves in a division with two such behemoths.

All of this made for a negatively reinforcing cycle: the Blue Jays bounced back from a terrible 1995, but they were stuck behind teams who increasingly had greater financial capacity. The run of mediocre-but-non-contenders slowly bled interest and what was once league leading attendance to the bottom half of the league, causing further financial stress. The red ink mounted, with losses of C$100-million from 1997-2000, and forecasts of $30M+ for each of the next three years which apparently held MLB approval of the ultimate sale.

Enter Rogers

The late-1990s saw a tidal wave of transformation and consolidation in media, with vertical integration between content creation and distribution, fueled with flying stock market and the explosive growth of the internet. It was the age of the AOL/Time Warner, and moguls like Ted Turner and Rupert Murdoch who starting buying up teams to put on their media empires.

Ted Rogers followed in their footsteps. One of the cornerstones of his media division was to be (CTV) Sportsnet, launched in 1998 but available for sale because CTV was buying NetStar and its main asset, TSN. Ironically, NetStar was spun out of Labatt when Interbrew took over, Labatt having been put in play precisely because it had its fingers in too many pies in the first place.

A core problem for Sportsnet was muscling into a space dominated by an entrenched competitor and brand in TSN, which had a 15-year headstart. After years of funding losses, Interbrew was finally past holding out for a return to the peak valuation closer to US$200-million from 1993 and in September 2000 Rogers bought 80% for US$112-million, valuing the team at US$140-million (actually a little more, since Interbrew retained 20% without the obligation to put more money to cover losses and could force Rogers to buyout the rest in three years at a higher price).

The first few years were certainly a financial drag. From 2001 to 2003, Rogers injected C$120-million of cash to the Blue Jays segment to cover operating losses of about C$150-million (narrowing from $77M in 2001 to $19M in 2003), with another C$22-million in 2004. Those losses exclude non-cash accounting charges, but even then might not be truly accurate given the broadcast rights are not arm’s length transactions.

Nonetheless, the cash injections are an acid test indicating significant losses. Unfortunately, from 2005 onward, the Blue Jays are rolled up in the media division and their financials are largely guesswork. But if we roughly assume they’ve roughly broken even on a cash basis since then, then the cumulative investment is about C$325-million or US$225-million (C$164M/US$112M initial purchase, C$39M cost of remaining 20%, and the losses).

Given a franchise valuation of US$1.6-billion by Forbes, or roughly $2-billion Canadian, that works out to a compound annual rate of growth of about 10%. In fact, I’d argue Rogers buying the Blue Jays has a claim for the top corporate deal done in Canada so far this century.

Buying the Blue Jays gave Rogers and Sportsnet control 500+ hours of valuable premium summer content. Of course, they could have just paid for this directly, and that value is reflected in the increased franchise values. But owning it means not having to engage in risky long-term deals that can badly backfire. Rogers will never be in a situation with Blue Jays rights like it is with the NHL rights it overpaid for.

Typically, when a company buys a strategic asset, it has to pay up for it, relying on optimistic assumptions and synergies to justify it. That’s why most deals don’t really work out for the acquirer. Here, Ted Rogers bought such an asset instead at its lowest point — things were so dire there was even some talk the Jays could move. Within a decade, all those structural headwinds had turned around or lessened, and he had a team located in the largest MLB market not split between multiple teams.

Moreover, Rogers was one of the few who stuck with the strategy though the lows. A lot of the big media mergers of the late-1990s were undone in the fallout of the dot-com bust a few years later, and sports teams were sold out of them (for example, Fox selling the Dodgers in 2004). But then the cycle came roaring back in the last 10 years as controlling content regained strategic content, and ever increasing prices are paid.

In short, buying the Jays has been one heck of a coup for Rogers. But next, we’ll look in-depth at the present.