Rogers and the Blue Jays, part 3: the future

See also: Part 1: Background and history | Part 2: The present fit within Rogers

In this final instalment, we turn to the potential future if Rogers isn’t to remain the 100% owner of the Blue Jays as it has been for the last 20 years,

One frequently floated option is for the Jays to be folded into Maple Leaf Sports and Entertainment, joining effectively every other major Toronto sports property. This of course would not fully end Rogers involvement, since they own 37.5% of MLSE, but there is some compelling rationale.

First, it would move the Blue Jays and their revenue and expense lines off the Rogers income statement directly. Rather than than the entire operation being consolidated in the media division, minority investments like MLSE are accounted by the equity method. It’s important to note however this accounting treatment doesn’t actually remove the ultimate profits or losses from the very bottom line (other than it being 37.5% instead of 100%) since they are included in other income. It does reduce the direct scrutiny of changes in costs and revenues.

Moreover, MLSE has significant expertise in stadium and real estate development having shepherded the construction of the ACC/Scotiabank Arena and BMO Field as well as Maple Leaf Square. Given the blockbuster news late last year that the Jays are looking at a potentially massive redevelopment of the Rogers Centre property, the strategic overlap is obvious.

Finally, it would allow Rogers to monetize a significant part of their holding and realize profits without totally selling out. Assuming a valuation upwards of $2-billion Canadian, selling/transferring the team to MLSE would net Rogers over $1-billion towards those core cable/wireless capital expenditures, assuming the ownership structure wasn’t changed.

The problem is that the whole strategic nature of the Blue Jays to Rogers is in controlling their broadcast rights and 500+ hours of live summer content plus ancillary content packaged around it. Especially as distribution moves towards streaming rather than cable bundles, that’s a major differentiating point. This exclusivity, and any extension into the future, needn’t be a dealbreaker for Larry Tanenbaum.

But it’s a different story when it comes to the final partner, Rogers’ rival-cum-awkward-equal-partner Bell. One cannot fathom that Bell would entertain facilitating a large payment to their rival while tolerating being shutout of the broadcast rights. After all, the whole genesis for the “Team of Rivals” coming together to buy the majority stake in MLSE was the fear of the other being able to acquire or buy exclusive broadcast rights. Or perhaps even worse, winning such a ruinous bidding war.

So the only way a Blue Jays to MLSE scenario works is if Rogers was willing to split the broadcast rights with Bell/TSN (in which case it’s not much of a strategic asset anyway and they may as well just sell entirely), or if Bell doesn’t particularly care for baseball (in which case why effectively buy 37.5% ownership of a team?). Perhaps there’s some longshot threading of the needle where this could be worked out (perhaps involving any future Montreal broadcasting rights). But in the end, it seems like too much of a roadblock.

There’s a number of possible alternate structure where Rogers could look to “surface value“ while retaining a stake for strategic control purposes. If the idea where a bigger, more radical move out of the media business, they could spin off the division into a separate company, perhaps retaining a minority stake at least initially. There’s some precedent for this with the Atlanta Braves and Liberty Media, part of the John Malone constellation of entities.

This would leave the Jays in the familiar under corporate ownership, presumably in the public markets, but as a material and much more significant piece of the pie. Instead of perhaps 2%, they’d make up more on the order of 20% of revenue, and almost certainly a great deal more of the value. In fact, the Jays are probably big enough that they could be a standalone company.

There’s likely also be a lot more pressure on them to carry their share of the financial load and generate earnings, so if you thought payroll parameters have been an issue in the past 10 years, it would probably be worse. But for these reasons, realistically it makes a lot more sense for sports franchises to be held privately, and if Rogers is going to cash in, that’s the most logical route and outcome.

Most critically for our purposes, there’s a plausible endgame where Rogers can achieve their most important objectives — strategically controlling the broadcast rights while enhancing shareholder value — without hobbling the team’s ability to compete on the field

Suppose that if broadcast rights were put up for auction for a typical of long term deal at their true market value (an arm’s length transaction), the result would be a fee that started at $100-million/season increasing at 3% annually. Over 25 years, that would be a total of $3.65-bilion ($146-million average).

Suppose instead that before selling the team, Rogers locked the Jays into a 25-year deal with Sportsnet that started at $50-million, and increased at 4% (slightly higher to slow down how fast the absolute difference grows). At just under $2.1-billion ($83-million average), that would obviously cripple the team financially and ability to compete on the field, right? In reality we wouldn’t be dealing with something so large, but not necessarily at all.

When it’s said that the team might be worth $2-billion, that doesn’t mean a buyer who paid that price would actually be ponying that amount of cash. A prospective buyer might put up $500-million in equity while borrowing the remaining $1.5-billion. Then the cash flows of the business are used to service and repay the debt. A lot of debt not only means paying less of your own money upfront, but is a means for claiming the business is a lot less profitable or unprofitable when the employees want to share in the spoils.

That’s why baseball’s collective agreement has debt service rules, so that baseball revenues are not disproportionately sucked away from paying player salaries to servicing and paying debt. Even with very low interest rates, 3% on $1.5-billion amortized over 30 years makes for an annual payment of $76.5-million. At 5%, it’s almost 100-million!

Perhaps one sees where I’m going. Owners are highly incented to use a lot of debt, and under a new owner inevitably a good chunk of revenue will be diverted away. An artificially low TV deal with a discounted sale price to offset it is effectively the same as paying a much higher price but but paying the cost of that additional capital. A long-term investor will be most concerned with the long-term prospects, and such a broadcast deal could be a finite liability that eventually expires and disappears.

How do the numbers work for Rogers? They get a much lower price upfront, but which would also reduce the tax hit and leakage. More importantly, it creates a robust stream of predictable future cash flows for the media division that will pad their margins and earnings well into the future. The exact thing prized by the dividend/income investors who largely forms Rogers shareholder base. In a perfectly efficient market, there shouldn’t be free lunches, but in practice beyond unlocking value while maintaining control of the prize for them, such a structure could conceivably make Rogers more valuable.

Rogers is Gone! Long live...Rogers?

Who could end up the buyer of the Blue Jays? There’s myriad possibilities in Canada, to say nothing of international high flyers looking to make a splash in a high-potential market. In the best case scenario, Jays fans get their own Steven Cohen.

But one possibility in particular sticks out at me...a local with more than the requisite wealth, involvement in the sports business and intimately familiar with the team. In fact, at the top of the masthead already. And to boot, he potentially has a particularly valuable currency with which to purchase. I’m referring to Edward Rogers, son of and one-time heir apparent to Ted.

The second part reviewed how he was removed from Rogers management, and around the same time joined the MLSE board and became chairman of the Blue Jays. Since then, his ventures have focused on real estate, which just so happens to dovetail nicely with what the Jays are scoping out (and more broadly, the type of bigger play MLB is becoming, for example the Cubs/Wrigleyville).

If Rogers the company with telecom management wants to monetize the asset, selling to Rogers the son would make a lot of sense. He’d broadly have incentive to maximize the value of the broadcast rights, but also has a huge stake in the success of Rogers Communications. That is to say, he might drive a hard bargain but he wouldn’t be taking them down the street to Bell.

Finally, to the extent the company wants to free up capital to ultimately at the margin to do share buybacks...he’s theoretically got a lot of them. It’s indirect ownership, through trusts, but if there’s a will I’m sure a deal could get done, especially since not only would it cut out the middleman but I assume it could be structured to minimize taxes all around. Granted, he may not have have serious interest — but if nothing else, presumably he’d have first crack.

The question is given what we know about his involvement with the team (Ex. A: l’affair Beeston), whether this would this be a good thing or a bad thing for the team and the fans. Would be finish what his father set out to do and bring another championship banner, or end up a Dolan of the north?

There is upside and downside to a potential new owner for the Blue Jays. A company is not going to chase championships, but it’s also been 20 years of stability and relative competence. For those who don’t like Rogers corporate ownership of their favourite baseball team and would welcome a more conventional arrangement, my word of caution: be careful what you wish. You just might get it.