This may be considered another crack in the foundation of Ricketts' ownership.
The SunTimes noted that the Ricketts family is
exploring opening the Cubs ownership to minority shareholders to help
finance the long-sought renovation and expansion of Wrigley Field.
The SunTimes story said the Ricketts would offer the shares in a team that Forbes values at $1.2 billion.
If the deal goes through, the
Cubs would be seeking a small number of high net-worth shareholders. The
shares would come out of the Ricketts’ 95-percent ownership of the
Cubs.
But shareholders would not be offered a vote at the table. “There would be no change in control,” the source said.
“The Rickets family is looking
at a number of financial options to be prepared to finance expanding
and preserving Wrigley in the event that there is a project to move
forward with,” said Ricketts family spokesman Dennis Culloton, who noted
that going forward with any financing plan depends on a positive
conclusion to ongoing negotiations with rooftop owners concerning
expansion plans.
“[The Ricketts] may wind up
just writing a check themselves, but this may be another way to generate
new capital,” the source said. “The long term goal is to get this
project moving forward so the Cubs can generate new resources for the
baseball operation.”
There are many problems with the story.
First, when Sam Zell and Tribune sold the Cubs it was under strict guidelines in order to create a "tax free" transaction so the Tribune would not have massive capital gain to report. (The IRS is currently reviewing the transaction to see if taxes are owed on the sale.) The Tribune bought the Cubs in 1981 for $30 million, and the sale was for $845 million. $815 million could be subject to capital gain taxes.
Second, most of the sale price was used by leveraged debt. Under normal commercial loan covenants, ownership cannot change during the term of the financing agreement. In addition, in order to preserve the fiction of the transaction being a partnership and not a sale, Zell's plan mandated that the Tribune maintain a 5% ownership interest in the team and Wrigley Field.
Third, the Cubs and their spokespeople continually lump everything under one banner, "the Cubs" in discussing the renovations, the team, the park, etc. But as the Ricketts zoning petition indicated, a separate legal entity owns the ball club, Wrigley Field, the parking and the new commercial properties outside the park. So if the Ricketts are really trying to sell shares in the "team," it would run afoul of the Zell ownership rules.
Fourth, even if the Ricketts can sell part of their 95% of the team, those current shares have voting and equity rights. The media reports indicate that the Ricketts are thinking about selling "non-voting shares" to raise capital for the renovation. A new share classification of ownership could violate the Zell covenants, and possibly run afoul of Major League Baseball ownership rules, where the other owners must approve any transfers of ownership interests.
Fifth, adding another classification of shares as a means of disguising new "loans" to the Cubs would run afoul with Major League Baseball equity to debt ratios, for which the Cubs are currently not meeting that standard. The idea of using shares to raise capital is common in most normal corporations to fund operations or expansion of goods or services. When a company issues another round of newly issued shares, it dilutes the current equity of existing shareholders as a result.
Sixth, if the Ricketts are looking to get around current loan covenants, the MLB debt regulations and current commercial loan market, it means that the Cubs and the Ricketts cannot borrow from banks or financial institutions. One could state in that event the team has tapped out is borrowing, so it is seeking alternative means, through "qualified investors." But sophisticated investors are not going to be lured with a shiny certificate that says "You own 1000 non-equity and non-voting shares of the Cubs." They will want a return on the investment and a say in management to protect their investment.
Seventh, if the Ricketts are actually going to sell shares from their 95% of the team, those sale proceeds would not go back to the team but straight into the personal bank accounts of the Ricketts family. This does not raise capital for Wrigley Field renovation. The option noted in the article that the Ricketts could write the check for the renovation themselves seems to contradict the Day One mandate from patriarch Joe Ricketts who said the family would not add any more money to the Cubs; it had to be self-sufficient business. When an investor wants to start to take profits or retained earnings from their business, one way to do so is to sell a portion of their stake to new people. Perhaps, the Ricketts denials that they have not been taking operating profits from the Cubs are true (because the team has none to meet future expenditures), so the only way to get money out of the team is to sell shares. In most cases, this is probably the last thing an owner would want to do because it adds another layer of complication to running the business, new outsiders with differing views and requirements on how to make money off the Cubs.
The Cubs and Wrigley Field have been milked dry. This season of new promotions and the "Party at the Park" year round celebration is not going to be the big revenue spike that management is hoping for because the team (and attendance) will continue to be poor.
Even though when Ricketts bought the club and said they would be in it "for the long haul," every prudent investor needs to have an exit strategy. The Ricketts selling shares of the Cubs could be the first round of a divestiture of the team. Clearly, the Ricketts expectation of owning an iconic major league baseball franchise was slammed down by the reality of Chicago politics, poor neighborhood relations, poor regional economics and a one-sided purchase agreement that ties their financial options.
