Cubs sale complicated by broadcast contracts

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Posted by on June 01, 2009 at 12:50:27:

Unwinding TV, radio relationships trips up negotiations between Tribune Co., Ricketts family
By Ameet Sachdev and Michael Oneal | Tribune reporters
May 31, 2009

Tribune Co.'s ownership of the Chicago Cubs has always been on the cutting edge of sports.

Controlling both a baseball team and the media outlets that broadcast its games helped the Cubs develop a national following despite a century without a World Series championship. The exposure generated millions of ticket sales at Wrigley Field and increased audiences for its TV and radio stations. Most of all, it significantly increased the value of a team Tribune Co. bought for $20.5 million in 1981.

But now, unwinding those interlocking relationships is bogging down the media company's deal to sell the Cubs to Wilmette investment banker Tom Ricketts and his family. A dispute over the value of the team's broadcast contracts has thrown the deal's $900 million price tag into question and complicated a negotiation that many expected would be wrapped up by now.

The Ricketts family is planning to deliver a "comprehensive package" to Tribune Co. later this week outlining its latest proposal and a long-awaited financing package, a source close to the talks said.

But the family is also claiming that upon closer inspection, the broadcast contracts aren't worth as much as they originally thought. And that has led the Ricketts to seek concessions in the contract language or a $40 million to $50 million reduction in the sale price.

Frustrations have boiled over. Both sides have complained to Major League Baseball about the difficulty of dealing with the other. Both parties have expressed their dissatisfaction in the media, usually anonymously. But on Thursday, Sam Zell, Tribune Co.'s chairman and chief executive, upped the rhetorical ante.

"If the Ricketts deal doesn't get done, I am sure there'll be other ones," he told Bloomberg Television, although he suggested the two sides are working toward a close.

For the Ricketts, the future value of the broadcast contracts is crucial. In the four months since the family emerged as the winning bidder for the Cubs, the credit markets have continued to erode, driving up financing costs. Meanwhile, the searing recession has called into question the earning power of all professional sports franchises.

Revenue from stadiums and media contracts drive franchise values. The Cubs play in the second-oldest ballpark, a fact that makes it a shrine but also constrains a new owner from finding additional revenue sources without making a significant investment in stadium improvements.

Considering that the Cubs already sell out their games, the team's future revenue growth depends largely on getting the most out of its television and radio contracts.

Lee Berke, president of LHB Sports, Entertainment and Media Inc., said that given Tribune's history with the Cubs, it is hardly a surprise that tensions have erupted over how to structure contracts to broadcast games on the company's WGN-Ch. 9, WGN radio and Comcast SportsNet Chicago.

The Cubs and WGN are synonymous in fans' minds. WGN-TV began broadcasting home games in 1948; WGN-AM radio carried games long before that. When Tribune Co. turned WGN into a cable superstation in 1978, Cub games reached millions of homes outside Chicago, turning people like 43-year-old Tom Ricketts, who grew up in Omaha, into Cub fans.

Over time, Tribune Co., which also owns the Chicago Tribune, began moving more games to cable. It made sense because the company could strike deals that assured a guaranteed revenue stream even if advertising dipped. Cable channels can pay a flat fee for sports programming because they receive subscriber revenue as well as advertising dollars. In 2004, Tribune Co. formed Comcast SportsNet in concert with other team owners in the city, giving the company a cut of the channel's profits as well. (Tribune is selling its 25 percent stake in Comcast SportsNet, in addition to the team and the stadium.)

But Tribune Co. also wanted to protect WGN. So it continues to broadcast about 70 games a year on its television station and all 162 games on the radio. The Cubs and WGN have historically split advertising revenue 50-50, three former Tribune executives said. The Cubs' share was probably less than the team might have gotten from an independent station.

Tribune doesn't release those numbers, but in 2001, an MLB report to Congress showed that the team's broadcast revenues were significantly below what other big-market teams pulled in, including the Chicago White Sox, the rival across town. The document said the Cubs received $23.5 million in revenue from local television, radio and cable contracts, while the White Sox commanded $30 million.

Putting a cap on Cubs revenue was always in Tribune Co.'s overall interest because it meant the team would not have to pay as much into baseball's revenue-sharing pool, sources said. Other media companies that owned baseball teams had the same strategy.

"When you have a single owner of the two parties of the contract, it's really just a question of which pocket you want the revenue in," said a banking source who has worked on many baseball transactions. "Baseball does audits to make sure that other teams aren't getting chiseled [on revenue sharing]. But the baseball audit process isn't perfect. They don't really want to ruffle the feathers of the big media companies. So as long as it meets the basic smell test, it's OK."

But now Tribune Co. and the Cubs' interests have diverged. The Ricketts want to make sure they maximize the potential broadcast revenue from one of the most popular franchises in sports. Tribune Co., which is struggling under $13 billion in debt while operating under Chapter 11 bankruptcy protection, wants to preserve the value of WGN. The station relies heavily on Cubs games to drive viewership to its prime-time programming, and the team draws national advertising to the WGN cable superstation.

Sources close to the family say that as the Ricketts went through their due diligence on the team they determined that the broadcast contracts contained provisions that limited their value to the team. The sources haven't identified the sticking points. A spokesman for the Ricketts said the family wouldn't comment on the negotiations. Tribune Co. also declined to comment.

But people familiar with sports broadcast contracts said there are a number of potential areas of dispute, particularly because the Cubs and WGN have a revenue-sharing deal. Increasingly, franchises seek rights deals that guarantee a minimum level of revenue. But in a revenue-sharing arrangement, there is more room for the numbers to shift. For example, said one banker familiar with broadcast deals, since the station sells the ads, it potentially could capture more of the revenue for itself by raising commissions or sales fees. As long as it controls the books, it has a lot of ways it can affect the net revenue totals.

A potentially bigger issue might involve what are known as "back-end provisions." These are contract terms that address what happens to the broadcast rights at the end of the agreement. For a team owner, the best terms would allow the team to take its games and shop them to the highest bidder when the contract expired. The station would prefer a right of first refusal or some other way to hold on to the games without getting into a bidding war.

"How the back-end provisions read is critical to whether there's a big bump up in long-term revenue or not," the banking source said.

Being able to count on future revenue growth is especially important for the Ricketts because the deal has become increasingly expensive. In order to limit its capital gains tax exposure, Tribune Co. has demanded a complex structure that requires a lot of debt. Sources familiar with the deal said the Ricketts are close to finalizing agreements with banks to borrow about $400 million, plus a $25 million revolving credit line. But the terms are onerous. They include an upfront fee of $18 million to $20 million and an interest rate that will likely start between 6.5 percent and 6.75 percent but will rise and fall with a lending standard known as Libor.

The rest of the $850 million to $900 million will come from money the Ricketts raised by selling stock in TD Ameritrade Holding Corp., an online brokerage started by Tom's father. If the Ricketts close the deal, sources say the family would like to swap some of its bank loans for longer-term debt from insurance companies and other institutional investors.

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