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Sunday, December 1, 2013

The Minor Model and the Chicago Cubs: It Still Comes Down to Money, Honey

The Minor Model and the Chicago Cubs: It Still All Comes Down Money, Honey

The Present and Past: The Minor Model to World Series Success

The model Theo Epstein and Jed Hoyer have sold the last two seasons to the faithful Cubs fan is one of small and varied investments and flipping short-term assets to achieve a top-notch minor league system. Every now, and again, mentioning the Cardinals, almost harkening the ghost of Branch Rickey, when he too built the Cardinals from a derelict franchise to the World Champions of the NL in 1926. Then Branch moved on to the Dodgers in 1942 – creating the Jackie Robinson-led Dodger way – and then, Pittsburgh and their rebirth in the late 1950s to league prominence with the likes of Mazeroski, Groat, and Clemente.
It took Branch approximately seven seasons to build the Cardinals to champions. After World War I ended in November 1918, he came back to the struggling and financially troubled National League team. First, he tried his hand at field management, primarily, to only middling success. But it was his destined role as a general manager that help the Cardinals the most as he bought out low level minor league teams and installed new methods (or revived old ones) to get more quality from that new found and harnessed quantity in farm systems. By 1939, his Cardinals had 28 affiliated teams. 1940: 30 teams. 1940 Cubs: 6 including the LA Angels and the Milwaukee Brewers (soon to be owned by William Veeck for $25,000.)
This model does have the long-term result of working. Others have tried this…some better than others, as at some point, money has to be employed, large trades, better scouting, and revenues increase to make a final push to the top of the league.

Baltimore Orioles: Paul Richards & Jim McLaughlin

The defunct Browns/new Baltimore Orioles succeeded with GM/field manager Paul Richards took the reins, but only after he built them up through various trades, better evaluation and a new stadium produced good attendance. From SABR Bioproject:
He traded the Orioles’ lone star, fireballer Bob Turley, to the Yankees in a seventeen-player deal that was the largest in big league history. The trade brought the Orioles an eventual all-star catcher in Gus Triandos, while Turley helped the Yankees win the 1955 pennant and won the first Cy Young Award three years later. When local sportswriters and fans complained that Richards had handed the Yankees another pennant, he responded, “What concern is it of mine who wins the pennant? I need to get the Orioles out of seventh place.”
It took him six years to lift the Orioles above .500, but he stuck to his plan: build through the farm system, concentrating on young pitchers. He kept the scouting and farm director he inherited, Jim McLaughlin. Although the two arrogant, stubborn men squabbled constantly, it was the best decision Richards ever made. McLaughlin believed in a scientific approach to appraising young players. He was one of the first to use cross-checkers to put a second pair of eyes on every prospect. One of his scouts, Jim Russo, said McLaughlin was “years ahead of his time.”
Richards moved on Houston before the Baby Birds flew; his prospects and bonus babies landed their 1st big league championship in 1966. From 1964-1983, the Orioles won 90+ games 16 times.

 

Montreal Expos: John McHale, Jim Fanning, Mel Didier

While Richards took over Bill Veeck’s first defeat in ownership, McHale came from the commissioner’s office to Canada as lead executive to billionaire Charles Bronfrom to build a franchise from scratch. Like Richards, McHale had to find money when and where available and make trades to go with likely the best decade of drafting seen at the outset of a franchise. Their first star, Rusty Staub, came to Montreal through a trade controversy that stirred around Donn Clendenon, who refused to report to New York Mets in what would be their championship year.
Thereafter, McHale, general manager Fanning and director of scouting Mel Didier found the likes of Steve Rogers, Gary Carter, Warren Cromartie, Andre Dawson, Tim Wallach, and Ellis Valentine, and Tim Raines to name the well known names of 1970s. With enormous stadium issues at the outset, and mediocre attendance due to those struggles and sterility, it took Montreal 11 seasons to crack into the top tier of the National League. And then, they fell short in 1981 in game five of the NLCS to the LA Dodgers.

 

Cubs Finances: Baseball LBO

Is the model for success a one-route only plan?
In the prior examples, all during very different financial times (Pre-free agency), making a successful team hinged on judicious use of resources, expert and differentiating scouting, and signing players more as prospects than ever as finished products. An incubation period of 5-7 years was a given; no matter how much a team wanted to win now, that could not happen. That said, the 2014
Cubs are not that destitute. Or at least, they should not be.
But when the ownership changed hands from Sam Zell to Tom Ricketts, and his family of board directors, a substantial debt load too was placed on the team, by  business reports $674 million in notes. In 2010, in their first season, as full owners, they reduced payroll by $10 million, overcame some bad press about their Dominican Republic facilities (and thus put a $7 million investment into that area), and then put together a future plan to succeed at baseball. Their private investors likely required that – due to their heavy backing of the team, which was just in the playoffs two straight seasons. (But likely no nothing of the game…)
From Crane’s Chicago Business, January 4, 2010, calling this Creative Debt:
Mr. Ricketts and his financial advisers brought in institutional investors — such as insurance companies, pension funds and banks — to refinance $250 million in short-term debt provided by three banks, according to a Ricketts family spokesman….
Documents related to the deal, reviewed by Crain’s, provide a glimpse into how Mr. Ricketts, an investment banker who specializes in debt markets, orchestrated the highly complex deal, creating an unusual structure at a time when credit markets were nearly inert.
So, to make this leverage work, the Chicago Cubs needed to follow a plan that maximized returns to the investors in their debt. In 2012 payroll paid dropped to $80.4M from $136M. In 2013, the amount dropped to $61.6M. Added up from the 2011 near peak: 56 + 75 = $131 million in saved monies to meet $175million term loan in October 2013. The plan revised further with Theo Epstein’s arrival to be:

The Steps (in no particular order):

  • Cut payroll – and stop large investments in top-tier FA contracts as debt service was needed first
  • Find the right baseball man to rebuild the team (Theo Epstein & Jed Hoyer)
  • Draft in top 5-10 for several seasons. This after making only half-hearted attempts to win
  • Secure low-risk FAs that could be traded mid-season
  • Trade away any high priced assets for younger controllable talent
  • Renovate Wrigley Field for $300-500M- amenities to ballpark functionality for ballplayers once revenues are in place
  • Renegotiate local TV contracts on the level of the Rangers, Dodgers, Angels deals
  • Remove obstacles to revenues – Rooftop ownerships cutting into their business
  • Add new revenue streams – advertising, signage, hotel operations
  • Build up minor league scouting and development system
  • Build up front office staffing well versed in business analytical techniques and sabermetrics
  • Install a field manager that operates well with the leadership at the top
  • Never pay out long-term deals (4+ years) to free agents over 30
  • Sign young talent (22-24) to longer-term deals (5-7 years) once they are proven capable
  • Draft top bats – less risk; add quantity of pitching in drafting
  • Trade for top-tier pitching when timing suits the plan
A big chunk of that debt came due in October 2013, $175 million. It is likely was paid down via sinking funds to retire debt in short order. $13.65 million of payroll savings in 2013 season made its way back to the Cubs as they did a massive sell off mid-season when they were no worse record wise than the National West champion Dodgers in just early June.
The Sun-Times quoted Andrew Zimbalist, an expert on baseball economics:
“He’s behaving like he’s a mid-market team,” famed sports economist Andrew Zimbalist said of Cubs chairman Tom Ricketts, whose family owns the most profitable team in the majors in the third-largest market in the country.
In terms of their timeline to be competitive, the Cubs could have a problem because their mid-market behavior appears to be caused as much by the debt left from the Ricketts’ highly leveraged purchase of the team as any premeditated rebuilding process.
Zimbalist, an economics professor at Smith College in Northampton, Mass., cautions against using baseball spending levels as a basis for criticizing ownership, pointing out the light correlation between performance and payroll and what might be nothing more than a function of a longer-range business plan.

 

A Minor Setback: FO Change of Managerial Direction

So, after two completely disastrous seasons of 197 defeats, resulting in the firing manager Dale Sveum, one can expect that new manager Rick Renteria will have at least two more seasons before their substantially promoted crop of minor talent comes to change the 106-107 year old curse.  Renteria’s seemingly first duty is to reverse the regressions of Anthony Rizzo and Starlin Castro from their quite disappointing 2013 seasons for Cubs faithful. He will have also set out to install a winning approach, with a team lacking vets, aside from Jeff Samardzija, the lone holdover from the 2008 97-win Cubs, or Edwin Jackson, coming off a sabermetrically decent, but traditionally bad season.  The new manager may find Samardzija gone, as the Notre Dame grad wants to a pricier extension, and to cash in on his first 200-IP season at two years before free agency. His demands may drive him out of a Chicago job; or the front office might find prospects more appealing than keeping a nearing thirty #2 pitcher with #1 velocity.  Even Jackson’s 4yr-$52 million FA contract has resulted in some backtracking too from the GM Jed Hoyer, saying, “we got a bit ahead of ourselves.” At the end of the day, newbie manager Renteria has his work cut out for him.
Yet, these installers of this Minor Model want to keep Cubs fans interested and thinking they will be competitive going forward. This after losing about 650,000 fans in 2013 from their peak at 3.3 million in 2008. At $50 per head, this is $32.5 million in revenues lost. But, never fear, the new MLB TV deal(s) will add over $25-75 million (depending on source of income) to the coffers starting in 2014. But then, the Cubs still kick in approximately $39 million to revenue sharing. And then more importantly, only insiders know the actual size of debt repayments (installments) and if the ghost of Sam Zell is floating around in the books too.
Sidetracking the critics, are reports of interest in uber pitching free agent Masahiro Tanaka, at least a 100-plus million dollar investment in just ONE arm, seem overblown, given the cost structures in place. Jacoby Ellsbury, a Theo draftee, would be another high price add, that the checking account is unlikely to pry open so wide that Scott Boras and Ellsbury are ever seen in Wrigley proper. But “interest” can be had at the low price of free. And it keeps fans hoping one day will be today.

 

The 7-Year Wait: Adds to the 106 Year Old Cubs Tradition

Cubs DebtSo, what should be next? From history, it takes 5-7 years, at minimum, to reach critical mass for a successful baseball build. The 1962 Mets did it in seven seasons; the Toronto Blue Jays reach playoffs in nine seasons, World Series, 15. Florida Marlins only five, then a massive sell off of assets. The Montreal Expos were a decade plus, but had Olympic Stadium and Canadian monetary issues to boot. Tampa Bay Rays made it to a World Series in a decade. Baltimore took a decade. Rickey, the absolute master, took five years with a team that had just visited the World Series in Brooklyn (1941). (But he had the misfortune of trying to usurp his former employer.)
So, Cubs faithful, this Minor Model will require much more sacrifice. Much more time. 2017 is, at best, the first window. The revenues will come on line. Financing will be redone again by the expert investment banker. The prospects named Javier Baez, Kris Bryant, Albert Almora, and C.J. Edwards will make their presence felt. Maybe a couple of trades in late 2013/early 2014 will land catcher Kevin Plawecki, RHP Rafael Montero, LHP Tyler Skaggs, or RHP Archie Bradley, or RHP Kyler Zimmer. Or some other interesting names in the top 50 of Baseball America’s ranking.
No one outside the minor plan in place can estimate who else is available for trade exodus – but the Cubs team is leaned out because the finances are at the very heart of it. So, patience is a virtue Cubs faithful. It has to be.
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