Financial Flexibility- What are the facts?
Posted: Fri Sep 02, 2016 3:32 pm
As I sit here in Florida this morning, very grateful that my wife and I successfully weathered the effects of hurricane Hermine last night, and especially grateful to have not lost electricity like so many thousands of others in central Florida, my thoughts naturally turn to my favorite baseball team. Perhaps it is the proximity of a natural disaster like a hurricane and its resultant low pressure or maybe just the hangover from that 3 game beat-down that the Cubs put on us this week that got me to pondering on the serious and contentious matter of the Pirates' front office concern/obsession with 'Financial Flexibility'.
Of course this issue became a headline recently in the much discussed 'trade' of Francisco Liriano to the Toronto Blue Jays. On the surface of it that deal looks a lot like the Pirates, desperate for financial flexibility, leveraged a salary dump by preferentially giving up two prospects instead of retaining salary. It was a deal that for the first time gave a pretty clear indication that for all of the Pirates stated valuing of their prospects and some would say over-protective attitude regarding their developmental talent pool they value financial flexibility more.
Some contend that 'Financial Flexibility' is just corporate-speak for being cheap. Others believe that it represents the savvy thriftiness of a successful MLB franchise. Unfortunately when this issue is discussed it ends up being much more an argument about beliefs than a discussion of comparative facts.
In an effort to try to come to an informed rational opinion on this matter I did some research into MLB finances. I found a couple of resources that were most helpful. This one: http://www.forbes.com/mlb-valuations/list/ in Forbes magazine had the best organized info. It looked at 5 financial parameters:
1. Current Team Value
2. 1 Year Team Value Change- what percentage value gained/lost in the past year
3. Debt Value- percentage of debt to team value
4. Revenue- earnings before interest, taxes, & depreciation
5. Operating Income- discretionary income before taxes- spending money and/or profit/loss
So what does Forbes say about the Pirates?
1. Current Team Value- they rank 18th in MLB at $975M- the team was purchased in 1992 by the Nuttings for $92M
which means that they have assured themselves of a tidy profit of $883M on their investment over the past 24 years for an average of $36.7M return on investment per year.
2. The 1 Year Team Value Change from 2015 to 2016 was 8% which ranks 10th in the league and amounts to an increase of $78M (more than double the 24 year average increase). The team is now becoming more valuable more quickly.
3. Debt Value is at 10% which ranks 16th in MLB (0% would rank 1st) so their debt is $97.5M
4. Revenue for 2016 is $244M which ranks 17th in MLB (tied with San Diego)
5. Operating Income is 9th in MLB at $35.3M
When viewed in a vacuum these numbers seem to indicate that the Pirate ownership has made a wise and very lucrative investment in purchasing the team. That the investment is growing at a rate that is accelerating. However, they do owe more money than the original purchase price of the team. They also generate a bit less revenue than the average, but nowhere near the bottom of MLB teams (even with their TV revenue in the bottom 20% of the league). And remarkably that their operating income is $35.3M placing them 9th in MLB.
In a larger context here are some things to ponder:
Payroll-
The Pirates rank 25th according to http://www.spotrac.com/mlb/payroll/ with a payroll of ~$102.5M. Compare this to another rising small market competitive team, The K.C. Royals who rank 15th with a payroll of ~$143.2. Why are the Royals able to spend $41M more on payroll than the Pirates? Let's look at the Forbes financials for both teams to see if there may be some clues in the numbers.
1. Team Value- Pirates: $975M (18th) Royals: $865M (25th)
$975M - $865M = +$110M Pirates
2. 1 Year Team Value Change- Pirates: 8% (10th) Royals: 24% (2nd)
$78M - $207.6M = +$129.6M Royals
3. Debt Value- Pirates: 10% (16th) $97.5M Royals: 7% (11th) $60.5M
$97.5M - $60.5M = +$37M Royals
4. Revenue- Pirates: $244M (17th) Royals: $273M (11th)
$244M - $273M = +$29M Royals
5. Operating Income- Pirates: $35.3M (9th) Royals: $39M (8th)
$35.3M - $39M = +$3.7M Royals
Crunching the numbers we see that the Royals possess an $89.3M advantage in these financials for 2016. More than enough for a business to justify a $41M higher payroll than the Pirates.
Also worth noting is that the Royals ownership purchased the team in 2000 for $96M resulting in a return on investment of $769M over 16 years or an average return of $48M per year. So the expectation of more return on investment can also be considered a factor which mitigates some of the Pirates advantage in their current team value.
continued...
Of course this issue became a headline recently in the much discussed 'trade' of Francisco Liriano to the Toronto Blue Jays. On the surface of it that deal looks a lot like the Pirates, desperate for financial flexibility, leveraged a salary dump by preferentially giving up two prospects instead of retaining salary. It was a deal that for the first time gave a pretty clear indication that for all of the Pirates stated valuing of their prospects and some would say over-protective attitude regarding their developmental talent pool they value financial flexibility more.
Some contend that 'Financial Flexibility' is just corporate-speak for being cheap. Others believe that it represents the savvy thriftiness of a successful MLB franchise. Unfortunately when this issue is discussed it ends up being much more an argument about beliefs than a discussion of comparative facts.
In an effort to try to come to an informed rational opinion on this matter I did some research into MLB finances. I found a couple of resources that were most helpful. This one: http://www.forbes.com/mlb-valuations/list/ in Forbes magazine had the best organized info. It looked at 5 financial parameters:
1. Current Team Value
2. 1 Year Team Value Change- what percentage value gained/lost in the past year
3. Debt Value- percentage of debt to team value
4. Revenue- earnings before interest, taxes, & depreciation
5. Operating Income- discretionary income before taxes- spending money and/or profit/loss
So what does Forbes say about the Pirates?
1. Current Team Value- they rank 18th in MLB at $975M- the team was purchased in 1992 by the Nuttings for $92M
which means that they have assured themselves of a tidy profit of $883M on their investment over the past 24 years for an average of $36.7M return on investment per year.
2. The 1 Year Team Value Change from 2015 to 2016 was 8% which ranks 10th in the league and amounts to an increase of $78M (more than double the 24 year average increase). The team is now becoming more valuable more quickly.
3. Debt Value is at 10% which ranks 16th in MLB (0% would rank 1st) so their debt is $97.5M
4. Revenue for 2016 is $244M which ranks 17th in MLB (tied with San Diego)
5. Operating Income is 9th in MLB at $35.3M
When viewed in a vacuum these numbers seem to indicate that the Pirate ownership has made a wise and very lucrative investment in purchasing the team. That the investment is growing at a rate that is accelerating. However, they do owe more money than the original purchase price of the team. They also generate a bit less revenue than the average, but nowhere near the bottom of MLB teams (even with their TV revenue in the bottom 20% of the league). And remarkably that their operating income is $35.3M placing them 9th in MLB.
In a larger context here are some things to ponder:
Payroll-
The Pirates rank 25th according to http://www.spotrac.com/mlb/payroll/ with a payroll of ~$102.5M. Compare this to another rising small market competitive team, The K.C. Royals who rank 15th with a payroll of ~$143.2. Why are the Royals able to spend $41M more on payroll than the Pirates? Let's look at the Forbes financials for both teams to see if there may be some clues in the numbers.
1. Team Value- Pirates: $975M (18th) Royals: $865M (25th)
$975M - $865M = +$110M Pirates
2. 1 Year Team Value Change- Pirates: 8% (10th) Royals: 24% (2nd)
$78M - $207.6M = +$129.6M Royals
3. Debt Value- Pirates: 10% (16th) $97.5M Royals: 7% (11th) $60.5M
$97.5M - $60.5M = +$37M Royals
4. Revenue- Pirates: $244M (17th) Royals: $273M (11th)
$244M - $273M = +$29M Royals
5. Operating Income- Pirates: $35.3M (9th) Royals: $39M (8th)
$35.3M - $39M = +$3.7M Royals
Crunching the numbers we see that the Royals possess an $89.3M advantage in these financials for 2016. More than enough for a business to justify a $41M higher payroll than the Pirates.
Also worth noting is that the Royals ownership purchased the team in 2000 for $96M resulting in a return on investment of $769M over 16 years or an average return of $48M per year. So the expectation of more return on investment can also be considered a factor which mitigates some of the Pirates advantage in their current team value.
continued...