Atlanta Braves 2018 opening payroll stands at roughly the true payroll level for last season. So, are the Braves being cheap or thrifty?
By now most understand Scott Boras’ rants should be taken with a grain of salt and two aspirin. Not only do they cloud the issues, they also cast aspersions on the Atlanta Braves among others.
Boras worded his statement carefully: exactly what one would expect from a lawyer.
"Now, with 24 teams earning at least $150 million more in revenue than their payrolls in this $12 billion industry, according to Boras’ calculations and refuted by club owners, maybe now they’ll take out that dusty checkbook and start spending. Bob Nightengale USA Today 1/29/2018"
His personal agenda aside, Boras’ remarks bear looking if only to clear the fog around them. he said revenue – not profit – with good reason: he doesn’t know how much profit the teams made. He also knew that the average person would hear revenue and assume it meant profit. According to Investopedia revenue and profit are completely different things.
"Revenue is the amount of money that a company actually receives during a specific period . . . the top line or gross income figure from which costs are subtracted to determine net income. Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity."
While we can’t look at every team’s financials, the Atlanta Braves parent company – Liberty Media – is publicly held and files an annual report with the SEC. That gives us a chance to look at how the Braves’ fiscal year went.
The Atlanta Braves and their money
(There’s a lot of detail on the SEC filing in the next four pages. The detail lends context, but if you get bored, skip to the conclusions page.)
The 2017 end of year report details the way Braves Holdings spent its money last year and discusses 2014, 2015 and 2016 as well for background. I’ll provide context but for the nitty-gritty, I suggest reading the report. Drink plenty of coffee first, it’s soporific.
Most of us subconsciously know the Atlanta Braves aren’t a singular entity. Yet when talking about their finances we tend to assume all of that money is available for their direct use of the team on the field and STP; that’s not the case.
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In the report LMC uses the term “Braves Group” but it isn’t a separate legal entity. Braves Group is simply a collective name for the businesses, assets and liabilities attributed to that group.
Braves Holdings makes up the largest part of the Braves Group. It indirectly owns the Atlanta Braves, various assets and related liabilities relating the ballpark, the Battery Atlanta and some corporate cash. LMC uses a similar structure for their Formula One group.
The filing spells out the content of Braves Holdings on Page I-19 and again on page II-8.
- The Atlanta Braves baseball team
- Five wholly owned minor league teams (Gwinnett, Mississippi, Rome, Danville and the GCL Braves)
- A baseball academy in the Dominican Republic that also fields a team in the Dominican summer league
- A business (financial) relationship with the Florida Firefrogs
- Exclusive operating rights to Sun Trust Park via a stadium operating agreement
- A lease on Champion Stadium – recently extended through the 2019 season
- 82 Acres of land minus the area under Sun Trust park where the Battery Atlanta is being constructed
The last one requires some explanation.
In 2014 Braves Holdings (and affiliates) purchased 82 acres of land for the project. The stadium became the property of Cobb County and the Cobb-Marietta Coliseum and Exhibit Hall Authority. The rest of the land where the Battery is being constructed remains a Braves Holdings asset (pg I-20).
That’s enough of that; on to the good stuff.
Small spreadsheet anyone?
Expenses incurred are broken down into two categories; ‘other operating expenses’ and what I’d call ‘administrative overhead’. The former is simply what it costs to run the baseball and stadium operations while the latter includes marketing advertising, finance and related personnel costs.
| Braves Holdings | |||
| Numbers in millions | 2017 | 2016 | 2015 |
| Total Revenue | $386 | $262 | $243 |
| Operating Expenses (excluding stock based compensation included below) | ($281) | ($224) | ($189) |
| Selling and General administrative expenses | ($98) | ($58) | ($51) |
| Adjusted OIBDA | $7 | ($20) | $3 |
| Stock-based compensation | ($46) | ($9) | ($10) |
| Depreciation and amortization | ($67) | ($32) | ($31) |
| Operating income (loss) | ($106) | ($61) | ($38) |
On page I-18 LMC spells out where Braves Holdings derives its income.
- Ballpark operations (ticket sales,concessions, advertising (called corporate sales in the report), the suites and premium seat fees.
- Broadcast rights, local and national
- Advertising and corporate sponsorships
Ticket sales and broadcasting rights are the team’s primary revenue drivers with the majority of income coming in the second and third quarter. In 2016 the Braves took control of the in-game concessions at Turner field. That added to expenses that year but increases the bottom line every year.
At the end of 2017, the Braves Group had cash and cash equivalents of approximately $132 million including $55M belonging to subsidiaries (not the Braves). The Group owed $417M in variable rate debt and $250M in fixed rate debt (pg II-29).
Because cash flow is seasonal, Braves Holdings generally funds its operating activities with two lines of credit with a combined borrowing capacity of $185 million. If they need more they borrow it, Major League Baseball even has an internal line of credit teams may use.
Please sir, may I borrow some money
In conjunction with access to their internal line of credit, MLB oversees the debt owed by each club. The Debt Service Rule limits a team’s total indebtedness as it relates to their revenue.
Attachment 22 to the 2017-2021 CBA lays out the detail of debt service rule (DSR); if you feel brave and have a background in accounting, dive in.
Essentially a team’s revenue is multiplied by one of three factors to determine how much debt is allowed. Like everything contractual, “Total Club Debt” (TCD) isn’t simply the sum of everything a club owes.
TCD includes without limitation all long-term and short-term obligations and all indebtedness resulting from:
- Money owed to the Major League Baseball industry credit facility
- Club Supported Debt incurred by the Club or any Club related party*
- Deferred compensation (not player compensation)
- Stadium-related Debt incurred for or in connection with ballpark construction or improvements (after first full season of play)
- Any other debt that is properly classified as indebtedness of the Club under generally accepted accounting principles
*Club supported debt is any debt created by the club or someone acting on behalf of the club or appearing to act on behalf of the club unless the club can convince the commissioner they club aren’t a party to that debt.
TCD does not include:
- Advances taken by a Club against future revenue that it is contractually entitled to receive
- Any debt issued in connection with the monetization of a long-term Club business contract, the proceeds of which are placed into an escrow account controlled by the Office of the Commissioner; and
- Any compensation payable to Major League Players, the Major League Baseball Players Benefit Plan or Industry Growth Fund
- The first seventy-five million dollars ($75,000,000) in outstanding debt from any of the sources described above
The reason for such oversight are pretty clear. MLB is a huge monopoly supported by a (questionable at best) antitrust exemption. MLB as a whole can’t afford teams and their owners playing fast and loose with team assets and risk the team falling into bankruptcy.
Pay up or. . .
Teams are generally not punished for failing to comply with the DSR for a season if it pinkie swears to fix it next year or at least in the next two years. When they continue to financially misbehave in year three, DSR provides the Commissioner with a laundry list of remedial measures.
The Commissioner’s remedial measures (punishment options) range from multiple levels of administrative oversight to forcing sale of assets to taking complete control of team finances. He may even restrict access to the Rule 4 and Rule 5 draft. All good reasons to watch your cash flow and keep the commissioner out of the club’s business.
In 2014 Braves Holdings added $330M in debt to build STP and $470M in development costs for the Battery; $270M of that comes from new debt. At the end of last year the Braves had drawn $175M of an available credit line for that purpose as well as opening a $40M credit line for the new spring training facility.
On March first we heard that the cost of the facility had increased.
"“The total cost of construction. . .is estimated to be approximately $125 million, of which the Braves are contributing approximately $55 million using debt and cash on hand. . .”"
The report also discusses off-balance sheet obligations. That’s a long-winded way of saying the Braves have contracts with players and coaches with guaranteed contracts .
The Braves incurred additional expense because players were released and due to penalties for exceeding the 2016 international bonus pool. Those expenses totaled $278 million. How does this affect the Braves today?
In 2015 and 2016 the Braves failed to comply with MLB’s debt service rules (pg I-47.) As a result they are “now subject to certain remedial measures” as well as being required to repay that debt. Those measures are not made public but it’s unrealistic to believe that those infractions weren’t taken into account when setting punishments last October. Thank you Mr. Coppolella, Mr. Hart, and Mr. Schuerholz: enjoy your golf.
Conclusions
Last year the Braves adjusted payroll cost including incentives, signing bonuses came to $115,455,675. That means they did have $150M in excess revenue after payroll. It does not mean they had that much money left after paying the bills. As noted in the spreadsheet, the actual profit came to $7M before tax adjustments.
The Hart/Coppollela duo’s misdeeds resulted in more financial hardship for the Braves than we knew and affected the 2018 payroll. While adding payroll now would not have counted against the debt limit, money is money and spending it on players means not spending it to clear the debt.
Reading the report leads me to believe Liberty Media doesn’t plan on selling the Braves any time soon. When the City of Atlanta continued to ignore or turn down Braves’ initiative to make Turner Field a ‘destination spot,’ LMC stepped in. Their expertise led to the creation of a better place for the team to play and created an ongoing income stream for Braves Holdings and for LMC through Live Nation.
According to the SEC submittal, Live Nation is considered the world’s leading live entertainment company with four divisions; Concerts, Sponsorship & Advertising, Ticketing and Artist Nation. LMC uses Live Nation to direct entertainment to the Battery, advertise that entertainment etc.
Reading deeper into the Section 10, the submission shows an ongoing acknowledgment of the need to develop and improve the brand.
"The financial results of the Braves Group depend. . . on the ability of the Braves to achieve on-field success . . . (successes creates) significant fan enthusiasm, resulting in sustained ticket, premium seating and concession and merchandise sales, and greater shares of local television and radio audiences . . . participation in MLB’s postseason 14 times. . . (provides) additional revenue and income. . . success of the Braves depends. . . on the ability to develop, obtain and retain talented players (long-term. . ."
SEC rules and shareholder rights make direct cash injections to a minority holding like the Atlanta Braves difficult to functionally impossible. The Battery’s structure should create an income stream to fill that void.
Braves Holdings manages the Battery and LMC acknowledges in the filing that the Braves Group has no experience doing that. LMC sees the Battery as a long-term income producer and will certainly us their leverage in the entertainment and services industry to provide the necessary guidance to make the Battery – and the Braves – a success.
That’s A Wrap
Like many of you, I wanted Alex Anthopoulos to do something to generate fan excitement. It turns out his hands were financially tied. He took the blame for this lack of movement by saying he needed time to view and evaluate prospects. That wasn’t a fib, but I don’t believe it drove his decisions this off-season; that’s not how Anthopoulos likes to play the game.
There were obvious moves not made that projected as long-term improvements for the roster; he had to hate not making a move for Christian Yelich, for instance. That said, the coffers look pretty well stocked for next off-season and AA indicated to XM Radio’s Jim Bowden that he planned to be very active in that period.
Money will always be a factor in winning championships. The rich teams are not using their resources to out-moneyball the moneyball teams. The latest CBA gives them and their resources more leverage than before to assess and make prudent signings and trades.
Next: Morning chop .. not pork
In those conditions, getting the Braves back in compliance with MLB’s debt servicing rule and providing a steady income unaffected by TV rights or owners getting caught in a Ponzi scheme, makes the team’ future more viable. That means being thrifty this year in order to be a challenging team in the future.