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October 13, 2011 at 12:37 PM

Why franchise value matters to the Mariners and the team’s owners

Lots of good debate over the Mariners payroll issue the past few days and of whether the team has the ability to raise payroll and plug holes sooner rather than later.
Some of you are speculating about the team’s ability to go after Prince Fielder, or David Wright, or Aramis Ramirez. As we’ve already mentioned, the M’s could acquire one costly big bat without having to increase payroll at all. But it’s the other missing pieces that need to be addressed before this team can seriously hope to contend.
And that’s where a significant payroll boost could help. One way to boost payroll is via a capital call, which we’ve discussed ever since our story last week on minority owner Chris Larson and his ongoing financial challenges and divorce. The team hasn’t gone this route in over a decade, but could theoretically ask owners to chip in more cash right away to boost payroll for 2012.
Another way to boost payroll is for the team to dip into its stockpile of surplus cash generated in prior seasons.
But there are things to consider with that second option as well, one of them being franchise value and the short-term rammifications for owners.
According to Forbes magazine, the Mariners were worth $449 million as of last April. That’s a $10 million boost over what the team was valued at 12 months prior. Let me say that once again — the Mariners lost 101 games in 2010, fired their coaching staff and generally embarassed themselves on a national scale after telling fans to “Believe Big”, yet they still saw franchise value go up.
How can that happen?
Easy. The team cut payroll prior to the 2010 season, offloaded Cliff Lee at the trade deadline for a bunch of cheaper prospects and generally — as they have done for years — spent only as much as was needed to break even at a minimum. And every year the team breaks even or turns a small profit, the franchise’s overall debt load goes down.
This tried and true formula has helped the Mariners build value for their owners every year of the Safeco Field era except for one. That one exception came in 2008, when the team went all-out, upped payroll to $117.6 million, declared they were “going for it” by trading for Erik Bedard and signing Carlos Silva, then saw it all blow up.
Their season was effectively over by May. Fans stopped coming to games and franchise value, according to Forbes, dropped by $40 million.
Now, since that one-year exception, franchise value — again according to Forbes, which has done the most detailed analysis of anybody so far — has jumped back up by $23 million.
Don’t forget, the owners have put in $220 million altogether, so we’re really only talking about how much money they stand to make as investment profit once they cash out. That investment is now up to $449 million — again, on paper and according to Forbes –not counting all the tax breaks associated with owning a team.
So yeah, the Mariners could take another shot at significantly upping payroll, crash and burn again in 2012 and still have owners well in the black since their initial investment. Or, they could also take a chance and see it rewarded with a playoff season, increased fan attendance right now and increased ticket purchases for future seasons with boosted franchise value as a result.
The whole “spend money to make money” argument.
So, that’s where we’re at.
But to really understand what’s going on, you have to keep an eye on franchise value. And believe me, the Mariners have done just that since that value dropped in 2008 at the same time the world’s stock markets plummeted and the American economy fell apart.
Know who else will be keeping an eye on franchise value right now? Or, at least, who should be keeping an eye on it?
Mariners minority owner Larson.

Unlike the other owners, Larson is the only one who tried to sell a 10 percent stake in the team two years ago to pay off a bank debt. Larson eventually pulled out because his non-controlling stake was only valued at $34 million.
So, the bank debt remains, as does Larson’s total 30.63 percent stake in the team.
Only now, there’s an added complication that’s arisen for him — his divorce.
His entire stake is now being re-appraised as part of the divorce proceedings. The reason this is being done is because he’ll eventually have to give a chunk of his total worth over to his wife in a settlement.
So, unlike other owners, who may be in this for the very long haul, we know that Larson already tried to sell a third of his Mariners holdings two years ago. We know that, as a result of his pending divorce, he might again have to contemplate selling part, or all of his holdings in the near-term to fund a settlement and/or pay off debts still out there.
Maybe he won’t. But for now, that possibility remains on the table.
And for Larson to get the most money out of any such sale, he needs franchise value to keep going up.
What’s the best way to do this?
Well, the best way would be for the team to up payroll, bring in some proven MLB talent to fill numerous holes and boost the cheap, young talent already here, win the World Series in 2012 and see the stands packed with 35,000 fans per game now and for the near future.
That would take franchise value to a new level.
But it also has risks, as we showed you from the 2008 example. Seeing a “go for it” plan blow up in May and causing more short-term loss in franchise value is the last thing any owner needs if they are thinking of cashing out anytime soon.
So, let me rephrase the question. What’s the best way to ensure franchise value doesn’t take a hit in the near term?
That’s easy. Take no risks. Keep doing what the M’s have done. Spend just enough to break even or do slightly better. The upside isn’t as high as “going for it” but the downside is drastically reduced. As we saw in 2010, the M’s could lose 101 games and still come out ahead by $10 million.
For every $10 million increase, Larson’s stake — in theory — goes up by $3 million. Now, he may not be able to garner 30 percent of what Forbes says the team is worth. We’ve already seen that the 10 percent non-controlling stake he tried to sell in 2009 came back at $34 million — far less than 10 percent of overall team value as stated by Forbes. Things are different when stakes are non-controlling and appraised in terms of real life sales.
But in theory, if Forbes and private appraisers feel team value is going up, Larson will get more money in exchange for his shares. In theory, the $34 million he could have sold a 10 percent stake for in 2009 should be worth more today. That’s how it works when value goes up.
We don’t yet know how the team did in 2011. Those numbers won’t be out until next spring.
But safe to say, if you’re Larson and already tried to sell once and might have to again soon, you’re rooting for that value to go up, not down. That’s common sense.
This doesn’t mean there’s some big conspiracy underway. Doesn’t mean Larson is sitting there telling the team not to boost payroll, or to avoid taking any undue risks. We don’t know what anybody is saying behind closed doors because the team keeps all of this stuff private.
What we do know is that the best interests of the team’s biggest minority owner at present may run contrary to the best interests of M’s fans who want to see the squad win as quickly as possible. That while some owners might be able to ride out a one-year dip in franchise value over the next decade, other owners thinking of selling in the near term might not have that luxury.
Something to keep in mind as the winter moves forward. Whatever else happens — and whether you think the team can compete on $93 million or $83 million or $50 million or $150 million — keep an eye on franchise value.
Because if you’re Chris Larson, you want to see that value maintained so you can make as much money as possible if ongoing events force you to sell your stake. And the team putting that value at risk in the short term by spending what it takes to contend a lot sooner probably is not your preferred course of action.



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