Behind Dodgers Deal: TV Riches

The record-setting $2.15 billion sale of the Los Angeles Dodgers to a group led by former basketball star Earvin "Magic" Johnson and financier Mark Walter dropped the jaws of even the most bullish sports-industry veterans.

In an industry where the usual multiple is about three times annual revenue, the team sold for about 7.3 times its high-water mark of $293 million in revenue, set in 2008.

But with its lucrative media rights coming free from contract after the 2013 season, the new owners have a rich opportunity to either launch a regional sports network in the country's second largest market or to hold an auction for the rights to telecast Dodgers games in a golden era for sports deals.

New owners are willing to spend $2.15 billion on the Dodgers. So just how the heck are they going to make this expensive purchase a profitable enterprise? Matt Futterman discusses on The News Hub.

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"If you realize it's not a baseball deal first but rather a television and entertainment deal that also comes with a real-estate opportunity, then you can begin to scratch your way back toward justifying the price," said David Carter, director of the Sports Business Institute at the University of Southern California.

In an interview Wednesday, the Dodgers' new owners said that they expect to close their deal with the current owner Frank McCourt by May 1 and that the intense interest in the team justified the price.

The greater Los Angeles television market is just under five million homes, but its outlying areas boost that figure to more than seven million. One of baseball's oldest franchises, the Dodgers have won six World Series, including one in Brooklyn, their original home, where they remain legendary.

"The Dodgers are one of the world's most storied franchises, and the opportunity to be the custodian and help build it in my view was a once in a lifetime opportunity," said Mr. Walter, chief executive of Guggenheim Partners, a fund that is making a significant investment in the team.

Mr. Johnson said he would work to enhance the "community ties and involvement. I will have an office there and will be there every day." Another investor, veteran sports executive Stan Kasten, will oversee the team's baseball operations.

Buying and Selling the Dodgers

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Among the Dodgers' former owners: Brooklyn attorney Walter O'Malley—at center here in the 1950s with Dodgers manager Walt Alston, left, and shortstop Pee Wee Reese.

But the most important task will fall to the person the team selects to oversee its media venture, which is where the investors' greatest opportunity to make money lies.

During the next six to 12 months the Dodgers' owners will select one of two lucrative alternatives to pursue at a time when marquee live-sports events have become increasingly valuable.

The simplest move would be to sell their local TV rights to an existing regional sports network. The Dodgers would be entering the market at the perfect time. News Corp.'s Fox unit is trying to stave off a challenge from the new regional sports network that Time Warner Cable plans to launch next year. Dodgers telecasts form the backbone of Fox's Prime Ticket, which would lose substantial value without the team's games. Fox declined to comment. News Corp. also owns The Wall Street Journal.

Recent rights deals for the Los Angeles Angels and Texas Rangers are valued at nearly $150 million a year, including equity in the sports networks. As the top baseball brand in such a large market, the Dodgers would likely command more than that, Lee Berke, a sports media consultant, said.

The other alternative would be for the Dodgers to launch their own network as the New York Yankees did with YES and the New York Mets did with SNY. These networks have become cash cows for team owners because of the monthly fees cable operators pay on behalf of all of their basic subscribers.

WSJ's Matt Futterman breaks down the deal that awarded the Los Angeles Dodgers to a group of investors led by basketball legend Magic Johnson. Photo: GABRIEL BOUYS/AFP/Getty Images

Analysts say a Dodgers network could command a monthly fee of about $3.50 per home beginning in 2014 and reach a market that could stretch as far east as Las Vegas and north to San Luis Obispo.

That could translate into nearly $300 million in revenue annually before the network sells a single ad spot. Another bonus: Proceeds from regional sports networks aren't subject to baseball's revenue-sharing rules, which seek to maintain competitive balance among the MLB's 30 teams.

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Cable operators would have to agree to carry the channel, whose high price might require them to raise rates for customers. In some markets, such price rises have resulted in ugly fights between station owners and service providers. Some of these networks have failed because cable operators refused to carry them and consumers didn't demand them.

To mitigate the risk, some teams have provided equity in the networks to the major cable operators. The Mets own about 65% of SNY, and cable distributors Comcast Corp. and Time Warner Cable own the rest.

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Mr. Johnson said he would work to enhance the 'community ties and involvement. I will have an office there and will be there every day.'

Of course, there is a chance the investors have overpaid. Even if the network gets off the ground, a sports team needs to perform well on the field to sell tickets and attract viewers and corporate sponsors. Losing bids were at least 25% less than the winning offer, suggesting that the competitors took a less bullish view on the team's financial potential than the Johnson-Walter group did.

The Dodgers have a payroll of just over $100 million, which will likely have to rise if the team is to return to excellence. The Dodgers had a win-loss record of 82-79 last year and finished third in the National League's West division.

Opened in 1962, Dodger Stadium is the third oldest in the Major Leagues, and it will require an estimated $200 million renovation if the Dodgers want to offer the luxury seating and other amenities that have become customary at ballparks.

With an average ticket price of $30.59, the seventh highest in the major Leagues in 2011, it may not be an option for the new owners to raise prices quickly. Attendance last year fell 18% from a year earlier to 2.9 million.

Write to Matthew Futterman at matthew.futterman@wsj.com

A version of this article appeared Mar. 29, 2012, on page A1 in some U.S. editions of The Wall Street Journal, with the headline: Behind Dodgers Deal: TV Riches.
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