News: The Miami Marlins have a handshake agreement to sell the club for $1.6 billion to a New York real estate developer.

Thoughts: Whether or not the sale goes through (and there are concerns the purchaser may not be liquid enough to get the deal approved by MLB), remember this report the next time any baseball owner pleads poverty. The current Marlins owner bought the team in 2002 for $158 million. Likewise, the Castellini Group bought the Reds ten years ago for $270 million. Forbes estimated a year ago the club was worth $905 million. That wouldn’t include the value of the new TV agreement with FSO. It likely doesn’t include the value of the Reds share of MLB’s online platform. To give you an idea how much that’s worth, Disney recently paid $1 billion for 33% of BAMtech, a technology company spun off from MLB’s digital media company MLB Advanced Media. MLB Advanced Media earns more than $1 billion/year. Divide that by 31.

Remember this – The owners of major league baseball teams are billionaires who are rapidly becoming vastly more wealthy due to their ownership share of the team. For them to plead hardship over annual dips in attendance that amount to maybe $10 million in lost revenue is laughable – and disgusting – in the extreme. It’s their money, they can spend it how they want. But raise your hand if you’re sick of hearing rich people play the “woe is me” card to the rest of us suckers? Me, too.

News: Homer Bailey has surgery to remove bone spurs in his elbow.

Thoughts: We’d felt a disturbance in the Reds force about Bailey before this news landed yesterday like a lightning bolt. Intrepid and loyal Nation member John Rohrig reported Dick Williams’ cautionary approach to answering a question about Bailey at a West Virginia caravan stop. Meanwhile, Bailey said less than a week before the surgery: “I don’t think about the elbow. I can hang tree stands. I can climb up in a tree. I can rope. I can grab feed bags and hay bales. Do whatever and I don’t think about it.” Bailey told Zach Buchanan a week ago: “I don’t think there is such a thing as normal anymore, but everything is OK,” But when Bailey started upping his throwing regimen in line with regular pre-season preparation, he felt a pain in his elbow.

First, Homer Bailey may be the only $100-million guy who climbs trees, ropes, and grabs his own feed bags and hay bales. Second, as elbow problems go, bone spurs are pretty routine. It’s excess bone that grows over time and starts to run into other stuff. Doctors shave it down and that’s it. There aren’t short-term relapses to worry about. The New York surgeon who did the bone spur procedure said he checked on Bailey’s flexor mass and Tommy John ligament and they looked healthy. That’s the serious stuff.

Dick Williams has indicated that Bailey’s delay in appearing for the Reds won’t cause the club to go shopping for another free agent pitcher. That’s smart. Bailey should be back for most of the season. The Reds may welcome the opportunity to give another one of their young pitchers a chance to develop at the major league level.

Flogging the Dead Horse: The Bailey news raises again the issue of Michael Lorenzen. Repeated statements from the front office indicate the decision has been made and firm that Lorenzen will be used in the bullpen and not tried in the rotation. For all the good tactical moves of the Reds front office this offseason, their myopic view of Lorenzen’s role stands in stark contrast. The Reds aren’t going to contend this year. There is no rush to fill bullpen roles. In fact, it’s hard to imagine a LOWER PRIORITY than deciding, even before spring training starts, who is going to pitch the 8th inning in some games in 2018. Aargh.

We kill off plenty of pixels comparing the Reds young pitchers. Cody Reed, Robert Stephenson, Amir Garrett, and others. Well, the best young pitcher the Reds had last year – by far – was Michael Lorenzen. Lorenzen just turned 25. There are solid reasons to believe he’s developed in ways that translate to success as a starter. Using his major league starts in 2015 as a basis for judging Lorenzen’s potential seems even more unreliable than evaluating Cody Reed or Robert Stephenson by their 2016 major league appearances. The Reds may be consigning their best young arm to relieving, all because he filled a role in the Reds horrifying bullpen last year. Look, Lorenzen may not have what it takes to start, but the Reds will never know unless they try it and see. The upside seems so great, the downside so small, the front office’s stubbornness on this is a real head-scratcher. Math refresher: 200 is still a bigger number than 80.

News: Reds sign Desmond Jennings and Zach Walters to minor league contracts.

Thoughts: Good signings for different reasons. Jennings (30) is a veteran who hasn’t been the same player since 2014. But he’s a solid bat against LHP (career: wRC+ of 120) and still has an above average walk rate (9.3%). Walters (27) is nowhere near as accomplished as Jennings, but he’s also three years younger. He plays IF and OF, is a switch hitter, and had a solid year at the plate for the Dodgers AAA team in 2016. Jennings and Walters are both on minor league contracts, so the Reds aren’t committed to anything at this point. The real issue will be whether they make the Opening Day roster. Walters would be good organizational depth at AAA. Remember, anyone who had a respectable 2016 season would be out of the Reds price range. Rebuilding.

Painful Memory: Remember 2014 when the Reds won a few games prior to the All-Star break to eke out a 51-44 record? (Yes, that’s almost impossible to believe.) They were 1.5 games out of first place. They then proceeded to lose seven games in a row, crashing like the Falcons defense. Zach Walters doubled off Alfredo Simon to drive in and score a run in the seventh game of that losing streak.

News: The Reds will have four players representing their countries in the 2017 World Baseball Classic. Starting pitcher Scott Feldman will play for Team Israel. Reliever Jumbo Diaz will pitch for the powerful Dominican Republic. Second baseman Dilson Herrera will be with Colombia. Finally, catcher Shawn Zarraga will play for the Netherlands. Joey Votto declined an invitation to play for Team Canada. By contrast, eleven Cleveland players were selected to play in the WBC.

Thoughts: Lots of people wondering why Billy Hamilton wasn’t asked to play for the favored Team USA. His health wasn’t an issue. The two creaky CF on the US roster are no-longer-good-on-defense Adam Jones and never-was-any-good-on-defense Andrew McCutchen. Hamilton’s exemplary abilities to cover all the field and pinch run could have provided good value in late innings.

Also, Shawn Zarraga? (Signed a minor league contract with the Reds in December.)

19 Responses

  1. Pablo

    Hoping the Reds find a sucker of a buyer and sell to an owner who is willing to play the ownership game like a big market player. Wishful thinking I know it will never happen because Charlie Sheen doesn’t have that kind of bank.

  2. Chuck Schick

    MLBAM has revenue of over 1 billion per year. They do not earn 1 billion per year. Fan Graphs reported in 2015 that each team receives about 10 million per year from their MLBAM stake. Joey Votto likely pays more in federal income tax than the Reds currently receive from MLBAM.

    There are 5 million people within 50 miles of the Marlins Stadium. Miami is the business gateway to Latin America…a region in which baseball’s popularity is extemely high. As baseball becomes more Latino dominated, the Marlins could become a financial powerhouse. They’ve been run extemely poorly and there is a large amount of growth potential in the brand. The area has tremendous demographics from a marketing perspective and the population is growing. Cincinnati, KC, Milwaukee Etc. have none of those advantages that would increase the franchise value to that level.

    Any dollars drerived from MLBAM are shared equally so even if the Reds were to receive 20 million, 50 million or 100 million per year from MLBAM in the future they still would rank much closer to the bottom than the top of the revenue tree.

    No bank is going to lend millions each year to a team to deficit finance payroll with illiquid collateral. Forbes can assign a value to a franchise, but cash pays the bills.

    • Simon Cowell

      All solid reasons by the Reds should lose their franchise. All the smaller markets should lose their franchises. Only thing that should change this are reduced wages to players and a hardline salary cap.

    • Chuck Schick

      The Reds are worth a lot of money. Perhaps 900 million, perhaps more. My point is that “value” has minimal impact on spending. Though it is fair to note that the Reds have a history of limiting primary ownership to people from Indian Hill, which limits potential owners. Bob C doesn’t want to have to explain why he sold the team to a bunch of carpetbaggers at the Camargo Club Clam Bake.

      In conjunction with that, you have an area with virtually no population growth, an ageing fan base and limited business growth potential. The 101 loss 2012 Chicago Cubs drew 500k more fans than the 97 win Reds and likely made 10x’s the profit. It is what it is.

      MLB has very stringent debt/equity ratio rules. Banks are eager to lend money to finance the purchase of teams, but they’re not eager to lend money so a team can consistently cover operating losses. The IRS isn’t a fan of on going operating losses either. At a certain point, they don’t think you’re a business but someone’s expensive hobby. The last thing they want is for Bob C to use losses on the Reds every year to avoid paying taxes on his banana empire’s profits. You can do it occasionally; you can’t do that forever.

      Yes, sports teams can employ creative accounting and show a loss and have positive cash flow. However, that generally happens in the first 7-10 years of ownership as the original assets ((players) are depreciated. Also, teams have minimal tangible assets so the purchase of a team often has an enormous amount of ” goodwill” cost that are depreciated in the first few years. Once you get to year 10 or so there aren’t a lot of accounting charges you can use.

      You can’t spend money that you don’t have forever

      • big5ed

        MLB has “stringent” debt/equity ration rules, but it doesn’t enforce them. The Mets were WAY over when the Fred Wilpon lost a bunch in the Madoff mess, but MLB didn’t do anything about it. My guess is that the Marlins also have a lot of debt, and that the $1.6 mm price tag includes assuming quite a bit of debt. Loria’s group will still make a bundle, though.

        But you are generally right. Many ownership life spans are about 10 years, when the accounting advantages run out and the search for the bigger fool begins.

      • Chuck Schick

        Big5….while Selig did give Wilpon some extra time and a loan, the Mets were required to raise 240 million in capital, which diluted Wilpon’s ownership stake. Also fair to note that Wilpon lost a great deal of his personal wealth in a fraud as opposed to profligate spending on middle relievers or taking excess dollars from the team.
        The Dodgers were driven into bankruptcy by MLB’s decision to not let them borrow against the future value of their tv deal because Frank McCord was basically looting the franchise and their debt levels were absurd

      • Chuck Schick

        Steve….Castellini’s assets make him a billionaire…or at least close to one. Does that mean he has loads of excess cash laying around? No.

        He accumulated most of his pre-2006 wealth from a produce business and private equity investments…..which tend to be highly illiquid. Obviously, the Reds have created an enourmous amount of wealth for him over the past 10 years. There is a huge difference between wealth and cash.

        Could he sell some of his produce business to raise cash to improve the bullpen? Sure…though his tax basis is likely close to 0 and he’s going to lose 20-30% of those proceeds to taxes.

        Could he borrow against the tomato empire to get a left fielder? Maybe…we have no idea what his borrowing capacity may be. Could he borrow against his Reds stake to increase payroll? Perhaps to a degree….perhaps he already has.

        It’s important to note that a bad Reds team likely produces 12-18 million less in revenue than a good Reds team. He could leverage himself to the max, win the WS and have a nice trophy and a mountain of debt. What rationale person would do that?

      • Chuck Schick

        Steve, do we have any reason to believe that the Reds haven’t increased payroll as revenue increased? They went from 60 million in 06′ to about 120 million in 15′. Did their revenue double over that period? It’s estimated that revenue increased by 60% so they increased spending at a higher rate than they increased revenue.

        While the Astros were rebuilding they cut payroll to the 25 million range and the Reds are still above 80. Are they profitable with an 80 million payroll? Likely. Is that a bad thing? Is it beneficial to the fan base that the team operate profitably?

        Did the 50% jump in payroll between 2012 and 2015 help? No.

      • Chuck Schick

        Steve…I’ve made no claims that Castellini is illiquid, heavily leveraged or in anyway an inprudent financial manager. None.

        I’ve simply tried to debunk a fallacy that an increase in the arbitrary value of an asset can easily enhance him to spend ” phantom cash” in an on going manner to theoretically improve the fortunes of a baseball team.

        No prudent or responsible business man is going to assume that huge rates of appreciated value of an asset will continue forever. Baseball struck gold with local cable deals, new stadiums and MLBAM over the past 15 years. There is no rationale reason to believe that those exceedingly high rates of appreciation will continue.

      • Chuck Schick

        Things go in cycles. Marge Schott’s annualized return for the Reds was about 5.25% over 20 years. Thought it could’ve been higher had she not run up an enourmous amount of debt deficit financing payroll. Debt that created a financial straight jacket that contributed mightily to the Lost Decade.

        Linder is more difficult to calculate since there were more partners but he had an estimated annualized return of closer to 7%

        What’s occurred over the past few years isn’t normal.

  3. Carl Sayre

    I am not an economist but a little common sense and reading comprehension will go a long way! The owners accumulating wealth because the value of a team increases has nothing to do with having the money to sign big contracts, especially big and bad contracts! The Castellini Group may be amassing wealth but that only is when they sell and the next ownership group will be in worse shape from paying such an amount! I am skeptical about the cry of poverty for a couple of reasons, the income streams you pointed out and the CBA is tied to how much MLB makes so of course they will have some um………..very creative accounting practices!
    The other thing that stood out in your comments was about the fairly insignificant bone spurs. That comment is dead on, my comparison is my shoulder and ball joint of the shoulder and while I did not put pitchers type stress on mine it was good after about 6 weeks and lasted for 10 years of manual labor! The overall question is why are they scoping it 2 weeks before reporting instead of the first of January? I mean he did end the season on the DL aren’t they monitoring the players during the off season, especially those who were injured? Thank you for covering multiple topics with a concise commentary on each issue!

    • David

      Commenting on the bone spurs: I think part of the TJ surgery is drilling a hole in ulnar and humerous, and then threading the transplanted ligament into the holes. It is not unlikely that as the holes filled in with new bone growth, some bone “spurs” or rough spots formed.

  4. Hoosier Red

    Per your thoughts on Michael Lorenzen: Thank you, thank you, and thank you. The kid is more than just an outstanding arm, he is the entire package. He’s athletic, smart, and very mature for his youth. I believe he will be a high end starter in this league. I just hope its in a Reds uniform. The Res need to wake up on him. I was beginning to think that I was the only one who felt that way!

    • Hoosier Red

      Probably spot on. The same can generally be said for Iggy. But I can’t help but often think the Reds may have their “future starters” vs. “future 7-8-9 guys” reversed. The haul in the Cueto trade isn’t exactly setting the world on fire. I like our system prospects better. Just my opinion.

    • Bill Lack

      And we all know how much we believe in the Reds medical staff…didn’t Homer just go elsewhere for a 2nd opinion and his surgery? 🙂

      • Hammer

        I would like to add, that we don’t know what the ultimate plans are with Lorenzen, or Iglesias for that matter. Maybe they plan on Lorenzen being in the BP this year in order to build up innings towards starting next year. Or at least I hope so…

  5. Bill Lack

    I, for one, am thrilled to see Billy not invited to the WBC (which, admitting my prejudices, I believe is a waste of time). This is a player that’s having trouble enough staying healthy. Anyone think it’s a good idea to send him to a pre-season tourney and risk him missing part of the season? What’s the upside for the Reds?

  6. Redsman

    The arguments for Lorenzen starting remind me of the very same arguments that were made for starting Aroldis Chapman back when that COULD have been changed. I have a feeling the same thing will happen to Lorenzen. Not sure why/how these decisions are made, or by whom. It just seems that someway, somehow the FO, manager or whoever, aren’t giving us the best starting staff they could. Then and now. It looks now as though Aroldis will forever be a closer and FO on record saying Lorenzen going to pen as well.
    I certainly hope all medical personnel really know what they are doing…assuming as many have, that these young men have been deemed too ‘fragile’ to become starters.

    Personally, I am not convinced that is the case any more than when we debated this re: Aroldis. Sad.

  7. KetteringRedsFan

    Pat: They are run like businesses, with some caveats. But before reaching to a conclusion, I’d suggest you look at the pro-formas of some publically-traded REIT’s and Master Limited Partnerships (pro-forma and K-1 for passive/pass-through) to gain some insight into the accounting. In many cases, these firms are run on a cash-flow basis and not a GAAP earnings basis. Plus you gain some vision into arcane accounting treatments – for instance, you can gain some vision into how depreciation of player contracts might work in practice on a Reds balance sheet. This also plays out in how various club assets may or may not be available for collateralization of debt. Then there is the whole separate manner of leasing (chuckle). Remember that most clubs are tenants, not owners, their facilities or have them in separate vehicles.

    Some observations (and I’m thankful that Steve clarified his position):
    — depending on debt level, the Reds may or may not be in the position of being asset-rich but cash-constrained. (Yes, I also wonder…..). And, since they don’t own the stadium, they are, in some respects, asset-lite – there are probably tight covenants on what debt they carry beyond amortization of the original purchase
    — investment in the business franchise involves more than payroll investment. For instance, the Castellini ownership has continuously invested in improvements to GABP since the park opened. Some of that comes back in increased ancillary revenue, but possibly not all. And it’s a park they lease, not own.
    –Also look at John Malone’s Liberty group of companies. Malone (like Buffett) is a big advocate of tax efficiency. Never pays a tax today (earnings) that can’t be deferred to a later date as a preferential capital gain.

    That said, I’d be right in line behind you to see the financials (chuckle). Sorry for the length, hope I haven’t been patronizing (after all, you -do- know what a quick ratio is).