Ricketts forced by Tribune to take on huge debt in Cubs purchase

Ricketts forced by Tribune to take on huge debt in Cubs purchase
April 25, 2013, 2:00 pm
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We maxed out our payroll last year and we maxed out our payroll this year.
—Theo Epstein
What we’re trying to do is take an overall approach. The healthier this organization gets, the more games we’re gonna win.
—Theo Epstein

While Cubs fans live and die with each and every game, looking forward to the day that their beloved team is contending on an annual basis and finally winning the organization's first World Series in over 100 years, a dose of perspective is necessary after a tough start to the 2013 season.

The organization was extremely unhealthy when Theo Epstein and Co. arrived in October of 2011 to start the arduous task of building a championship-caliber baseball team. The major league roster was filled with bloated contracts for players who were not stars worthy of multi-million dollar paydays, the minor league system was non-existent with pitching depth the worst in all of baseball. Add in a constraining contract signed by Cubs management in 2003 with the rooftop owners that is hamstringing renovation efforts to this day and media rights deals that are far below what the best markets in the industry should command, and you had an organization that had a cupboard full of bad deals which were the recipe for one of the worst organizations in baseball.

That does not absolve Epstein and general manager Jed Hoyer from blame as the bullpen that they put together for 2013 is woefully short of what the Cubs need to compete. Add in a gaping hole at third base that has not been addressed in two seasons and you have a couple of the major problems the current club is trying to overcome.

[MORE: Hoyer doesn't play blame game: Cubs 'all in this together']

With the 2013 Chicago Cubs off to a 6-14 start amid reports that the team's finances are slowing progress on the baseball side, I decided to do some research on the sale process to the Ricketts family and to see if indeed the Cubs ownership group is hamstrung by debt from the purchase of the franchise from the Tribune Company back in 2009. Multiple sources with intimate knowledge of the sale have confirmed to me that when Sam Zell and the Tribune Company decided to sell the franchise, there were several bidders who were looking to buy the team with a minimum of long-term financing needed to make the purchase. That included the Ricketts family, who multiple sources have confirmed to me wanted to use much more cash in their offer than Zell would accept due to tax implications on the transaction.

Zell and the Tribune Company required anyone who was interested in buying the team to heavily finance their purchase and to allow the Tribune Company to maintain a five percent stake in ownership for several years going forward. One prospective buyer who quickly withdrew from the process told me "it was the most complex financial transaction he had ever seen," with another telling me that he wasn't willing to jump through all of the hoops that the deal required. However, the Ricketts family stayed the course before eventually reaching their breaking point. They told the Tribune and Zell in the summer of 2009 to either make a deal or they, too, were going to withdraw from the process. At that point, according to sources, the deal quickly moved towards completion.

"Minimizing tax liability with debt financing was the No. 1 goal of Tribune Company management and Sam Zell in selling this asset. That alone made it a tough deal for many of the interested parties to handle. Add in the fact that the world markets were on fire so financing was very difficult to obtain at that time. Whoever was going to buy the Cubs -- from Mark Cuban, to John Canning, to any of the other interested parties -- was going to have to play under those rules. That narrowed the playing field quickly. Plus, do you really think that [MLB commissioner] Bud Selig, who is one of the smartest guys around, would have allowed the Cubs, a premier franchise, to be operating under a risky structure? No way," a former ownership candidate told me.

Major League Baseball has long had strict rules on debt ratio and the complex Cubs sale required the approval of Selig before baseball ownership voted on the sale to the Ricketts family. A recent inquiry to Selig by the Chicago Sun-Times into the Cubs' debt service elicited this response from Selig's spokesman: “The Ricketts family worked closely with our office to develop certain financial structures designed to [ensure] the stability of the franchise at these debt levels. The structures have worked, the club is healthy and the Cubs have been very up front and clear with us since Day 1.”

Forbes magazine has listed the Cubs' debt at $580 million and multiple sources have confirmed that to be accurate. It also appears that the large debt service payments that the Cubs are responsible for have maxed out the money available for the rebuilding process that Epstein and Hoyer are in. Epstein himself admitted to me on Opening Day that the Cubs are maxed out on payroll, preventing them from making major free-agent signings that could accelerate their ability to at least be more competitive at the major-league level. It also appears that once a renovation deal is finally signed, as well as a new TV deal for the games that currently air on WGN TV is completed, more money will be available for Epstein and Hoyer to add to the major league payroll.

[RELATED: If the money's right, Wrigley will be a destination for free agents]

In an interview on The Score - Sports Radio 670 on Wednesday, Epstein echoed his remarks from Opening Day when he was asked about building up the farm system, while also trying to be more competitive at the big league level.

“It’s not a choice,” he said. “We are not making a fundamental choice to only focus on the future. We’re not withholding dollars from this year’s team. We are spending every dollar that we have on this baseball team. We maxed out our payroll last year and we maxed out our payroll this year. It’s not a choice. It’s not like we’re making a conscious decision to say, ‘Hey, let’s withhold $15-20 million from the 2012 or 2013 payroll because we don’t think we’re quite good enough to spend it there. Let’s save it for a rainy day. Or let’s save it so we can get that free agent in 2016."

Epstein said the Cubs need things like the Wrigley Field renovations and a new TV deal to continue to pump money into the team.

“The baseball department is spending every dollar that is allocated to baseball operations,” he said. “Yeah, we’re spending it in the draft and we’re spending it in the minor leagues. There’s only so much you can spend there. We’re also spending every dollar we have available on the Major League payroll. We need a renovated Wrigley Field to produce more revenue. We need new TV deals so we can generate significant local revenue that way.”

Epstein also understands where the Cubs are in the building process and says that no amount of money can correct years of struggles at the minor-league level that have now left the Cubs far short of in-house, cost effective replacements.

"Take a look at that first offseason, and then first base is a microcosm for organizational issues as a whole, so people looked at ‘oh the Cubs, big market’. Maybe they assumed we had more money to spend than we actually had. Everyone was jumping over themselves to sign Albert Pujols or Prince Fielder, you know, two good players…but two good players who at some point during that contract are gonna be past their primes, so instead, we took one of the few pitching prospects that we had and traded him. (We) turned him into Anthony Rizzo, who is going to be in his prime when we’re winning this division and contending on an annual basis," he said.

"That’s how we’re trying to address all the issues of the organization. Now, it doesn’t always work out that smoothly, those opportunities don’t always present themselves, but yeah, would it have felt good to sign Albert Pujols? It would’ve felt great at the time. Would it have served the best long-term interest of the organization? No. And would it have made us make the playoffs last year? No. So what we’re trying to do is take an overall approach. The healthier this organization gets, the more games we’re gonna win. The more games we win, the happier everyone’s gonna be. There’s no single move that you can make to make that happen quicker."

[MORE: Theo waiting for Wrigley deal, business plan, payrolls to come together

Epstein also told Comcast SportsNet that he fully expects to have the necessary payroll flexibility when he believes the time is right to -- as he put it -- "put the throttle down and go for it," which is probably at least two years away.

"That when it’s…when we have the nucleus we want to have and it’s time to add impact assets from the outside, I’d be really surprised if we’re not able to. So where we are right now, money’s not gonna get us out of this problem anyway," he said. "It doesn’t matter how much we have to spend. Now, it will be really important down the road, and I expect that we should have the flexibility to add what we want to add at that time," Epstein told me.

The current state of the pitching in the Cubs system is so abysmal that multiple scouts around baseball told me that it is mind boggling that a team could draft 396 pitchers between the 1995 and 2009 drafts and see only 28 ever pitch one game in a Cubs uniform at the major-league level, and develop so few into consistent major-league caliber starters and relievers.

Adding pitching through free agency is expensive and is a very risky proposition considering the fragile state of health for many major-league arms. When questioned on Opening Day about the cost of adding pitching to the major-league team, Epstein was extremely cautious about building a pitching staff that way.

"There’s some talented arms down there, but they’re not the operative level: starting pitching prospects that you need, the volume that you need to develop one or two or three at the big league level, so that’s made our focus really clear and is what we need to do in the draft to drafting high-volume starting pitching, developing them. We hired a new, and I think excellent, minor league pitching coordinator to help make that happen, so it doesn’t matter whether if I was surprised by it or not. What matters is how we’re addressing it, and we need to really to produce starting pitching internally because you see what the price of starting pitching is from outside the organization. That is unsustainable. Bringing in…trying to only rely on elite starting pitching from outside the organization, I don’t think there’s an organization in baseball that can afford that anymore," Epstein said.

To add it all up, when one looks at the Chicago Cubs it is important to realize that the long-term future has the potential to be great, but the next couple of years could still see their fare share of tough times. There will be more pain and suffering at the big-league level as the organization continues to stockpile prospects and lock up long-term assets on the baseball side and finalize their renovation plan and their media rights on the business side. All of it is expected to peak for the day that Epstein tells his bosses that it is time to put the throttle down and go for it. Sadly, that day is still a ways away.