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Baseball Business Part II: Royals' Value Rising, But Not Like Rest Of MLB

This is the second of two articles examining the economic environment of Major League Baseball in 2012 and the impact on the Kansas City Royals.

Kauffman Stadium, home of the Kansas City Royals and the 2012 MLB All-Star Game.
Kauffman Stadium, home of the Kansas City Royals and the 2012 MLB All-Star Game.

The value of Major League Baseball franchises continues to steadily climb, and that rising tide is affecting every team - albeit by varying amounts - including the Kansas City Royals.

Forbes estimates the current value of the Royals at $354 million, which ranks 27th among all of Major League Baseball. That represents a one-percent increase in the appreciated value of the team since last season. But it is over two-and-a-half times what team owner and Chairman David Glass paid for the Royals in 2000, when he purchased the team for $96 million. The former chief executive officer of Wal-Mart, Glass had been interim CEO and chairman of the board of the Royals since team founder Ewing M. Kaufmann died in 1993.

For a period of time after Glass' purchase of the Royals, he was required to turn over to charity whatever profits he might earn from the sale of the team, but that clause in the purchase agreement has since lapsed.

Major League Baseball teams, on average, rose 16 percent in value from 2011 to the current season to a record-high average franchise value of $605 million.

The New York Yankees retain their long-standing position as the highest valued team in baseball, with a net worth estimated by Forbes to be $1.85 billion, a nine percent gain from the team's estimated value a year ago. The Yankees, who produced 439 million in revenue in 2011, most of it coming from a huge TV contract and revenue from the Yankee Entertainment and Sports Network (YES), The 27-time World Series champions also rank as the third most valuable sports franchise worldwide, according to Forbes, behind the world soccer power Manchester United and the Dallas Cowboys of the National Football League.

The big driver behind the rapid rise in team values is the large revenue stream that big-market teams, especially, are receiving for local TV rights. Combined cable TV revenue for the 30 major-league teams increased nearly three times, to $923 million, what it was 10 years ago ($328 million), Forbes reported.

Some experts are saying that, because of new TV deals that are forthcoming for teams like the Houston Astros, Los Angeles Angels, Texas Rangers, and a new deal that is coming in 2014 for the Los Angeles Dodgers, local TV broadcasting rights could exceed $1.5 billion three years from now.

Although the Dodgers have a current franchise value of $1.4 billion, a bankruptcy court in Delaware recently approved the sale of the Dodgers for $2 million to an ownership group headed by former Los Angeles Lakers star Magic Johnson. The group is willing to pay a $600 million premium over the face value because of an anticipated doubling of the team's television contract, from $55 million presently to around $100 million annually, beginning in the 2014 season.

The Royals reported the smallest increase in year-over-year value of the 30 MLB clubs. Only two of the 30 lost value: the New York Mets, off four percent to a present value of $719 million (sixth among all MLB teams), and the Tampa Bay Rays, down two percent to $323 million (ranked 29th).

According to the Forbes annual report on the business of baseball, the Dodgers showed the biggest gain in value from a year ago, up by 75 percent to $1.4 billion, from around $8 billion. The Seattle Mariners reported the second highest annual increase in value, a 30 percent rise to $585 million (the 12th most valuable MLB franchise), followed by the Miami Marlins, who increased in value to $450 million, a 25 percent gain, mostly attributable to their brand new ultra-modern stadium, Marlins Park.

Three major-league teams came into the 2012 season operating debt free: Seattle, Atlanta, and Toronto. The Royals reported a debt/value ratio of 14 percent at the end of the 2011 season. This is the eighth lowest debt ratio of all the teams. Kansas City generated net revenue (total revenue less the cost of covering stadium debt) of $161 million, the second lowest in both leagues. While the Royals' management was at a huge disadvantage in revenue-producing opportunities, only one other team in baseball had higher operating income coming into the new season.

Kansas City's 2011 operating income was $28.5 million. Only Cleveland did better, at $30.1 million. By contrast, the highest-valued team in baseball, the Yankees, had operating income of only $10. Amazing what a drain that super high-price All-Star lineup can have on profitability.

So while the value of the Royals is on the rise and the team's front office is managing the operations of the ball club more productively than practically every other team in Major League Baseball, Kansas City finds itself facing a paradox: The Royals can't pedal fast enough to keep from losing further ground to the teams in the AL Central and elsewhere throughout the major leagues with increasingly lucrative TV deals.

The Royals' TV contract with Fox Sports Kansas City pays the club $20 million annually, far below what other teams are getting, and runs for the next eight years. Unless this discrepancy gets fixed, it's unlikely the Royals ever will - at least not to the extent that current expectations and reality become one.

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