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Tom Hicks, Debt-to-Value, and the Leveraging of the Texas Rangers

Yesterday's discussion of the Rangers' operating income, and what that does and does not mean for the franchise, prompted me to take a look at another relevant bit of data regarding the current Rangers situation...

I think everyone knows that the Hicks Sports Group has defaulted on a bunch of loans, which is what has led to the current situation where MLB is having to front the Rangers money and Tom Hicks (or, technically, HSG) is having to sell the team.

The 2009 Forbes data supports the notion that the Rangers are a highly leveraged franchise...the team's debt to value ratio is 66%, the third highest in baseball, with only the Yankees and Mets (both of whom took on a bunch of new stadium debt the previous offseason) with higher ratios.  The Washington Nationals, at 62%, are fourth, and they obviously have a new stadium (and, I believe, associated stadium debt).

The Padres are sitting at 60%, and of course were just purchased by the Moorad group.  The Dodgers are at 58% and, reportedly, the purchase by the McCourts was almost completely debt-financed, so it makes sense that they'd have a high debt to value ratio.  The Tigers are at 57% (also with a relatively new stadium), the recently-purchased Diamondbacks are at 51%, and the St. Louis Cardinals are at 50%.

Every other team has a debt to value ratio of 38% of lower, with half of MLB teams having a debt to value ratio of less than 30%.

The Rangers are something of an outlier, having an extremely high debt/value ratio, and having not been recently purchased or incurring significant stadium-related debt recently.

In any case...according to the April, 2009, Forbes data, the Rangers, valued at $405 million, are saddled with $265-270 million in debt.

What is particularly interesting to me, though, is that this huge debt level for the Rangers was only recently incurred.  In April, 2002 -- just a few years after Hicks bought the Rangers -- the team's debt/value ratio was 40%.  With a value of $356 million, that meant the team, in April, 2002, had around $140-145 million in debt.

But that increase in debt, that was because of the ARod contract, the Juan Gonzalez contract, and all that other spending in the early 2000s, right?  That explains why debt increased by over $100 million over a 7 year period, surely... April, 2005 -- one year after ARod was traded and the payroll was slashed and Hicks became fiscally conservative, at a time when the debt should have been at its highest, the level of debt was the same as it had been in 2002.  The team had diminished in value, to $326 million, meaning that debt/value was up to 44%, but that still put the total debt in the $140-145 million range.  According to the Forbes data, the Rangers debt, after the spending spree of the early 2000s, was no higher than it had been at the beginning of that period.

So what happened?  It 2006, the debt level based on the Forbes figures was around $160 million.  Still not unreasonable.

Then in 2007, Forbes reported the Rangers at a debt/value ratio of 73%, the third highest in baseball.  Valued at $365 million, that meant that the Rangers were carrying $265-270 million in debt -- over $100 million increase in debt in one year.

And of course, as I wrote yesterday, the team over the past five years has generated a significant amount of operating income, so the baseball operations shouldn't have been going into the red there.

So what happened between April, 2006, and April, 2007, that caused the debt to value ratio to skyrocket, and that led to the Rangers being so heavily leveraged that they've spent the past year hamstrung in terms of being able to spend money, turning into a ward of the MLB state and forcing a sale?

One can only speculate, but this seems like the most obvious cause:


Wednesday, 07 February 2007

Americans George Gillett and Tom Hicks buy Liverpool Football Club

gilletthicks US business tycoons George Gillett and Tom Hicks have negotiated a deal to buy Liverpool Football Club and will be co-chairmen, but current chief executive Rick Parry will retain his position too.

"If you have a chance to get a great player, you get a great player," Tom Hicks said after confirming their takeover, and he added: "We're not going to put a budget on what we're going to do."

Liverpool FC chairman David Moores, who now becomes an honorary life president, said: "This is a great step forward for its shareholders and its fans."

Tom Hicks, who owns the Dallas Stars ice hockey club and the Texas Rangers baseball team as well, joined forces with George Gillett to outdo the competition from Dubai International Capital and it was Tom Hicks and George Gillett who won.

George Gillett and Tom Hicks are reported to have guaranteed an investment of over £200m in Liverpool Football Club, but they have declined to discuss this, although they said they will make funds available, both for supporting the team and for the building of the club's new stadium in Stanley Park.

Hicks, the leveraged buyout king, dumps millions into Liverpool right around the same time as the Rangers' debt increases by $100 million. 

And now, Hicks has stopped paying the Hicks Sports Group creditors, and the once financially-healthy Rangers, a franchise that has been generating significant cash for the past half-decade, and that should currently be in a position to ramp up payroll to add pieces to the young talent that is starting to blossom, instead have turned into a fiscal embarrassment, and the organization is forced to sit on its hands in a crucial offseason rather than make moves to improve the team.

Thank you, Tom Hicks.