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Baseball is back! Today the St. Paul Saints, a minor league affiliate of the Minnesota Twins, will make a third attempt to hold their home opener in the always lovely weather of April in Minnesota. The Saints have undergone some dramatic changes in recent years, which began when they shed nearly 30 years of independence to become the highest-level affliate (AAA) of the big league club in the Twin Cities.
The Saints were launched in 1993 by Mike Veeck, the brainchild of the infamous 1979 Disco Demolition disaster, well-known groundskeeper Bill Murray, and Marv Goldklang, a minority owner of the New York Yankees. For the past three decades the Saints ecclectic ownership group turned the franchise into a quirky minor league jauggernaut, but those owners are no more. Several weeks ago the Saints were purchased by Diamond Baseball Holdings, a private-equity controlled outfit that has been rapidly gobbling up minor league teams.
Minor League Revolution
The Saints are not the only thing in minor league ball experiencing upheaval. In 2020 the agreement governing the relationship between Major League Baseball (MLB) and the Association of Professional Baseball Leagues (APBL), the governing body for the minors, expired. MLB Commissioner Rob Manfred used the end of that agreement to take control of the minor leagues, replacing the APBL with the Professional Development Leagues and shrinking the minors to 120 teams at four levels of classification (AAA, AA, High-A, Low-A). This left over 40 teams without affiliation in 2021 and was one of the reasons the Saints moved to affiliate.
This new agreement also removed caps on the number of teams one person or company could own. In the wake of this change Endeavor, a sports and entertainment company that also owns the UFC (which just merged with the WWE), created Diamond Baseball Holdings (DBH) in 2021. With their recent acquisition of the Saints and the Salem Red Sox, DBH now owns 16 minor league teams including all four of the Atlanta Braves affliates, two Boston Red Sox affliates and now two Twins affiliates (DBH already owned the AA Wichita WindSurge).
Because Endeavor has a sports agency that represents professional baseball players, the players union, the Major League Baseball Players Association (MLBPA), raised concerns about the conflict of a company both owning teams and representing players. This concern lead MLB to push Endeavor to sell DBH, but they sold it to Silver Lake Partners a Silicon Valley private equity (PE) firm that just so happens to own Endeavor, which would be ironic if it were not for the fact that PE is gobbling up companies across the economy.
Silver Lake and Private Equity
If you know anything about PE, it might be the impact it has had on hollowing out companies and bankrupting them, like Toys R’ Us. PE firms raise money from investors and combine it with debt in order to purchase existing companies, which makes them different from a hedge fund investing in stocks or a venture capital firm investing in startups. Upon acquiring a company, PE firms can load up that company with the debt it took on while charging management and consulting fees for restructuring, which typically means slashing expenses like workers or selling off assets. If the company emerges from this restructuring, the PE firm benefits. If the company fails, the PE firm bears no responsibility and still benefits while workers and debt holders get stiffed. A win-win for Wall Street!
Beyond this looting of companies, PE is a massive consolidating force. The industry owns companies in a wide variety of industries including nursing homes, fast food franchises, real estate and yes, sports. PE owns over 8,000 US companies that employ nearly 12 million Americans. Globally the industry has over $4.5 trillion in assets and the industry’s monopolistic aims are only increasing as over 70% of PE deals in 2020 served as “add-ons” where a firm acquires a company to add onto an existing portfolio company.
The largest add-on transaction in history was driven by the friendly new owners of our local minor league squad. In 2013 Silver Lake took Dell Technologies private in a $24.9 billion deal and just two years later Dell acquired EMC, a computer storage giant for $67 billion in the largest tech merger in history. This has made Dell a behemoth in the commercial computing space, although despite its success the company announced multiple rounds of layoffs in recent years to address “cost structures” which is likely code for paying off the $50 billion in debt Silver Lake used to acquire EMC.
There is always money in baseball
Minor league baseball seems well suited to be a PE dream. The players, coaches and anyone else involved with the on-field activity of a minor league club are all paid for by the big league team. This means that Saints manager Toby Gardenhire or second base prospect Edouard Julien are the responsibility of Twin’s owner Jim Pohlad, not Silver Lake. Player salaries are usually a key expense for a professional sports team, although minor leaguers are woefully underpaid, and there is nothing PE loves more than free labor or in the parlance of bankers, low unit cost. Not only that, teams can market top prospects or rehabbing stars while not having to pay them a dime.
The Saints were estimated to be generating around $20 million a year before their affiliation with the Twins. A story in the Minneapolis/St. Paul Business Journal in 2021, a season that began with COVID restrictions still in place, reported the Saints affliation with the Twins had generated a 30% increase in revenues while expenses had remained flat. That is $6 million in profit.
Silver Lake will also benefit from one of the most ridiculous trends in economic development, taxpayer funding for stadiums! CHS Field, where the Saints play, cost $63 million to build, but the Saints only paid $11 million with the City of St. Paul and Minnesota chipping in most of the rest. The Saints are not alone. By my count 13 of the 16 teams owned by DBH have received some level of public funding for their stadiums. This includes paying for MLB-mandated updates to minor league stadiums like in New York, where Dutchess County is using $25 million from the American Rescue Plan for clubhouse renovations for the Hudson Valley Renegades the High-A affliate of the New York Yankees.
Stadiums are not the only taxpayer dollars at play here either. The Minnesota State Board of Investment has nearly a fifth of the state’s public pension assets in private equity. This includes over $300 million in Silver Lake.
While minor league teams do not have the TV deals that have made MLB a nearly $12 billion business with soaring team valuations, top minor league teams can generate plenty of cash. From 2013 to 2016 the average value Forbes estimated for the top 20 minor league baseball franchises increased by over 30% to $37.5 million. This is why the Sports Advisory Group, which advised DBH on its 2022 acquistion of the Midland Rockhounds, has touted how great a deal investing in minor league baseball is. The group should talk to the investment banker Rob Manfred claims told him baseball is a bad bet.
It remains to be seen what this PE rollup of minor league teams will mean for the Saints and affiliated baseball broadly, but everyone should be worried. While MLB recently reinstituted a cap on ownership, DBH will still be able to own up to 24 minor league clubs, 20% of available teams. There is also the possibility Silver Lake just acquires another portfolio company that can gobble up another 24 teams.
A 2019 study of PE buyouts found average job losses of 4.4 percent in the two years after a company was bought by private equity. What will this mean for the workers the Saints do employ? Will the vast sports and entertainment portfolio of Silver Lake lead to DBH steering contracts or advertising dollars to companies within the firm’s control instead of local businesses in the cities these teams reside in? Will ticket prices ratchet up?
This is why its high time we take steps to reign in the power of PE so it can stop looting our economy. We should also get rid of baseball’s antitrust exemption, but I will save that topic for another time. Play ball!?