Crystal Ball: Year 1 Post Angelos

This off season and spring training has been a slow one for baseball and the Baltimore Orioles.  It appears that MLB at large decided to do what the Orioles have been doing under Dan Duquette: wait out the market.  Waiting out the market, particularly when so many others are waiting out the market, brings on the anxiety and a rush for explanation.  Adding to that unease, is that the Orioles currently stand about 30 to 40 MM under where their payroll sat last year.

There were reasons though to think that a constriction of payroll was coming.  One, the Orioles did not make the post-season and did not get to taste the extra revenue that brings.  Two, MASN ratings decreased (26% decrease from 2016) and, we believe, that cable rates were renegotiated with providers this past off season.  Three, the club was already highly leveraging their revenue to the extent that it was unique.  Four, I had some peripheral interactions that led me to think that the club was perhaps reorganizing allocation of assets for sale of the franchise.

That last point has had the most travel with people discussing it.  The Angelos ownership group gives some giddiness with the thought that a major player will come in, buy the team, increase payroll, and the club will win out.  I personally think the assumptions at play there are a bit too optimistic.  When one looks at payroll leverage, the average club invests 46% of their revenue into their payroll.  Mets, Indians, and Giants are good examples of teams with vastly different revenues who all settle in there.  Half of baseball falls within about ten percent of that rate.

Last year, the Marlins were leveraged 58% into payroll, which was fourth most.  After the roster exodus, the club now sits at 42%.  While the meager revenue stream in Miami (compared to MLB in general) makes that 86 MM payroll look lean, it actually is a common carrying amount of leverage.  Some point to the Red Sox after John Henry bought the club.  His first payroll saw a decrease from 65% payroll leverage to 54% leverage (which was league average at that point in time).

Really the only team that has bounced that trend was the cash flushed Magic Johnson et al. purchase of the cash poor and inept McCourt ownership of the Los Angeles Dodgers where they more than doubled payroll.  One would argue that there are major differences there.  One, the Dodgers had an absurdly wonderful new television deal coming into play and, two, did not have the crippling debt that the McCourts had.

While the Orioles have not been a stranger to debt, running into some accounting troubles a few years back, they are thought not to be struggling under the debts accrued by the club.  However, there are concerns that a re-consolidation purchase under John Angelos would be the best case scenario and, yet, still have major issues with respect to buying out the partners that would be leaving and needing replacements.  Any new group would likely be met with a hard purchase from the Angelos group and that being coupled with an uncertain value for MASN (due to arbitration and court issues) and a market that is somewhat undermined with the presence of the bigger and more cash flushed DC metropolitan area being controlled by the Nationals.

What is going for the team is that the local fan base is heavily engaged in the club with the team often finding itself in the top ten, if not top five, in tv ratings.  That is somewhat lessened by the small media market when that rating figure is translated into actual households.  In the end, a strong argument can be made that the Orioles are a small market team and that argument is validated by how MLB views the Orioles within revenue sharing.

What direction this all points us in is that the Orioles, when ownership transitions, will likely see a reduction in payroll.  Last year the Orioles leveraged their revenue around 65% (2nd overall).  With the reduction in payroll this year, that figure now sits at 53% (7th overall).  There is some indication that the club will make one more signing and could well wind up around 57%.  Anyway, if we assume that the team will drop down to a league average payroll, we are looked at a figure of around 114 MM.

To get to 114 MM in 2019, it will actually be quite easy.  The team stands now at 134 MM.  The departures of Adam Jones and Manny Machado would take the payroll down to 101 MM.  Zach Britton would be another significant departure of 12 MM.  Get rid of those free agents and others (e.g., Brad Brach, Chris Tillman) and figure in potential arbitration raises, you get a potential payroll of about 94 to 110 MM for 2019.

I think it would be reasonable to think that a sale this year or in the off-season would result in a freezing of the roster for 2019.  2020 would then present the likely scenario for what the new ownership group would be able to afford.  History would dictate something in the neighborhood of 105-125 MM, which is slightly below where the club is now.