The Ricketts finally own the Cubs outright. It was announced Friday afternoon that Chicago Entertainment Ventures, LLC, the Cubs’ parent company, had purchased the remaining 5 percent share of the team still held by the Tribune Company.
The Ricketts family assumed controlling interest of the Cubs from the Tribune Company, controlled at the time by Sam Zell, 10 years ago. Notice I did not say “purchased.” The Tribune was in financial distress at the time and selling the Cubs for a profit would have triggered a host of taxes. Instead, the Ricketts and the Tribune formed something called a leveraged partnership in order to avoid those pesky taxes.
This partnership included the Ricketts contributing a substantial amount of money obtained via loans, with the Tribune contributing the Cubs and a 25 percent stake in Comcast SportsNet Chicago (now NBC Sports Chicago). The Ricketts family trust, aka Chicago Entertainment Ventures, owned 95 percent and the Tribune owned the rest. To satisfy the IRS, both parties needed to stay in this partnership for 10 years. At the conclusion of that decade, the partnership could be dissolved with the Tribune leaving with the cash (and a lower tax bill) and the Ricketts retaining the Cubs and the debt.
The dissolution of the partnership will have several ramifications on the Cub’ finances and payrolls going forward. For example, I explained in a previous column that the leveraged partnership needed to stay leveraged (a fancy word for being in debt) for tax reasons. Thus, the Cubs hold about $425 million in debt, on which they pay around $30 million per year in interest. With the Tribune gone, the Cubs are now free to pay off the debt and avoid that annual expense. This obviously could free up extra money for future payrolls.
Paying off the debt will also allow the Cubs to spend a little more on payroll in the future for a second reason. The collective bargaining agreement (CBA) has a debt service rule that requires teams in debt to limit spending in certain ways. The rule exists to prevent teams from taking on more debt than they can afford to pay (unless a very popular former player heads up a group to buy a team like the Miami Marlins). The precise rules are complicated and would require a substantial explanation, but the short version is that the Cubs were prohibited from spending about $10-15 million a year to comply.
There’s been a lot of talk about the new TV network and other revenue streams, but keeping money around to pay off existing debt may be part of the reason the Cubs’ baseball operations budget was so low this offseason. I will be addressing this very issue shortly in a more in-depth post.
Ed. note: There are other minority investors, like South Bend Cubs owner Andrew Berlin, but the Ricketts family holds the vast majority of the team for all intents and purposes. Or all intensive purposes, if you’re into that sort of things.