Under The Knife 6/24/22

The Massive Weight of Dodger Success

Todd Boehly purchased Chelsea FC with a total commitment of nearly five billion dollars, then was outbid for the Denver Broncos by scions of Sam Walton. North of Los Angeles, Alan Smolinsky is partnering with Nike founder Phil Knight to try and buy the Portland Trailblazers. Along with the purchase of a percentage of the Lakers, these get lumped into “the Dodgers” doing something, but a recent call with a high-ranking banker that is regularly involved in similar transactions tells me that not only am I incorrect, but that this could be the downfall of the modern Dodgers.

I’ll try not to get too inside baseball - or inside soccer - but feel free to skip down to the injuries if this isn’t your thing. Since taking over Chelsea in one of the most rushed transactions ever, Boehly has done a lot to keep fans on his side, to hold his team together, and to hold the front office together. He’s lost Marina Granovskiya, one of the key figures in the previous administration and one that will make it far tougher to get things done. Boehly doesn’t know soccer owners or have the connections Granovskiya built up, but having to personally take over while he fills that slot definitely takes Boehly out of even the minimal involvement he had with the Dodgers.

One can think of the Dodgers as a baseball team, owned by Mark Walter, Boehly, and a handful of others, or even an investment vehicle, especially the part at Elysian Ventures, a firm with some success in the field and that is wholly outside the “baseball income” portion, despite owning a part of Rawlings and the ball itself. (That latter part is a whole other issue.) While Walter is the managing partner or equivalent, the others have varying stakes, along with several others. Part of the reason is that MLB doesn’t allow an entity like Guggenheim Partners or Boehly’s Eldridge Industries (itself a Guggenheim Partners off-shoot, err, partner?) to own a team. The notable exception is the Atlanta Braves, who were a small part of a much larger deal involving Ted Turner’s assets. Liberty Media probably wouldn’t happen today.

However, MLB has investigated changing that policy and if so, the Guggenheim boys are going to get a lot of company. While a firm like Guggenheim ($340 billion AUM) or Seidler Equity ($3 billion AUM) is big in baseball, it pales in comparison to something like BlackRock, Bridgewater or KKR. MLB got as far as writing a policy for allowing private equity investment, but it hasn’t yet received a vote, which in the Selig era meant it wasn’t going to pass.

In the case of the Dodgers, the fact is that the owners have held a crown jewel asset for better than a decade, maximized their asset, spun out even more assets into an investment arm, added to the halo effect with a World Series title, and leveraged several partners into single owners themselves. That’s success, but aside from industry value- which of course, the commissioner will tell you is a terrible business - is there more room for the Dodgers to grow, especially as a recession looms?

That banker thinks that the Dodgers partners will be distracted by these new ventures and eventually, will break up. You could easily see that happen with Boehly, given the size and scope of his investment in Chelsea. That will put some cash crunch on the Dodgers in a macro sense - not in a payroll sense, though they could use that as an excuse to downsize if they face a rebuild - and perhaps make further private equity investment a convenient way to exit or lock in some of the gains. “Spend to win” is a nice philosophy when it’s your owner, but it requires continual cash generation or cash infusions and those are subject to market conditions.

This won’t happen overnight, but the Dodgers have exploited every opportunity they had and like any arbitrage, the spread closes and a good trader moves on to the next one.

With that, I’m also moving on, to the injuries:

FERNANDO TATIS JR, SS/OF SDP (fractured wrist)

Dennis Lin got the scoop that Fernando Tatis Jr, while not cleared to hit, has been swinging a bat and doing bat-like things for better than a month. While he’s not Batman, Tatis’ bat hijinx give us an indication that he’s as frustrated by the slow pace and conservative non-clearance as we are.

The report states that Tatis is swinging at 40 percent. That’s pretty specific and difficult for any athlete to hit a number when asked. Less than 50? More plausible. The bigger key is that while he’s watching pitches, from both machines and live pitchers (including some big league ones doing side work), he’s not hitting baseballs just yet. That shock of impact appears to be the last thing doctors will add and indicates the stability of the fixation might be a question.

There have been indications along the way that Tatis’ work would get him to a rehab quickly and hopefully keep that rehab short. He’s not going to make it back in June, so the goalposts have slipped to the ASB, which no one is noting is later this year than normal. Even that remains a question mark. Tatis swinging a bat is a good sign, but it will be better when he puts that bat on a ball.

Also, a reminder when you’re trying to fairly value Tatis currently, the shoulder remains a risk. Not only did he not have surgery to correct it, but there wasn’t a full off-season of work to help strengthen it either. The Padres have considered a lot of options, including keeping Tatis in the outfield for ‘22 only, but they won’t make any decision until his return is closer.