MLB Didn’t Cut The Dodgers A $6 Billion Revenue-Sharing Shelter, Bankruptcy Court Did

In the frenzied state of whether the Los Angeles Dodgers have an unfair economic advantage – especially after Kyle Tucker signed his record four-year, $240 million deal with the club – talks of a salary cap have swirled. Now, talk has surfaced that MLB gave the Dodgers a sweetheart deal with their television deal that shelters them from paying all they could with revenue sharing around the regional sports network deal. How accurate is it? It’s more complicated than you might think.

It’s rare that news from 15 years ago takes front and center, but that’s what has happened over the last week. The headline catcher was that the Dodgers aren’t paying as much in revenue sharing as they with their $8.35 billion media rights deal, adding to their bottom line and giving them a leg up on the other 29 clubs.

That may be true, but how we got there is anything but simple.

We have to go back to 2011-12, when prior owner Frank McCourt was using the Dodgers as a bit of a personal money playground when he and his wife went into one of the most costly divorces in California history. McCourt was looking to do a 17-year, $2.7 billion deal with FOX that was key to the divorce settlement, to which then commissioner Bud Selig rejected, saying the deal was not in the best interest of baseball. Ultimately, McCourt and MLB reached an agreement for the sale of the Dodgers.

“The Los Angeles Dodgers and Major League Baseball announced that they have agreed today to a court-supervised process to sell the team and its attendant media rights in a manner designed to realize maximum value for the Dodgers and their owner, Frank McCourt. The Blackstone Group LP will manage the sale process,” said a statement from MLB and the Dodgers in November of 2011.

That bankruptcy sale and the future of the Dodgers’ local media rights loom over the here and now. It’s not that MLB granted the Dodgers a sweetheart deal with their revenue sharing. It’s that the courts had to determine what those media rights might look like when they finally came to fruition.

In October of 2012, I went about tackling what is now bubbled to the surface with the Dodgers for Baseball Prospectus (Do the Dodgers Really Have a ‘Secret Deal’ to Avoid Revenue-Sharing?). Since there have been some additional twists to the story since then, it’s worth going over it.

During the bankruptcy sale, McCourt sought to determine what the “fair-market value” of the Dodgers’ media rights might ultimately be, which could be higher than what he had been seeking with FOX when the sale finally closed. These “special terms” determined in the court-controlled proceedings amounted to $84 million annually, with escalators. By setting that figure, it put in motion the revenue-sharing terms for a future deal: the league taking 34% and distributing it to the league’s payees.

As history shows, that projected “fair-market value” was woefully short.

Guggenheim Partners eventually purchased the Dodgers for $2.15 billion in 2012, and said that a key part of their offer was the “special terms” for the projected local media rights. In 2013, the Dodgers went 50/50 with Time Warner Cable to launch Spectrum Sportsnet LA, the new regional sports network launched for the Dodgers in 2014, is a 25-year deal valued at $8.35 billion.

According to the LA Times, the average annual value of the deal is $334 million. As is often the case with media rights, the amount started lower than that, and with escalators, the value will eventually exceed the yearly $334 million when the 25-year deal expires.

Needless to say, the league and other owners weren’t happy with the 34% of $84 million annually that had come out of the bankruptcy proceedings, but the Dodgers pointed out that those terms were driven by court proceedings.

MLB and the Dodgers did get those figures adjusted, but even so, they come woefully short of the AAV the Dodgers are getting. From the LA Times:

In 2012, the league steadfastly claimed that “All up-front cash payments and all annual rights fees shall be subject to revenue-sharing under normal principles.” The problem is, “all” was the amount subject to the bankruptcy sale based on the then “fair-market value.”

So, MLB never gave the Dodgers a sweetheart deal. If Frank McCourt hadn’t driven the Dodgers into a court-controlled sale, this messy loophole that the Dodgers benefit from never happens. So, how much of the local media rights do the Dodgers ultimately shelter from revenue sharing over the life of the 25-year deal? It’s somewhere around $6 billion. That advantage is likely to stay with the Dodgers, even if somehow the owners were able to strongarm the players into a cap system when the latest labor deal expires on December 1st of this year.