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The Financial Reason for Andell Inc. to Sell Chicago Fire

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The fan push for Andell Inc. to sell Chicago Fire has long been bubbling below the surface through years of disappointment on the field and it came to a head in the fall of 2015.  It is hard to completely blame ownership for the team’s poor performance, but Andell Inc. (specifically Owner Andrew Hauptman) is the only common thread during the lowest point in the team’s history.

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Chairman, Andell, Inc Andrew Hauptman speaks onstage at the City Year Los Angeles 'Spring Break' Fundraiser at Sony Studios on April 19, 2014 in Los Angeles, California.
Chairman, Andell, Inc Andrew Hauptman speaks onstage at the City Year Los Angeles 'Spring Break' Fundraiser at Sony Studios on April 19, 2014 in Los Angeles, California.
Alberto E. Rodriguez/Getty Images

Fandom could easily be described as complete lack of rational thinking due to the fanatic nature of a person’s support for a team or sport.  Wins and losses, which ultimately define a team’s success, are purely emotional events.  This is especially true in soccer.  However, front offices and team owners have to abstain from irrationally chasing positive results at all cost, or the club could fall into despair as so many do around the world.  My hope is that this proposition can be read with complete objectivity and that it can be clearly seen that there is a business case for Andrew Hauptman to sell Chicago Fire...today...now...before his actions or inactions further hinder his return on his investment.

Why Having a Holding Company Own a Team is Bad

I know I said that team owners have to be rational to ensure a team’s survival, but in reality, the best owners have a balance of financial savvy and passion for the sport.  Look at some of the best owners in professional sports and they are at every game rooting for the team’s success (see Jerry Jones, Mark Cuban, Arthur Blank, etc.).  Some are known to meddle too much in team operations and this can be a problem, but at least fans know they will do whatever it takes to win.

A holding company is basically one that is designed to buy and hold shares of other companies, generally with the goal of establishing a controlling stake.  The goal is to buy companies that they see as being undervalued or prime for growth and sell their stake sometime in the future when they have earned a profit.  So what does Andell Inc. hold and what do they do?  Well, your guess is as good as mine.  Look at their website.  If anything screams Tradition, Honor, and Passion, it surely is not a black and white website with a name and address.  Sometimes I wonder if that the simplified goal of Andell Inc.’s purchase of the team was to take ownership, spend as little money as possible to fund the operation of the team, and be prepared for a sale in the future, at a hefty return.  How can a team be competitive if the owner wants to commit the minimum amount of resources possible to survive?

The State of CF97 Ownership and its History

Chicago Fire were founded in October 1997 and its first owner was AEG, a sports and entertainment group wholly owned by the Anschutz Company.  It is believed that they paid a $5,000,000 franchise fee to join MLS.  By all objective measures, AEG was a great owner for the team as they won MLS Cup in their first season and took home four US Open Cup trophies in the first 8 years of play.  In September of 2007, the team was sold to Andell Holdings (now Andell Inc.) for a reported $35,000,000.  While the early days of MLS did not guarantee owners any positive return on their investment, AEG did a good bit of business with the sale.

Every few years, Forbes puts out a list of MLS franchise values.  I find this list to be highly speculative because the true value is what someone else is willing to pay.  However, it does give a read into the value based on geography and the overall state of the league.  The 2015 list had Chicago Fire valued at $160,000,000 and 2014 revenue at $21,000,000 (this does not include expenses, so it does not necessarily mean the team made money).  With NYCFC’s franchise fee being $100,000,000 and MLS stating that new franchisees can expect to pay nearly $200,000,000, the value Forbes assigns the team doesn’t seem to be unreasonable.

Guillermo Rivera previously reported for Fire Confidential that there are at least three parties interested in purchasing the team, a welcome prospect for fans.  Two of the three possible buyers appear, on the surface, to be "soccer guys."  As new ownership in Columbus shows, having a owner/fan can do wonders for a club.  The key is having an owner who is willing to make the big investment with the long term vision to know this investment will be recouped and a profit is to be had in terms of future value of the club.

Professional Sports Ownership and the "Rising Tide" Problem

On last week’s The Mutant Gene Podcast with Alexi Lalas, guest Taylor Twellman talks about his issue with MLS rewarding mediocrity.  He is spot on in terms of what it does for the competition in the league.  The major problem I see from my Fire-centric view is that Andrew Hauptman is rewarded for his mediocre (that might be giving him too much credit) ownership.  They way I see it and likely the way he sees it, he just has to survive to reach his goals.  He doesn’t need to win championships to make a profit for his company.  He doesn’t need to get excited about the style of play on the field to make a profit.  He doesn’t need to be an equal in ownership meetings to make a profit.  As long as Hauptman doesn’t bankrupt the team, he will make a tidy return on his investment for the company in the event of a sale.  Andell Inc. is the buoy being lifted by the rising tide of MLS.  If the league continues to grow and increase in value, so will his franchise.  This is largely true in most professional sports.  The LA Clippers were as unsuccessful as teams come and it recently sold for $2 billion.

So how was the NBA able to force the sale of the LA Clippers?  The rest of the team owners voted to force the sale.  I can’t be certain, as nobody but "The Don" knows all of the rules and intricacies of MLS, but I would think there is a mechanism in place to force the sale of a team if enough owners agree it is best.  It seems likely this was the case when Chivas de Guadalajara was forced to sell Chivas USA to the league for a reported $25 million a few years back.

As it seems, this might be the only way to get Andrew Hauptman out of Chicago.  There would need to be enough pressure on other owners to decide his actions or inactions are harmful to the league and to their own franchises.  Particularly in the single entity structure of MLS, the owners are business partners to some extent, despite also being competitors.  If the other owners feel the Chicago Fire organization is dragging their value down, they might elect to force a sale and welcome an owner who cares about winning.  As reported by Fire Confidential, it is believed that Chicago Fire get fairly regular offers to sell the team and they continually reject them.  At this point, I cannot imagine they can continue to ignore these offers.

Financial Case for a Sale Today

First, it is important to note that many of these figures and financial calculations should be taken as a "best guess" scenario.  Specific financial terms are rarely disclosed or confirmed by the league and journalists have to rely on sources for this kind of information.  Also, when calculating the real annual return on this kind of investment, inflation should be considered because a dollar today is generally worth more than a dollar tomorrow in terms of spending power.  However, the goal of this exercise is to compare a possible financial return of a sale to the S&P 500 without inflation factored in.  Since neither reference points accounts for inflation and they use the same US Dollar, it is fine to ignore it.

I wanted to look at the possible annual return of a sale by Andell Inc. which required several assumptions and/or generally believed details.  They are as follows:

  • AEG purchased the Chicago franchise for $5 million from the league in 1997.
  • AEG sold the Chicago Fire to Andell Holdings (the previous name for Andell Inc.) for $35 million in 2007.
  • NYCFC purchased the New York franchise for $100 million in 2014 and the league’s current asking price for a franchise is $200 million.
  • One difficulty of selling MLS teams is that historically, they don’t always make an operating profit each season.  While owners claim they are losing money each year, the increase in the team’s value more than makes up for this negative cash flow.  Few know how much Chicago Fire lose each season, but I assumed several scenarios from no profit or loss, all the way to losing about $5.6 million per year.
  • The S&P 500 assumes that all dividends paid to the stakeholder would be reinvested (meaning they wouldn’t be taking cash out of the investment during the investment period).

Here are the resulting examples:

chart

It is clear that owning an MLS franchise in Chicago during the first 20 years of the league can prove to be a very profitable business venture (to be fair, owning any part of a monopoly is generally profitable).

AEG likely made a profit from the team’s sale in 2007, but that is dependent on what kind of operating losses they incurred each season.  I’d say it is unlikely they had a total operating loss of more than $10 or $15 million during their 10 years of ownership because player salaries were much lower.  As long as operating losses were as low as assumed, they probably outperformed the S&P 500 by close to double during that same time period.

Andell Inc.’s return is dependent on two murky variables.  The first is the annual operating losses (which may not actually be substantial since they refuse to compete with other teams on player salaries) and the second is how much they could earn from the sale of the team.  I ran the operating losses at four different levels and figured the annual return of a sale at five different levels to give a variety of scenarios.

See all those green boxes?  Those are all the ways Andell Inc. could sell the team and outperform the S&P 500 over the past 8.9 years.  The only way they would not outperform it, and keep in mind this still wouldn’t result in actual monetary losses for the company, would be to sell for $100 or $125 million AND to have had annual operating losses of ~$5.6 million each of the nearly 9 years of ownership.  This is a fairly unrealistic way to assume the team is operating and how it would be valued if sold today.  Otherwise, Andell Inc. could sell the team and outperform the market (6.14% return over this same time period).

Again, this isn’t a perfect analysis and does not include all kinds of other variables like taxes, fees, commissions on a sale, etc.  My hope is that this gives a brief understanding how an owner whose primary business is making money through investments can disregard the team’s fans, act the way he does, stay out of the public eye, and provide far less financial support to win championships and still make a profit.  While equally disgusting, this is behavior expected from the CEO of a multinational corporation, but not the owner of an MLS club.  Mr. Hauptman, please take your money and run (or take your money and continue residing in Los Angeles).  We need someone who cares about this club as much as the fans do.