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The 51 Percent Solution

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I must say, I quite like the cut of this Fake Sigi Schmid guy’s jib. I’ve just recently discovered him and I wish I knew who he was. (He’s much better than Not Doug Logan, who is apparently also Not Pretending to Not Be Doug Logan Anymore1.)

This is a good analysis of MLS’ single entity structure, with a very good conclusion: that no, it’s not something you do for a while to get up and running, it’s a structure you stick with long-term.

I do have a minor bone to pick, and it’s largely a semantic one, and I wouldn’t mention it except that I’ve had to point it out to another blogger over and over in increasingly not-so-nice terms. Fake Sigi doesn’t explicitly say this, but it’s only a matter of time before said blogger writes “See! I told you so!” and since my 2010 resolution is to not read anything at that particular website, I’ll just say my piece after the jump.

Here’s the relevant piece of Fake Sigi’s post (which, again, doesn’t explicitly state the canard I’m about to debunk):

MLS LLC is a limited liability company with single taxation and partners that own it who are a mixture of corporations, partnerships and individuals. MLS owns all of the teams that play in the league (a total of 12 prior to the start of 2002), as well as all intellectual property rights, tickets, supplied equipment, and broadcast rights. At the same time, MLS contracts with owners to operate the teams it owns. These contractors retain a portion of ticket sales and other revenue, and must pay a portion of operation expenses. Contractors have a right to operate the teams they contract for and can sell a percentage of that right to other investors who may not be investors in MLS LLC.

While it’s true that MLS, LLC is a limited liability company and has investors (and investor/operators who actually run teams, in addition to investors like Alan Rothenberg, who do not), I need to clarify the concept of MLS “owning” its teams. Over the years, it’s gotten stuck in some people’s minds – again, not Fake Sigi’s, but many on Bigsoccer – that single entity means MLS, LLC “owns” 51 percent of each team, giving it, in essence, control of everything.

But what gives MLS control over its franchises is the franchise agreement it makes with the investor/operators. The only “51 percent” control MLS, LLC has over its franchises is much like the reason your dad got the last pork chop or the Vice President gets to cast a tiebreaking Senate vote – it’s their game. They’re their franchises. MLS, LLC doesn’t “own” 51 percent of the stock in a franchise (the normal way an individual or a block would have “control” over a corporation), it has at its disposal a number of licenses to conduct Major League Soccer games in a given territory, and it can assign, create, disband, revoke or otherwise dispose of those franchises as it sees fit, subject to the terms of the franchise agreement.

But MLS, LLC doesn’t “own” 51 percent of the stock in DC United. Will Chang bought out his other partners in DC United and now “owns” 100% of the operating rights2 – in essence, the franchise/club – to DC United. When the Chang/McFarlane/Davis/Laettner group bought DC United from Anschutz Entertainment Group in 2007, they paid AEG $33 million. Hold that number in your head for a second.

If – as some say – MLS, LLC “owns” 51 percent of each team, wouldn’t that put the value of DC United at more than $66 million? If AEG couldn’t have owned more than 49 percent of the club and Chang et al paid $33 million for that, what did MLS (the owner of the other 51 percent) get? And if that $33 million went to AEG and MLS, LLC (some of it may have been diverted, MLS takes a cut of a lot of things), that would mean that AEG only got about $16.2 million. (The proposed 2005 sale to a group led by current club president Kevin Payne didn’t take, and it was for $20 million.)

And if AEG only got $16.2 million for their just-less-than-half of DC United, they got hosed, because Oscar de la Hoya and Gabriel Brener paid a combined $20 million – to AEG, no less – for half of the Houston Dynamo less than two years ago. If they could only buy half of the 49 percent, that would put the value of Houston at more than $80 million. And with expansion teams (which MLS can just create out of whole cloth) going for $35 million (after an original asking price this last time around of $40 million), you can see where there’s a disconnect.

MLS controls its franchises. MLS ultimately decides what happens to its franchises. The “owners” (investor/operators) of MLS clubs own stakes in MLS, LLC, which, in its single-entity model, controls player contracts and league-wide marketing and media deals.

But MLS, LLC does not “own” 51 percent or any percent of the stock in its franchises. Each franchise is operated by one of (now) 16 separate holding companies (Phil Anschutz had several different ones for his different franchises when he owned half the league’s teams – Chicago’s was “Anschutz Chicago Soccer,” for instance), each with their own stockholders and profit & loss ledgers. While MLS, LLC takes a percentage of ticket sales from each club, a piece of the sales of shirt sponsors, etc. and gives each club a percentage of things like transfer fees, it is NOT a situation where MLS, LLC owns 51 percent of each of its clubs3.

Controls (at the end of the day), yes. Owns, no. That’s the sum of the bone I have to pick – less so with Fake Sigi, who, as I’ve said, I quite like.4

1 – Seriously, his stuff is so funny in retrospect. Like listening on Monday to Ron Jaworski picking NFL games from the previous Friday’s Tony Kornheiser Show. And, yes, I’m putting footnotes in here because I just got done reading Bill Simmons‘ 700+-page Book of Basketball. Sue me.
2 – I’ll take Steven Goff here over Richard Snowden, thank you very much, Bill.
3 – I should mention that my basis for this conclusion was a very long conversation on a very long red-eye flight from the west coast with a longtime MLS executive, who explained the whole thing to me in great detail about five years ago. If he was wrong or lying, I’m going to punch him in the face.
4 – No, it’s not me.

Written by admin

January 7th, 2010 at 10:48 am

Posted in soccer

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