A Look at the Padres’ Finances
On the public side, there are few opportunities to see the precise financial machinations of major league baseball teams. The Atlanta Braves are a publicly traded company so we have some information on their inner-workings. And a recent piece by Kevin Acee at the San Diego Union Tribune provides a little bit more information. Acee was granted access to some of the Padres’ finances, though as Acee noted, the league keeps a close watch on financial information and generally doesn’t want it to get out:
The caveat from the club was that many of the numbers shared herein had to be “general.” The Padres are a private company and one of 30 members of a greater private organization. One member does not have the prerogative to make public financial data Major League Baseball has not approved for release.
The Padres’ decision to grant a reporter access to some of the team’s financial information is an unusual one, though the motivation is fairly clear. The Padres are still in the midst of a rebuilding process that isn’t likely to end this season. The club believes their window of contention isn’t yet open and as a result, they aren’t likely to spend big right now. A peek into the books, and the team’s debt, helps them provide further justification for that lack of spending. There is a lot of financial information disclosed in the article, and it is probably best to break things down a bit.
The Debt
The crux of Acee’s article involves a refinancing of the debt the team’s current owners have carried since purchasing the Padres. According to the article, that debt amounted to roughly $193 million at the time of the purchase back in 2012 — it was no doubt factored into the purchase price — and the interest rate on the loans was something like 8.5%. Due to the nature of the loan, which included a make-whole provision that would require paying extra for paying down the loan early, refinancing it to get a lower interest rate would have meant an extra payment of close to $70 million. As a result, the team elected to make payments on the loan, including interest payments of $13 million in 2015 alone.
By 2017, the make-whole penalty was down to $28 million and the club made a cash call for about half of that amount and used some of their MLBAM money for the rest. Reading between the lines here, the piece mentions a total of $68 million in money coming from the sale of BAMTech, with $50 million of that amount presumed to have been received last year. That means that the first sale of MLBAM to Disney, which netted the league one billion dollars, likely resulted in some smaller payment, perhaps $18 million, that was used by the Padres in their refinancing in 2017. The team appears to have further used about $45 million of the $50 million BAMTech proceeds to pay down additional debt. The club has now paid down 40% of the original $193 million, reducing interest payments to around $4 million, a savings of around $8 million per year, plus additional savings on principal payments. In short, the club took $15 million of owner money. plus nearly all the BAMTech money it received, and used it to make $10 million or more per year for the foreseeable future. It has obviously been a good investment for the owners, and the tenor of the article suggests that that money will be invested back into the club at some point in the future, likely, if team officials are to be believed, when the club is closer to contention.
The Minors
In 2016, the Padres were coming off a minor debacle in 2015 (more on that in a bit), having expended a decent amount of cash and prospect capital to attempt to contend. That attempt failed, and the Padres decided not to invest any more money in the major league ball club. Under baseball’s old international spending rules, teams could splurge on international prospects for a year before being restricted to more expenditures in the following two seasons. The Padres splurged like nobody had splurged before, spending around $40 million on prospects and around that amount on penalties. Between the major league payroll and the bonuses for the draft and international amateurs (and the penalties that followed), the team probably spent close to $200 million in 2016, with Acee’s piece indicating the owners pitched in about $20 million to make that happen.
As for the results, the Padres now have one of the best farm systems in baseball, and that 2016 class is a big reason for their success. As of the end of last season, the Padres had 12 players from that class alone receive a graded rank, including three who already project as average despite the fact that most of these players are under 20 years old. Those 12 prospects, including Adrian Morejon, Luis Patino, and Michael Baez, were already worth roughly $100 million by the end of last year. While it hasn’t impacted the results at the major league level yet, that investment should pay huge dividends going forward. As for investments that didn’t go so well…
The First Prellering
The Padres hired A.J. Preller in the middle of the 2014 season, and Preller aimed to make the team a contender the following year. He essentially traded Yasmani Grandal for Matt Kemp, then sent prospects to Atlanta for Justin Upton. He traded Joe Ross and Trea Turner, among others, for Wil Myers and others. James Shields was given a four-year contract. Right before the season started, he took on the money owed to B.J. Upton to get Craig Kimbrel. Those deals added about $20 million in payroll over the previous year and about $40 million over the 2013 campaign. The moves weren’t successful, although they weren’t quite the disaster the Union-Tribune piece and Padres ownership make them to be.
In the piece, the club claimed to have spent $40 million more for the season. That is partially true given they spent that much in new salaries, but when compared to the previous season, the additions were about half that much. Interestingly, the club indicated that all that movement netted the team an extra $15 million in ticket sales and concessions. While that number isn’t too far off from the payroll increase, we can glean more from that bit of information. From 2014 to 2015, the Padres increased attendance by 265,000 fans. Some simple math has the increase in revenue at about $57 per attendee. What’s interesting about that information is just how the attendance increase happened. The Padres’ gambit almost worked.
On June 13, the Padres had a .500 record, were five games out of first place, and three games out of the wild card. Over the next month, they went 9-17 and fell out of the playoff race. Through the trade deadline that season, the club was averaging 31,782 fans, but after the season went south, attendance the rest of the way dropped to 28,200. If the team had remained competitive and drawn the same amount, that potentially would have meant another $6.5 million in revenue, making the increase in payroll worth it. If the team had made the playoffs, the club would have come out ahead. Adding the declining Kemp, the unproven Myers, a one-inning closer in Kimbrel, and getting a below-average performance from Shields sunk the club in 2015, but the decision to go for it wasn’t necessarily bad; it just turned out that some of the players underperformed or were poor fits on the roster. And the added salary commitments ensured the team would spend millions on players who wouldn’t even be with the team after another season. Preller’s first go at building a contender failed; the second, as noted, had to take a different approach.
Revenue Estimates
The article doesn’t come out and say how much the Padres make, but there are a fair number of estimates. First, the piece says that interest payments went from 5% ($12.6 million in 2015) to 2% ($4.6 million in 2018) of the budget, which would put revenues somewhere between $252 million and $230 million, though a few decimal points of difference on the interest percentage significantly changes the total. Looking at their larger expenditures and the percentage of expenses might be more helpful. Roughly one-third of revenues have gone to major league salaries over the last four years, which would put average annual revenue at around $295 million. They have spent around 22% of revenue on operating expenses — that number is listed at $68 million, which would put revenues at around $310 million. Forbes last year estimated the Padres’ revenue at $266 million, which now looks like that might be a little low. I should also note that the team does spend money on stadium maintenance and improvements along with all those debt repayments, but that those amounts are taken out of net local revenue and serve to increase the amount of revenue sharing they receive from the league.
Looking Ahead
Acee’s whole piece is fascinating, and I recommend reading it in full. All of baseball has seen a considerable increase in revenue over the last few seasons, an increase from which the Padres have benefited. With their revenues, they have opted to pay down debt and make an international splash. Their payroll has been lower due to those decisions, and the amount of payroll we actually see on the field has been lower still, due to bad contracts taken on in trades and free agent signings for players who were later dealt with money attached. The explanation offered in the piece is pretty clear, and while the team wasn’t completely forthcoming, most of the information checks out. The team is asking fans to be patient for one more year. Building up the minor league system should eventually create a better on-field product at Petco, but the team’s debt reduction and refinancing does more to add to a franchise value that has already doubled since Executive Chairman Ron Fowler’s group took over seven years ago. The club will need to continue to invest in the big league product to demonstrate that this is more than just perpetually shifting fans’ expectations off into the future. It’s up to the fans to determine how much more losing they can stomach.
Craig Edwards can be found on twitter @craigjedwards.
But what we all want to know is what Cameron is making!
(not really)
Super interesting piece. I would feel pretty good about how things were going as a Padres fan, although the Hosmer acquisition would be a little deflating….
I think that the key reason to believe in the Padres ownership/FO team is that they repeatedly opted to pay down big salaries or absorb “dead” salaries to get what they wanted. Tatis Jr. and Kimbrel both came this way. When an ownership team does that, you get the sense that they’re willing to spend when the time is right.
Unfortunately, of the $64M in guaranteed contracts they’re on the hook for in 2020, $43.5M is tied up in average first basemen. This team has been remarkably bad at spending money when it does so, with the Shields, Hosmer, and Myers contracts all looking pretty awful. I think that the logic posited in the article is correct–this is a team that wants to juice its ticket sales with some splashy moves, but the moves they’re selecting are bad ones. If they drop $50M on Marwin Gonzalez and $90M on Keuchel and $65M on Pollock, those would be sort of in line with what they’ve done in the past, and not a good move. Those are win-now moves because those guys are all in decline.
On the other hand, I bet signing Manny Machado would supercharge ticket sales, and he’s young enough that he would still be good when Tatis Jr., Paddack, and some set of the Mejia/Morejon/Quantrill/Baez/Allen group is actually good, to say nothing of the next crop of guys led by Gore/Weathers/Edwards. If they’re going to spend a massive amount of money to make a splash, you might as well do something that will actually help you.
Hosmer is making $20 million in 2020. They have no other 1B.
I guess it would be more accurate to call Myers a utility player these days.
That doesn’t sound much better.
I would argue that the Pods should have waited longer and not splurged until they had paid all of the debt off, but they still showed admirable restraint waiting for as long as they did.
The 60% of debt remaining, about $115 million, is what they originally put into Petco. Those are 30 year bonds that can’t be called early, and the Padres’ 30% ownership of Petco is the collateral. The bond interest rate was 8.65% when the bonds were sold in 1999. When the 30 years is up, the Padres have to give up their 30% of Petco to the City of San Diego, which owns the other 70%.
Also, it’s not “pods”, it’s Pahds. Ask any Red Sox fan.
Dave,Hosmer gets a long term monster contract.
What happened?
Have you ever had a situation at work where you (delicately) let people know that something wasn’t a great idea, got overruled, had the bad idea happen and had that turn out not so great like you expected?
Sometimes all you can do is lead a horse to water, you can’t make it drink.
If I had a buck for every time that happened, I could drink myself into unbridled bliss.
Just neighing.
Padre fan here.
Management is taking a beating due to this article and rightfully so. The article essentially lays the blame for them not improving the club on the field to interest payments…
Oh, and a world class ballpark.
I’m so sorry that you owners have to pay your bills and keep your ballpark nice. Sure does suck that we can’t also win while you’re doing that…
In all seriousness, both of these payments may hit their yearly revenue but they are adding to the long term value of the ballclub. So, essentially ownership is saying that we can’t win because they’re busy making money.
The bigger problem is that this narrative doesn’t make sense. If they can’t afford a league average payroll with the current financial constraints then why did they sign Hosmer? Also, these costs were known prior to ownership acquiring the team. If they were going to be this cash poor then should they really be owning a ballclub?
Craig, your section on the 2015 season is fantastic and something that most don’t consider. There was legitimate excitement in SD heading into 2015 and had they stayed in contention we would be having a very different conversation.
I also wonder why the Padres would even publish this article. They should have known how this was going to be received. It makes me question if they have a functioning marketing department at all. If they had half a brain they would have seized the opportunity that the Chargers gave them by leaving to grab every fan in town. Instead they fielded a boring team and are still refusing to improve it through a young fantastic player like Harper or Machado.
San Diego deserves better sports owners than this.
That world class park cost $456.8 million, and the Padres organization only paid a third of that.
Private ownership is supposed to mean access to capital along with whatever business acumen the partners have. But baseball keeps letting cash-poor owners buy into the cartel, and allowing them to put an awful product on the field while they pay off debt incurred by the purchase (see Astros, Marlins).
I think you guys know better than this. Money mostly gives you access to FA’s since paying big posting fees and contracts to foreign stars/prospects has gone away. The FA market has generally been a terribly uneconomic place to add wins to a team. In the rare cases FA’s are actually successful, they suck up a lot of payroll capacity. Thus, it’s normally best to access the FA market once your team hits around an 83-ish win projection. I don’t think there’s any way a 65-ish or 75-ish team for that matter can accrue say $35M/season in FA’s over 2 seasons and reasonably expect to make the playoffs.
SDP deployed their money very smartly in pursuing all the 2016 J2 dudes that comprise much of their top-3 farm system now. As the Trombone-r says above, they also smartly bought down some of Shield’s and Kemp’s contracts to get prospects in return, one of whom is Fernando Tatis, the #1 prospect in the MLB.
I think they’re in a similar place as the White Sox, maybe half-a-season and 1 or 2 Top 100 prospects ahead so I too am puzzled as to why they didn’t sit out Hosmer last year and make a bid for Harper or Machado this year as the ChiSox are attempting. But that’s more a dumb act of commission rather than a profit-hoarding act of omission.
Finally, Craig’s article mentions MLBAM’s sale as some kind of MLB-team profit. It isn’t. The owners pooled money to create a NetFlix-like carrier and provided MLB games as the initial content. MLBAM then powered OTT broadcasts of PGA, HBO, NHL, et al and next was sold to Disney. To say the San Diego Padres accrued additional revenues as a result of the sale is misleading. They accrue to Ron Fowler individually.
Good points, although Vlad Jnr may have something to say about Mr Tatis being #1 prospect.
The MLBAM payment is and always has been a red herring for writers like Craig, Sawchik et al. Unsurprisingly, writers here have never made a coherent accounting-based or legal argument for why it should be baseball revenue. For f’s sake, even the MLBPA itself doesn’t think the MLBAM payment is part of the calculation of owners’ revenues subject to division with the players (because the MLBPA has able lawyers/labor economists saying there’s no basis for it).
Saying that owners have any duty whatsoever to use the MLBAM payment on player salaries is as dumb as saying that players should pay team owners part of their income from endorsement contracts. After all, doesn’t Jeter “owe” part of his millions in endorsements to the Yankees, since he was associated with their existing valuable brand and he made more money because of it? (Obviously not).
I think that’s a little pessimistic, although it’s certainly the overwhelming sentiment I’ve seen in SD lately.
You can frame this offseason, and the past few seasons, as the owners being cheap, but when you consider everything from a baseball operations perspective, I think it makes much more sense.
At least for me, given the current state of the Padres, none of the major FA the past couple offseasons (besides Machado) are/were worth the money for the 2018-2020 years, and none of the trade targets (Kluber, Syndergaard, Realmuto, etc) are worth cashing in chips like Paddack, Urias, or Gore for 2-3 years of control. And surely if they could have been had for lower-level prospects, they would’ve by now, either by the Padres or someone else.
Taking each potential move or non-move in a vacuum, I have no serious complaints this offseason, besides just the general pent-up frustration of being a Padres fan. Doing nothing is obviously less fun than doing something, but sometimes it makes the most sense to do nothing.
And ownership, as Craig mentioned, has done at least SOME interesting things that demonstrate a willingness to spend $$$ under certain circumstances. Specifically, the international binge of 2016 and the Chase Headley/Bryan Mitchell trade (a $13M lottery ticket on a high upside, near MLB-ready arm) are moves that, say, Jeffrey Loria would NEVER have considered in a million years. We are not the Red Sox, but we are also not the Marlins.
Next offseason though, when guys like Arenado, Rendon, Sale, Bumgarner, etc who are clear fits for the roster are free agents, and the young core is another year farther along, we had better see them splash some cash. If they don’t spend then, the whole “strategic patience” approach starts to fall apart. You can’t wait forever.
But, in the meantime, I’m 100% fine with not signing guys like Dallas Keuchel or Mike Moustakas.
Man, I forgot about the Chase Headley/Bryan Mitchell trade. Another example of the team doing dumb things with their money. They’re trying, but pretty much all their moves have backfired (that said, they made some nice lemonade with the Shields trade).
“Next offseason though, when guys like Arenado, Rendon, Sale, Bumgarner, etc who are clear fits for the roster are free agents, and the young core is another year farther along, we had better see them splash some cash. If they don’t spend then, the whole “strategic patience” approach starts to fall apart. You can’t wait forever.”
The Pirates and Rays front offices beg to differ.
Only really dense people think the team is taking a beating because of the article.
Smart fans realize that baseball is a business and they applaud the team for paying down the debt in order to have more operating capital to invest in MLB payroll. They also applaud ownership for spending record amounts of money on Intl FA and on MLB payroll.
So, no one cares what stupid fans think.
8.5% rate on that loan omg how is that possible? are these the least connected owners ever?
Clearly the marketplace had little hope for the Padres or the owners wanted the team so badly they got a bad interest rate.
Seriously. I’d love to hear from a debt aficionado whether that’s as wild as it sounds. If they’re so junky why does the cartel want them?
(Or is this not a full representation of their debt terms?)
The San Diego Union-Tribune article mentions that the debt in question is stadium / real estate debt from 2004 tied to construction of Petco Park and related parking.
The article refers to “[then owner John] Moores, mired in other financial bogs outside baseball”, implying that there may not have been much equity in the project. That will drive up debt financing costs.
Another point to remember is that long-term interest rates in general were about 2 points higher in 2004 than they have been in recent years.
As someone who has deposed John Moores related to 9-figure “financial bogs outside of baseball,” I’m surprised he got financing at all….
Right, and if you think about a lot of the evidence in the Tribune article about owner/member cash calls, interest rates, etc. it gives a picture of the actual cash flow for the business.
And the picture being painted is that the cash flow (above costs) isn’t that great, and certainly not at the levels that get blithely thrown around by writers.
I was surprised at how negatively the Padres subreddit received the Acee article, then I remembered the ’07 off-season when we were told by the FO that they had $40m to spend. Their big announcement signing was Andy Masur for the radio broadcast. It was a gut punch and this fan base has a hard time trusting what ownership says. It’s understandable.
That being said, I’m really glad that this article specifically breaks down the spending that has already been done, especially in 2016. I currently live in Phoenix and there’s a constant argument going on between the team and the city regarding improvements to the ballpark, and the rent the team is paying. It reminds me of another San Diego sports team that used to be. This ownership group has worked to keep Petco looking like one of the most beautiful parks in the MLB, and they’ve invested heavily in the future cornerstones of this team. At this point, I’ve decided to keep the faith until 2021.
Holy crap they got Masur ?
YESSSS !!!!!!
$50 million was from BAMTech sale. $18 million was a cash call to the other partners.
The Padres spent $130.2 million on payroll in 2018. The largest sum in franchise history. From the article you can see that their revenue was around $250 million, give or take a few million. Not $310 million. Not close.
The 12 Intl FA prospects cost $81 million, not roughly $100 million.
I would recommend you read Acee’s article again.
IMO, Padres fans should remain optimistic. The Farm is one of the best and, according to the article, old debt is close to being paid off.
It seems like they learned from the 2015 season and are trying to build a long-lasting successful franchise.
The Padres’ front office should pay attention to how the Reds fair this season. Whether or not the Reds are actually trying to compete, or just get some butts back into seats, both possible intentions should be of interest to the Padres. San Diego, like the Reds, has had some solid pitchers come through their system, but for some reason those pitchers don’t pan out for them (like the Reds). Maybe in 2020, the Padres do what Cincy is doing this year, and add some household names on short deals to try and halfway compete until their world-class prospects are ready.
“It seems like they learned from the 2015 season and are trying to build a long-lasting successful franchise.”
How does the Hosmer signing fit into this narrative?
My bet is the owners wanted a guy who had played in a World Series with a public reputation of strong defense to help out the youngsters. Math does not generally help with these touchy feelly decisions that signing Hosmer was right fully or wrongly.
like the marlins, a case of a group buying a team it can’t afford. given the breathtaking appreciation in franchise values, makes perfect financial sense. it just means they give their fans a shitty product for years while those same fans buy tickets to pay off debt. the miami group paid TWICE the forbes estimate of the franchise value then say they are “forced” to shed players, fire scouts and iconic goodwill ambassadors, etc.
You’re half right about the ownership group. Chairman Fowler led the minority group that partnered with Jeff Moorad, and bought 49.3% of the team. When Moorad was turned down by MLB, the majority owner, John Moores, sold his controlling 50.7% to the Seidler/O’Malley group.
The Fowler group may have been tapped out buying their minority share, with the prospective Moorad group having operating capital. Moorad was just replaced by the Seidler group. Minus the debt, Moores sold for a bit over $300 million, and the $200 million from the Fox channel was used, so the Seidler group paid a bit over $100 Million for a controlling interest.
Seidler Equity Partners is the investment vehicle for the O’Malley and Seidler families, former Dodgers co-owners Peter O’Malley and his Sister Terry O’Malley Seidler, and two each of their sons. That’s where they put their proceeds from the sale of the Dodgers in 1998. The group also includes a Mexican millionaire banker who owns the Mexico City team in the Mexican league. Seidler Equity has over $2 billion under management, and is run by Peter Seidler who also is managing general partner (the money man) of the Padres.
The majority ownership group has the money, but has to watch out for the minority group that allowed them to buy a controlling interest dirt cheap. The franchise has to stay within its revenue, getting added capital from ownership only under special circumstances. Except for the 4-5 biggest market teams, owners don’t make money owning a franchise, they make it when they sell the franchise.
Preller is a hard guy to grade. Seems like there have been a few really bad signings/trades, and ethically questionable tactics. Yet he salvaged something from a couple of the deals that didn’t work, and has made several smart moves to acquire/upgrade prospects, and SD looks like their contention window will be wide open soon while ARI and SF rebuild and COL treads water.
The Hosmer signing is the baseball equivalent of the Bansky auction
https://www.nytimes.com/2018/10/06/arts/design/uk-banksy-painting-sothebys.html