The dollars and sense of being a silent partner

Buying minority stake in Ravens would have pluses and minuses

July 19, 1999|By Jon Morgan | Jon Morgan,SUN STAFF

Wanted: A sports fan with plenty of money who is willing to let other people invest it in exchange for bragging rights. Capital gain presumed but not assured. Dividends unlikely. Good seats possible.

That classified advertisement will never run. But the message has been sent out that the Ravens are looking for someone to buy a stake in the team to help pay down the club's stratospheric debt.

The essentials of what's being offered -- including the percentage of the team that is for sale -- haven't been worked out. Controlling partner and longtime owner Art Modell plans to hire an investment banker to explore the options. Modell, 74, says he doesn't want to give up control of the team, or see it leave the family after his death.

That means he is looking for a silent partner willing to invest in a long-term proposition. Experts in franchise valuations say it's an offer many people can and will refuse. But so many others are eager to become involved in sports that there should be no problem finding someone to put up the $60 million or more that Modell hopes the stake will generate.

"A minority shareholder isn't even entitled to get tickets to the owner's box," said Michael Megna, president of Megna Valuations. The Milwaukee-based firm evaluates investments, including those in sports teams.

Despite that, Megna said, "There are some people who are willing to take a minority position so they can say they are a sports team owner. There is a lot more money around than most people are aware of."

Modell said he has been "deluged" with interested investors. "The franchise has never been in better shape," he said.

He said he is not limiting the search to people from the area, and wants someone who intends to stay involved for many years and be a partner to his heirs. NFL rules prohibit corporate ownership, so the buyer must be a single individual or a group.

The league also requires a single decision-maker for each franchise, and Modell said he intends to continue to fill that role for the Ravens. His wife, Patricia, is now the only other stockholder. The team's financial restructuring two years ago left her with the majority of the stock, but day-to-day control remains with her husband.

Depending on how the bylaws of the franchise are written, a part-owner might have no say in its operation or have a vote only in certain major decisions -- such as relocation. Even a skybox, tickets or free parking at games would have to be negotiated.

As a consequence, buyers of a minority share of a team usually pay less than their share of ownership might indicate. For example, buying 10 percent of a team valued at $500 million usually costs less than the implied value of $50 million.

Financially, such an investment can be lucrative, even if it doesn't come with profit sharing or dividends, Megna said. The payoff comes when the team is sold. Franchise values, especially in the NFL, have been soaring.

Sometimes buyers negotiate a "put" option that obligates the controlling partner to buy back the shares if the minority stakeholder demands it. Usually such a clause specifies a negotiated price or one tied to team profitability and can only be triggered after a certain period of time, Megna said.

Modell has said he may offer a right of first refusal to an investor, meaning the new partner would have a shot at buying the rest of the team if it is sold. Megna said such provisions are uncommon, especially for purchases of less than 25 percent of a team, because they encumber the owner and his or her heirs.

On the other hand, the right could prove worthless to the partner if the NFL disapproves acquisition of the controlling interest. The league jealously guards access to the club.

John Moag, an investment banker and head of Legg Mason's sports industry practice, said it is growing more common for teams to attract part-owners by promising dividends or other payments.

"It depends on structure. These teams are able to turn out some cash flow. It is an asset that appreciates dramatically and it's fun. It has real value in terms of participation in the community," said Moag, former head of the Maryland Stadium Authority.

Modell said he is also seeking to incorporate some estate-planning in the sale. He wants his sons -- one of whom is team president -- to inherit the franchise.

Megna said that could be accomplished by slicing the ownership into many shares, keeping the minimum necessary for control, selling some to the new partner and parceling out the rest to Modell's children and grandchildren. Done correctly, and gradually, this could avoid both inheritance and gift taxes, Megna said.

Modell has had bad experiences with partners in the past. Robert Gries, a Cleveland financier, and his family acquired about 40 percent of the Browns at the same time Modell bought the team, in 1961. Gries filed a series of lawsuits starting in 1982 accusing Modell of mismanagement and operating the team as "one-man autocratic rule."

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