The Chicago Cubs are down 1-2 to the Cleveland Indians headed into tonight’s Game 4 of the World Series. In light of the much-talked-about “droughts” that plague both teams, it might not get any more exciting, and it certainly doesn’t get any more pleasant, than October baseball at Wrigley Field on a Saturday night. So what better or worst opportunity to reminisce about that time when the Chicago Cubs, one of Major League Baseball’s most storied franchises, spent a week or two in bankruptcy.
The Cubs and 100+ of Their Closest Friends File Bankruptcy
The year was 2009. Ironically enough, the month was October. The Cubs had just finished their 138th regular season (and 94th season at Wrigley Field) 83-78–just good enough for a 2nd place finish in the NL Central behind the St. Louis Cardinals. And, just a few hours before the Phillies knocked-off the Rockies to take the NLDS, the Cubs made their bankruptcy official. Specifically, on October 12, 2009, the Chicago National League Ball Club, LLC (CNLBC) filed its voluntary Chapter 11 bankruptcy petition in Delaware, making it only the 3rd MLB team, after the Brewers (technically, the Pilots) and then the Orioles, to ever file for bankruptcy–the Texas Rangers followed closely behind in 2010 and then the L.A. Dodgers.
Represented by a gaggle of Chicago’s finest lawyers from Sidley Austin, the Cubs parachuted into the In re Tribune Company bankruptcy when that case was already 2,300+ docket entries old. Tribune Company (the sole owner of CNLBC) and 100+ or so of Tribune’s affiliates had filed their Delaware Chapter 11 cases in late 2008. Tribune’s bankruptcy case already included household names like the Chicago Tribune, the Los Angeles Times, and the WGN TV network. Although the history of the Tribune bankruptcies is too long to tell in this post, they were triggered by what the Wall Street Journal described at the time as a “toxic stew” of “heavy debt, withering advertising declines and the recession” following Tribune’s 2007 decision to go private for $11 billion.
On the one hand, Tribune would need 3 more years and 10,000 more docket entries to emerge from its bankruptcies. On the other hand, the Cubs’ very well-orchestrated and rather perfunctory filing needed just 2 weeks. Indeed, far from an “October Surprise,” the Cubs’ bankruptcy case was merely the final step in a sales process that started with Tribune’s 3 year marketing campaign. In April of 2007, Tribune announced that it would sell the team and began soliciting bids. There was no shortage of interest in one of sports’ most valuable teams. By late 2008, with Tribune’s sprawling and contentious bankruptcy well underway, the list of potential bidders had narrowed to 3. And, in consultation with the Unsecured Creditors Committee and the Lenders Steering Committee in Tribune’s case, Tribune agreed to sell the Cubs and a host of related Cubs assets to the Ricketts family of TD Ameritrade fame.
[In the category of trivia, last year we placed a spectacular Jackson Hole, Wyoming ranch in a Chapter 11 in the Northern District of Georgia. The ranch claims Joe Ricketts as a neighbor.]
Judge Carey Plays Matchmaker for the Sale of All Sales
On the petition date, and before the Cubs had even filed their Schedules and the like, the Cubs filed a 464 page motion to sell. In the sale motion, the Cubs asked Judge Carey to bless a transaction which had all but already closed. As evidenced by the 100s of pages of documents attached to the sale motion, the transactions proposed in the sale motion had already received preliminary approval on September 24, 2009 in Tribune’s main case and closed in escrow on October 9, 2009. The Cubs just needed Judge Carey’s blessing so that the Cubs could untangle itself from Tribune’s bankruptcy, monetize the assets and position them for sale, and break escrow 2 weeks later.
The bankruptcy sale of the Cubs is most interesting for what was sold and somewhat interesting for how the parties structured and funded the sale.
As for the assets, the Cubs proposed the sale of the “Cubs Business” which spanned approximately 5 Tribune subsidiaries (including CNLBC, the only Cubs-related subsidiary that had filed). The Cubs Business, valued by the parties at $845 million, included the Cubs’ MLB, spring training, and Dominican baseball operations (i.e., the Cubs franchise); Wrigley Field (!) and its related parking lots; a 25% interest in Comcast SportsNet Chicago; various radio and TV broadcast rights; intellectual property owned by the Cubs (which is literally and exhaustively depicted in the Cubs’ bankruptcy schedules); accounts receivable, and goodwill related to the Cubs Business.
As for the structure, the Cubs’ lawyers could not have chosen a more understated title for the transaction: the “Proposed Business Combination.” In Plain English, the transaction contemplated that the Cubs Entities would contribute all of the above assets, free and clear of all liens, claims, and encumbrances, to Ricketts Acquisition, LLC (RAL), a joint venture. In return, the Cubs Entities would receive, after various post-closing adjustments, approximately $740 million in cash from an $840 million special distribution and a collective 5% stake in RAL. Additionally, RAL was to assume almost all of the liabilities of the Cubs Entities (except Tribune-related guaranties), including those owing to players, employees, and officers in the Cubs Business.
To fund the sale, the Ricketts family, backed by a guarantee from the Joe and Marlene Rickets Grandchildren’s Trust, arranged for $450 million of senior debt, $249 million of subordinated debt, and $150 million of equity financing to RAL, for a total package of $849 million, which had already funded in escrow as of the date of the sale motion. On October 6, 2009, a week prior to the filing of the sale motion, Major League Baseball unanimously approved the transfer of control of the Cubs Franchise to the Ricketts. The Rickets and the Cubs Entities retained calls and puts, respectively, for the 5% stake in RAL, with the calls being available from 2018-2024 and the puts being available from 2021-2027.
The parties contemplated that the Special Distribution would be $828 million with a $15 million carve-out for indemnity obligations. After various post-closing adjustments, the parties estimated that the Cubs Entities would receive cash of about $740 million for distributions to an overwhelming majority of the Cubs’ creditors (other than Tribune creditors asserting guaranties).
Concluding that no further due diligence or marketing was necessary, and in consideration of the extraordinary efforts that the parties had gone to to negotiate the deal with the Ricketts family and obtain MLB approval and that notice had been sent to over 11,000 creditors and, Judge Carey approved the sale motion on October 14, 2009. The sale closed on October 27, 2009.
Notably, Theo Epstein, a lawyer no less, joined the Cubs as President of Baseball Operations exactly 2 years to the day after the Cubs filed their bankruptcy. Perhaps the Ricketts would have paid more had they known that the “curse killer” would bring the Cubs this far so quickly. Anyway, we’ll leave it to the sports bloggers to fill you in on what happened following the 2009 sale.
But, if tonight’s game gets too raucous or exciting, then we encourage you to dive into the Chicago Cubs’ bankruptcy schedules (part 1 and part 2), statement of financial affairs, and the sale motion. In those pleadings, you’ll get an inside view of the Chicago Cubs, at least as an asset and as a business, a view that only bankruptcy can provide.