On Reds Ownership
Maybe not what you're expecting to hear
What's up everybody! I'm back. The Reds aren’t - yet - So I’m starting with a topic that doesn’t require on-field action.
People really love to hate on Reds ownership. The part-time pastime falls somewhere just above loving Bob Huggins and below hating Bengals ownership in the how-much-passion-does-this-provoke-in-Cincinnati sweepstakes. It’s pretty easy to look at a Forbes valuation of ~$1.25B and 2006 sale price of $270M and think ownership is pretty cheap for not spending more on payroll, but it’s not that simple.
Bob Castellini and 18 other people/groups bought the Reds in 2006 for $270M. Those 19 members split 27 shares, with Castellini having the most shares (4). Not all the shares came with voting rights. The short version is Castellini controls the most voting shares, and is officially recognized as the Reds ownership representative by MLB, but cannot unilaterally make decisions for the rest of the ownership group.
There are two ways to make money on a sports team: appreciation of the value of your ownership interest, and cash flow from net profitable operations. The Reds are now estimated by Forbes to be valued in the $1.25B - $1.5B range. Choosing the middle of that range means the ownership group has received roughly a 9% annual rate of return on the original investment. Yes, sounds great, but it actually loses out to the S&P 500 by a slim margin. If this group had simply poured that $270M into an S&P 500 tracker, they’d have more total value than they do now from owning the Reds. Plus the Reds are an illiquid investment, there’d be costs to selling the team, etc etc. I think this is an important note since everyone points at this increase in ownership value as a main reason for calling the group ‘stingy’. Yes they’ve made a lot of money, but less than if they had just let that money ride in the market.
Looking at the second way to make money - cash flow from net profitable operations - when Castellini and co bought the Reds in 2006, they made a promise to the rest of the group to NOT do any capital calls, which basically means no one would have to put more money into the team. The only way to do that is to fund payroll out of revenue. If the team is going to do $300M in revenue, and your non-payroll costs are $200M, your payroll is going to be max $100M. Any less than that and the cash either goes back to the owners or carries over to the next season’s payroll. From what I’ve read, my understanding is the Castellinis hold leftover cash for future payrolls. While they aren’t making capital calls, I don’t believe they are paying ownership dividends either. I could be wrong here, but I believe this ownership group isn’t pocketing checks of any kind year over year.
And finally, let’s review actual net worth. Bob Castellini himself is rumored to be worth about $400M (with 20%ish coming from his illiquid ownership of the Reds). Because of the ownership structure, he can’t put money into the Reds without asking the rest of the owners to do so as well. But, even if he could, he can’t personally afford Shohei Ohtani. Heck, he may not be able to personally afford Pete Alonso.
So what does all of that mean? Well, it means if the Reds are projecting to have $100M to spend on payroll out of operating income, and they did want to go get a couple big contracts, they’d have to either do a capital call for the first time or - potentially - take out a loan against the value of the franchise (which is really just a roundabout capital call since the owners would pay off the loan out of the sell price of their shares during an ownership change). As a fanbase, we’re basically asking a group of owners who have done worse over the past 18 years on their investment than the S&P 500, to reduce that rate of return to improve the product on the field. If the rate of return on those ownership shares was significantly outpacing the market, I think that would be a fair ask, but it’s not. You could also fairly argue that investing beyond cash flow would improve the on-field product, thus increasing revenues, thus creating an opportunity to pay that investment back - but then ownership would start pocketing annual dividends, and we’d be right back where we started.
The truth is the Reds ownership group isn’t stingy. They’re simply not willing to invest simply for the fanbase to enjoy the best product possible. If we want ‘better’ owners, the only answer is to find an individual or group who is willing to lose money on an annual basis simply because appeasing the fans is the right thing to do. I think this conversation isn’t an indictment of the current group but an existential discussion around the responsibility of sports team ownership.
Should sports teams be run like a business or a passion project? If it’s the former, the Castellinis have actually done a damn good job. If the latter…well they should sell the team, if and only if they can find a massively wealthy good soul who is simply in it for the happiness of the fans.
I don't know what this season is going to look like for me exactly but Reds content will hit your inbox, sometimes, in some capacity. I don't plan on doing anything on social media, so if you like anything I write, please text it to someone! And if I only ever max out at 10 subscribers, that’s cool too.