Flu-Like Symptoms: It’s Not Gambling If You Can’t Lose

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I was going to write about the debt that the new Marlins ownership incurred in buying the team, and how that’s not a good excuse for the fire sale they’re conducting. In doing the research, though, I came upon something amazing. It’s amazing to me, at least. Maybe to you, too. Namely: There’s a hedge fund that makes out if the Marlins make money. They make out if the Marlins break even. And they make out if the Marlins lose money. You’ve gotta like those odds.

Here’s the financing for the Marlins purchase, per Forbes:

• $800 million cash (including $90 million of preferred stock)
• $400 million debt (all assumed from prior ownership, $300 million being refinanced)

In addition, ownership has pledged the team’s proceeds from MLB’s sale of BAMTech, roughly $50 million, and an additional $50 million to cover future losses.

I was going to look into the debt, but the preferred stock caught my eye. Preferred stock is a type of stock that some companies issue. The most familiar type of stock is common stock. If you buy 100 shares of Apple, for example, that’s common stock. Preferred stock is a little bit different. Preferred shareholders can’t vote on corporate resolutions; common shareholders can. Preferred stock almost always pays a dividend, and its dividend must be paid before common shareholders can get a dividend. And in the case of a bankruptcy, preferred shareholders’ claims to the company’s assets (after employees, suppliers, lenders, and others are paid) are superior to those of common shareholders. The preferred moniker derives from the latter two points.

The preferred stock is from MSD Partners, an investment fund controlled by Dell Computer founder Michael S. Dell. In other words, MSD handed Marlins ownership a check for $90 million, and in return it received preferred shares. The shares have two features that I think are pretty interesting:

• The dividend rate is 14 percent.
• They are puttable in 2020.

Let’s go over those one at a time. The 14 percent dividend rate is—at a time when 30-year Treasury bonds are yielding under three percent, money market accounts are below 1.5 percent, and the interest rate on your checking account starts with a zero and a decimal point—well, it’s pretty high. Really high, in fact. A big real estate investment trust, Ashford Hospitality Trust, recently issued $85 million in preferred stock, and the yield on it was 7.5 percent, just over half of what MSD is getting from the Marlins. The Marlins are paying MSD $12.6 million per year for that $90 million investment.

When a security is puttable, it means that the owner has the right to sell it (“put it”) back to the issuer at a set price. In the case of MSD’s preferred stock, they can put it back to the Marlins in 2020. And they’ll get their $90 million back. Fair enough, right?

Well, here’s the catch: If the Marlins can’t come up with the cash, they must give MSD common stock in lieu of cash. Now, if the Marlins have turned things around in three years and are printing money (cough), they’ll pay off MSD. What if they’re barely breaking even or, as seems very possible, losing money? Then MSD will get their $90 million in the form of stock.

Currently, MSD’s $90 million investment represents $90 million / $800 million = 11.25 percent ownership of the Marlins. Let’s say the Marlins lose $75 million during the next three years, over and above the amount offset by the BAMtech sale and the $50 million ownership has in reserve. That’ll reduce the value of Marlins from $800 million to $800 million – $75 million = $725 million. But MSD is still owed $90 million. So the $90 million in common stock they’ll receive would represent $90 million / $725 million = 12.41 percent ownership of the Marlins. They get a bigger share of the Marlins because the Marlins lost money! The more money Miami loses, the bigger MSD’s share.

So there are three possible outcomes for MSD:

• They hold their preferred shares and just keep banking those 14 percent dividends for as long as they want. That is a really, really good return.
• If they have a better use for the $90 million, and the Marlins have the cash, they can exercise their put in 2020 and get their investment back, after having received $37.8 million in dividend payments.
• If the Marlins are struggling, with continued losses and cash getting tight, as they claim it is now, MSD can turn its 11.25 percent ownership of the club into a bigger stake, again after having received $37.8 million in dividend payments.

There’s really no way MSD does badly. Marlins ownership can lose money. Marlins players are stuck with a team that’ll probably be dreadful. Marlins fans have to watch a club without Giancarlo Stanton, Marcell Ozuna, and Dee Gordon (so far). But MSD makes out no matter what. Short of a complete bankruptcy and liquidation (which MLB won’t let happen), MSD will collect big dividend checks for as long as it wants. And after three years, it can cash out (if things are going well for the team) or turn its initial investment into a bigger slice of the ownership pie (if they aren’t).

It appears that the current state of the Marlins doesn’t make Derek Jeter, or J.T. Realmuto, or Marlins fans happy. But pretty much anything imaginable will work out just fine for the hedge fund that comprised just 7.5 percent of the franchise’s total price tag of $1.2 billion.