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Opinion: The Detroit Tigers Are Up For Sale

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Opinion: The Detroit Tigers Are Up For Sale
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The Detroit Tigers spiraled out of control this year, on pace for their worst record in more than 10 years.

Chris Ilitch, president and CEO of Ilitch Holdings, has remained quiet since assuming leadership of the team after the death of his father, Mike, in February.

With that, I'm sticking my neck out with this prediction: The Ilitch family is going to sell the Detroit Tigers.

A succession plan released by the late Mike Ilitch and his wife Marian in May 2016 calls for the Tigers to remain family-owned, team spokesman Ron Colangelo told Benzinga in an email.

“Through careful long-term planning, which continues, I’m pleased to say that all of our businesses, including the sports teams, will remain 100 percent Ilitch-family owned,” the elder Ilitch said at the time. 

Could the younger Ilitch go against his father's wishes? Let's take a look at what Chris is facing in managing Detroit's baseball club. 

A Franchise In Need Of A Turnaround

One question that needs to be asked is whether the Tigers front office has finally embarked on the long-overdue rebuilding process, or if there are other plans for the team.

The front office's actions this summer closely resemble the repair of a home before it's put up for sale. Over the last month, the team shed some major salaries and potential liabilities, highlighted by the trade of 13-year veteran Justin Verlander to the Houston Astros. In return, they've received several prospects that come with low salaries and high expectations. Whether or not the moves will turn the team around won't be answered for years.

A recent evaluation of MLB teams by Forbes found that the Tigers have lost money six times in the last nine years. For the 2016 campaign, the operating income resulted in a loss of $34.6 million, the worst in the MLB. In contrast, the Ilitch's Detroit Red Wings, despite a disappointing season, posted an operating income of $6.1 million.

In order to truly determine what the intent is or what may be in the best interests of the Ilitch family, one must examine their actions from two different perspectives: an economic one, with the team's tax liability and valuation, and their ownership history.

Huge Inheritance Tax Likely In 2017

Unlike longtime New York Yankees owner George Steinbrenner — who died at the end of 2010, a year in which the estate tax wasn't levied — the Ilitch family may have to pay an inheritance tax on its assets in 2017.

Most likely, the Ilitch family and their accountants have done their best to estimate their long-term tax liability, and are certainly hoping to avoid a similar fate to the inheritors of William Davidson's estate. Upon the former Pistons owner's passing, the inheritors were sued for $2.7 billion in estate taxes, but settled for $388 million. No matter what pre-planning the Ilitch family has in place, they could be cutting a huge check to the U.S. government in 2018.

If the family doesn't have the ample cash, or doesn't want to part with it, there's one way the Ilitch's can generate cash without tax on the gains: selling the Detroit Tigers.

The team was reportedly purchased for $85 million in 1992. The sale of the team today could be in the $1 billion range; Forbes pegged the Tigers’ value at $1.15 billion last year. With the step-up in cost basis to the current value of the team at time of the owner's death, the cash received won't be subject to capital gains taxation.

The Ilitch empire is valued around $6 billion, according to Forbes' estimates.

How Much Higher Can The Tigers' Value Go?

Much of the value of any professional sports team is mainly driven by the dollars received from television coverage. At this time, the MLB’s coverage rights with Fox (Twenty-First Century Fox Inc (NASDAQ: FOXA), Turner and ESPN (Walt Disney Co (NYSE: DIS) all expire in 2021. After years of huge price escalations for these rights over the last two decades, there's no guarantee the trend will continue.

The overall decline in television ratings in the two other major professional sports last year may be of concern to club owners. NBA viewership was down 6 percent, according to Variety, while Recode reported NFL viewership was down 12 percent in 2016. The sharp decline in NFL ratings is a bit alarming since 2016 was the first year of a multibillion-dollar contract extension.

These factors make it difficult to predict how willing the major networks are to up the ante.

More importantly, the major networks will be facing fierce competition from technology companies that can provide live sports coverage at a fraction of the cost. Surely, the networks aren't looking forward to competing with Facebook Inc (NASDAQ: FB), Amazon.com, Inc. (NASDAQ: AMZN), Twitter Inc (NYSE: TWTR), Google (Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) and Apple Inc. (NASDAQ: AAPL), all of which have entered the content arena.

Why Was Ausmus Kept On?

When the Ilitch family purchased the team in 1992, the legendary Sparky Anderson was at the helm. He remained there for three years until his retirement in 1995. From 1995 to 2005, the organization had five managers.

Stability on the managerial front didn't arrive until 2006, when Jim Leyland guided the team until 2013; that was highlighted by two World Series appearances, in 2006 and 2012, respectively.

After the inexperienced Brad Ausmus took over the playoff-caliber team, the Tigers were swept in the 2014 Divisional Series. They haven't made the playoffs since and many were surprised Ausmus returned for the 2017 season.

The deviation from the managerial rollercoaster that was evident in the late 1990s and early 2000s may be an indication that the Ilitches' long-term plans for the Tigers have changed. How could the Ilitch family negotiate in good faith with potential new hires for both positions if a potential change in ownership is on the horizon?

Potential Buyers

Some have speculated Dan Gilbert as a likely suitor. The chairman and founder of Rock Ventures and Quicken Loans is also the owner of the NBA's Cleveland Cavaliers and has played an instrumental role in the resurgence of downtown Detroit.

Tom Gores seems like a natural fit. The Flint-native, graduate of Michigan State and current Pistons owner has expressed a commitment to “continued expansion of his interests in the city,” which may go beyond his attempt to bring a local soccer franchise to town.

Mark Cuban has made it known he wants an MLB team. His failed attempts to acquire the Texas Rangers and the Chicago Cubs were attributed to his poor relationship with then-commissioner Bud Selig. With Selig gone, there's one less obstacle for Cuban to overcome in an acquisition of the Tigers.

Only Time Will Tell

Chris Ilitch inherited a franchise that wildly overspent in an attempt to win a World Series while his father was still alive. That, coupled with the responsibility of maintaining his father's business empire — which includes privately owned Little Caesars Pizza, multiple real estate holdings and ownership of the struggling Red Wings — may force him to dispose of the Tigers. A sale would liberate assets to retool the Red Wings, who will be moving into a costly new arena for the 2017 season.

The Ilitch's are also dealing with the $863 million Little Caesars Arena, part of the $1 billion District Detroit development. Rebuilding one professional sports team and an entire neighborhood is a daunting task in its own right. Rebuilding two and reviving a neighborhood may be impossible while being fiscally responsible.

For now, Detroit Tigers fans are forced to cheer for an inferior team that has been one of the league's highest providers of salaries over the last few years. The organization's instability is made visible by the inferior product presented on the field. Only time will tell if the Tigers will clean house and embark on a costly rebuilding process or close a historic chapter in sports history.

In the words of veteran attorney Stephen Feldman, an estate, business and tax planner at Finkel Whitefield Selik: "2017 is the perfect year for a sale."

Posted-In: Chris Ilitch Comerica Park Detroit Detroit Red Wings Detroit TigersSports Opinion General Best of Benzinga

 

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