What Influence Will BAMTech Windfall Have on Cubs Payroll?

People usually associate Major League Baseball’s revenue stream with gate and merchandise sales, TV deals, and various other sponsorships. But one of the most lucrative ventures in the sport is BAMTech. Initially established in 2015 as a spin-off of MLB Advanced Media, BAMTech specializes in streaming media technology and facilitates over-the-top content for several major sports and movie channels.

In August 2017, MLB agreed to sell 42 percent of BAMTech to Disney for a reported $1.58 billion. The profits from the sale will be distributed in equal shares to all 30 MLB owners by the end of this month, which would result in the Cubs receiving a $52.7 million payout. NBC Sports reports the purchase price could be even higher, with the Cubs receiving as much as $68 million.

So how will the Cubs’ payroll be affected by this windfall?

The short-term answer is very little. The 2018 payroll is already set at $174 million, which is roughly the same as the last year. The Cubs appear committed to staying below the luxury cap in 2018, hopefully as a precursor to splurging in the 2018-19 free agent market.

Long-term, however, the BAMTech profits could help the Cubs to pay off team debt and thereby permanently increase annual payroll starting in 2019. When the Ricketts family “purchased” the Cubs from the Tribune Company in 2009, it was not an outright sale. Rather, the two parties formed a leveraged partnership for tax reasons. The terms of this partnership require the Cubs to maintain a large debt load ($425 million in 2014) until 2019*.

At last estimate, the Cubs pay $28 million in annual interest on this debt, which represents a drain on revenue. Even receiving the more conservative estimate from those BAMTech profits would pay off a nice chunk of the debt, if the Ricketts are so inclined.

Paying off the debt would free up that $28 million to be used for other purposes, including extra payroll. Specifically, paying off the debt would add something in the neighborhood of $6.4-10.4 million of new payroll after accounting for revenue sharing, organizational spending practices, and luxury tax penalties.

To explain, the Cubs lose about 12 percent of all total revenue to the revenue sharing program, so they will only keep around $25 million of the original $28 million. And like most teams, the Cubs spend roughly 50 percent of revenue on payroll, leaving $12.5 million in potential payroll.

Finally, some of this $12.5 million needs to be budgeted to pay luxury tax penalties. The luxury tax, known more formally as the Competitive Balance Tax, charges teams a tax on payroll spending above the cap. There are also potential losses to draft position and international signing caps that are beyond the scope of this discussion.

The tax ranges from 20-95 percent of the overages, with the actual figure varying according to several factors. The Cubs already have the revenue to spend to the luxury cap, as demonstrated in 2016, so spending the $12.5 million on new salary would require the team to spend over the cap. If the Cubs spend the $12.5 million at the lowest penalty rate, they can afford $10.4 million of salary, plus a $2.1 million luxury tax. At the highest rate, they could only add $6.4 million in salary because they would incur a $6.1 million tax penalty.

In conclusion, the BAMTech profits could hasten the payoff of team debt, allowing the Cubs to increase team payroll to increase by $6.4 to $10.4 million per year starting in 2019. Again, this is taking the more conservative estimate of the total payout and assuming there are no other payroll increases via other means.

Some may suggest the Cubs instead will use the BAMTech profits to fund the ongoing $700 million 1060 Project that includes renovations and new construction in and around Wrigley Field. But my understanding is that the funding for the Wrigley renovations has largely already been raised from other sources, such as selling 5-10 percent of the franchise in 2015 (at a sizable profit) and through several large corporate sponsorship deals, like the Budweiser Bleachers.

So even if the BAMTech cash is temporarily diverted to the renovation, the money from these other sources originally earmarked for the renovation will become available for debt payoff in the future, resulting in the same outcome.

*For those curious, a sizable portion of the rest of the debt can be paid off by team profits in 2017 and 2018. Specifically, annual team revenues increased substantially since 2016 and the team received millions in postseason revenue, even as payroll stayed constant, allowing the Cubs to bank $140 million.