Winning at any Cost

How the Diamondbacks used huge debts to level the playing field of pro baseball.

While Colangelo has been masterful in putting a great team on the field, the team's financial structure is far less impressive.

Hailed widely as one of sport's most savvy owners, Colangelo deflects questions about the team's finances with a "trust me" approach.

Arizona Diamondbacks managing partner Jerry Colangelo hopes the team's World Series run will generate a sharp increase in attendance next year at Bank One Ballpark.
Arizona Diamondbacks managing partner Jerry Colangelo hopes the team's World Series run will generate a sharp increase in attendance next year at Bank One Ballpark.
Enthusiastic Diamondbacks fans sit in the street to watch the game outside of the sold-out Bank One Ballpark.
Enthusiastic Diamondbacks fans sit in the street to watch the game outside of the sold-out Bank One Ballpark.

"I keep telling people I'll worry about the finances. Everything will be fine," he says.

Colangelo's assurances aside, the fact of the matter is the Diamondbacks are saddled with massive debt and rising expenses in the face of anemic revenue growth and a nationwide recession.

That's as wicked a scenario in business as facing Johnson and Schilling is on the field.

Even with the Diamondbacks' early success in winning the first two games of the World Series, the team's long-term financial outlook remains grim.

So much so that prospective investors tell New Times Colangelo is trying to raise $160 million in new limited partnership shares. These potential investors could join other limited partners who have already put up nearly $200 million.

Colangelo declined to comment on the offering.

Several of Colangelo's current limited partners say they were not aware that Colangelo was seeking more investors until contacted by New Times. According to the team's 1995 limited partnership agreement, Colangelo can sell an unspecified amount of additional limited partnership shares beyond the original 29 shares that were sold.

John Finn, venture investment manager for El Dorado Investment Company, says El Dorado has had no discussions with Colangelo about additional partnership shares. El Dorado has about a $7 million stake in the Diamondbacks.

The addition of another $160 million in equity in the team would increase investment in the Diamondbacks to about $510 million, more than twice the $245 million value placed on the team this year by Forbes magazine.

Obviously, attracting new investors could be a tough sell for Colangelo. Particularly when operating losses are expected to continue indefinitely.

"Realistically, this thing is never, ever going to throw off positive cash in the foreseeable future," Colangelo says. "It just flat-out isn't going to happen."

Nevertheless, attracting new investors appears to be the team's only hope in reducing debt -- which requires regular payments.

Just as Colangelo misjudged the "Johnson Effect," he also grossly underestimated the cost of Bank One Ballpark. The team agreed to cover all costs of the stadium beyond the $238 million contributed by taxpayers. Colangelo anticipated the stadium would cost about $270 million. But a tight construction time line along with design and construction snafus drove up the price to about $370 million.

The Diamondbacks had to absorb the cost overruns. In 1998, the Phoenix Industrial Development Authority issued $127 million in bonds that the Diamondbacks are obligated to repay. The bonds consolidated much of the team's outstanding debt. The tax-free municipal bonds also save the team on interest on the $11 million annual payments.

The July 1998 IDA bond agreement required the team to publicly release annual financial reports, but the Diamondbacks stopped doing that after the 1999 season. The Phoenix Industrial Development Authority did not return calls seeking comment about the team's failure to disclose its finances.

The stadium was just the beginning of the red ink.

In Colangelo's zeal to field a winning team now, he has persuaded more than 10 of his players to defer more than $150 million in salaries -- at a reported 6.5 percent interest rate.

Even with the deferrals -- and a reported $20 million loan co-signed by Major League Baseball -- the Diamondbacks' operating losses are mounting. The team says it lost $65 million in the last three years, but no one outside the team's owners and bondholders have seen audited financial statements since 1999.

Colangelo hints that major changes could happen following the 2002 season, when many contracts with his players expire.

"Next year, we are still going for it," he says. "What I do beyond that is going to depend on a lot of things. It's going to depend on what kind of support we do get. How much of an increase are we going to have next year? What is going to take place?

"My job is to feel the pulse, [and] make the changes that need to be made."

Colangelo's pulse must have spiked in the fall of 1998 when he got word that season ticket renewals had plunged 25 percent after the team's first season.

Such a precipitous decline in season ticket sales was not anticipated in the team's five-year business plan. The Diamondbacks were hoping to emulate the Colorado Rockies, an expansion team that has achieved stunning attendance success since joining the National League in 1993. The Denver sports market is very similar to Phoenix -- both cities have four major sports franchises.

"Our plan going into our first season was take a four- or five-year run at building our franchise slowly, and the model more than anyone else was probably Colorado," Colangelo says.

"Colorado," he says, "was enjoying a honeymoon, so to speak, because people were so excited about getting major league baseball."

The Rockies' love fest had lasted five years by the time the Diamondbacks took the field for the first time in 1998. Denver drew more than four million fans in the 1998 season and the team played in a free stadium.

"So my goal, my objective, was let's go with young players, let's build a farm system, let's do it slowly and kind of model ourselves assuming we have that kind of support," he says.

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