Sports Business

Indians stock buyback raises more questions: Analysts say highest offer yet isn't high enough

December 25, 2006

The Indianapolis Indians saw attendance, profit and dividend payments shrink in 2006. But a recent stock buyback program launched by the baseball franchise to boost the value of its shares is the biggest in the team's long history.

Whether the offer price is big enough is an open question. Market observers don't think so.

With 799 shares outstanding when the buyback was announced Nov. 16, the offer price of $15,329 per share put a $12.2 million price tag on the AAA minor-league baseball franchise.

"The thing Indians stockholders need to know is that this stock is actively trading on the Pink Sheets, and most of the recent trades are at significantly higher values than what the team is offering," said Walter Carucci, chairman of New York-based Carr Securities Corp., which has made a market in Indians stock. "The stock doesn't trade like IBM, but there is a market, and I haven't had a trade as low as $15,000 in a very long time."

Recorded Indians stock trades have ranged as high as $24,000 in the last two years, according to Bloomberg News and the Pink Sheets, NASDAQ's division that tracks thinly traded stocks. There is a current Pink Sheets offer to pay $17,250 for a share.

The most recent buyback price is a significant increase from the $9,200 offered by the team in 2002, which placed the team's value at $8.3 million, but it's not enough for some.

"Looking at the market forces, I'm not sure I understand this buyback price," said Robert Briles, vice president of David A. Noyes & Co., a local investment firm that has brokered Indians stock.

Shares that are bought back by Indians Inc. are retired, effectively making the remaining shares more valuable. Indians Chairman Max Schumacher, 74, does not plan to sell any of his 310 shares and could become majority owner if the number of shares in circulation drops to 620.

Schumacher doesn't think the price comparisons are fair.

"You can't point to a handful of transactions made over a period of time and compare it to the broad-based offering we're making," he said.

Schumacher and Indians board members said a number of factors went into determining the stock buyback price, including a comparison to previous valuations, trends within the industry, and the team's recent financial performance.

Profits have dropped from just more than $1 million in 2004 to $810,108 during the most recent fiscal year, which ended Sept. 30. Attendance slipped from 558,901 in 2005 to 547,768, despite the team's having two more home dates. Average attendance slipped from 8,100 to 7,715.

Schumacher said the switch to daylight saving time hurt his club, but he hopes an aggressive marketing campaign aimed at hard-core baseball fans will boost attendance in 2007.

The later sunset under daylight saving time means fans in the right-field bleachers are looking into the sun almost the entire game, Schumacher said. The additional daylight also inhibits fireworks displays and keeps people doing other outdoor activities and away from Victory Field, he said.

While ticket revenue was down a little more than $100,000 last year, promotional advertising revenue took a bigger hit. It was down from $888,399 in 2005 to $692,552 in 2006. Gains in suite rental and merchandise sales helped offset those declines.

On a positive note, Schumacher said the team's partnership with Major League Baseball's Pittsburgh Pirates-a partnership extended through 2008-will assure the Indians will field another competitive team in 2007.

Briles contends the team's long-standing financial success-the Indians have been profitable every year since 1973-overshadows year-to-year hiccups.

"A lot of things can affect one-year earnings, even the weather," Briles said.

The franchise awarded a stock dividend of $200 this year, down from $250 last year, partly Schumacher said, because profits were down and partly to reserve money for the buyback. The Indians had $5.5 million cash to fund the buyback as of Sept. 30. The team's total assets climbed from $6.74 million in 2005 to $7.72 million in 2006.

"Our feeling is we could finance whatever shares are offered," Schumacher said.

In the first three weeks of the buyback, six shares were tendered. The board will determine the offer's closing date.

Schumacher and Indians board members said they feel it is important for the team to offer stockholders an option to cash out of the highly illiquid stock.

"Shareholders are perfectly free to look for a buyer," Schumacher said. "A lot of people don't know where to go to look for that buyer, so, periodically, that's why we fill that niche."

The status of most Indians shareholders is what bothers Briles most.

"These shareholders are the moms and pops," he said. "Many of them aren't as tuned in to the stock markets as your average investor. Oftentimes, the only source of information they have is the team itself, and that's where I see the injustice."

Indians officials did not commission an appraisal of shares before the most recent buyback, but used a formula "commonly used in business," to determine the offer price, Schumacher said.

As outlined in a letter to stockholders, the buyback price was calculated by taking the 2006 earnings before interest and taxes-$1.35 million-and multiplying by five, rendering an "enterprise value" of $6.73 million. That sum was added to the $5.5 million cash on hand, which equals $12.3 million. That number was divided by the 799 shares.

"I don't know where the multiple of five comes from," Briles said. "That would appear to be somewhat low. This is certainly a hybrid formula."

Milt Thompson, a local attorney, sports marketing consultant and longtime Indians board member, said the buyback price was set after careful consideration by Indians management and board members.

"We looked at franchise operations, the market and the history of like-franchise sales," Thompson said. "A board vote determined this buyback, and I don't remember it being less than unanimous. As a fiduciary, we believe the price is a reasonable one based on what we know."

Even Briles admitted placing valuation on a company such as the Indians can be difficult.

"The anomaly in this thing is, there isn't much of a market to compare this to," Briles said. "There are so few sports teams that trade, it's difficult to calculate."

Sales of minor-league baseball teams over the last five years would seem to indicate the buyback price is low, said Andrew Zimbalist, a professor at Smith College in Northampton, Mass., and a noted sports economist.

"I've seen AAA teams selling for $20 million, and the price tag on those franchises is going up, not down," Zimbalist said.

By reducing outstanding shares, Indians Inc. could become a subchapter S corporation, which carries certain tax benefits, Thompson said.

For Schumacher, reducing the number of shares inches him closer to becoming majority owner in the team that has been publicly owned since the Cleveland Indians divested themselves of the farm club in 1956.

Schumacher has no plans to retire, but he said when it's time to go, his sons who work for the team will play an important role.

Bruce Schumacher is the Indians' director of corporate development and Mark Schumacher is director of merchandising.
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