Hundreds of reporters congregated outside Dodger Stadium in Los Angeles this week to greet Shohei Ohtani and ask how the Japanese superstar made the choice to suit up in Dodger blue.
Donning his crisp No 17 uniform for the first time, Ohtani said that during his meeting with the team’s owners, “they said when they look back at the last 10 years, they made the playoffs every year and even won one World Series, but they considered that a failure”, he said. “When I heard that, I knew they were all about winning.”
Enormous ambition has powered Ohtani and the Dodgers into the record books with the 10-year, $700mn playing contract announced last week. The deal trumps other record player signings, including the 10-year, $450mn extension for NFL quarterback Patrick Mahomes and Cristiano Ronaldo’s two-year agreement to combine Saudi Arabian soccer team Al Nassr FC at more than $200mn per year.
Such sums are the extension of a modern sports industry where club valuations have skyrocketed, powered by exponential growth in broadcast rights contracts and the addition of lucrative new revenue streams through luxury stadium refurbishments and, in the US, the legalisation of sports betting.
There are perhaps no two entities better poised to capitalise on this phenomenon than Ohtani, a once-in-a-century talent at both pitching and hitting not seen since Babe Ruth, and the Dodgers, one of US baseball’s most beloved clubs with a consortium of savvy financiers occupying the owners’ suite since 2012.
In 2012, the Dodgers franchise was bought at auction by an affiliate of Guggenheim Partners, a then-obscure, new-ish money manager headquartered in Chicago with a large office in Santa Monica, California. Guggenheim shocked the baseball world by paying a then-record $2.15bn sum for a Major League franchise.
The Guggenheim executives — Mark Walter, Todd Boehly and Scott Minerd — had devised a clever arrangement to defend the hefty valuation: the group, appreciating that the demand for media rights for sports would soon explode, signed a lucrative 25-year pay-TV contract worth more than $8bn with Charter Communications’ Time Warner Cable that ensured the club a steady and sizeable stream of cash flow.
Guggenheim currently manages nearly $300bn and is considered one of the savviest credit market investors in the world. In particular, it has pioneered the practice of creative debt investing using life insurance premiums as a base. Such a strategy involves a precise matching of long-dated assets and liabilities, not unlike a player contract with obligations stretching out decades.
In fact, the Dodgers now have three star players with deferred contracts — Ohtani, second baseman Mookie Betts and first baseman Freddie Freeman. Altogether, the Dodgers will owe $857mn in deferred salary and bonuses to the trio when their playing terms expire, due to be paid from 2028-2044, according to Sportrac.
Terms of the Dodgers’ current broadcast rights deal with Charter extend through 2038, insulating the club from the disruption of income from smaller regional sports networks, the largest holder of which, Diamond Sports, registered for Chapter 11 bankruptcy this year.
The fine print of the Ohtani agreement reveals sophisticated financial engineering for both sides: Ohtani has opted to defer $680mn of his deal until after his playing days, taking just $2mn in salary per year over the 10-year playing life of the contract, according to a person familiar with the deal. Using a present-value discount rate as specified in the MLB collective bargaining agreement with players, the value of Ohtani’s decade-long playing contract for calculating the Dodgers’ payroll is just $460mn.
The benefits are twofold: the Dodgers have additional space on their payroll to go after more World Series championships and add more stars — the front office was still negotiating trades for other players during the Ohtani news conference; and Ohtani can reduce his overall tax burden over the lifetime of the deal, particularly while he pulls in endorsements during the prime of his career.
Ohtani is represented by Creative Artists Agency, the Hollywood talent giant acquired this year by the Pinault family. Michael Levine, a CAA board member and co-head of its sports division, told the Financial Times that the firm spent years preparing for Ohtani’s free agency and how it would vet competing teams’ interest in the two-way talent.
“For somebody who was in a position to completely change the pay scale of a team sport in general, to also include this selfless approach to deferment of capital, represents a core tenet of who he is as a teammate and a competitor,” Levine said of Ohtani.
The record sticker price and unique structure of the deal — which includes a no-trade clause and an opt-out for Ohtani if some top Dodgers executives were to leave — is a byproduct of what Levine said was a conscious decision not to feed a “media frenzy” that surrounds other highly-sought free agents. And by all accounts, the deferral structure was suggested by Ohtani.
“I would not have had the guts to propose a deal with 97 per cent deferrals”, Andrew Friedman, the Dodgers president of baseball operations, told MLB Tonight on Thursday. “I said to Mark [Walter], ‘You’re going to think I put this in there. I didn’t!’”
“Any time a major contractual breakthrough occurs, people look at it as the end of civilisation as we know it”, said Leigh Steinberg, an independent sports agent best known as the inspiration for the film Jerry Maguire, who was not involved in the Ohtani transaction. “People think that athletes are being paid this money to play a game. No, they are being paid this money because baseball revenues have quintupled [over the last 30 years],” he added.
Steinberg said Ohtani had “more leverage than any player I can recall entering free agency” based on talent alone.
To be sure, deferred contract payments in baseball have occasionally become punchlines. The most famous belongs to Bobby Bonilla, a former All-Star who has not played since 2001 yet continues to earn more than $1mn each year in deferred payments from the New York Mets. The payouts have become a symbol of ill-advised financial decisions by the previous club owners, who also invested in Bernie Madoff’s Ponzi scheme. Each year millions of Mets fans, as well as new owner Steve Cohen, ironically celebrate the July 1 payday as “Bobby Bonilla Day”.
For his part, Levine of CAA said “this was not an irrational or emotionally driven process. The reports were that there were multiple teams that were interested in and willing to make comparable deals [to Ohtani] which I think speaks to the merits of this being a win- win.”