A new player has entered the sports acquisition industry, and a familiar face is involved
Billy Beane’s new project seems to be the antithesis to his infamous “Moneyball” scheme. Private-equity firm RedBird Capital Partners, with whom Beane is now partnering, has not shied away from making splashy, lucrative acquisitions in the sports industry. RedBird, through its new special purpose acquisition company (SPAC), RedBall Acquisition Corp., may be adding one more title to its belt: Fenway Sports Group LLC.
For a valuation of $8 billion.
RedBall, which would receive less than 25 percent of Fenway Sports, may receive quite the bang for its buck ($1.575 billion, pending additional capital). Fenway Sports owns the Boston Red Sox, Fenway Park, Liverpool FC, and the New England Sports Network.
The possible acquisition would make Fenway Sports a public holding, a new addition to the short list of American professional sports teams owned by the public. The NFL’s Green Bay Packers are well known for being held by a shareholder group, and the MLB’s Atlanta Braves are held by Liberty Media Corp. Public listings may be one route sports franchises take to offset losses from COVID-19. One analysis suggests the Red Sox are projected to lose $338 million in ticket revenue alone this year.
The acquisition is not RedBird’s first rodeo in the sports industry. In December 2019, RedBird partnered with the NFLPA and MLBPA to monetize the Name, Image, and Likeness (NIL) of players for video games and trading cards. In July, RedBird acquired an 85 percent stake of Toulouse FC, and in August, it was part of an investment group that paid $15 million for the XFL. RedBird also has a stake in the YES Network.
RedBall, a newly created company by Beane and RedBird, is an SPAC, which serves as a shell company to help other companies go public. SPACs offer no actual business operations but raise capital through an IPO, which they then use to acquire other companies. SPACs must acquire a business within two years; otherwise, they must return their funds to investors. Fortunately for RedBall, it just had its IPO in August.
SPACs are advantageous for private companies seeking an easier route to going public. Because of COVID-19, SPACs have exploded this year as startups and private companies seek to take advantage of a displaced market. Fenway Sports Group’s acquisition would be the second MLB sale in a two-month span: Steven Cohen purchased the New York Mets for $2.475 billion in September.
While SPACs may present an easier path for companies looking to go public, drafting such a merger agreement with a party like Fenway Sports Group LLC is no simple feat. There are a myriad of issues that will be heavily negotiated between the parties.
Mergers can be risky if each side is not careful. The parties would likely use a direct merger here — Fenway will merge into RedBall, the shell — but if a reverse triangular merger were used, it would offer the buyer some protections from the target’s liabilities. Even so, both parties still attempt to limit their risk by performing due diligence and requiring strong representations and warranties.
In a typical merger, buyers want to know everything — everything — about the company they are acquiring, such as: its financial books, whether the seller is facing pending litigation, the seller’s contracts with third parties (and whether those contracts can be assigned, in the case of a direct merger), the seller’s intellectual property, and much more.
SPAC mergers are slightly different because the seller (Fenway) will also want to know everything about the shell, since Fenway will be merging into the shell but still operating as normal. Fenway doesn’t want to take on any unforeseen liabilities from a dirty shell company. The due diligence in this case should be straightforward, though, since RedBall is a newly-created shell with little/no history.
Due diligence is the stage where both parties look through their operations and contracts. It’s a tedious but incredibly important task to ensure the buyer knows everything about the seller and the seller is valuing its company correctly. The buyer doesn’t want to take on bad contracts, unknown debts, potential litigation, or other issues from the seller; on the flip side, the seller wants to make sure it’s selling for the right price and making accurate representations and warranties.
Representations and warranties are a list of representations each side makes. A typical representation from a seller may say: “Seller has no actual knowledge of pending litigation against the company.” A typical representation from a buyer may say: “Buyer has sufficient consideration to pay the Purchase Price.” A breach of a representation or warranty could warrant cancellation of the deal or damages.
Oftentimes, those damages are dealt with by negotiating escrow agreements, caps and baskets, and material/immaterial breaches. Damages can be awkward in a reverse merger structure because the private company owners now own the shell, so they would essentially be suing themselves. Such an issue can be resolved by agreeing to an escrow agreement where the buyer (RedBall) places security in an account. If a breach were to occur, the private company owners could take money from RedBall’s escrow account instead of just suing themselves.
Caps and baskets also allow the parties to determine damages and indemnification for breaches. A cap is the total amount for which a side may be liable. For example, if the seller’s cap is $10 million, the buyer won’t recover more than $10 million for breaches of the representations and warranties. Setting a cap limits the seller’s liability.
According to the 2019 ABA Deal Points Study, roughly 40 percent of deals had a cap between one-to-five percent of the deal value. In this case, if the deal value were $1.575 billion, a cap may be somewhere between $15 to $60 million, depending on other deal terms.
A basket is another option. Baskets may limit small amounts of damages and require a party to reach a “threshold” amount before it can recover. Some parties don’t want to deal with “penny pinching,” and administratively, it could be a hassle to cut a check every time there’s some damage worth $15. For example, if the deal has a basket of $1 million, the buyer will not recover anything on a seller’s breach until the total amount of damages reaches $1 million. If damages are only $999,999, the buyer will not recover a penny.
Both parties heavily negotiate these points because they often define their liability in case of breach. Whenever a breach of a representation or warranty occurs, each side wants to limit how much in damages it may have to pay. Other heavily-negotiated provisions include covenants, indemnification, closing conditions, termination fees, and materiality. The few provisions mentioned are just the tip of the iceberg of negotiable issues.
Merger agreements are long, heavily detailed, and intensely-negotiated documents. Undoubtedly, with billions potentially on the line between RedBall and Fenway Sports Group, lawyers for each side will fight for their client. While the terms of the agreement are still to be seen, one thing is certain: RedBird, RedBall, and Billy Beane are making their name in the sports investment industry.
Hayes Rule is a second-year law student at Florida State University College of Law, a legal intern at Heitner Legal, and a staff editor of the Florida State University Law Review.