Fixing the Reds’ Payroll Collapse: Part 3

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This post wraps up our series on the Reds payroll collapse. It explains how ongoing factors are working in perverse synergy to produce this outcome. We then get to solutions, although the obvious one isn’t going to happen. The next-best fix isn’t what you expect and may be hard to swallow.

But before we get to all of that, let’s check in on the Reds investors and see how they’re doing.

About Those Shares

It’s an oft-cited claim. The folks who own the Reds have seen their investment skyrocket in value. Is that really the case and can we put an actual number on it?

Recall, investors purchased at least one share of the Reds franchise for $6.5 million in 2006. To establish a baseline for comparison, if you had put $6.5 million in a safe asset in January 2006, say with a 5% rate of return compounded daily, your investment would now be worth about $15 million. If you’d plunked it down in the stock market, your $6.5 million would have a value of about $27 million today.

The best way to find out what a share of the Reds is worth today would be to sell it and see what the market says. That’s where we come back to Mrs. Nippert.

Louis Nippert was an attorney and majority owner of the Reds from January 1973 to February 1981. He was known as a hands-off leader during the highly successful Big Red Machine Era. Nippert was also the great-grandson of James Gamble, co-founder of Proctor & Gamble. Louis Nippert died in 1992 at age 89. At his passing, Nippert’s remaining Reds share went to his wife Louise. She outlived her husband for 20 years, dying at the age of 100.

In 2014, Louise Nippert’s trust sold the family’s remaining interest in the Reds – one share – to Frank Cohen. Cohen was the senior managing director of the Blackstone Group in New York, fourth-generation Cincinnatian and lifelong Reds fan. Terms of that sale weren’t released, but an investment banker estimated the share brought $40 million.

Since that 2014 sale, the Reds have doubled in value per Forbes.

So, those Reds’ owner shares that cost $6.5 million in 2006 are now probably worth about $80 million. Even at $60 million, the rate of return would be astronomical compared to other investment vehicles. It’s true that the only way to cash in on that wealth is to sell (or borrow against), like any non-liquid asset. That so few shares have changed hands in 16 years is ample evidence their owners are passionate about the Reds and/or the rate of return.

Downward Spiral

As laid out in the first two posts in this series, the 2023 financial landscape for the Reds is grim and fraught with uncertainty. The team’s fans stare into the abyss of another 100-loss season. Phil Castellini remains an ugly face of the franchise. Attendance at GABP seems destined to continue to decline. The threat of a bankruptcy filing by Diamond Sports jeopardizes tens of millions in revenue from Bally Sports.

Bob Castellini has to set the team’s payroll now. He can’t wait to see how all that ambiguity plays out. Castellini has shown time-and-again he places supreme value on making sure his investors aren’t inconvenienced by being asked to contribute another nickel to the franchise. When you channel that kind of worst-case, risk-averse conservatism through a breakeven policy you end up with a low, low payroll number.

Friends, that is payroll pessimism. It’s how you get from $149 million to $80 million in the time it takes a Hunter Greene four-seamer to hit the catcher’s mitt.

It doesn’t help when Nick Krall’s front office complies with cost-cutting demands by front-loading the misery and figuring out the merits later. Trade away the good players first, then spend $10 million on Mike Minor. Dump Raisel Iglesias in December for nothing instead of holding him for a deadline deal to a team in contention. Curb shop injury prone players to fill out the roster. Point to the future as a way to deflect accountability for today.

The financial situation and breakeven policy have produced a vicious downward spiral for the Reds. Fewer fans mean lower payroll. Less spending on players means a worse team. More losses on the field mean even more fans lose interest and don’t show up. Down the deepening whirlpool into the undertow.

Castellini’s no-cash-calls policy – the original financial sin of his ownership – locks the death spiral into place.

Buy The Team, Bob

The cleanest solution would be for Bob Castellini and his group to cash in and sell the Reds to owners with unencumbered deep pockets and willingness to spend what it takes to put a winning team on the field.

But the Castellini family has announced they won’t do that. Phil Castellini, entitled to own a baseball team by nothing more than birth, appears determined to take his swing at the family sports business.

If Castellini isn’t interested in selling, the next best alternative comes loaded with irony.

Bob Castellini must propose a new deal for his co-owners. First, he should congratulate them on the outstanding 17-year run they’ve enjoyed. Success in the team’s win-loss column has been scarce, but they have been repeat runaway champs when it comes to profit-loss. Their initial $6.5 million stake is likely worth 10 times that today.

Then Castellini should announce an end to the no-cash-calls policy. He should let the investors know he’ll be asking for regular contributions of cash to support the Reds payroll. That amount will be a small fraction of the wealth they’ve gained and will continue to accumulate through the value of their ownership shares.

Finally (and this is where the situation turns ironical), Castellini should offer to buy the shares of anyone who doesn’t want the new deal. His interest in taking on a bigger chunk of the team has been reported over the years.

So, buy the team, Bob.

I doubt it would come to that. My guess is the co-owners would be eager to chip in to help build a winner. And after all, that 10% annual rate of return isn’t going anywhere.

Conclusion

To be clear, I’m not endorsing the Castellini family’s operation of the Reds. Their tenure as principal owners has been a nightmare of serial mismanagement and failure on the baseball side of the franchise. If the team ever does win a championship, it will be in spite of, not because of, the Castellini family.

Bob Castellini has confessed to a record of meddling in baseball decisions, second-guessing the experts. The family’s myopic, nepotistic front office hiring practices have robbed the Reds of valuable external viewpoints. Castellini family involvement in the baseball side of the franchise has produced a strong, sustained headwind blowing against success on the field. That’s the fundamental, underlying problem. Further, the prospect of Phil Castellini inheriting his father’s role as Control Person, with the unilateral authority that brings, is as terrifying as it is repulsive.

Despite those words of caution, there’s still the issue of the toxic, downward payroll spiral that must be addressed. If the Castellini family isn’t willing to step aside, the next-best result might be an increase in their ownership share and more freedom to spend. We Reds fans may need to accept that outcome while holding our noses.

People I’ve talked to who know Bob Castellini have praised his loyalty as a personal quality. Without question he has demonstrated steadfast commitment to the promise he made to investors. Now, after nearly two decades, it’s time for Castellini to place a higher priority on his other founding pledge (his word). The one he made to the rest of us to bring championship baseball back to Cincinnati.