4/17/2000 @ 12:00AM

Strike Two

WHEN THE NEW YORK YANKEES merged with the New Jersey Nets in September, George Steinbrenner touched all the bases.

The Boss, who owned 57% of the world champs, pocketed $160 million as a result of the merger because the Bronx Bombers were valued at $450 million more than the Nets. Steinbrenner, who owns 28% of YankeeNets, is now trying to build a cable sports network, (see “Out of his League“). That’s why he’ll soon be adding hockey’s New Jersey Devils to his empire. When that deal is completed Steinbrenner will control the most valuable collection of teams (see table).

Hoping to capitalize on the creation of YankeeNets, shareholders are looking to sell an 8.5% stake for $75 million, with Steinbrenner reaping $21 million of that. But new investors have reason to worry.

YankeeNets is asset rich but cash poor. Combined, its teams had a $4.3 million operating loss last year, even though the Yankees broke the 3 million home attendance mark for the first time.

The problem is that the Yankees, Devils and Nets each generate paltry luxury suite revenues from their facilities. Yankee Stadium was built in 1923 and has only 19 luxury boxes. In contrast, new baseball stadiums in Baltimore, Cleveland, Denver and Phoenix have between 50 and 120 luxury suites. The Devils and Nets, which share Continental Airlines Arena in New Jersey, are victims of low attendance and an onerous lease.

So far these teams have been unable to get taxpayers to finance new stadiums. Having to pay for their own real estate is a terrible hardship for team owners. Says Brian McGough, a sports valuation expert with Banc One Capital Markets in Chicago, “For the type of optimal returns investors are looking for, new facilities are a must.” Strike one.

YankeeNets is also highly leveraged. To pay Steinbrenner for half of his interest in the Yankees, the new holding company sold $200 million of bonds and now has total debt of $327 million, an amount equal to 35% of its value. Both Moody’s and Standard & Poor’s gave the bonds a junk rating, the first time ever a sports team’s debt was rated so low. The rating agencies cited the YankeeNets’ high debt, climbing player salaries and dependence on the teams’ performance for their revenue.

Says Marc Ganis, president of SportsCorp, a consulting firm in Chicago, “YankeeNets will have to dilute equity further to pay for the Devils.” Strike two.

Finally, there is a real possibility that a good portion of the 2001 baseball season could be canceled. The current agreement between players and team owners ends after this season. The owners, claiming financial duress, want a salary cap, perhaps the one thing players despise more than a Randy Johnson fastball. As a result, most experts expect a brouhaha between the two sides. That would spell disaster for YankeeNets because the baseball team contributes two-thirds of the holding company’s revenues.