A Costly Toy Subsidized by Others

When the numbers don’t seem to add up, it’s worth asking some questions.

For the last two weeks, I’ve been puzzled by the announcement of a $2.15 billion deal to buy the Los Angeles Dodgers by Magic Johnson and a group of financiers.

Of course, Johnson got most of the attention. But his celebrity has obscured a drumbeat of questions about the businessmen behind this headline-grabbing sale, which doubled the record for the price tag of an American professional sports team, set by the Miami Dolphins when it was sold for $1.1 billion in 2009.

The winning bid was led by Mark Walter and his firm, Guggenheim Partners, which most people in sports — and frankly, even on Wall Street — know very little about. (Peter Guber, the film producer behind “Rain Man” as well as Stan Kasten, the former president of the Atlanta Braves, are also involved.)

A quick background check and some back-of-the-envelope math raises an obvious red flag: how on earth can this group of individuals afford to pay $2 billion in cash?

The answer is that they probably can’t — at least, not by themselves.

Mr. Walter, along with his colleague Todd Boehly, Guggenheim’s president, appear to be living out a childhood fantasy using other people’s money, some of whom may not even realize it.

In addition to their own cash, Mr. Walter plans to use money from Guggenheim subsidiaries that are insurance companies — some state-regulated — to pay for a big chunk of his purchase of the Dodgers. Guggenheim controls Guggenheim Life, a life insurer, and Security Benefit, which manages some $30 billion, among others.

Using insurance money — which is typically supposed to be invested in simple, safe assets — to buy a baseball team, the ultimate toy for the ultrarich, seems like a lawsuit waiting to happen. Mr. Walters has been somewhat open in acknowledging that Guggenheim’s companies will be tapped, but the investor group has not disclosed how much of the purchase price is coming from individuals.

The transaction seems even more questionable when considering Mr. Walter’s own words to The New York Times two weeks ago: “I don’t want to realize a return on investment on buying the Dodgers. I want to have a multigenerational relationship that changes my life, Magic’s life, Magic’s grandchildren’s lives and all of our lives.”

So let’s get this straight: Mr. Walter, who has a fiduciary duty to the firm’s policyholders, plans to pump their money into a baseball team, even though he says he’s not seeking to realize a return on the investment. And he is seemingly wildly overpaying by some $500 million more than the next highest bidder — he outbid Steven Cohen, the hedge fund manager, among others — so that he can be the league-designated owner of the Dodgers.

“Paying $1.5 billion or $1.6 billion — I can get there. But anything after that is pure ego,” said a longtime sports banker who worked for a rival bidder for the Dodgers. “We’ve done the math. At that price, it just doesn’t make any sense unless you want to be the king of Los Angeles.”

In fairness, many insurance companies use their premiums to make investments, including private equity and real estate deals, a slice of which can sometimes even be speculative. As long as the insurance companies meet minimum capital requirements as determined by various regulators, they do not run afoul of the law.

However, rarely does an insurance company — let alone an investment firm — buy a sports franchise using its policyholders’ or investors’ money. When Tom Hicks, the founder of the private equity firm Hicks Muse, Tate & Furst, bought the Texas Rangers in 1998, he had the good sense not to use his fund’s money; he brought in qualified outside investors, who by the way, ended up suing him anyway when the team filed for bankruptcy.

In one case, the Ontario Teachers’ Pension Plan had owned Maple Leaf Sports and Entertainment, the company that owned the Maple Leaf professional hockey team and the Toronto Raptors pro basketball franchise, but the pension’s fund chief was not considered the teams’ owner. The pension fund sold the company last year.

So far, Mr. Walter and Guggenheim are not saying much. They have yet to reveal anything publicly about the proposed ownership structure. They are buying the team from the parking lot mogul Frank McCourt, who sent his debt-laden team into bankruptcy last year. In a filing to the bankruptcy court handling the sale of the Dodgers, none of the documents describe any of the financing arrangements except to suggest the deal is all cash.

Guggenheim Partners started relatively recently, in 2000, by a great-grandson of Meyer Guggenheim, the patriarch of the famously philanthropic family. It now manages some $125 billion for the very wealthy — including Michael Milken — and has proved itself to be a skilled risk manager. Under Mr. Walter, the firm has grown beyond money management into insurance and recently hired Alan D. Schwartz to run its advisory practice. Mr. Schwartz is the former C.E.O. of Bear Stearns, who sold it as it was collapsing to JPMorgan Chase.

People involved in the process who are close to Guggenheim said that while the company was using its insurance companies to pay for the Dodgers, it was a very good, prudent deal for its investors and policyholders. As long-term investors, these people said, the new owners could afford to be patient to see a return.

One person involved in the deal, as a point of comparison, noted that MetLife had paid $400 million for the naming rights to Giants Stadium. “This is a much better deal,” this person said. As for MetLife, “They don’t own anything.”

In a statement, one of Guggenheim’s regulators, Stephen W. Robertson, the Indiana commissioner of insurance, said: “Guggenheim’s past dealings with the Indiana Department of Insurance have demonstrated to us that the company and its representatives are of the highest integrity, and we have not taken exception to any interest Guggenheim may have in the Los Angeles Dodgers, nor do we plan to do so.”

Paying a record amount for a pro sports team may or may not turn out to be a good bet. But if rich guys are going to buy their toys, they should probably use only their own money.