The dismantling of the Yankee empire

NEW YORK (Fortune) -- The New York Yankees' cable network, the YES Network, is for sale, Fortune has learned. And some baseball insiders and Yankees limited partners are wondering whether the team itself might be next.

The highest-rated regional sports network in the country and the cable home of the Yankees and the NBA New Jersey Nets, YES is jointly owned by the Yankees, investment bank Goldman Sachs & Co. (Charts, Fortune 500) , and former Nets owner Ray Chambers. Goldman and Chambers would like to cash out, YES and Yankees insiders say, and one source says to expect a deal by summer's end. Some possible bidders: Cablevision, Comcast (Charts), News Corp. (Charts, Fortune 500) and Verizon (Charts, Fortune 500).

Publicly, Yankees and YES officials are noncommittal. "Absolutely not," Yankees president Randy Levine replies when asked whether YES is for sale - though not before acknowledging some "testing of the market." Gerry Cardinale, a Goldman managing director and YES board member, is more forthcoming, conceding that YES is in fact being shopped. "We're testing the waters with a limited universe of quality buyers," says Cardinale. "We would consider selling only if we receive a full and fair price."

And what might a "full and fair" price be? Try a cool $3 billion to $3.5 billion. At that price, one could argue that the true gem of the Yankees business empire isn't the team itself but YES.

The team hasn't distributed profits to owners in about 10 years, two Yankees insiders say. (Responds Yanks chief operating officer Lonn Trost: "There have been distributions in the past and the expectation is there will be more in the future.) Meanwhile, YES brought in $340.5 million in revenue in 2006, up about 6 percent from the prior year, according to Kagan Media Research estimates. (YES doesn't release official financial data.) John Mansell, a prominent sports analyst, believes that 40 percent of that revenue - about $136 million - translated into cash flow.

The cash flow, of course, is the key to YES's valuation. Mansell notes that stakes in other regional sports networks have traded hands recently at 19 times cash flow. So if YES, which is the cable home of the Yankees and Nets, can grow its cash this year by 8 percent or more - as Mansell thinks it will - a $3 billion valuation seems well within reach.

News of a possible YES sale comes at a crucial time for the Yankees. On the field, a team loaded with All-Stars and future Hall-of-Famers is struggling to keep pace with the American League East-leading Boston Red Sox.

Off the field, an even weightier drama is playing out. George Steinbrenner, the Yankees' demanding, combustible, and usually larger-than-life principal owner, has been strangely silent. This silence is feeding rumors of the Boss's failing health. He also lost his well-regarded number two - son-in-law and Yankees Global Enterprises chairman Steve Swindal - in March when Jennifer Steinbrenner, Swindal's wife and George's daughter, filed for divorce. And the team is building a new $1.2 billion ballpark across the street from existing Yankee Stadium in the Bronx - a somewhat risky venture given skyrocketing construction costs, but one that comes with a potentially huge payoff.

Details about the new stadium and its value to the Yankees will be examined further in the next issue of Fortune. Some highlights: The new stadium will add a minimum of $100 million annually in extra ticket-and-luxury box revenue. The rent the Yanks are paying New York City for the new stadium will drop to $10 a year (from $10 million a year for the old stadium). And the cherry-on-top: City officials get their own luxury box.

With Swindal gone, George's youngest son appears to have stepped in as his father's chief lieutenant. An executive with another club tells Fortune that Harold "Hal" Steinbrenner, 38, was the Yankees' surprise representative at Major League Baseball's owners meeting in May - something which the Yankees confirm.

Hal runs the family's hotel business, and associates describe him as bright, capable and driven - much like his father. "Hal is probably more like George than any of his other children," says one Yankees limited partner. "He's a very strong businessperson," adds John Swart, a Florida real estate developer who worked with Hal on a hotel project. "If Hal says he'll get something done, you know he will."

In an interview with Fortune, the usually press-shy Hal is forthcoming to a point. He declines to put a label on his stepped-up role: "That's a decision for George." Nevertheless, he acknowledges that his Yankees responsibilities did expand significantly following Swindal's exit. "When he left, of course there was a void," he says. "Let there be no doubt that I will fill that void enthusiastically."

Hal won't discuss his father's health, which is the subject of much speculation and little certainty. George Steinbrenner himself declined an interview through his spokesman. Yankees president Randy Levine says he talks to Steinbrenner "ten times a day" and insists the Boss is still making the important decisions. Daniel McCarthy, a Yankees limited partner and a long-time Steinbrenner friend, says Steinbrenner seemed "100 percent sharp" when he saw him in the spring.

However, such assurances conflict with what other well-placed sources say - reluctantly - about the Boss's health. A baseball executive - someone who has seen Steinbrenner this year and talks with Yankees officials - describes him as "inconsistently lucid." A New York businessman who knows Steinbrenner reports "George is very sick."

On the subject of a possible sale, Hal is emphatic. "There's no thought of selling the team," he says. "It's been in the family for 35 years, and it's going to stay that way."

Indeed, selling YES could well be part of a long-term plan to keep the Yankees in the Steinbrenner family. The windfall from YES, of which the Yanks own 36 percent, would provide a cushion to pay off any future estate taxes as well as provide the money needed to sign expensive free agents, pay draft picks and otherwise run a business heavy on fixed costs. "The reason they're cashing out is in very large part so they'll have enough cash to continue to own the team," says one source.

Even so, there remains speculation among the Yankees limited partners and other baseball insiders that Hal is simply echoing the wishes of an ailing father - that the Steinbrenners do not intend on keeping the team long term. The topic of a sale "comes up all the time" in conversations with the other partners, says Yanks minority owner Edward Rosenthal, a retired steel executive. Adds another Yankees limited partner: "If I were handicapping it, I think we're looking at a sale of the team within three or four years."

Were the Yankees to be auctioned off, the price tag for the team alone (in other words, not including the Yanks' stake in YES) could easily soar past $1 billion, given the global reach of the Yankees brand, the benchmark that will be set by the upcoming sale of the Chicago Cubs (for a sum that could approach $1 billion), the untapped revenue sources (a Yankees hotel or restaurant chain?), and the fact that many if not most of Wall Street's heavy hitters are Yankees fans (or have children who are). "My golden retriever could sell the Yankees," jokes one sports banker. "It would be the greatest bidding war in the history of bidding wars."

A banker with the firm helping to sell the Cubs - J.P. Morgan managing director Richard Walden - believes the Yankees would fetch "at least" $1.5 billion. "I actually think three years from now," says Walden, "that will look conservative."