by Richard Walden for Sports Business Journal
Media headlines for sports franchise sales have included record-breaking prices in each league over the last year in spite of the overall economic downturn. The Chicago Cubs sold for a reported $840 million, the Miami Dolphins for $1.1 billion, the Golden State Warriors for $450 million and the Montreal Canadiens for more than $500 million. These prices instill confidence in the value of sports franchises and support the expectation of potential owners that prices will always go up.
But do headlines tell the whole story?
We reviewed all team sales involving change of control and have seen the historical average compound annual growth rate (CAGR) in the double digits across all four major leagues (see chart). However, when looking at the last four team sales in each league, there are marked differences from the long-term average, with the NBA and NFL trading at less than half the historical average.
The natural conclusion in a down economy would be that consumers would hold their discretionary dollars tighter, putting stress on attendance at sports events, thereby putting stress on price. And while there has been pressure on attendance, it wouldn’t appear that franchise sales prices have been affected.
Is there anything different going on with team sales in the current market that might be affecting the unusual recent price data? I think so, but it is not buried in the numbers; it is in the perception of value that buyers see in the assets.
Most of the historical data for sales have represented a “pure play” sale in which a buyer was obtaining a franchise within the chosen league and was betting primarily on the on-field play of the team and its share of national revenue. Sales agreements were relatively straightforward and, other than some typical adjustments for timing of cash inflows and outflows (such as timing of season-ticket sales), the headline price was a pretty good indicator of the actual purchase price for the subject franchise.
In today’s market, that dynamic is changing. While the headline prices seem to reflect an ever-increasing value for each franchise, the components contributing to value may or may not be paid in cash and may reflect a fundamental change in a buyer’s view of future franchise value.
We have begun to see much more variation in the composition of agreements to purchase franchises. In addition to the typical working capital adjustment, we have seen several new elements that are becoming common:
Reducing upfront cash in deals by the amount of operating losses expected at a team.
Placing higher value on non-franchise assets such as real estate, regional sports network investments and future development rights.
Reducing upfront cash for expenses, litigation and intangible other matters.
League Teams Franchise Ave Years From CAGR CAGR (Last 4)
Sales Purchase to Sale
NFL 32 45 17 34% 15%
NBA 30 47 8 28% 6%
MLB 30 80 18 13% 12%
NHL 30 31 18 11% 9%
Source: JP Morgan Sports Franchise Group
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The record-breaking Cubs price included Wrigley Field and share of an RSN. The Canadiens sale included an arena that is one of the most used venues in the area and provides an unusually high percentage of revenue to the enterprise. The Dolphins purchase included the stadium and future land development rights. And the list goes on.
The point here is that there are subtle shifts going on in the sports world that may have great impact not just on value, but also on how owners view the game.
Low debt caps at each league (relative to sale prices) imply that buyers will have to focus on related assets to provide funding for purchases, or raise large amounts of equity to buy a team. Buyers will therefore focus on ways to create more lending value outside of the team, or more perceived equity value to an investor. In recent deals, this has meant just as much focus on real estate value or RSN value and potential as the prospects of the team itself.
The overhang to any discussion of value and trading prices for franchises has to be the potential for work stoppage. In 2011, the NFL, NBA and Major League Baseball will be dealing with expiring collective-bargaining agreements with their players. The key to these negotiations has always been: How much of the revenue generated by the leagues and teams will be shared with the players? And how can it be made to be fair to both large- and small-market teams?
Today’s market may be further affected by a trend of decreasing overall revenue available for sharing. For example, the 2009-10 season marked just the second time in NBA history that the salary cap decreased year over year. As the largest single expense for any team, player payroll will continue to be under pressure, it will turn owners’ attention to other revenue streams, off-court assets and financing, all of which take the focus off the court.
Clearly, a team’s revenue has some correlation to its on-field activity, and I don’t expect the major leagues to become virtual reality games any time soon. Even so, it is clear that there is serious pressure in current markets that will divert owners from the game to the corporate finance transaction. Will this make the on-field event just content for media? Will the teams just be tenants in a real estate transaction?
Winning on the field just ain’t what it used to be, and if you are scanning the headlines to see what a team is worth, you better look deep into the fine print and away from the league standings if you want to see the drivers of true value.
Interested in the purchase, sale or investment in a professional sports team, e-sports organization or in sports tech? We’d welcome the opportunity to chat further with you about the various opportunities that exist in today’s market. Contact: Tommy George, President, (240) 409-6297; tgeorge@thesportsadvisorygroup.com.