Getting into the Game
12 Feb, 2013
Unless you are a real estate magnate, hip-hop icon, millionaire tech prodigy, or high-net-worth individual of the like, the odds of you owning a significant share of a sports franchise are quite slim. According to Forbes, out of the 31 current NFL owners, 18 are billionaires. Similarly, 10 out of 30 NHL owners, 10 out of 30 NBA owners and 8 out of 30 MLB owners share this coveted ten-figure status.
What makes investing in the professional sports industry so lucrative? And with recent lockouts in the NBA (2011) and NHL (2012), coupled with the common perception that teams are constantly in the red, why do sports franchises continue to experience increases in value? Why would Joe Lacob and Peter Guber, for example, purchase the perennial bottom-feeding Golden State Warriors franchise for $450 million, a 43% premium to Forbes’s fair value estimate of $315 million?
Aside from the obvious social and prestige-related benefits associated with owning a sports team (case in point: Jerry Jones, owner of the Dallas Cowboys, or Mark Cuban, owner of the Dallas Mavericks), the industry has in fact been quite financially rewarding over the years. Regulations favouring owner profitability, too, have played key roles in turning the professional sports industry into the attractive business it is today.
Favourable Economic Conditions
The economic climate for owners of sports franchises has improved substantially over recent years. The industry managed to withstand the 2008-2009 recession relatively unscathed, even posting Y/Y revenue increases in each of the four major sports leagues (the MLB, NFL, NBA, and NHL).
Sports fans, and evidently, their wallets, maintained loyalty to their teams throughout the economic turbulence. According to WR Hambrecht + Co.’s annual report on the US professional sports market, spectator sports are increasingly receiving a larger chunk of American consumers’ disposable income, reaching levels unseen since the mid-90s.
Franchises Increasing in Value
The report also showed that over the last decade, the average value of a US professional sports franchise has ballooned considerably, climbing to all-time highs as of 2011. NFL franchises exhibited the most growth in terms of value, posting an 8.3% CAGR (Compound Annual Growth Rate) over the ten-year period. MLB, NBA, and NHL franchises also displayed reasonable growth, recording 7.1%, 5.8%, and 4.3% CAGRs, respectively, over the decade.
This bull market can be explained by the robust performance of each of the industry’s main revenue streams. Higher gate receipts, surges in television revenue, longer network contracts, and the establishment of new arenas (or improvements to old ones) subsidized by taxpayer funds have all played significant roles in fueling the growth of the industry. As a result, overall revenue has soared in each of the four leagues over the last six years, posting impressive CAGRs subject to low levels of volatility.
The increasingly long-term and profitable nature of television contracts has been a key impetus to the upswing in the value of sports franchises. In 2011, for example, the NFL signed a nine-year television rights contract with CBS, Fox, and NBC, resulting in a record-setting estimated $28 billion in television revenues over the period. ESPN, under Disney, similarly has a significant $1.8 billion in TV rights payments committed to the NFL and MLB through 2013, and to the NBA through 2016.
Franchise owners also have benefited from favourable stadium subsidies from local municipalities. According to research by the College of Holy Cross’s economics department, an excess of $15 billion of taxpayer revenue has been spent on NBA, NFL, and MLB stadium financing over the last decade, saving owners millions in building and renovation costs. These subsidies, virtually unheard of ten years ago, are buffered by the owners’ threats of franchise relocation, as well as promises of economic benefits to municipalities.
Lower sports-related costs, too, have helped expand the owners’ bottom line. Recent lockouts in the NBA and NHL are appropriate examples of this. Thanks to amendments to collective bargaining agreements during lockouts, player costs have fallen over recent years. The NBA’s new 2011 CBA, for example, pays players 10.5% less as a percentage of basketball-related revenue.
Diverse revenue streams and a strong consumer base capable of weathering the ebbs and flows of the economy are the key reasons savvy investors continue to pay premiums for sports franchises. But what’s the downside? Labour disputes, as well as the growing fear that the pro sports industry may indeed be in the midst of a massive bubble continue to loom over the industry. The bubble theory, founded on the increasing disparity between franchise prices and actual cash flow, as well as the industry’s dependence on cable TV subscribers, remains the most important issue. But the increasing tension between players and owners, fueled by unsatisfactory CBA terms and lockouts, is a long-term problem that must be followed with a careful eye.
Getting into the Game
You don’t have to be Justin Timberlake (minority owner, Memphis Grizzlies) to enjoy a piece of your favourite sports team. But you may have to be a European football fan. Presently, the majority of publicly held professional sports franchises are European football teams, such as Manchester United PLC (NYSE: MANU). Another notable publicly-owned franchise is that of the Green Bay Packers, whose untradeable, no-dividend-paying stock serves more as a collector’s item for diehard fans than an actual functioning share.
Sports-hungry investors can also gain exposure by buying shares in the major companies affiliated with sports franchises. The Toronto Blue Jays, for instance, are owned by the Rogers Blue Jays Partnership, a division of Rogers Communications (TSX: RCI.B), while The New York Knicks and New York Rangers are owned by The Madison Square Garden Co (NASDAQ: MSG).
Disclosure: I have no positions in any of the aforementioned stocks, and no plans to initiate any positions within the next 72 hours.
All charts and graphs are taken from The U.S. Professional Sports Market & Franchise Value Report, 2012 by WR Hambrecht + Co.