The deal life: The sporting club
by Douglas McCollam
Published: March 21, 2005
Gulfstream gassed up in a hanger at Teterborough? Check. Triplex apartment with Central Park views? Right. Standing invites to Davos and Renaissance Weekend? Been there, done that.
Dealmaking success opens lifestyle options that didn’t exist when you spent weekends crunching numbers. But with all the status that comes from scoring that architectural gem in Sagaponack or building a state-of-the-art wine cellar, comes a challenge: How do you do engage in these new high-end pursuits as shrewdly as you built your career? How do you juggle consultants, buyers and other experts who swarm as you enter the auction house, check out the yacht, the watch, the Jasper Johns? To provide a guide to these new, often challenging, worlds, we offer a new monthly column, The Deal Life.
We begin with sports franchises ? sports being the second language of finance. Sports may not be as esoteric as, say, art, but for all the fantasies of that championship ring, it’s full of perils. With the Rotisserie baseball draft upon us and National Football League free agency in full swing, what fan hasn’t pulled apart and reassembled rosters? Indeed, that sense of sports infallibility may be the would-be owners’ greatest peril.
Because it’s not easy. What does it take to go from club level seating to the owner’s box? Start with a call to Sal Galatioto, a specialist in buying and selling sports franchises. Galatioto recently left Lehman Brothers Inc., where he was a managing director and head of the sports advisory and finance group, to form his own shop, Galatioto Sports Partners.
Galatioto says the first question is, naturally, which sport? The price of admission varies greatly. “If it’s the NFL, you’re talking about the Rolls Royce of sports leagues.” For the league to even consider you for a majority-ownership position, Galatioto says, you probably need to be worth $100 million or more. NFL franchises are highly valued because of the league’s lucrative television contract and generous profit sharing among big and small market teams. The league also has a hard salary cap and doesn’t give players guaranteed contracts, keeping labor costs predictable and under control (unlike the shuttered National Hockey League). Consequently, even small-market teams fetch huge prices. The recent bid by Arizona businessman Reggie Fowler for the Minnesota Vikings came in around $625 million. Current Vikings owner Red McCombs bought the team in 1998 for $245 million.
While NFL franchises run above half a billion dollars, the buy-in for other leagues can be much lower. Galatioto advised Walt Disney Co. on its sale of baseball’s Anaheim Angels for $180 million in 2003. Last year The Mouse also dumped its NHL team, The Mighty Ducks of Anaheim, for $75 million. Galatioto also advised Robert Johnson, founder of Black Entertainment Television, in his $300 million purchase of a new National Basketball Association franchise in Charlotte, N.C., in 2002.
Steve Greenberg, a managing director at Allen & Co., also specializes in sports deals. He says finding investors is as much art as science. When he was retained to help sell the Milwaukee Brewers, he received calls from more than 50 investors interested in bidding, many of whom he knew from past deals. But the winner turned out to be unfamiliar, Los Angeles businessman Mark Attanasio. “That’s why I always return calls,” Greenberg says. “You never know who’s going to jump in.”
Greenberg says the stereotype of the owner as a dilettante has given way to a new generation focused on bringing sophisticated management to teams. While most bidders start with a passion for their sport, they still expect a solid return. Major League Baseball purchased the Montreal Expos three years ago for $125 million and, after moving them to Washington, will probably sell them for more than $300 million. “That’s a pretty good return,” he says. Franchise investments, however, are illiquid. “You can’t risk capital that you might need to pay the mortgage,” he says.
If buying a majority stake in a team is too dear, investors can look to join as minority partners. Take heed. New York Yankees’ owner George Steinbrenner once remarked there was nothing more limited than a limited partner in a sports franchise.
“Actually, George never said that,” says Marvin Goldklang, a Yankee limited partner who attributes the remark to another Yankee LP. He admits his investment doesn’t give him much say, but says it has “high psychic income.” He and his kids have ridden in every Yankee championship parade. “Not many people, regardless of social or business standing, have had an experience like that,” he says.
Not all partnerships are as autocratic as the Yankees. Bob Caparole, chairman of Game Plan LLC, a Boston-based investment bank specializing in sports, helped assemble a group to buy the Boston Celtics in 2002.
The deal featured a multilevel structure. Four investors who put in $25 million or more became “managing members” which involved direct participation in running the team. Those on the lower tier got ownership perks, such as premium seating, the right to attend some practices and occasional travel with the team.
Of course, if you really want to run the franchise, there’s always the minor leagues. That’s how Goldklang got into baseball. In the early ’80s he was a Cahill, Gordon & Reindel LLP partner and invested a few thousand dollars in a client’s team. Though he got back “10 cents on the dollar” in that investment, he now owns three minor league teams.
These days buying a healthy Class A minor league baseball team will set you back at least several million dollars, says Sherrie Myers, co-owner of Professional Sports Marketing, which owns the Lansing Lugnuts and Montgomery Biscuits. Add another million or so for capital improvements, marketing and lease payments, if your team doesn’t have its own facility. A good double-A ball club goes for close to $10 million. A triple-A franchise in a big market can fetch $20 million.
While this is a rough guide, Goldklang notes franchise value has more to do with the health of the market and its facility deal than baseball skills. The market for minor league franchises has generally exploded, in part because minor league baseball teams are actually profitable (unlike many of their major league affiliates). On the downside, minor league owners don’t get to sign prospects or manage personnel ? the parent club supplies and pays for players and managers. On the upside, you don’t have to meet that payroll. Teams manage facilities, sell tickets and concessions, handle marketing and merchandising. In fact, while corporations have been dumping major league franchises, minor league baseball has attracted corporate buyers, such as Mandalay Sports Entertainment, which owns five minor league teams, and cabler Comcast Corp., which owns three, plus a team in the American Hockey League.
If football is your game, check out the Arena Football League. Franchises cost between $15 million and $20 million, and the AFL has a national television contract with NBC. “We think the AFL has a chance to break out,” says Greenberg, who has advised several AFL franchises.
Still, the primary motivation is rarely about making money. “It’s more of vanity purchase,” says Michael Rapkoch, whose Dallas-based firm, Sports Value Consulting LLC, worked on the buy side of several team sales. Galatioto agrees: “I don’t see buying a franchise if you don’t love the game. It will probably appreciate, but it’s still more about the psychic rewards.”
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