Franchise values: Which price is right?

By Daniel Kaplan & John Lombardo, Staff Writers
Sports Business Journal
Published: June 30, 2014

When a team unexpectedly reels off a long winning streak, fans can be tempted to start thinking even bigger: championships, parades — the good times going on and on. So when the news hit last month that the Los Angeles Clippers were selling for the staggering sum of $2 billion, sports team owners understandably might have started to do the same. In their case, “good times” would mean the radical escalation of the value of their own franchises and the prospect of selling their teams for what not long ago were virtually inconceivable sums.

But before they contemplate those sales, they might want to consider the following: No MLB team has sold since Guggenheim Partners paid the astounding price of $2.15 billion for the Los Angeles Dodgers in 2012.

As occurred with the Dodgers sale, the Clippers deal is serving to spark confusion in the marketplace about what teams are really worth. It’s an effect that is reverberating through team sponsors, marketers and regional sports networks, as well.

“Expectations have risen,” said sports finance adviser Mitchell Ziets, who counseled Chris Hansen on his
attempted bid to buy the Sacramento Kings last year. “The question is, How deep is the market? There are not 15 buyers lined up for every team.”

The Clippers presented a host of unique circumstances, including the forced sale (with pending litigation) and the lucrative Los Angeles market. Those circumstances are unlikely to get replicated elsewhere, but tamping down expectations that all teams in sports are now worth at least $1 billion is a challenge.

Live for the moment — that can be part of the equation, even if it means dollars outside of a book-value calculation.

“Look at the world,” said sports investment banker Sal Galatioto. “The Russians are taking over Ukraine …
terrorists are taking Iraq and Syria, the North Koreans are testing cruise missiles — there could be a flash point in the next 10 seconds, and everything could change.”

So is there a present-day benchmark for what teams are worth, both now and looking ahead?

Many bankers believe that instead of the Clippers deal, a better standard for the market going forward is the sale of the Milwaukee Bucks that occurred earlier this spring. That deal came in at $550 million. While that amount pales in dollars relative to the $2 billion that Steve Ballmer has offered in Los Angeles, consider what was acquired for that $550 million sum: a team that plays in an outdated arena and in a small market, and that has a modest, at best, following. Despite all that, the Bucks attracted a purchase amount that at the time — and pending approval of the Clippers’ deal — was a record franchise-sale price in the NBA.

Further, that Bucks price represents about five times the team’s revenue, said Rob Tilliss, a sports finance adviser with Inner Circle Sports. Previously, teams typically sold for three to 3 1/2 times revenue, so five times revenue could be the new floor, Tilliss said. By contrast, the Clippers’ $2 billion deal comes for a franchise that had $150 million in revenue last year — so it represents a double-digit multiple that is hard to justify from the perspective of a traditional financial model.

That said, Tilliss pointed out that from a tax perspective, the deal for Ballmer in Los Angeles has a benefit in that the Microsoft billionaire can depreciate the purchase over 15 years. Ballmer also represents a new type of owner in sports: the mega-wealthy, with their riches often coming from hedge funds or entrepreneurship. For these owners, paying a few times more on revenue than what the traditional team-purchase model suggests should be done is not the concern that it was for owners in prior years.

“Steve wanted the team and he didn’t want to be outbid,” said Michael Rapkoch, founder of Sports Value
Consulting, which has been involved in analyzing the value of a variety of big league teams. “The other bids were $1.2 billion and $1.6 billion by sophisticated buyers, but [Ballmer] wanted a major-market team and didn’t want to leave a chance of being left out.

“But the game-changer in all this is the Bucks deal,” Rapkoch said. “That deal set the floor.”

View from the owners’ suite

Of course, financial advisers aren’t alone in seeking trend lines. Current franchise owners and others active in the industry are watching the marketplace, as well. Former team owners also are following the numbers, and for some of them, neither the Clippers’ price nor the Dodgers’ deal will have substantial bearing on future franchise transactions.

“Based on the things we know, neither the Dodgers’ or the Clippers’ value pencils out,” said Jerry Colangelo, former owner of the Phoenix Suns. Colangelo bought the Suns in 1987 for $44 million and sold the team in 2004 for a then-NBA record $400 million.

“You look at all of it, and it doesn’t figure,” he said. “But there are some individuals with the capacity and the desire to own a team and it has nothing to do with the true value. The bio of the owner today is so different. They are entrepreneurial and hedge fund guys and they look at it through a different microscope. The number wasn’t imperative to Ballmer. He was willing to pay. There are still only 30 of these jewels.”

But former Sacramento Kings owner Joe Maloof, whose family last year sold the Kings for a then-record $534
million, said the increase in franchise values that’s being seen is likely to continue.

“There was a line around the block to buy the Clippers,” Maloof said. “Maybe [Ballmer] overpaid in the short term, but in the long term, it will be a great investment for him. Los Angeles is a platform to the

Part of that platform includes being in the nation’s No. 2 TV market. Talk to anyone in the business of buying and selling sports teams, and likely their first point of comment in assessing a deal will be the
value of the team’s local TV deal.

“Typically, TV plays a big role in the actual purchase decisions for teams,” said Chris Bevilacqua, co-founder of Bevilacqua Helfant Ventures, which helps teams negotiate television rights fees. “This is
especially true in a sport like basketball, which is a global sport that gets the vast majority of its revenue domestically. There’s a lot of upside growth in the league’s international business, [and] you benefit from new national and local TV deals. If you add those three up, over time, NBA franchises as a whole will continue to see an increase in value.”

That said, Bevilacqua considers the $2 billion purchase price for the Clippers high — even with the prospect of the team signing a new local TV deal expected to be worth significantly more than its current level of around $30 million per year. That local deal expires after the 2015-16 season.

“In the case of the Clippers, it doesn’t feel to me that TV revenue had a lot to do with it,” Bevilacqua said. “It’s not a price you can justify on today’s known set of facts. It’s like a piece of art: It’s worth what somebody will pay for it. It’s the price for Ballmer to get into the exclusive club of NBA owners.”

Sponsors considering impact

The recent run-up in team valuations does have brand and marketing executives expecting clubs to start charging higher prices for sponsorship categories across the board. That expectation comes from the team owners looking for ways to offset their record-setting franchise prices.

And sponsors might not be alone.

“The usual suspects will be the targets for increased revenue: advertisers, media rights holders, suite and clubseat holders, and season-ticket holders,” said Tony Schiller, executive vice president and partner of Paragon Marketing, which represents brands including Bud Light and PNC Bank. “The reality is that we’re close to a ceiling from a sponsorship and advertising perspective, relative to what brands are willing to invest for sports marketing partnerships. So if there is any opportunity, it will be from new brands in new categories. I don’t think the existing group of rights holders [is] going to spend two or three times more.”

Still, the new owners will be looking to get a positive return on their team purchase deals, so they’ll want to maximize the gains from the deals they do with the corporate marketing community for sponsorships, suites and media, said Michael Lynch, who runs Repucom’s U.S. consulting business.

Those pricing concerns can be heard on the brand side as well.

“It has evolved to the point where it is less about the business model and more about the ego,” said Tim Collins, senior vice president of experiential marketing for Wells Fargo, whose list of sports deals include facility naming-rights agreements, team sponsorships and a league-level contract with MLS. “If someone has the money and thinks it is a good value, then fine. But I question whether there is a business model with revenue streams to support that. I’m concerned that prices brands will pay will be jacked up to justify that.”

Chuck Browning, head of sponsorships and events for Farmers Insurance, is more blunt.

“In some way, we are going to pay the piper,” he said. “We’ve seen [team sales] go from millions to billions. Brands are going to pay the price, and so are consumers.”

Bigger roll for smaller stakes

Even if Ballmer’s $2 billion bid for the Clippers won’t necessarily stoke other NBA franchise sales, the price might cause some owners to consider selling new limited-partnership stakes in their franchises.

“The [Clippers’ sale] won’t just impact the sale of 100 percent of a franchise; it will also impact the valuation when current ownership brings in one or more investors,” said Bob Caporale, chairman of Game Plan, which has been involved in numerous team sales over the past decade.

Marc Ganis, president of SportsCorp Ltd., which represented Tom Benson in buying the New Orleans Pelicans
from the NBA in 2012, stressed the importance of the Milwaukee deal in this regard more than the higher-price deal in Los Angeles.

“The Bucks’ sale at $550 million has more impact than a Clippers sale because the Bucks are the lowestvalued team and everything is higher than that,” Ganis said. He added that the sale of 100 percent of a franchise doesn’t always translate into a huge run-up in the value of minority shares.

“There is a huge premium on control,” Ganis said.

There’s also a key financial downside to these increasingly rich deals: more difficulty for current longtime owners in succession planning, given that inflated team values mean a substantial hike in estate taxes.

“That goes for minority interests as well,” Ganis said. “The IRS is licking its chops.”

So sometimes, no matter how long the winning streak lasts, the victories don’t end with a parade.

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