Filed under: Uncategorized | Tags: celtics, dodgers, maple leafs, mlb, nba, nfl, nhl, Patriots, private equity, profitability of professional sports teams, venture capital
With the recent labor stoppages in the NFL, NHL, NBA etc. It made me stop and think about why this is happening. And as I have written before, I think the reasons have changed. Until around 10 years ago, you owned a professional sports team, regardless of NBA, NFL, NHL, MLB, for the same reasons you owned any other business, to run it profitably and disperse the profit among the stakeholders/owners. These businesses could be run that way. The NFL had the most valuable franchises but 10 years ago still only around $500MM, other leagues far less than that.
Well here is the challenge, as revenues have grown in the leagues, so has franchise value and so has the cost of buying these teams. After all the Dodgers sold for nearly $2 BILLION! Most NFL teams worth over $1 Billion and NBA, NHL, MLB franchises worth from $300-700MM at least. Well when you buy a franchise you actually get a loan, just like a mortgage, to do it as I have written before. No one can shell out $1B out of their pocket. This leads to large monthly/quarterly payments that can really eat into the profitability of a team. Then owners want more money because they are not making what they think they should be making because of what they had to pay to acquire. A vicious cycle.
I think the reasons for owning a team have changed, and not all owners have realized this. The reality is that the most successful professional sports teams, Patriots, Celtics, Maple Leafs, etc. actually do not generate a ton of profit. Definitely not the level or profit a traditional business of the same size would. But the value is in the value of the team. If the value of the team you own is growing 6-9% per year, as many of them are, that is better than the return of the public stock markets (that is a 7% average). In that way owning a team has become more like a venture capital or private equity investment. The return you get on your investment will come when you sell the team. If you bought the Dodgers 10 years ago for $1B, and sold it for over $2B in 10 years, you can’t really get a return like that in any other investment class consistently.
For those reasons owners need to think more about running their teams at break even or slightly profitable and make their money back when they sell all or part of the team in the future. The real value creation is in the increase of the valuation of the team, not the year to year profitability and cash flow of the team. You really can’t look at these like traditional businesses anymore, the health of the teams is now too tied to the overall health of the leagues….
Filed under: Uncategorized | Tags: nhl, nhl lockout, nhl quebec city, nhl toronto, nhl tv deal, nhlpa
Just as an adjunct to my previous post. News this morning puts the latest NHL / NHLPA revenue split proposal at 50-50. By my calculations that will about double the operating income of NHL teams from $1-3MM on $80MM in revenue to $3-8MM. That is for the average team. For the low revenue teams (that really shouldn’t exist like Phoenix, Florida etc. but that is another story), this should change them from losing $1-5MM pper year on average so around $1-3MM in operating income. So actually profitable. Those marginal teams are the drivers for national audience numbers to drive TV deals. There is also a story of adding a second team in Toronto and putting one back in Quebec City. Both are very viable but I would rather see them move a team from the Southern US to those cities than further dilute the talent pool. What do you guys think?
Filed under: Uncategorized | Tags: nfl, nhl, nhl attendance, nhl lockout, nhl ticket prices, nhl versus other leagues, original 6, tv rights deals
Check out these graphics. Is it possible that the NHL is overestimating their strength? While their attendance is up slightly, the ticket prices have risen far more than the other sports leagues. While the average spend by fans on sports is on the rise, I think the NHL thinks they can get a far bigger piece of the pie.
On paper the NHL looks pretty strong. But keep in mind they have the lowest revenue per team of any of the 4 major sports, are the least profitable (see prior posts), and are really just recovering from the 2005 lockout. While the sport is strong in traditional markets, like the Original 6, as long as these team are competitive. The other markets are struggling. This proposed change in the revenue share with the players I think is really to drive revenue sharing and general profitability for these non-traditional NHL markets (Florida, Arizona, etc.) to keep them solvent. What this does is really keep a national TV audience and would be the impetus for bigger and better TV deals in the future. In theory anyway! I really think the NHL is risking any interest in their sport in these marginal markets going away for good. Check out the graphic and come to your own conclusion….
Filed under: Uncategorized | Tags: boston bruins, boston celtics, boston red sox, dallas m, mark cuban, New England Patriots, pittsburgh pirates
Mark,
I wanted to take the opportunity to reach out to you today to let you know about a potential unique opportunity. Have you had a chance to take a look at our Boston Red Sox? Recent events have led the Sox faithful to actually lose faith in current ownership. We now look at the triumverate of Henry, Luccino and Werner no longer as the saviors who brought us two world series titles, but who are now focused on squeezing every dollar out of the fans. All you have to do is take a look at their attempts to sell everything from bricks from the old ball yard to membership in Red Sox Nation ( I refuse to buy a card). They encourage people to arrive early to look at plaques, in fact they brag about the Red Sox leading the league in historical plaques at the ballpark, calling it a living museum, never mind the last place record, insurrection in the clubhouse, and complete denial that the fans might actually be getting fed up. They put billboards up of LeBron James, who Fenway Sports Group represents, despite the fact that he is one of the more hated sports figures in this town and plays for the Celtics arch rival. They have become completely out of touch with the New England sports fan and simply seem to contrive ways to squeeze more revenue per fan out of us.
Given your recent attempts to purchase franchises such as your hometown Pittsburgh Pirates, your recent success with the Mavs, and just the way you run a franchise and really seem to take the fan’s perspective, I think you would love owning a Boston sports team. And we would love having you. Financially, the Red Sox are very profitable, own their own cable network and stadium, and are in the #6 TV market in the nation. We need someone to turn the Red Sox back into a sports experience and a winning one, not part amusement park and ATM for the owners.
Overall I think you would excel in an environment where the fans are this passionate, has great fellow owners at the Patriots and the Celtics, and an area that has one of the strongest fan bases in the country. Please take a look, I think we need you.
PS- Could you take a look at the Bruins while you are here?
Filed under: Uncategorized | Tags: business issues driving nhl lockout, nfl, nfl lockout, nfl tv deal, nhl, nhl lockout, nhl revenue, nhl team profitability, nhl team valuation, nhl tv deal
The NHL seems to be headed to a lockout. Certainly the gap between the latest player and owner proposals is slightly larger than gigantic. Donald Fehr, who remember from his running of MLB’s player association, has not taken a completely hard line, but the owner’s initial proposal was so drastic, a huge gulf it has created a huge gulf. Those of you who have read my blog before know I spent some time analyzing the NFL lockout last year, business issues driving it etc. and was even on the Pulse Network a few times to talk about it. I thought this might be a good time to do a similar analysis of the NHL.
I tend to look at these problems from an investment banking perspective, given that is what I do for a living. And the metrics etc. I use are standard for figuring out how much a company is worth if you were to sell it and potential business issues you would run into if you were evaluating this business to buy it. Sports are are unique market to say the least, but I think it bears looking at how these businesses compare to more traditional businesses.
Again, I use a lot of data from the Hambrecht market study on the sports industry. They really do an amazing job. Basically, when we look at an NHL team we see a business that is increasing in value every year generally, but lower profitability and flat attendance (while also raising ticket prices). The main argument is the player costs are dramatically reducing team profitability. The reality is that player costs are the largest cost a team has, so naturally if you are trying to improve profitability, you look at the largest cost first, and in this case it is one that the teams feel they can change. My opinion is that when these team owners look at their teams, they compare them to their more traditional businesses where they actually initially made there fortunes (usually). So if we look at it this way, NHL teams operating margin to revenue, basically profitability and how much cash the business throws off, is around 3-5%. So many teams are running $2-5MM in operating income on $80+MM in revenue. Sounds like a lot. But in most businesses that number should be closer to 15%. So 3X what an NHL team generates (NFL teams by comparison are closer to that number). So while the lay person sees the millions, the business owner see a business not doing nearly as well as his other businesses and wants to change it. Since most teams do NOT own their own arenas, and NHL teams are more dependent on ticket sales for revenue (39% of revenue from tickets as opposed to the NFL which is 16%), there are only a few levers owners can pull to get more profitable. Really difficult to change attendance, arena costs are essentially fixed and very difficult to change, so the largest target becomes player salaries. More about logic than greed really, although you will almost NEVER find me siding with owners given my Dad was a player in the NFL for 8 years.
So the question is what are the alternatives? The NFL gets a great deal of there revenue (and profitability) from the TV contract. Now the NHL has a very nice deal, probably better than they deserve really, but not the numbers that the NFL has, and probably will never get there. The only options are to increase topline revenue or lower costs. We have touched on lower costs. Perhaps, now you might kill me for this, the only way to increase topline revenue is uniform advertising. Similar to soccer, the NHL does not have a great deal of commercial breaks. The NFL TV contract is so huge because the game itself lends to frequent commercial breaks. Soccer and hockey are much more continuous action and do not. Soccer gets a great deal of revenue by selling logo space on the uniforms, really because they can not sell as many TV commercials, just not the inventory of break in the action. I think the NHL is in a similar spot and could generate probably $5-10MM per team in revenue that way, and alleviate the pressure coming form player costs. What do you guys think?
I have attached some detail below on overall team profitability in the NHL. great numbers and you can see how revenue and attendance are flat, team value is going up, but so are costs and how low the operating income actually is. Let me know what you think….
Filed under: Uncategorized | Tags: nfl, nfl pension, pga, PGA pension, pga tour, tiger woods
Recently I ran into a minor player on tour. He was telling me a bit about the PGA pension plan. Given that I have written on this blog about the NFL, NHL, etc. pension plans, I was more than a little curious. What he told me I found to be totally unreal! Teach your kids to play golf! In this instance, a player that had never cracked the top 50, was going to get $1Million per year after 10 years on tour. Astounding! I found a great article on Golf UK I copied below. Love to get your thoughts on this one given what the other leagues have….
http://www.golftoday.co.uk/news/yeartodate/news01/pensions.html
PGA pensions the richest in sport
The $9.1 million Tiger Woods earned last year on the PGA Tour in his record-setting season could turn into an additional payoff of nearly $13 million when he turns 60 under the PGA Tour’s retirement plan.
In a comprehensive study of the PGA Tour’s pension plan, Golfweek Magazine also projected Woods’s total deferred compensation package from the tour at about $200 million, and as much as $300 million if he were to become fully vested.
That’s not counting investments from Woods’s earnings outside the PGA Tour, money from worldwide tournaments, appearance fees and the $54 million a year from contract endorsements.
His father and financial overseer said Woods’s net worth could eventually exceed $5 billion.
“If things continue and he remains healthy, there’s no limit,” Earl Woods told Golfweek, adding that $5 billion “might be on the short side.”
Woods isn’t the only player to benefit from the PGA Tour’s performance-based pension plan.
According to tour projections obtained by Golfweek, a 26-year-old player who begins his career in 2001 and plays 17 seasons could stockpile an account of nearly $43 million, just by averaging 75th on the money list. He could reach that amount without ever winning.
For better players, the future gets even brighter.
The deferred compensation plan features three programs. One rewards players for making the cut, another program contributes money based on how much players earn during three separate segments of the season, and a third deals with overall earnings for the year.
Tour officials said they expect to add $27 million to the retirement plan, which has quietly grown to more than $200 million in total assets since its inception in 1983.
“A few years ago, a player could come out and play his entire career, his life, and still struggle financially,” PGA Tour commissioner Tim Finchem said. “There is no reason why world-class athletes in our sport shouldn’t be compensated in the range of world-class athletes in other sports. The retirement plan helps us move in that direction.”
Some financial analysts, however, caution that tour projections are unrealistic. For example, some projections include players making at least 12 cuts a year between the ages of 45 and 49, which few players have done.
Projections also assume a 5 percent annual increase in plan funding by the tour, an 8 percent average annual interest return on a player’s account, and the plan is based on benefits that are not paid out until 60, which skew the numbers.
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| Tiger Woods in on course to get the biggest pension payout in sport. Allsport. |
“It’s by far the best pension plan in sports, but the assumptions used in the projects are ridiculously overaggressive,” said Dave Lightner of McCormack Advisors International, a branch of IMG.
Cuts are the lifeblood of the original retirement plan, launched by former commissioner Deane Beman in 1983 and crafted by Victor Ganzi, a former tax attorney and longtime member of the PGA Tour policy board.
Last year, each cut made was worth $3,253 to a player’s plan, and the value doubled to $6,506 after 15 cuts. The arrangement favors a young, successful player such as Justin Leonard, who made an average of 23.8 cuts from 1995 to 2000.
“I’ve seen the projections of what I’ll do, and it’s impressive,” said Leonard, who estimated his overall tour retirement package between $60 million and $100 million, counting his segment bonuses and yearly earnings.
The incentive plan, based on earnings over three segments each year, was designed to encourage players to enter more tournaments. Woods likely never will be fully vested because he only plays about 20 tournaments a year. He is projected to become vested at 62.5 percent, which would make his payout about $200 million, the magazine said.
“We know Tiger has big numbers and the tour does a fantastic job with the pension plan,” said Mark Steinberg, Woods’s agent at IMG. “But Tiger will not play events with the pension plan in mind. He will continue to do what he’s doing — that’s building a schedule with being the best golfer ever.”
Woods also will be the richest, even after he stops playing.
“His great, great, great grandchildren will be juiced up over this,” Brandel Chamblee said. “They’ll all be lobbying to get rid of the inheritance tax.”
Filed under: Uncategorized | Tags: advertising rates, economy, nfl, nfl media spend, valuation, valuation bubble
I have been spending quite a bit of time looking at the most recent report from the folks at WR Hambrecht. They do a fantastic job of gathering data on the sports industry. One thing struck me as someone who used to focus on online advertising in my investment banking days. The charts of revenue, valuation, media spend etc. combined with the current economic environment looks a great deal like the early 2000s and tech companies prior to the bubble bursting there. The attached document has some good data in there. For example, valuations. Every other league has had a fairly steady rise in valuation, the NFL has a spike in 2006 (new media deal) and then relatively flat. This is supported by the chart showing the media spend by media outlet on the NFL. A huge number. Now you know why the NFL only has 16.6% of their revenue from ticket sales.
Now given the extreme reach you get advertising through the NFL, the current ad revenue and rates seem to be well supported, but the plateau in revenue seems to indicate those revenues just might be maximized. And if the economy does not turn, the ad rates will have to go down. Many companies are already cutting back on their media spend. As soon as the media spend starts to dip, the NFL revenue will dip. And since the team revenue and valuations are sooooo closely tied to the media deals. The valuation of the teams will fall as well. The question will be how much. Will this be a repeat of the tech bubble of 2000? Or simply a gradual 20% or so decline. I tend to think it will be somewhere in the middle. Maybe a 20-30% decline but sometime in the next 36 months.
Something else supporting a bubble theory would be that while NFL attendance has been relatively steady, it has declined slightly the last few years, while ticket prices rise 4.4%. At some point the amount we spend on sports will decline, although it currently is growing slightly. I am a believer that while industries such as alcohol, gambling etc. actually grow in a down economy, sports will grow or maintain from an attendance perspective. Just great escapism. However, as retail spending declines continually, the advertising side HAS to decline. Ad rates HAVE to decline and this has to affect valuations and probably operating income. More to come on that in the future. Love to get your thoughts!!!!!
2012 attendance ticket price valuations revenue
Do you think the NFL has a bubble coming or are they just never going to be in line with the other leagues?
Filed under: Uncategorized
Well, the fallout from the lockout seems to have one more issue in it. The NFL essentially fined/punished the Redskins and Cowboys for overspending in the lockout year when there was supposedly no salary cap. Apparently they were warned not to do this, and did it anyway. But officially there was no cap, so what did they do wrong? The NFL being the most exclusive old boys club going had a handshake and wink agreement that even though there was no cap, no team could spend beyond a certain amount. The Redskins and Cowboys did, and the NFL punished them by taking away salary cap space over two years. Sounds an awful lot like collusion to me, and it sound like that to the NFLPA as well. Check out the link to the paperwork of the lawsuit below. I think the NFLPA wins this one easily, the question is what will the damages be? Anyone have some thoughts on that? I am betting an undisclosed monetary amount out of court….
Click to access nflpa_official_collusion_claim.pdf
Filed under: Uncategorized
Good article today on the ongoing NFL negotiations with a union, not the NFLPA but the Referees Union. It is interesting. Generally speaking NFL refs are part time employees, they have real jobs otherwise, and make $100K+ per year for the part time duty. Once could argue they have been the least controversial of all the referees of the 4 major sports, possibly the least powerful union, and might do the best job. The question is in my mind, should we make NFL refs a full time position? Year round training etc. This may even give the refs more leverage in these types of negotiations. And may lead to a better product on the field, probably more impactful than even more instant replay. What do you think? Here is the article…
http://espn.go.com/nfl/story/_/id/7914674/nfl-referees-make-little-progress-talks-sources-say
Chris Whalen's Random Life 