Valuation of a Posts Franchise-An Updated Approach

by Christina Vogel
Law & Valuation
Professor Palmiter

&There are several appraisal methods used today to value a professional sports team.  As a  broker we prefer to use a mix of methodologies.  In her article, Christina Vogel focuses in one aspect, team revenues.

Instead of applying a balance sheet approach to valuing a sports franchise, perhaps a better method would be to look at a franchises revenues.  In 1997, after seven years of research, including speaking with consultants, bankers, league executives, union representatives, media representatives, venue personnel and, in some instances, team owners, Financial World Magazine (FW) complied an extensive database on each teams revenues, expenses, venue and debt.

Using this information, FW has developed a methodology for valuing a sports franchise.  This methodology has gained FW a reputation as an expert on sports franchise valuation.

Using FWs methodology, franchise values are calculated using the teams average revenues for the past three years.  A multiple is applied to the average revenue to arrive at the franchise value.  The multiple represents such factors as the venue the in which the team plays ( including whether the team has favorable lease terms), the debt the team is carrying, and the market the team is playing in.  A team with a favorable lease and not too much debt are given the highest multiples.

FW is not the only financial magazine which believes that a teams revenues and it venue are the best indicator of a teams value.  In its December, 1998 issue, Forbes Magazine examined the same question, how do you value a sport franchise.[20]  In their analysis, Forbes also based franchise value on revenues.

The first question, why use revenues rather than operating income.  Both FW and Forbes believe that revenues are a better indicator of long-term values than operating income.  Items such as signing bonuses can cause big swings in operating expenses which can reduce operating income, but not necessarily long-term value.  For example, in 1997, the Detroit Lions paid out $20 million upfront to sign Barry Sanders and Scott Mitchell to multiyear contracts.  As a result of these payments, the Lions reported a $21 million loss for the 1997 year.  Using operating income to value the Lions would have presented a distorted picture.

If revenues are going to be the cornerstone in valuing a sport franchise, it is important to understand the different types of revenue.  Franchise revenues may include venue revenue (suites, concession, parking and advertising), ticket revenue, venue naming rights, team merchandising and television fees. Owners generally exclude venue naming rights, advertising, luxury suites and team merchandise revenues, which is why some owners are able to cry poor.  Although these revenues are not as big a piece of the revenue pie as ticket sales or broadcast fees, they can be very profitable.  Approximately one-third of the sport franchises have corporate sponsorship.

In addition to corporate sponsorship, venue naming rights can add a significant amount of revenue to a sport franchise.  For example, in Philadelphia, Corestate Bank, now First Union, is paying $40 million for the 29-year naming-right agreement for the First Union Center, home of the Philadelphia 76ers basketball team and the Philadelphia Flyers hockey team.

In calculating franchise values, both FW and Forbes included revenue from continuing operations in their calculations.  This would exclude proceeds from the sale of personal seat licenses, and entry fees paid by expansion teams.

With an accepted methodology for valuing sports franchises, why then would a purchaser pay up to 97% more than the value of a franchise.  Is this the ego factor at work?  Not necessarily.  To some individuals, like Rupert Murdoch, a sports franchise represents more than just the purchase of a team.  In 1998, Murdoch purchased the Los Angeles Dodgers from the OMalley family for $311 million.  According to FW, the Dodgers 1997 value was $180, Forbes had valued the Dodgers at $236 million in 1998.  Why then would Murdoch pay so much above the franchises value.  Is the ego factor that valuable or was FW and Forbes calculations that far off.  Essentially, the problem wasnt with the methodology used by both FW and Forbes.  The problem lies more with what was being valued, in this case, a baseball organization, a stadium on a parcel of land and a training complex with some undeveloped land in Vero Beach Florida.  However, to Murdoch, chairman of News Corp, which owns Fox Networks, the Dodgers represent much more.

In the Dodgers, Murdoch gained a guaranteed audience, at least 162 days a year, in Southern California for his cable sports TV station.  Additionally, there is the possibility that the Dodgers brand can be exploited by his other sports shows and even his Fox movie operations.  There are also expectations that the Dodgers surplus land in Los Angeles may become home to a football stadium and a new NFL team.  It is also possible that the undeveloped parcel of land in Florida could be used for the development of a theme park for 20th Century-Fox and Fox Sports.  These are some of the reasons why the Dodgers were so valuable to Murdoch and why he was willing to up to 97% more than the current value of the team.

Murdoch isnt the first or only media company to own a sports franchise.  Others include Cablevision, which owns the New Knicks and New York Rangers, Comcast Corporation, which owns interests in the Philadelphia Flyers and 76ers, The Tribune, which owns the Chicago Cubs, Walt Disney, which owns the Anaheim Angles and the Mighty Ducks and of course Ted Turner, owner of the Atlanta Braves.

What does the purchase of a sports franchise give these media companies.  It allows them to own content as well as distribution. By owning a team outright, these companies can, in most instances, control all the rights to games without paying someone for them.  In essence, they are cutting out the middleman.  This is the same logic that has pushed networks to create their own TV shows.

What else is it about sports franchises that have media companies bidding far above the franchises actual calculated value.  In sports programming, companies have a fail-safe tool for holding audiences captive for predicable periods of time.  More specifically, sports programming allows media companies to hold the attention of 18-to-49 year old males, the rich core of television demographics.  Advertisers will pay a premium to reach this group of consumers.  Additionally, sports viewers are also the most likely to pay for see games on a pay-per-view basis.

Considering these factors, is it really a surprise that Murdoch bid $ 1 billion for England premier soccer team, Manchester United.  Murdochs bid was a 50% premium above the price Manchester United dictated in the stock market before his bid was made.  Murdoch isnt really interested in the sport of soccer.  His goal is to own Britains premier team for its broadcast rights, to pipe through his broadcasting system, charging fans whatever he wants.  He can also use the games as an opportunity to promote other programming in a manner similar to that in which he had Bart Simpson promote other Fox shows during US football games.

It is widely thought that Murdoch would love to make many of Manchester Uniteds games pay-per-view events.  Many industry watchers believe that with the popularity of Manchester United, pay-per-view events would be like coining money.  It is also widely thought that Murdochs purchase of Manchester is only the beginning of an even greater plan.  Suspicions are that Murdoch would like to use his ownership of Manchester to gain leverage to organize a pan-European super soccer league.

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