Taking A Bite Out of D.C. Sports’ Apple
BY ADAM GROSSMAN
Laurene Powell Jobs, wife of the late Steve jobs, is reportedly “buying a significant stake in Monumental Sports & Entertainment (MSE), a sprawling $2.5 billion complex that includes the NBA Wizards, NHL Capitals and Capital One Arena.” The article by The Washington Post business reporter Thomas Heath contains two interesting insights.
The first insight is that Powell Jobs may have decided to invest in Monumental because she eventually can become the majority owner of MSE. According to Heath, “If [Monumental Sports & Entertainment majority owner Ted] Leonsis, 60, retired, Powell Jobs has the resources to assume his shares. Leonsis has long been the lead shareholder, with around 40 percent. Most contracts with a stake of this size include language that allows the buyer, in this case Powell Jobs, the option of a path to ownership.”
Female majority owners of major professional sports teams are relatively rare. Currently, there are only three woman majority owners in the 30-team NBA. However, women are increasingly making up a large percentage of the sports fan base. Having more female owners, given the changing demographics of sports customers, should serve to benefit teams and leagues in the future.
The second insight that Heath makes is more controversial. He states, “Powell Jobs’ investment is part of a trend in which deep-pocketed financiers and Silicon Valley billionaires are buying stakes in professional sports properties, helping drive franchise prices to even greater heights.” The problem with this type of statement is that he is stating that the value of the team is determined by how much the team is purchased for and that the “deep-pocketed financiers” are the ones driving up value.
Yet, this a common way of looking at asset valuation when it comes to sports. As Heath later asserts, “Forbes earlier this year estimated the Wizards’ value at $1 billion, but after recent sales in the league — including the Houston Rockets for $2.2 billion — the team is worth much more than that.” A natural question is why are the Wizards worth more than a $1 billion because the Rockets were sold for $2.2 billion?
Both teams do participate in NBA revenue sharing which includes the massive media rights deal that contributes $2.67 billion per year to the league. Yet, this deal had already been in effect and accounted for in the Forbes valuation. In addition, the Wizards and Rockets play in different sized arenas, have different local media rights deals, different sponsorship agreements, different population sizes, and different fan demographics. So why would the Wizards automatically be “worth more” because the Rockets sold for $2.2 billion?
A good to way to examine the value of sports teams is to look at the analysis we completed of the Los Angeles Clippers at the time when Steve Ballmer purchased the team in 2014. In asset valuation, there are usually three different approaches that can be used to determine value
- Inherent valuation typically uses a discounted cash flow analysis which essentially looks at the operating income (or operating profit) that the company produces and discounts future cash flow so that they are equivalent to present day values.
- Relative valuation uses a ratio analysis to determine the value of a company. The most typical ratio used to evaluate stocks is called the price-to-earnings (P/E) ratio. The market capitalization (or overall listed value on a stock exchange) of a company is compared to the operating profit of that company. In our analysis, we compared the P/E ratio of the Clippers to major stock indexes.
- Comparable valuation is where you compare comparable companies purchase prices to the company being evaluated. In 2014, there were fewer transactions in the sports industry than now.
The average of these three types of valuation places the Clippers value at $1.92 billion. The reason the Clippers were this valuable is not solely because other sports teams were being purchased at certain prices. In fact, for the Clippers that actually lowered the team’s overall value at the time. The Clippers were valuable because the operating income of the team increased. More specifically, all NBA teams received increased revenues from media rights deals (both national and local) that far exceeded their increased costs (primarily the increase in players’ salaries). For the Clippers, the team’s local media rights deal increased from around $20 million per year to the “low-to-mid $50 million range”.
That is not to say that all NBA teams are profitable. For example, MSE “is close to breaking even financially” in part because the Wizards’ deal with NBC Sports Washington pays a reported $35 million per year – or at least $15 million less than the Clippers. This difference would potentially make the Wizards less valuable than the Clippers because the team likely generates less cash. The lower annual fees may be in part due to MSE now having a 33 percent equity ownership interest in NBC Sports Washington. All of these factors, and not just the price of a recent transaction, need to be considered when looking at MSE’s value.
This type of analysis can and should be applied in other areas of the sports industry. For example, Block Six Analytics (B6A) corporate asset valuation and revenue above replacement models use all three valuation approaches to determine the price of a sponsorship or player contract, respectively. To clarify, we do complete a comparable analysis as part of our standard product offering. However, combining all valuation approaches enables us to look at the fundamentals of each asset type and determine how value is created for a business based on the impact a sponsorship has on revenue generation and achieving company goals.