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SBJ/19980629/This Weeks Issue
Capital needs, political realities fuel new interest in sports offerings
Published June 29, 1998, Page 27
Public ownership of sports franchises is not new. Several publicly traded companies own sports teams.
Nor is there anything new about direct public ownership of sports franchises, or “pure plays.” Stock in the Cleveland Cavaliers was publicly traded from 1970 to 1984; likewise with the Boston/New England Patriots from 1960 to 1976, the Baltimore Orioles from 1954 to 1979 and the Milwaukee Bucks from 1968 to 1979. Prior to an offering by the NHL’s Florida Panthers in 1996, however, the only existing pure play was the Boston Celtics, which issued approximately a 40 percent ownership stake to the public in 1986.
How can we understand this renewed interest in stock offerings? First, the stock market represents an important source of capital for most business in the United States beyond a certain size. As the sports industry has grown, its need for capital has grown, too. It would be hard to imagine the U.S. economy today if there were a requirement that the General Motorses, Boeings, Pfizers and IBMs all had to be family- or partnership-owned. As sports franchises have appreciated in value, the sports industry has needed to tap more sources of capital to sustain and enhance that value.
Second, an economic theory known as Tobin’s Q (after Nobel Prize-winning Yale economist James Tobin) points to the greater attractiveness of new investments and public stock offerings when the stock market overvalues an asset relative to its replacement cost. With the price-earnings ratio of the S&P 500 hovering above a heady 22 today (implying a less than 5 percent return on a risky investment), the stock market is a very alluring venue to seek asset valuation. Like everyone else, team owners want to take advantage of the buoyant U.S. stock market.
Third, sports teams are a natural for public ownership. Sports fans have a special relationship to their teams, quite unlike the relationship between the public and typical manufacturing or service companies. This relationship comes not only from their emotional bond to the team but also from the multimillion-dollar annual public subsidies provided to sports teams. Going public gives fans an opportunity to put their money where their hearts are, and it give owners an opportunity to broaden and deepen the support base for their teams.
Fourth, the post-1950 trend toward growing public subsidies to build stadiums is being challenged. In the last two years, stadium referendums have failed in Minnesota, Pittsburgh and North Carolina and passed by razor-thin margins in San Francisco and Seattle (though the legitimacy of the vote in each case is being questioned by citizens groups). Owners in New York, Miami, Los Angeles, Chicago and Boston have failed to muster sufficient political support for their stadium initiatives. In this context, owners have been compelled to assign larger shares of their new stadium revenue streams to help finance construction. Capital from the stock market can be used to supplement or replace the commitment of stadium revenue.
As in other industries, the trailblazers get the highest return. As long as public offerings in sports are a novelty, owners can expect a premium. That, of course, is bad news for prospective shareholders. The Celtics stock sold for $18.50 a share at issue in 1986; today it sells for $17.50, or less than $12 in 1986 prices. The Indians sold their shares for $15. Their prospectus warns investors not to expect any dividends and that the company has likely maxed out on local revenues, i.e., don’t expect this to be a growth company with revenues already at baseball’s apex above $140 million a year. Incumbent owner Richard Jacobs, however, will do very well: He pulled out $49.2 million prior to the offering, nets more than $50 million from the stock sale, receives over $715,000 a year in various forms of compensation, benefits from heavily subsidized naming rights to Jacobs Field, extracts net income as minority partner, enjoys profitable related business transactions with his other investments and maintains complete control over the team.
The largest potential premium, though, goes to the Green Bay Packers. Prior to its offering, the Packers split the existing stock 1,000 to 1, yielding 4.6 million shares. Then it offered 400,000 new shares at $200 apiece, which implicitly values the team at $1.006 billion!
The only case where there has been a payoff to the investor is the Florida Panthers, and this return has come because the company has diversified rapidly since the IPO, buying at least six other properties in the entertainment and resort industries. Whether the Panthers’ stock price continues to increase remains to be seen.
But the pure plays have not paid off. As the novelty wears off, as more franchises do public offerings, as investors see they have no control and no return, then having a framed Indians stock certificate in one’s den will have all the cachet of a laminated rookie card of Todd Van Poppel. At such a point, team IPO deals may become more structured in an economically more realistic manner.
Andrew Zimbalist is a professor of economics at Smith College. He is author of “Baseball and Billions” and co-author and editor of “Sports, Jobs and Taxes.”