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SBJ/19980629/This Weeks Issue
Public Companies: Teams
Published June 29, 1998, Pages 28-29
The Cleveland Indians’ stock is falling in the standings.
After going public amid intense publicity earlier this month, Cleveland Indians Baseball Co. shares have dropped from their $15-a-share initial public offering.
Few observers really expected the Indians’ stock to perform well. The new firm isn’t diversified – there’s only the baseball club and a stadium management company – the team pays sky-high salaries, and profits will decline significantly in years it does not make the playoffs.
“The Indians are not a major market team,” Taulli said. “That is probably why they did an IPO. A media company wouldn’t be interested in buying them.”
Teams such as the Los Angeles Dodgers and Anaheim Angels in major markets, confronted with the same stark economics the Indians faced, were able to sell to media firms willing to shell out big bucks for sports programming.
But arguments against the stock didn’t stop Indians fans, who gobbled up millions of shares in the first hour of trading.
Green Bay Packers
The Green Bay Packers are the most pristine example of either capitalistic democracy – when a community owns the majority of a cherished local institution – or the idiocy of loyal football fans.
The Green Bay Packers are owned by 108,000 fans, who since 1923 have saved the team from bankruptcy at least twice through their quick infusions of capital. That sounds great, except the fans receive no financial reward in return because their shares, which do not trade on an equity exchange, are guaranteed never to appreciate in value and grant no voting rights.
Earlier this month, thousands of cheesehead investors poured into the annual shareholder meeting at Lambeau Field, an appropriate site because the latest stock offering will pay for its refurbishment.
The March stock offering, the first since 1950, attracted 106,000 new investors who paid $200 a share. The offering raised $24 million.
“This is basically a love affair with an organization,” said Bob Harlan, president of the Packers. “It is a unique situation. We have had a number of cities who called me, particularly Cleveland, and asked me how we could exist and if they could do it. But after I explained how we were set up, they realized they couldn’t do it that way.”
The NFL also now prohibits public ownership of its teams. The Packers were grandfathered in after that rule was established.
The team first went public in 1923 on the brink of bankruptcy. Local businessmen raised $1,500 in exchange for company shares to save the ailing team.
The team also issued stock in 1935 and again in 1950, when fans actually went door to door seeking new investors. The Packers did not issue stock again until the latest offering, which ended in March.
Boston, home of mutual-fund giants Fidelity, Putnam and John Hancock, can also lay claim to the NBA’s only public team, the Celtics. But if the Celtics’ historical success appears to have rubbed off on the fabulously profitable financial companies, the reverse is not true: The Celtics’ stock is an airball.
The Boston Celtics went public in late 1986 during one of the greatest periods in the franchise’s history. Fresh off their third championship in the 1980s, the Celtics in 1986 looked to take advantage of a loophole in a tax law about to expire. By going public as a limited partnership, the team avoided having to pay both dividend and corporate taxes.
While its investors may be happy with the light tax load, they cannot be happy with the stock. The stock opened at $18.50 in 1986, and today still trades in that vicinity. Compare that with the nearly eightfold increase in the Dow Jones industrial average in that time, and the Celtics’ stock performance looks miserable.
“With all sports stocks, people tend to buy it for emotional reasons,” said Richard Pond, the team’s chief financial officer. Pond also argued that investors enjoy healthy dividends and that stock appreciation is not the only barometer of success.
The team, however, is hurt by being a sports stock, which large investors generally avoid. When team revenue began to climb after the hiring of coach Rick Pitino last year, for example, the stock barely moved.
What is in the future for the stock? The team is restructuring its partnership units because the tax loophole is expiring. But with few large investors and no diversification strategy to boost revenue, the stock is likely to remain the quintessential “wallpaper” issue: Every Boston bar has to have a share, every Boston mutual fund doesn’t.
When Wayne Huizenga’s Florida Panthers went public in late 1996, investors large and small flocked to the initial public offering. The stock more than tripled in its first months of trading, boosted more by Huizenga’s pull with investors than by enthusiasm for the economics of hockey. He even got Wall Street heavyweight Donaldson Lufkin & Jenrette to underwrite the IPO.Since the euphoric beginning, however, the situation has changed rapidly. The stock is now down to $18.13 after reaching the low $30s in early 1997. The company is also under legal assault from investors unhappy with the firm’s dramatic diversification into real estate. They argue that they were fans who bought into a hockey team, and Huizenga used their cash to buy hotels.
In fact, hockey now generates only about 15 percent of the company’s revenue – the remainder coming from hotels and other assets – and there is even talk that the holding company may shed the team.
“We like the ice hockey team; the questions is, is it best for both of them [the company and the team] being together,” said Ron Castell, senior vice president of Florida Panthers Holdings. “But right now we think it is fine.”
After going public in 1996, the company realized it could not operate as just a hockey team, Castell said. The team, which lost close to $5 million in the first three months of this year, is expected to become profitable once it moves into a new arena later this year. But how the team fits into what is essentially a resort hotel business is unclear.
If Huizenga decides the team has no place in his real estate company, then the team, once the most successful sports IPO, could go back to being private.
Florida Panthers hockey fans may be angry at owner Wayne Huizenga for turning their public team into a real estate concern, but they need look no further than the Vancouver Canucks for an explanation why.Northwest Sports Enterprise, whose sole asset is the Canucks, has not reported a profit since 1994, and its stock has nose-dived recently as losses mount.
Earlier this month the news got worse: The company announced losses of $30.7 million Canadian ($20.9 million U.S.) for the nine months ending March 31, a nearly 100 percent deterioration from the previous period. Northwest now subsists on cash infusions from its majority shareholder, Orca Bay Holdings. The team concedes that the situation must change quickly.
“The losses are almost exclusively because of high player salaries,” said David Cobb, vice president of finance.
The company is betting that a new cable television contract will help boost revenue and that the team can win some new sponsorships. The team also must control payroll, Cobb added, though that does not necessarily mean cuts.
The Canucks had one of the highest payrolls in the NHL last year, but they did not make the playoffs. Only the New York Rangers got less out of their payroll, Cobb said.
“If people put capital into your business, they expect a return,” Cobb said. “At this point it is very difficult” to generate capital appreciation, he said.
Most of the shares, which trade on the Vancouver Stock Exchange, are owned by principal shareholder Orca Bay, however, so Canuck fans cannot be too upset with the poor financial record. How they feel about the on-ice performance is another matter entirely.
While names like the Packers, Indians and Celtics are the first to come to mind when discussing sports stocks, the Arena Football League’s Orlando Predators are also a public company.
Far off the radar screen of even most niche investors, the Predators are hoping to cash in on the AFL’s growing visibility.
The NFL recently allowed its owners to buy AFL teams. New Orleans Saints owner Tom Benson became the first to take advantage and agreed to launch a new AFL franchise in New Orleans in 1999 or 2000.
While investors historically have shied away from sports stocks, the Predators, who went public seven months ago, hope that will change soon.
“Today’s business community is accepting sports as a separate business entity. It has become its own segmented industry,” said Alex Narushka, the Predators’ chief financial officer.
The Predators plan to issue several million more shares soon. With the $6 million the organization hopes to raise, the team plans to buy an equity stake in the AFL and buy minor league teams in the southeastern United States.
Despite its aggressive strategy and the growing popularity of its sport, the Predators’ stock has stumbled. After opening at $5 a share in mid-December, the stock has fallen as low as $2.93 and now hovers above $4 a share.
Team analyses by staff writer Daniel Kaplan