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SBJ/19980629/This Weeks Issue
LBO fund is casting its net far and wide
Published June 29, 1998, Page 30
Street & Smith’s SportsBusiness Journal correspondent Ron Feemster talked with Moross about sports investments.
SBJ: How did IMG get into the sports investment business? The company made its name as sports agents representing athletes and as marketers and merchandisers. Where did the new interest come from?
Moross: As sports have exploded and become front-page news in almost every newspaper, there has been a great lack of understanding of the investment potential in the industry by outside investors. People in the industry understand how they make money, but very few others know how to do it.
Because of the interest in soccer around the world, a number of banks in Europe and the U.K. have considered putting together soccer funds – funds to buy soccer teams. These teams are way behind the curve in terms of merchandising, licensing, negotiating television rights and so on. IMG and I were each approached about this but it never happened. Then about a year ago, in the course of some other work I was doing for IMG, I recommended we put together our own private equity fund, and that culminated in where we are today.
SBJ: What kinds of teams do you want to buy, and how do you decide what they are worth? How do you determine the value of a sports asset?
Moross: Every investment is different, of course. So first of all let me tell you our target areas: sports teams; media companies, both print and electronic, including Internet businesses; broadcast companies; sporting hard-goods and apparel businesses. And we’re also going to be investing in sports real estate – stadiums, arenas, theme parks, those kinds of things.
So every one of those things is valued differently. Some of them are typical LBO [leveraged buyout] models, some are venture capital models and some are real estate models. The key to it is that IMG has innate knowledge of what makes money and doesn’t make money in sports.
SBJ: What do you mean by innate knowledge?
Moross: Sports is what they do for a living. They have a knowledge that has developed over the years, throughout their 103 offices and 2,000 employees strategically located throughout the world. For example, if we are going to buy a soccer team’s commercial-rights package, they can tell us how well-priced those rights are. They make our job a whole lot easier and remove a lot of the risk.
SBJ: You are speaking about “them” and “us” when you talk about IMG. Could you tell us about the structure of the fund?
Moross: It is them and us. It is a partnership between three entities. There is IMG, then there is Whitehall Financial Group – which is me, my capital – and the other one is Chase Capital Partners. Each of those partners is a member of the general partnership. The manager of the fund is myself and group of people we’re assembling. IMG has an economic interest in the partnership, as do I and Chase, both in the fees that we generate and the profit participation we have on the back end.
SBJ: And what is IMG’s role in this?
Moross: IMG has a network of opportunities to source deals for us, deals which we hope are proprietary. And since we opened our doors in February we’ve had about 120 proposed deals come in, most of which are proprietary and non-auction. In our business, if you can get proprietary-deal flow it’s literally 75 percent of the battle. We make money by buying cheap and selling high. What IMG brings to the table is help finding those deals, but even more important, they help us manage those deals. If we find something, it’s only natural that we would use IMG’s resources to help enhance the value of the assets we buy.
SBJ: How big is the fund? How much money does an investor need to get in?
Moross: It is going to be a $200 million fund with a minimum investment of $5 million. We are fund-raising the second $100 million now. We have over $100 million committed already by the general partnership now. Chase Capital gave us $100 million.
SBJ: Let’s go back to picking investments. When you go in to look at a team or an opportunity, what are you looking for?
Moross: It depends. We are not actively looking for any one category in those five target areas I described. We are looking for companies where we think we can consolidate a buying audience, a consumer base, for example. Where we can buy them and enhance their value simply by cross-selling product ranges, by strict disciplines on how we manage companies.
Then we look at what IMG brings to the table. In certain areas, IMG brings immediate value. For example, IMG knows how to manage commercial rights of a football team. And IMG comes in as part of our diligence team, and quite frankly as part of our whole structuring team.
SBJ: You haven’t closed any deals yet, but can you give us an example of a promising deal?
Moross: We’re looking at a little sports goods manufacturing company. It has a 37 percent market share and is the leader in its market in the world. It is a very focused market on the Generation X and Generation Y communities. Now the idea there is that if we bought this company we would want to buy three or four companies that produce products for that same group. Why? Because there is cross-selling potential. We’re also looking at brands.
SBJ: Can you give me an example of that kind of brand?
Moross: There’s a series of them. I’ll give you examples of brands, not necessarily ones that we’ve approached, but examples of brands that were household names that have fallen into bad times and that were resuscitated. FILA, for example, is a company that came right back. Adidas is the best example. It has come back like a lightning rod. It’s terrific, the story about Adidas.
SBJ: Could you talk about some deals that you turned down? What are the big problems, the deal breakers?
Moross: If management teams aren’t very good or don’t come with a big track record, we’ll turn it down. It begins and ends with management.
Look at ice skating rinks. There’s been a great growth of consumer interest over the past years. What attracted me to the investment concept was that in Canada there are 2,800 rinks and in this country there are 1,600 rinks. But the largest single owner of ice rinks owned 12 as of a few weeks ago. To me as an investor and a buyout investor, that just smells of great consolidation. You can buy rinks, create a formula for entertainment and teaching and brand it. We looked at a company in Canada that owns six rinks, 10 sheets of ice. Our idea was to buy that company and use it as a platform and then go out and buy more rinks and consolidate the industry. Then at some future point to IPO the company. Conceptually it’s sound, but in practice it’s not sound.
SBJ: What was wrong with it?
Moross: When we did our research, we found there is an enormous lack of management at the ground level. Not necessarily at the corporate level, in the executive suite. But when you get down to the actual rinks themselves, there’s a void in general. So for us to go out and train a whole management team throughout the country was too costly.
SBJ: Are there problems that are unique to sports?
Moross: Maybe not unique. We saw a little company here that developed a chip technology that would be able to determine the impact of a hit in hockey or a tackle in football. For a media company, for a broadcaster, this is great because it offers more statistical information. The television viewer becomes dependent on it. We turned that company down for a couple of reasons. Most importantly, we weren’t sure if the players unions would allow the leagues to use this technology when it is installed in their helmets and it’s so close to the brain. From a business perspective, I would have to have that absolutely certified from the various leagues and federations.
SBJ: How do you see the Florida Panthers? Was the most famous IPO in American sports a good investment strategy? Does Wayne Huizenga have the right ingredients to be successful as an investor?
Moross: I haven’t followed the exact share price of it, but I think Wayne Huizenga’s got a lot of component parts that make a lot of sense. He’s got a strategy that’s a sports strategy, an entertainment strategy. But I think what’s happened with the baseball team has been somewhat of a travesty. Again, he’s a smart investor and he looks at this the way I would look at it: If a company is just hemorrhaging badly, you’ve got to make changes. But overall I think it’s a sad day for U.S. sports down in Florida.
Here’s where the strategy went wrong. If you get into major league sports acquisitions, especially in this country, the wage-price inflationary pressures are real and you’ve got to accept that going in. From an investment perspective, that hurts earnings. If one is pricing an investment on earnings and the potential to enhance earnings, you’ve got to realize that it will be very difficult in major league sports in this country. You’ve got capital appreciation because the capital value of these teams is often very interesting to media groups and to richer people. Vanity buyers!
SBJ: Can you get around the cost problems with the single-unit ownership model of Major League Soccer? This is what the Turner group is planning to do with its new football league as well.
Moross: That’s a difficult question. I think at the end of the day the players are going to rule the roost. It’s the same in Hollywood. The stars dictate the costing of any team, whether it be single-unit ownership or individual team ownership.
SBJ: What about other sports? Are you branching out into sports that are over the horizon of American sports fans? Games that no one cares about here but that Chinese or Japanese fans love?
Moross: IMG is active in a variety of sports in China, including badminton and table tennis. But we’re most interested in football and basketball, not necessarily with the intention of buying more teams, but there are a lot of ancillary businesses around the teams, like licensing companies.
I went to a basketball game in China a few months ago. It was the national finals but I didn’t see one T-shirt, one sweatshirt, one cap with a logo of a team. And this was the finals! The game was nationally televised, they had cheerleaders out on the floor, the Spice Girls were blaring from an antiquated PA system, but there was no merchandising, no licensing. There are opportunities for that as well as stadium development, real estate development.
SBJ: Can you get into those businesses at a proprietary level?
Moross: I think our fund can. Not just anybody can walk in. You need to be IMG or someone like IMG. I wouldn’t go into the sports investing business without deep, deep inside information. You’ve got to know what you’re doing.
Ron Feemster is a writer living in New York.