SBJ/October 1 - 7, 2007/SBJ In Depth
Spotlight on team values
Published October 1, 2007
For hours the financial analyst flipped through slides of financial charts and graphs in a darkened, Park Avenue conference room.
The charts detailed $40 million in losses annually for the NHL’s St. Louis Blues, but sports finance analyst Randy Vataha of Game Plan said the team wouldn’t lose that much anymore. He showed how the NHL’s new collective-bargaining agreement could contain salaries and deliver cost certainty. Owning the Blues now made sense.
The presentation roused Dave Checketts, who was seated in the room that day in early 2006. He left the meeting convinced the NHL lockout had secured one of the most fair deals in sports, and he reacted quickly.
Within four months, his company, SCP Worldwide, completed a deal to buy the Blues and its arena for $150 million, a 100 percent jump from the $75 million that the Anaheim Ducks cost in February 2005. It remains the only franchise purchased after the lockout.
“[That presentation] really changed our view,” Checketts said. “Fixing the cost problem I felt changed the whole economics of the league.”
The same way
the collective-bargaining agreement made buying the Blues palatable for
Checketts, it helped unlock the value of NHL franchises across the
league. The value of NHL franchises had remained stagnant for years until the CBA was completed, but bids and agreements over the last year have doubled what franchises sold for before the lockout.
The Tampa Bay Lightning are the centerpiece
of a $206 million purchase offer.
Agreements to purchase the Nashville Predators and Tampa Bay Lightning hover around $200 million. The Lightning is expected to sell for $206 million in a deal that includes nearby real estate, while the Predators, a team that lost $27 million over the last two seasons, are expected to sell for $193 million.
“Prior to this [collective-bargaining] agreement that just wouldn’t have happened,” said Jeremy Jacobs, owner of the Boston Bruins and chairman of the NHL’s board of governors. “The investment market is saying there isn’t much uncertainty in this business and there’s a settling effect to that.”
David Zimmerman, NHL executive vice president and general counsel, agreed, saying, “Every one of our teams is worth at least $200 million and some far more.”
The CBA delivered cost certainty to NHL franchises in two ways. First, it reduced salaries across the league from 76 percent of league revenue to 56 percent, currently, which created a team salary range capping spending and decreasing payroll disparity. Then it offered teams that struggled financially extra revenue from lucrative teams.
The result meant a team such as the Dallas Stars would no longer follow big-market clubs such as the New York Rangers in signing players to multimillion-dollar deals. Every team would operate under the same cap restrictions, a change that has allowed the Stars to go from losing an estimated $20 million annually to posting only marginal losses.
Stars owner Tom Hicks said financial certainty is the primary reason team values have risen. “If you talk to anybody who has the money to buy a sports team, they ask if they’ll have to keep feeding it,” Hicks said. “In the low end [of the NHL], they are having to keep feeding it because they aren’t reducing their payroll enough, but I bet at least 20 teams are making money — maybe even more.”
That cost certainty has fueled interest in the league from prospective buyers, which has furthered the rise in values. In 2003, more than eight NHL teams were for sale but only four — New Jersey, Anaheim, Buffalo and Ottawa — were sold. Last year, bids for the Predators alone attracted three bidders.
“Interest is up and a lot of people who were thinking about it before and didn’t pull the trigger are still looking at teams,” said Gordon Saint-Denis, managing director with the CIT finance and advisory group. “The values have popped as a result.”
Few potential buyers have made more runs at teams than Research In Motion CEO Jim Balsillie. His $223 million bid for the Predators — a team with a track record of financial losses — is believed by many to be another major reason that franchise values have risen so quickly.
“When people who everyone believes have the money start throwing around big numbers for a team, it tends to drive up the value of every other team,” said Bob Caporale, chairman of sports finance firm Game Plan. “People get fixated on numbers and won’t remember if it’s a team and an arena or a team and anything else.”
When that sale is broken down, part of the reason the team fetched a price that high was because of the perception that it could be moved, analysts said. For that reason, it’s really having no effect on other team values. “It’s an odd anomaly,” Saint-Denis said. “He didn’t set an artificial floor.”
While the new economic system has more to do with the rise in values than Balsillie, it is not flawless. Because the salary cap’s ceiling and floor are designed to rise with revenue across the league, 20 of the league’s 30 teams could push the floor upward, forcing teams losing money to spend more on players. Though some teams receive revenue-sharing relief in excess of $10 million, it may not be enough to soften their losses as the cap rises. “That’s why, as we move with more performance under this economic system, the disparities will become more apparent and could impact values,” Caporale said. “Even in the NFL, where there’s the most sharing, there’s grumbling that there isn’t enough.”
The potential that the cap rises rapidly combined with the limited national revenue the league generates for teams puts a premium on NHL local markets. NHL teams each receive only $5 million to $6 million annually in TV revenue from the league — far less than the more than $25 million NBA teams receive.
As a result, teams rely heavily on local media packages. Some can be lucrative, such as the New York Islanders’ $18 million contract, annually, or the Pittsburgh Penguins’ $12 million. Others can be far less, such as Nashville’s $3.5 million.
The proposed new owners of the Predators
would need to significantly
The absence of significant league revenue also makes attendance and demographics that much more important in evaluating teams. Markets with stable attendance and projected growth like Tampa Bay can differentiate an NHL team from its peers.
“If you have positive demographics and good revenue, you’ll pull away from the rest of the pack,” said Sal Galatioto, president of Galatioto Sports Partners, which worked on the sale of the Lightning. “That bifurcation will continue until you get a national media contract.”
Others see the absence of a larger national media contract as a factor that can drive team values upward in the future.
“The only thing holding hockey values down is TV, but that’s been factored in for some time and can only get better,” Hicks said. “I’m optimistic.”
Getting a new national media contract alone won’t be enough. The league also will need to show that there is an appetite for the sport that extends beyond what many perceive as a niche group of avid fans. That, in large part, is still determined by TV ratings, a category in which the league continues to struggle.
Viewer numbers for the first four games of the Stanley Cup Finals last year dropped 21 percent from the first four games of the 2006 Stanley Cup Finals and 25 percent from 2004. NBC’s broadcast of Game 3 on Saturday, June 2, became the network’s lowest-rated night ever.
Though the league is positioning itself to attract a new generation of fans online by being one of the first to sign content agreements with MySpace and YouTube, that effort won’t be rewarded until it begins to make a real impact on the league’s bottom line.
Ultimately, the CBA provided an immediate correction for franchise values; it didn’t ensure that they would keep rising. Like an express elevator that runs from the first floor of a skyscraper to the 40th, it carried values up in one swift movement. Now values will increase more slowly, floor-by-floor. Whether they rise as the result of a lucrative, national media contract or substantial new revenue generated online, the league will have to look elsewhere to push franchise values upward.
Its owners are optimistic it will.
“The last two deals that have been announced are significantly above ours, and we bought a building as part of our purchase values,” Checketts said. “Franchise values are headed north.”