Breaking the bank
Have team valuations peaked?
By now that is an age-old question that history has consistently replied to with a firm answer: no. But with the cost of entry into major league team ownership surging, there exists today a real conundrum of figuring out who is left to pay prices that could reach or exceed $1 billion.
“As sports franchise values continue to climb, there will be fewer and fewer individuals who can afford them,” said Sal Galatioto, who has been advising on team sales since the late 1990s. “[I]n the end, ownership structures may have to be modified to allow the continued strong upward movement in asset values.”
Indeed, the NFL this summer invited financial companies to the league office to present ideas on changes to the ownership structure. Already, last month the league lifted its decades-old cross ownership ban that had prevented NBA, NHL and MLB owners in NFL markets from buying an NFL team in another market.
When the Panthers hit the market in January, the whisper numbers were $3 billion, if not more. While Panthers owner Jerry Richardson insisted on the number and his investment bank repeated that figure early in the process, multiple sources said, it appeared logical given that two NBA teams (the Brooklyn Nets and the Houston Rockets) recently were valued at or sold for $2.2 billion.
Instead, the Panthers sold for $2.275 billion to David Tepper, and some market observers feel the league was lucky to get that because of the weak competition for the team. There were three bidders, two of whom struggled to raise the equity. If Tepper, a multibillionaire whom the league knew through his Pittsburgh Steelers limited partnership stake, had walked away as he almost did, the league could have been faced with whether to approve a buyer that had to cobble together the purchase price.
From 2000 though 2014, an average of five sports teams in the top-four leagues sold annually, according to Sports Business Journal research (see table, Pages 22-23). From 2015 to this year, nine team sales have occurred over those four years. Some of the slowdown is because the business of owning a team has improved, so owners have fewer reasons to sell. It is also because as prices rise, finding the right buyer is much harder than it used to be.
Rob Tilliss is the founder of Inner Circle Sports, a sports investment bank, and the adviser of one of the Panthers bidders, Alan Kestenbaum. He is more bullish than many of his peers that there are enough pockets of enormous wealth to appease rising prices.
“In terms of big check writers, there is still a lot of massive wealth out there in different pockets — technology, private equity, hedge funds,” he said. “Did anyone see a Tilman Fertitta coming? Not really.” Fertitta, a restaurant tycoon, bought the Rockets last year for $2.2 billion.
Tilliss’ colleague, Steve Horowitz, chimed in during an interview at Inner Circle’s midtown Manhattan’s office: “In my eye, everyone thinks valuations have gone wildly through the roof. But when you track valuations and media rights, with the exception of MLS, which is just weird — there is no reason the teams should be trading for 400 some-odd million. If you track the other ones, the NBA grew their TV rights. It’s not just willy-nilly; if you follow the NFL it is the same sort of thing.”
Jim Weinstein, a lender with Sumitomo Mitsui, at one point in his decades-long career had a lot of his lending portfolio in sports acquisition loans. But now that is no longer the case. He takes a different view from Horowitz.
“Since the purchase of the Clippers for $2 billion, there is almost no cash-flow rationale in team valuations,” he said. “The sole valuation seems to be what the last team in the league traded for.”
In fact, part of the reason MLS team valuations have surged despite the league not having top-dollar media deals, appears to be the sky-high prices elsewhere in professional sports that have buyers considering alternate investments like soccer.
Even if Horowitz is right and the valuations are economically justified, that begs the question of what happens as more media and gambling revenue flows in. That means economics would justify higher prices. But who can cut a check for billions?
The easiest step is to allow more debt, or leverage. The NFL allows $350 million per team, but doubling or tripling the sum for acquisitions could prop up higher prices. MLB’s debt rule is tied to a team’s cash flow, while the NHL’s is based on team valuation.
A true test of whether valuations have peaked should come with the expected sale of the Seattle Seahawks. While the estate of the late owner, Paul Allen, has not tipped its hand about whether the club will be put on the market, assuming it does, it should go for far more than did the Panthers. The vibrant Seattle market is home to major technology companies.
But skeptics remain. A $3 billion price means a buyer needs to come up with at least $2.65 billion in equity. Under NFL rules, he or she has to put up at least 30 percent of that, so at a minimum the buyer would need to write a $795 million check. But that assumes the remaining 70 percent is filled in by limited partners, which is not realistic. While limited partners can be counted on for a certain amount, expecting to raise nearly $2 billion from them, when they don’t have a say in operating the team, is all but impossible.
“It’s hard to raise that much LP money,” Horowitz said.
So that means chances are a buyer of the Seahawks at a $3 billion price needs to have around half that liquid. Few individuals fit that bill.
Leagues that elect not to raise debt limits could allow corporate ownership for general and limited partnerships. They also could raise the number of permissible LPs (the NFL’s limit is 25) and allow LPs to finance their investment where it was not allowed previously.
Short of these measures, however, it is tough to envision the prices going much higher if a buyer is asked to cut a 10-figure check to start.