The first three months of 2019 were characterized by robust activity in the world of sports investment and mergers and acquisitions. While the $3.5 billion sale of the YES Network to a group including the New York Yankees was perhaps the largest sports transaction, there were several other high-profile deals, such as Tom Dundon’s takeover of the AAF and Fertitta Capital’s investment in the Action Network. Given the growing importance of digital media/OTT streaming, the emergence of esports, and changes in the regulatory landscape related to gambling, the remainder of 2019 promises to be even more exciting and unpredictable in terms of sports deal making. Key questions include:
1. Will the U.S. professional sports team market accelerate in 2019? Over the past four years, there have only been eight control transactions involving MLB, NBA, NFL and NHL teams. Pro team owners have generally enjoyed prosperity and rising valuations since the Great Recession, virtually eliminating financial distress at the team level and thus reducing the supply of available teams. The key issue for 2019 is whether concerns about the macro economy will encourage owners to sell at a peak valuation before the window of economic prosperity closes. On the other hand, the emergence of sports betting and new bidders for sports media rights (e.g., Amazon, DAZN, ESPN+) may lead owners to believe that valuations will continue to rise, irrespective of a broader economic conditions. If this optimistic view prevails, there will likely be few team sales in 2019.
2. Have esports valuations peaked? Several major esports-related capital raises were executed in 2018, including Cloud9’s funding from Valor Equity Partners, aXiomatic’s funding led by Michael Jordan, Epic Games’ funding from KKR and others, and Caffeine’s funding led by 21st Century Fox. The momentum continued in 2019, as Team Envy and G2 Esports also secured new capital. Valuations, especially for esports teams, has reached record levels. For example, Forbes recently released its first estimate of esports team values and deemed three properties to be worth $200 million or more (Cloud9 at $310 million, Team SoloMid at $250 million, and Team Liquid at $200 million). Many observers wonder whether these valuations are sustainable, given that monetization is still in the early stages of development.
On the other hand, the consumption of esports content continues to grow among a very attractive demographic. Also, some esports investments have involved preferred securities, thus reducing the sting of a high valuation. Depending upon how these deals are structured in 2019, the growth of esports valuations could surprisingly continue, despite already frothy levels.
3. Will momentum for sports betting transactions continue? Shortly after the Supreme Court struck down PASPA in May of 2018, FanDuel and Paddy Power Betfair announced that they would merge their U.S. operations. The sports data companies that serve the ecosystem were also active in 2018, as Sportradar completed a transaction with private equity firm TCV and the Canadian Pension Plan Investment Board. Genius Sports, another leading data provider, was acquired by private equity firm Apax Partners. It appears inevitable that future investment and M&A activity will occur in the sports gambling space, given the scale of the potential opportunity. Perhaps less clear is how the traditional U.S. media companies and sports leagues will (or will not) participate in this investment and M&A activity.
4. Will challenger sports leagues deliver on their ambitious business plans and spur additional investment? Over the past 15 months, a number of new or emerging sports leagues received funding, including the Professional Fighters League (which had previously operated as the World Series of Fighting) and Paul Rabil’s Premier Lacrosse League (PLL). In late February, the AAF secured capital from Tom Dundon, but last week the football league suspended its operations.
While it has traditionally been difficult for emerging sports leagues to gain traction, the power of social media and streaming video may facilitate success in this new digital era. While 2019 may not render a final verdict on all of the high-profile challenger leagues, it will be important to observe the level of progress and success being achieved by these properties and whether they inspire (or discourage) other entrepreneurs to launch new pro sports organizations in an unusually friendly market for early-stage leagues.
5. What is the future of the Fox regional sports networks? Now that the Disney-Fox transaction has been completed, the focus on this RSN divestiture will increase, given the limited window afforded to Disney to finalize the sale. MLB reportedly has expressed interest in the assets, as have several private equity firms and strategic buyers. The RSNs benefit from strong distribution, high quality programming, and deep relationships with dozens of professional sports teams. Buyers must weigh the risk of declining cable subscribers versus the potential of future digital revenue streams, subject to the availability of these rights. Also, sports betting could be a major boon to the RSNs, given the local rollout of gambling legalization. However, any betting related opportunities could be subject to league rules and a range of future uncertainties.
Chris Russo is a managing director in Houlihan Lokey’s Technology•Media•Telecom Group. He is the former head of the NFL’s new media group and the founder of Fantasy Sports Ventures (aka Big Lead Sports). He is an adjunct faculty member at Northwestern University.
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