Price Points: Could the pandemic finally reverse the trend of soaring franchise valuations?

From his courtside seat at Staples Center, Steve Ballmer often looks and acts the part of the super fan. With his fists pumping and his voice roaring, Ballmer, the 64-year-old former Microsoft CEO, has been the vein-bulging face of the Los Angeles Clippers since he bought the team from disgraced owner Donald Sterling in 2014. Ballmer’s histrionics are not for show, and they aren’t because he’s concerned about the value of his investment fluctuating with every win or loss. Indeed, that is one area he has no need to worry about, and not just because he has a reported net worth of $69 billion.

No matter the state of the global or national economy, or the health of any of their other business interests, majority owners in sports have long been able to bank on the value of their franchises escalating significantly on an annual basis, seemingly with no end in sight. Like so much else in the world, however, that expectation has run head on into the new reality spawned by the coronavirus. Its impact on the business of team operations — from ticket sales and game-day revenue to ratings on regional sports networks — has called into question whether the end is finally here for the never-ending growth of franchise values, and whether some sales may soon be on the horizon.

While the NFL has mostly been unaffected to date — and likely will remain so given its TV contracts — certain owners in the other leagues are feeling the pinch of the pandemic. One in particular is Houston Rockets owner Tilman Fertitta, who in April reportedly raised $300 million at an exorbitant 13% interest rate, perceived by many as a desperation lifeline to float his casino and restaurant operations, which have been hammered by COVID-19 shutdowns. “The guy’s world is crumbling, and he’s not even answering the phones to hear people who have reasonable offers for his team,” said one source. “If Fertitta doesn’t think he needs to sell, then no one in the world will think that across the major leagues.”

Owners are understandably reluctant to sell, largely because few investments have performed better than pro sports teams, which have consistently climbed in value alongside skyrocketing media rights deals. Fertitta, for instance, bought the Houston Rockets from Leslie Alexander for a then-record $2.2 billion in September 2017, a staggering 2,488% appreciation over the $85 million Alexander paid in 1993. That’s good for a 14.5% compound annual growth rate even before accounting for dividends. Late Kansas City Royals owner David Glass tallied 13.1% when he sold the Kansas City Royals to John Sherman for $1 billion last year, 19 years after purchasing the franchise for $96 million. In the NFL, David Tepper bought the Carolina Panthers for $2.275 billion from founding owner Jerry Richardson, who in 1993 had paid $327 million (an expansion fee of $140 million and $187 million in stadium costs), netting an 8.1% annualized return (see table, page 14).

Ballmer bought the Clippers for $2 billion, a record at the time for a North American sports franchise. Sterling had paid $12 million for the team in 1981, meaning that he had enjoyed a 16.6% compound annual growth rate on his investment. According to the latest valuations from Forbes, the Clippers are now worth $2.6 billion, a 4.5% growth rate.

Most industry experts agree that if the sports world returns to a semblance of normalcy, there’s ultimately little risk to the long-term value of these assets. But that relies on the assumption that, at some point, things will return to a semblance of normalcy. The alternative — a years-long public health crisis that reimagines sports as we know them— could instead undermine the entire industry. With revenue flatlining and owners still on the hook for significant expenses, including player salaries and facility-related debt service, the ongoing crisis may force some team sales and a potential softening of prices. As one sports banker summed it up: “It goes back to, is this a blip or are we f---ed?”

Let’s start with the first option. Although the coronavirus fallout has introduced some financial headwinds, team values have withstood tremendous pressures before. “If you look back at 2008 to 2010 in the last recession, there were still team deals that got done. I think these teams have pretty long-term appreciation characteristics,” said Fifth Generation Sports CEO Chris Russo. Stephen Ross shelled out a then-record $1.1 billion for the Miami Dolphins across multiple transactions in 2008 and ’09. Also in 2009, the Ricketts family spent $845 million on the Chicago Cubs and a stake in their regional sports network, and in 2010 Stan Kroenke paid $450 million for the 60% of the then-St. Louis Rams he didn’t already own.

Much of that stability is just the result of supply and demand. Put simply, despite the high price tag that has limited the pool of potential buyers, there is still demand for the increasingly expensive team assets, though there are precious few opportunities to buy them. “One of the reasons teams have held their value is we have a closed system and there’s scarcity. You have efficient pricing from supply and demand,” said O’Melveny partner Chuck Baker. “There’s limited supply and a lot of demand, because people realize the compounding annual growth rates of these assets and that they’re good to own as non-correlated assets in your portfolio, not just trophies.”

Cash-flow issues may require owners to dig a bit deeper into their pockets or force some limited partners to seek liquidity (see related story, page 16), but there have yet to be any long-term changes to that fundamental dynamic. And the nation’s team owners include some of the world’s richest men, so there’s plenty of runway to weather the storm.

“The biggest non-story is this notion that billionaire owners are going to be distressed sellers of some of the safest and most iconic assets that exist,” said RedBird Capital Partners’ Lyle Ayes. “You work your entire life to become an owner of one of these teams. Until you absolutely need to get rid of it, there just won’t be deals. Especially not with buyers who think that valuations have been cut in half.”

“It’s never been a cash-flow game anyway,” he added. “Owners historically have not bought these assets to generate cash, for the most part.”

What if, however, this is not a blip? If the COVID-19 crisis does not abate for years to come, then the sports world may be looking at a permanent restructuring. That means not just changes to stadium hygiene policies and point-of-sale procedures, but the possibility of no fans in the stadium for multiple seasons.

“Will we ever go to a stadium again? I think the answer to that is yes. We’re not going to stay locked in our houses forever,” said Inner Circle Sports partner Steve Horowitz. “But it’s not impossible. A year ago, I would have said it’s impossible.”

And a prolonged shutdown poses the risk that general partners may be squeezed to the point where they have no other choice to but to sell down.

Looming overhead is the concern that team-specific stresses may be exacerbated by broader and more long-term trends. For one, banks are under tremendous pressure, which may put limits on new borrowing. “There’s not much capacity at the banks right now to allow for sports lending,” said one finance source. “There’s a lot of people who are going to find that their [credit] facilities just got way more expensive and there’s just limited capacity at even the big banks. I think that’s going to put the squeeze on a lot of franchises.”

Another source voiced concerns about whether the current economic landscape could accelerate cord cutting, raising questions about how quickly RSN revenue might dry up as a result: “If I were the commissioners of those leagues, I would be terrified about this. Because it’s propped up the teams’ valuations, it’s propped up salaries and it’s going away.” Others aren’t quite so fatalistic. Said one source: “The death of the RSN might be coming, but it’s not coming because of COVID.”

The perceived threat level varies from league to league. For instance, none of the nearly dozen advisers, bankers and executives who spoke with Sports Business Journal expressed concern about the NFL. The league has yet to cancel any games, and even if fans ultimately get locked out of stadiums, the NFL has more than $5 billion per year in TV rights revenue to lean on. The league recently voted to raise the team debt limit from $350 million to $500 million, giving team owners another tool to relieve potential financial stress.

“Their TV deal pays them enough money that they’re better than break-even before they sell their first ticket,” said an investment adviser. “So what does that mean? It means teams are just going to make less this year. Are you really concerned if you were hoping to make $175 million and you only make $40 million? I don’t know that that’s devastating.”

Things aren’t quite so rosy for the other leagues. The NBA and the NHL both got through most of their respective seasons but the former has a far more lucrative national television deal to help it ride out the downside, while owners in the latter don’t have nearly the same deep pockets, which could make several teams more vulnerable. Like those leagues, MLB relies heavily on game-day income but has watched some of its most important revenue streams evaporate because the season has yet to begin. If any teams in those leagues were struggling to break even in the best of times, they’re likely deep in the red now and relying on ownership to keep things afloat through the canceled calendar. Add in potential facility debt or struggles in outside businesses, and there is a formula for real distress.

NHL Commissioner Gary Bettman has so far projected confidence, telling media that NHL “franchises have never been better owned in terms of the strength of our ownership. … I believe, based on our condition, while it may be painful and with some substantial losses in the short term and maybe getting to the intermediate term, we will get through this.”

Multiple sources point to Major League Soccer as the league with the most exposure. MLS teams rely almost entirely on local revenue, the majority of which went to zero when the 2020 season was halted less than two weeks in. MLS Commissioner Don Garber told media he expects the league will take a $1 billion revenue hit as a result of the pandemic. Looking to the future, league-level operations were expected to get a boost with a new TV deal — the league’s current rights agreements run through 2022 — but even those plans could be threatened if networks are now reluctant to commit to a major contract.

Meanwhile, many owners are still on the hook for significant debt-service payments related to stadium construction. “They’ve done so much expansion, and combined with that expansion was the requirement that they have soccer-specific stadiums. So you have a number of teams that have gone highly levered in order to build,” noted one investment adviser.

Last week, MLS announced a return to play on July 8, which should restart some revenue streams. And the league has strong financial backing in its ownership ranks, including the old guard like Philip Anschutz and newcomers such as Tepper.

“Investors in Major League Soccer continue to focus on the long-term opportunity when considering valuations rather than the short-term impact of the COVID-19 crisis,” said MLS President and Deputy Commissioner Mark Abbott in a statement.

Even if individual teams in the various leagues have to reevaluate their circumstances, owners in general can take comfort in the fact that there is no end to the thirst for sports, and that that alone will keep interest — and values — high for years to come.

“Over the long run, we’re believers in the enduring intrinsic value of these franchises — now and into the future,” said one longtime sports executive. “If anything, for me it’s only proven the point that, culturally, Americans can’t live without [sports].”