Brand News: Monday, August 04, 2008
Where Does Value Lie in a Sports Franchise Valuation??
by Brad Sarna
The staggering figures that sports franchises have recently sold for have caused many an eyebrow to rise in an attempt to find where the true value lies in these transactions. The trend is continuing as the Chicago Cubs are expected to be sold for more than a reported $1.3 billion and the Pittsburgh Steelers are rumored to be up for sale for possibly $1.2 billion. Is it simply wealthy men paying a premium to join one of the most exclusive clubs in the country or is it something more tangible that is leading to these record deals?
When examining the value of a franchise the main drivers of value include the various revenue streams, the market size, any broadcast deals, the “prestige” factor, and most importantly the stadium deal or leasing arrangement. These are not the only drivers of value but are the most significant.
- Revenue streams such as ticket sales, advertising, parking, concessions, television/radio contracts, luxury suite sales, and naming rights deals determine the amount of money that flows through to the franchise...
- The market size is important as it influences the various revenue streams. A larger fan base in a populous market and the presence of large corporations can boost the money brought in through those various revenue streams.
- Broadcast deals are influential in that they determine a teams total viewing audience, affect advertising income, and can increase revenues if the owner has an interest in the channel that broadcasts games.
- The “prestige” factor is the additional amount a prospective owner is willing to pay to join the “club”. There are a limited number of teams and fewer that are available, so opportunities to join the club are few and far between, leading to a willingness to overpay.
These factors are each important but the stadium deal/lease situation that a franchise is part of is more influential than many people realize. An owner with a beneficial stadium situation reaps much more financial benefit than those in an unfavorable situation. A great arena deal will enhance the franchise’s portion of revenue generating streams, such as advertising, naming rights, concessions, ticket sales, and parking, that all help increase the overall value of the franchise. Meanwhile, a restrictive lease arrangement limits the amount of these various revenue streams that actually make it to the franchise, leading to a lesser value. The terms of these arrangements are usually very long and are difficult to renegotiate or change, therefore having a tremendous affect on the current and future value of a franchise.
The stadium, if privately financed by a team or owner, can level a substantial amount of debt that can saddle a team with payments for years into the future. However, a privately financed stadium does allow the franchise to take full advantage of all the revenue streams that come with a new stadium. This is not always true with franchises that lease a stadium or arena from a municipality, as the distribution of various revenues is negotiated as part of a lease. This can diminish revenues if the franchise did not negotiate a good deal, but a good lease can bring in revenue without being saddled with the debt of a new stadium.
In the past 10 to 15 years cities have been bending over backwards to appease owners with new publicly financed stadiums and sweetheart lease deals to prevent them from leaving town for another city that would. This trend has slowed as cities face other more pressing financial issues and have forced teams to privately finance new stadiums and arenas.
The large benefit of owning a stadium or having a favorable lease can be evidenced with the pending sale of the Chicago Cubs, which may or may not include Wrigley Field. Sam Zell has already tried to sell Wrigley Field independently of the Cubs and this would have reduced the value of the team to any potential buyer. Any potential owners who are interested in buying the Cubs desperately wants Wrigley Field included in the deal and are willing to pay for it. With control of the stadium and its revenue streams the value of the Cubs jumps considerably. Many people have been quoted saying the whole package could go for $1 billion, but it would not be a surprise to see the price climb even higher. With the history surrounding the Cubs and Wrigley Field, along with the team’s success to this point of the season, it would not be unfathomable to see a winning bid of $1.3 billion or higher.