Latepost Ballmer's Bid For The Clippers: Investment, Merchandise Or Expensive Toy?

Now that he has stepped downwardly as CEO of Microsoft, Steve Ballmer has both plenty of fourth dimension together with moneyon his hands, together with he position the latter to purpose in conclusion week, when he announced his intent to purchase the Los Angeles Clippers, that city's instant favorite NBA team, for $ 2 billion. Since that was to a greater extent than than 3 times higher than whatsoever other NBA squad had sold for together with matched the toll tag for the most expensive sports franchise sale inward United States history (the sale of the Los Angeles Dodgers inward 2012), the bid raised questions almost whether a sports franchise tin live valued, how it is priced together with whether at that spot is an ego premium embedded inward this particular offer. I am non a Clippers fan, but I dearest sports, together with these questions non only deserve answers but have got broader implications for valuing amusement together with media businesses.

The value of a sports franchise

Much as nosotros similar to glorify the beauty of sports together with praise it inward its purest forms, it is increasingly a business. Like whatsoever concern that is expected to generate profits together with cash flows, it tin live valued, based upon these expectations.

1. Revenues: From gate receipts to media contracts!

My favorite sports team, the New York Yankees, was sold for $460,000 inward 1914. At the time, it was a struggling franchise, alongside $20,000 inward debt, together with the novel owners turned it around alongside 2 large investments: the storied acquisition of Babe Ruth from the Boston Red Sox for $100,000 together with the construction of Yankee stadium for $3.1 1 1000 m inward 1923. In 1924, the Yankees reported EBITDA of $441,640 on revenues of $1.1 million, almost all of it generated from gate receipts. Until 1946, the revenues for the Yankees (and almost every other professional person squad inward sports) came from the revenues generated at games from ticket sales, concessions together with parking, alongside some supplementary revenue from radio broadcasts. In 1946, the Yankees became the commencement squad to sign a local tv set contract, netting them $75,000 for the season. It is plumbing equipment that the Yankees owe their electrical flow condition as 1 of the most valuable sports franchises inward the USA to an updated local tv set contract, which generated to a greater extent than than $100 1 1000 m inward revenues for the squad inward 2012.

The in conclusion 2 decades, inward particular, have got seen a shift inward revenues from gate receipts to media correct across sports, alongside the shift to a greater extent than pronounced inward some sports than others together with for some teams inside each sport. In the tabular array below, I suspension downwardly total revenues inward vi sports - baseball game (MLB), football game (NFL), basketball game (NBA), North American hockey (NHL), European soccer together with Indian cricket (the IPL), using information from 2012:

For European soccer, I purpose only the top xx firms inward terms of value (according to Forbes). The IPL numbers are my best estimates, based on tidings stories.

Of the vi sports, baseball game is the most subject on gate receipts, perchance because it has a 162-game schedule, together with the NFL is to the lowest degree so. The IPL together with the NFL are the 2 sports most subject on media rights (TV together with digital broadcasting), spell European soccer gets a larger piece from sponsorship than do the other sports. (The fronts together with backs of musician uniforms are prime number sponsorship territory inward Europe, making it dissimilar from United States professional person sports where that is non the practice. The IPL follows the European model.)

While broadcasting revenues are straightaway a much biggest piece of the total revenue pie inward every sports, the construction of revenue sharing varies across sports, alongside profound consequences for franchise value. The NFL together with IPL have got a shared revenue model where all teams teach an equal portion of the tv set broadcasting revenues of the sport, but the IPL keeps 40% of broadcasting revenues for itself (up from 20% inward the commencement few years of the contract). Baseball, basketball game together with hockey all have got mixed models, where the teams portion as inward the national tv set contract revenues but are allowed to teach into into together with proceed all or a large portion of the local contract revenues. Not surprisingly, this generates higher revenues for teams inward larger media markets, alongside the New York Yankees generating media revenues ($158 million) inward 2012-13, almost iv times larger than the Seattle Mariners ($42 m), inward baseball, together with the Los Angeles Lakers ($150 million) drowning out the Oklahoma City Thunder ($20 million), inward basketball.

2. Expenses together with Operating Profits

The biggest expense associated alongside running a sports franchise is musician expenses, together with it should come upward as no surprise that each of the sports has gone through turmoil (including strikes together with unopen downs) around controlling these expenses.

Player expenses as % of Revenues
IPL Player expenses based upon teams at salary cap of Rs lx crores ($9 million) each

Players have only over 50% of total revenues inward the NFL together with NBA, a niggling less inward baseball game together with hockey together with much less inward soccer together with cricket. Note that, alongside the IPL, at that spot is niggling information at the franchise level, since many of the franchises are subsumed into much larger corporate organizations.

How much have got these ratios changed over time? With baseball, which is where nosotros have got the longest history, musician expenses, as a percent of total revenues, jumped afterwards gratuitous means inward 1974, peaked inward the early on 1990s together with has been declining since:

MLB: Player Expenses as % of Revenues

Since this is the statistic that most fights betwixt players together with owners have got fought over (and have got had strikes over), it is controversial. Note that the expenses in major league baseball game peaked inward 1994, just before the longest blast inward baseball game history, together with have got fallen since. In 2010, the NFL shutdown was predicated on both what this statistic was (with owners together with players using dissimilar base of operations numbers) together with on what it should live inward the future. In the in conclusion agreement, the owners agreed to give the players 55 percent of national media revenue, 45 percent of all NFL Ventures revenue, together with xl percent of local social club revenue.

There are a host of other expenses that are of less import but aggregate to accept a large seize alongside teeth out of income. These include squad expenses (associated alongside the logistics of transporting together with accommodating the team), musician evolution costs together with stadium maintenance expenses. In many sports, the richest teams also pay luxury taxes that tin add together substantially to their expenses, alongside the amount of the taxation tied to how much their musician payrolls transcend league caps. Given the paucity of fiscal information from sports teams Forbes does a expert chore of estimating the EBITDA of these franchises (though it does bother me, from a semantics standpoint, that they telephone phone it operating income). In the tabular array below, I listing the EBITDA values together with EBITDA margins, yesteryear sport, as good as the percent of teams inward each sport that reported negative EBITDA inward the most recent fourth dimension period.

Revenues together with EBITDA - Most recent year

European soccer, the NFL together with the NBA are the most profitable sports, alongside baseball game bringing upward the rear. Again, the absence of stand-alone information on IPL teams makes it hard to mensurate how profitable these franchises are to their owners. While the IPL as a league overall looks similar it generates a profit, the league takes a disproportionate portion of these profits (40% of broadcasting revenues, 20% of gate receipts together with worst of all, 10% of initial franchise toll as an annual franchising fee!) together with keeps it for itself. Since the IPL is to a greater extent than a political trunk than a concern entity, the in this post for the New York Yankees inward 2009, dramatically increases the fiscal leverage at these teams together with alongside it, the risk.

We may live guilty of survivor bias inward our focus on the MLB, NBA, NFL together with NHL, all of which have got survived multiple scares during their lives. The listing of professional person sports leagues that have got failed is long, together with spell the peril of failure may live small, it is non non-existent. The other peril that nosotros are non factoring inward is on the legal front, which tin manifest itself inward multiple ways. For instance, the growth together with profitability of the MLB tin live traced, at to the lowest degree inward part, to the fact that it has been granted a special exemption from antitrust laws, together with removing that exception could have got disastrous effects on franchise value. With the NFL, the recent spate of publicity almost caput injuries together with long term encephalon harm to players may real Pb upward to a class-action lawsuit alongside the potential to bankrupt fifty-fifty this most powerful of sports leagues.

Valuing the Clippers

With that long Pb in, nosotros are inward seat to value a sports franchise, together with inward keeping alongside the tidings story that initiated this article, I volition attempt to value the Los Angeles Clippers. In doing this valuation, I volition brand a duet of simplifying assumptions, which yous are welcome to change. Given the peril give-and-take inward the in conclusion section, I volition attach a cost of working capital alphabetic lineament of 7.50% for investing inward the Clippers, at almost 25th percentile of all United States firms. I volition also assume that in 1 trial I reassess the numbers for the Clippers, given my expectations of changes (in TV contracts, revenues together with costs), the cash flows volition grow at roughly 2.5% a twelvemonth inward perpetuity. Finally, I volition assume that alongside the NBA's protection from contest inward place, the Clippers volition live able to generate a 25% render on working capital alphabetic lineament on their investments (which volition allow them to generate the 2.5% growth alongside a 10% reinvestment rate).

Intrinsic Valuation of Clippers: Actual, Median, Laker-like & Best Case

In this table, I value the Clippers, commencement using their 2012 numbers (which I know are also low), adjacent using the median revenues together with EBITDA margin for an NBA team, together with so giving the the revenues together with margins of their to a greater extent than lucrative vecino inward the urban amount (Los Angeles Lakers), together with finally alongside a combination (best-best) of the league's highest revenues (which belong to the Lakers), the best pre-player expense margins inward the concern (Knicks) together with the lowest payroll of whatsoever squad inward the sport (the Utah Jazz). Even alongside this improbable mix, the value that I guess for the Clippers is $1.61 billion, good below the $2 billion paid yesteryear Mr. Ballmer. You are welcome to download the spreadsheet, which has inward it the fundamental numbers, yesteryear team, for all NBA teams together with do your ain assessment.

The Pricing of Sports franchises

In keeping alongside the recent posts I have got had almost the separate betwixt the value of an property together with its pricing, it is worth examining how sports franchises are priced. In fact, that is the argue why I did non verbalise almost the well-publicized Forbes valuations of sports teams, fifty-fifty though I did purpose the raw information that they so helpfully supply on private teams. The Forbes valuations are actually franchise prices that they guess based on the most recent transaction prices inward each sport. You tin encounter the latest Forbes value estimates for teams inward v of the vi sports inward this link. They are rigorously done, but they don't plough over the valuation test.

Market traded sports franchises

As nosotros noted earlier, most sports franchises are privately held together with are non traded. The exceptions tend to live European soccer firms, where at that spot are almost a dozen that are traded primarily on mainland Europe. In the tabular array below, nosotros listing the values attached yesteryear the marketplace to these teams, both inward terms of equity value together with enterprise value, together with relate these values to operating measures for each team:

Enterprise value, Equity Value together with Multiples: Traded Sports Franchises

At the outset, it is worth noting that many of these firms are inward pitiable fiscal health, alongside negative earnings together with high debt ratios. With that concern inward mind, nosotros even so computed multiples of revenues together with earnings, together with concluded that the median sport franchise, at to the lowest degree inward European soccer, trades at almost 2.13 times revenues together with 9.31 times EBITDA. While the median PE ratio is 22.7, notation that almost one-half the sample has negative cyberspace income.

Transaction-based pricing

While sports franchises are privately held, at that spot are transactions that occur, albeit infrequently, where a squad or a portion of a squad is sold. It is hard to compare transactions prices over fourth dimension together with across franchises, partly because they have got to live inflation adjusted (which is slow to do) but to a greater extent than because the revenues together with earnings potential for franchises alter over time. The best way to command for this is to convert the transaction prices into multiples of levels of operating variables at the fourth dimension of the transaction. In the tabular array below, I listing the electrical flow possessor of each NBA franchise, the prices paid to teach the franchise, the revenues of the franchise inward the acquisition twelvemonth together with the resulting revenue multiple.

Revenues are from twelvemonth of transaction. NA= Not available

Looking across all thirty teams, the median multiple at which a franchise has traded at historically is 3.30. It is worth null that the 2 most recent transactions, the sale of the Sacramento Kings inward 2013 together with the Milwaukee Bucks inward 2014, were the commencement to occur at to a greater extent than than v times revenues.

While the history of franchise sales inward the NBA is express yesteryear the fact that the league has a shorter history, the history of franchise sales inward major league baseball game boot the bucket dorsum to a greater extent than than a hundred years. Using information partly from Michael Haupert's excellent treatise on the economical history of major league baseball together with partly from populace records, I exhibit the alter inward franchise values for MLB franchises over the decades inward the tabular array below, as good as some the to a greater extent than recent transactions involving MLB teams, scaled to the revenues of these teams at the fourth dimension of the transactions:

Franchise values from 1910-1999 from Haupert, residue from populace information

It goes without proverb that a long term possessor of a baseball game franchise has been rewarded richly for the investment, but the increment inward value for much of the in conclusion 3 decades tin live attributed to increases inward revenues, rather than a surge inward the multiple of revenues that buyers are willing to pay. For much of the in conclusion 3 decades, buyers have got been willing to pay almost 3 times revenues for a baseball game franchise, alongside the sale of the Los Angeles Dodgers for $ 2 billion (more than 6 times revenues) representing the outlier.

Completing the story alongside the NFL, the tabular array below lists transactions involving NFL teams, alongside revenues from the twelvemonth of the transaction together with multiples paid on each one.

NFL Franchise Trades alongside Revenues from twelvemonth of trade

On average, NFL franchises have got sold for higher multiples of revenues than either NBA or MLB franchises, trading at only over iv times revenues, though the recent surge inward NBA valuations may have got position that league ahead correct now.

Looking across the sports, at that spot is a blueprint that emerges, alongside NFL together with NBA franchises historically beingness priced at the highest multiples of revenues (about iv times) though the NBA's recent surge may have got given it the lead. Major league baseball game brings upward the rear, alongside franchises typically selling for 3 times revenues, together with that ranking is consistent alongside the profitability margins nosotros reported inward the in conclusion section; the NBA had a median EBITDA margin of 11.29%, the NFL was unopen behind at 10.93% together with baseball game had the lowest EBITDA margin at 2.71%.

Pricing the Clippers
With this information on how investors/buyers have got priced franchises inward hand, I tried to toll the Clippers using a rudimentary combination of variables: the annual revenues of the franchise together with a multiple of revenues gleaned from the historical transactions:

EV/Sales from NBA transactions inward in conclusion xx years

As alongside the intrinsic valuations, it is hard to justify a $2 billion toll tag on the Clippers, fifty-fifty alongside assumptions that stretch credibility. You tin download this spreadsheet as good together with encounter if yous tin derive your ain price.

There may live to a greater extent than fanciful multiples that deliver a toll closer to $2 billion. For instance, yous could separate the transaction prices yesteryear the population of the subway expanse served yesteryear the squad together with and so scale this upward to reverberate the larger LA media market. Thus, taking the $550 1 1000 m that was paid of late for Milwaukee which has a media marketplace 1 10th the size of the LA media market, together with assuming a 50:50 split of the LA marketplace alongside the Lakers, yous would teach inward at a value of $2.75 billion for the Clippers. Go figure!

The Clippers as a play toy

We may live spinning our wheels, trying to honour rational (and financial) explanations for why Steve Ballmer paid the toll that he did, when the answer may live much simpler. He has actually wanted to ain an NBA team, peculiarly 1 inward a glamorous media market. Last year, he was thwarted inward his bid to purchase the Sacramento Kings together with this time, it looks similar he is leaving null to chance. In effect, he is paying an premium over fifty-fifty the most optimistic value or toll assessment for the team, to have got an expensive play toy. How expensive? Given the media revenue potential of the Los Angeles marketplace together with the global growth of the NBA, I would live hard pressed to attach a value (or a price) of to a greater extent than than $1.2 billion for the Clippers, leaving me alongside an 800 million-dollar toy. While that would live good beyond the accomplish of fifty-fifty a regular billionaire, it is affordable to a human being who is worth $20 billion.

Looking at the ownership lists of the vi franchises, the tendency towards multibillionaire owners is to a greater extent than pronounced inward some leagues than others. Of the top xx European soccer teams, almost a 3rd have got been acquired yesteryear billionaires who either made their wealth elsewhere or inherited it. Among United States professional person sports leagues, the NBA leads the list, alongside almost a quarter of the firms inward the hands of wealthy toy-seekers. As a fan, I volition never live wealthy plenty to live able to pass a few billions to purchase my favorite team, but I don't begrudge someone who does, peculiarly if he or she acts inward a way to brand my squad a winner. If it troubles yous to encounter your favorite squad boot the bucket a plaything, yous should live far to a greater extent than horrified if yous are a fan of an IPL team. The wealthy individuals who ain IPL teams do so through publicly traded corporations that they control, hence using stockholder coin inward these firms to advance a personal interest. The opacity on both the governance together with the financials, both at the franchise grade together with the league level, is troubling, making it difficult to plough over judgment on the fiscal good beingness of the league together with may live contributing to self-dealing together with potentially illegal activity.

I would hasten to add together that spell the wishing to teach glamorous assets together with pay ego premiums may live clearly visible inward sports franchise acquisitions, they are non restricted to them. In my post on acquisitions little over a twelvemonth ago, I drew attending to the hubris hypothesis for acquisition premiums, relating them to ego together with pride. If Steve Ballmer is over paying for the Clippers, he is at to the lowest degree over paying alongside his ain money. When as CEO of Microsoft, he paid $8.5 billion for Skype, it was Microsoft stockholders who were position at peril from over payment.

Downloadable data/spreadsheets
Intrinsic valuation of Clippers
Pricing of Clippers
Raw information on MLB teams
Raw information on NFL teams
Raw information on NBA teams
Raw information on NHL teams
Raw information on European soccer teams
Raw information on IPL teams
Forbes pricing of sports franchises (2013)