Inflation, Stock Market Fall, Global Uncertainty Can’t Stop Soaring Team Values
There’s a war in Eastern Europe, inflation is ravaging Western economies, and the stock market and other asset classes have recently taken a nosedive. Savings are dwindling and it costs more than ever to buy food and gas, which hurts the sports industrial complex’s ability to get money out of its customers’ pockets.
Shouldn’t that depreciate the value of sports teams? The answer, succinctly, is no.
Chelsea Football Club was sold for over $3 billion, the Denver Broncos are expected to sell well north of $4 billion – likely more than double the NFL’s last sale in 2018 – and even the Mid-market Portland Trail Blazers reportedly got a $2 billion offer. by Nike founder Phil Knight.
Part of the explanation is of course media rights. Sports, and sometimes news, are the only categories of live programming that can withstand the cord-cutting and ad-hopping trends that have consumed entertainment over the past decade. The NFL’s media deals over the past decade are worth more than $100 billion, and the NBA’s impending mega-media deals are just recent examples of the value the media places on sport.
“As technology continues to improve and people can record their favorite shows, edit the commercials and watch them whenever they want, the only thing people really watch live is sports,” he said. Sal Galatioto, a sports investment banker who has advised on team sales since the 1990s. “And so the value to an advertiser goes up and up.”
Streaming services like Amazon Prime, Apple TV+, and others that pay for sports to distinguish their products are only making more money flow to sports.
But there is clearly more going on than just the decades-long upward trend in media values; that can’t be the only explanation for a $2 billion jump in the price paid for an NFL team (and the top potential buyer, Rob Walton, a source said, has also pledged to build a new stadium in Denver, leading one of five bid groups to drop).
There is a scarcity value effect – there are only so many teams around. Leagues aren’t expanding anytime soon – NBA commissioner Adam Silver has dismissed 2024 expansion rumors at his NBA Finals Press Conference – and teams rarely go on sale. In fact, Knight’s offer for the Trail Blazers appears to have been unsolicited. The sport is akin to a booming real estate market with limited supply, in which eager buyers knock on owners’ doors.
“There are only 151 teams to own in the Big 5 leagues in the United States with very low turnover, which creates an imbalanced supply/demand equation,” said Rob Tilliss, founder of the advisor. sports mergers and acquisitions Inner Circle Sports. The Big 5 are the NFL, MLB, NHL, NBA and MLS. In fact, MLS values have surged in part because of buyers being shut out of other leagues by limited supply and skyrocketing prices.
Galatioto remembers selling the Chicago Cubs in 2009, during the Great Recession, when team owner Tribune Media filed for bankruptcy. And yet, the team sold for a then-record price for an MLB team.
“There were seven control deals during the Great Recession, six of them were above Forbes’ valuation, and three of them were record prices,” Galatioto said.
Some sports like NASCAR, which rely on a more blue-collar consumer base and fans driving from track to track, could see an edge effect. But big league team sports rely on big media deals and streams of corporate cash buying premium suites and tickets. While nothing is recession proof and businesses need fewer tickets with so many employees and customers working remotely, concerns about the economy had no dampening effect on the value. .
In fact, ticket demand is high for many sports and teams.
“Live sports can be a haven, a place to cheer on your favorite team,” Tilliss said. “Thanks to vaccines, stadiums and arenas are full again.”
“A lot of people will continue to go to NFL and NBA games rather than going on vacation,” Galatioto said.
Another factor in the rising prices of teams is that despite the pandemic and now the war in Ukraine, over the past few years America and the rest of the world have continued to produce more billionaires. There are more people able to pay the prices.
“Capitalism continues to produce more and more billionaires; the number of teams is more or less fixed. Every once in a while you have an extension,” Galatioto said. “The supply is obviously limited and the number of potential buyers is increasing, which is driving up prices.”
How much prices can continue to rise is a question. Will the next team after the Broncos sell for $5 billion (there are even reports the Broncos could sell for that much). When does it become untenable? Although media contracts are on the rise, sport is not a growth stock. The number of tickets, sponsorships and jerseys that can be sold is limited. Labor is expensive and unionized.
Some of the numbers floating around for the Broncos are of course likely spun off by the seller’s investment bank, a common ploy. Before the Carolina Panthers, which used the same investment bank, were sold in 2018, $3 billion had been pitched as the prize. The team ended up selling David Tepper for $2.275 billion.
Could the same drop in price expectations happen here with the Broncos? Possibly, although there are differences between now and the Panthers process. Tepper was by far the strongest of the three bidders. Depending on who you spoke to, the other two groups would not have qualified under NFL rules.
In the Broncos scenario, there are four identified buyers with vast resources. It’s unclear if each of these groups can meet the NFL’s ownership structure rules where the lead buyer needs at least 30% equity.
Yet since 2018, the NFL’s business has seen robust growth, from its increased dominance of top-rated programs to media deals and other business metrics. And don’t overlook the federal tax credit that allows business owners to deduct the purchase price of the business from their personal taxes.
If Walton, the former chairman of Walmart and son of the founder, buys the Broncos for, say, $4.5 billion, he can amortize that amount over 15 years and deduct the amounts from his taxes each year.
And another factor that also drives prices up is an old trusty: ego. As the saying goes, the sport is the only company to have its own section in the newspaper, which means the owners are high profile. They are often the most visible businessmen and women in their community.
This all adds up to a high demand for teams, and not just control parts, but also limited partner participations. Galatioto’s company specializes in this area, and asked if the inflation and uncertainty of war had an effect, he replied, “Never been so busy.”
(Top photo: Michael Allio/Icon Sportswire via Getty Images)