Media Companies Begin Ditching Ownership of Sports Teams

The $180 million sale of the Anaheim Angels baseball team by Walt Disney Co. in April caused dealmakers to reevaluate the value of sports franchises and their position within media conglomerates. At issue are questions about how the sports business has changed, how buyers or sellers should value these properties, and how aggressively buyers should pursue sports franchise assets, which, for all their glamour, are often cash-flow-negative. Setting their sights lower “The golden goose that was ownership of a pro sports team is shrinking and buyers and investors in these properties will have to adjust their expectations,” says Peter Goplerud, a professor at Drake University Law School in Des Moines, Iowa. Certainly, the four-year sales process of the Angels resulted in reduced expectations for Disney. The $180 million price, paid by Phoenix businessman Arturo Moreno, was considerably less than Disney had hoped to get for the Angels. By comparison, the Boston Red Sox were sold for $660 million and the Florida Marlins were sold for $158.5 million in 2002. The Red Sox sale included an 80% percent stake in the New England Sports Network. Four years ago, the Cleveland Indians went for $322 million. But the man who brokered the sale of the Angels, Sal Galatioto, managing director in charge of the sports advisory and finance group at Lehman Brothers, says that estimates of a sale price for the Angels of $275 to $300 million were “hilarious.” He adds that sports assets are unique properties and can’t be valued by yardsticks such as a multiple of EBIT-DA that is often used in other businesses. Another limitation in the sale of sports franchises is the narrow group of potential bidders. “You have 80 or 90 people who are owners or who want to be,” Galatioto says. This means that if you have an auction, you aren’t going to be casting as wide a net as would be the case in other industries. Moreno, for example, apparently caught the sports team ownership bug well before he successfully concluded his purchase of the Angels. He had owned part of the Arizona Diamondbacks baseball team and still has a piece of the Phoenix Suns basketball team. Experts say that the face of sports team ownership has changed. “Prior to the 90s, ownership changes were rare, but in recent years we’ve seen rapid-fire turnover of teams in all three major professional sports leagues,” Goplerud says. There are currently six or seven NHL teams, four NBA teams, and at least four baseball teams that are now on the block. Galatioto says that buyers or owners can no longer expect to see profits from owning sports teams double every three or four years. In addition to decreased returns, he says that the overall economic downturn has affected sports team earnings as well as team owners’ willingness to swallow losses. “Nobody is immune from the economy. You have owners who when their other investments were going well, didn’t mind writing a check for $10 million or $15 million in losses on a hockey team, but that’s all changed now,” he notes. Dealmakers also need to realize that franchise value depends on the sport, the locale, the status of the stadium or facility, and other factors. “The last place I’d want to be is in hockey now,” Goplerud says. He points to near-term labor issues of gargantuan proportions, including the possibility of a lockout. The league also lacks a national TV contract. For these reasons, he says that it will be a “hard sell” to unload a hockey team now. By contrast, the NFL is doing well. It has a revenue-sharing program that helps the weaker teams and national media contracts so it is less reliant on local media sales and gate receipts. Fan loyalty drops For some sports teams loyalties run deep, but this isn’t the case for all franchises. In newer locales, especially in the Sun Belt, there is less loyalty and more choices about how to spend leisure time. “If you’re in St. Louis in the winter, you are going to have an audience for winter sports like hockey and basketball,” Galatioto says. He adds that for expansion teams in the Sun Belt, you can’t make the same assumptions about fan behavior. The Lehman executive expects that rapid changes in technology will further fragment the core base of fans in some sports. Just as the world of owning sports franchises has changed, so too has the strategic rationale of some media companies that bought franchises to profit from owning the team and the programming that they create. Media companies own about 10% of North American pro franchises. The strategy of owning teams, broadcasting their games, and profiting from various tie-ins has run into some obstacles. In the current environment, facing depressed advertising markets and shrunken stock prices, many media companies are looking to shed non-core assets either to pare debt or to reinvest in faster-growth opportunities. News Corp. is trying to sell the Los Angles Dodgers baseball team, which it acquired for $311 million in 1998. As part of the package, it is selling Dodger Stadium and other assets. In addition to unloading the Angels, Disney is looking for a buyer for its Anaheim Mighty Ducks hockey team. And debt-strapped AOL Time Warner Inc. is looking to unload three Atlanta teams – the Braves baseball team, the NBA’s Hawks, and the NHL’s Thrashers. No more blank checks Goplerud states that factors like the decreased willingness of broadcasters to write blank checks for sports broadcasting rights and continued low levels of sports spending by corporate advertisers are among the reasons media companies are selling franchises. While media companies aren’t abandoning sports broadcasting, for many it no longer seems necessary to own the teams themselves. Disney’s experience with the Angels and the Mighty Ducks is a lesson for some media companies. The Angels are said to have cost Disney $100 million, despite the Angels’ success in last year’s World Series. Also reducing the enthusiasm of sports team owners is that in many cases, the profits emerge from selling the property, assuming that the franchise has risen in value. “Although they’re a good investment over the years, you only realize a profit on sport groups when you sell them,” Galatioto says. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com