Value of this organization EBITda discounted using a discount rate appropriate for sports organizations, specifically MLB clubs. You can probably reasonably adjust earnings based on the TV deal expectation for which you could find reasonable comparisons.
All that said I doubt there is any way to get to 2 billion even using the most favorable projections. You can adjust based on population growth and a possible ever expanding TV market, but that probably isn’t very realistic. To me this just seems like a miscalculation of expected growth of the sport or some kind of unreasonable hubris that only a wealth management/IB firm, such as the one leading this group, could have.
I know Forbes recently cam out with their MLB evaluations. They placed the dodgers at 1.4 billion. That would suggest an overpay here. However, I don’t know if Forbes accounts for stadium ownership, parking lots, and the potential TV revenue.
Comment by Atleast Frank'sgone — March 28, 2012 @ 12:16 pm
Sorry to nit pick, but apparently McCourt is going to continue to own half of the parking lots. Guess you are going to have to pry the franchise from Franks hands if he thinks those parking lots were worth not selling…Probably doesn’t make a whole lot of difference, but…ya know.
No one has been saying $300 billion per year that I know of. The low estimate on the TV contract is $3 billion over 20 years. It’s expected to go higher – say, $4 billion over 20 years – because it will be the subject of a bidding war more intense than the competition to own the Dodgers. Time Warner Cable and Fox will each be desperate to have the Dodgers, because the fate of entire cable channels are dependent on the outcome.
It’s not like I have my hand on the Dodgers’ ledger, but when you consider that baseline of guaranteed revenue, on top of a franchise that has its own profit potential, I don’t know how outlandish the $2 billion figure is.
Comparing to other sales from past years is a bit of apples to oranges. If the Cubs sold today in a similar TV rights environment, I’m sure their price would soar.
The simple answer is no. The team is not worth that much, and probably should have gone for less than their actual value as McCourt was forced to sell. But this deal benefits the current owners, by artificially inflating the value of teams, especially those with benefits beyond like stadiums, land, and lucrative TV deals. If this is the value of the Dodgers, other teams could push their sale value higher. The Giants, for example, own the stadium and land around it (with the possibility of a new arena on it), have a large stake in their TV partner, and don’t have the stadium upgrades or general debt issues the Dodgers have. With this deal in place, they could go for 2.5-3 Billion. The Yankees could theoretically go for upwards of 5 Billion.
Using a strictly financial analysis to determine the worth of a baseball franchise fails to give consideration to the factor that sports franchises – especially marquee sports franchises like the LA Dodgers – are status symbols for their owners. There is value inherent in the franchise beyond the dollars and cents associated with gate revenue and television revenue. It is not dissimilar to owing a piece of artwork produced by a famous artist.
The only scenario in which the Dodgers even approach a “value” of $2 billion is if they can start a network like YES, and then run it pretty flawlessly and benefit from dual revenue streams. They still need to have a massive operating profit (~$90 million in excess of TV deal) to break even, though. There’s no chance of that happening
Even using the rumored 20-year, $3 billion figure, the NPV is still only about $1.35 billion, which would require (based on my discount rate) roughly $40 million in annual operating profit to justify the valuation. I’m still not sold on a media rights deal of that magnitude getting completed.
As to the headline question, Tom Ricketts would say, “Yes”, perhaps with multiple exclamation points. The Cubs are due to sign a new TV deal in 2014, and even though I am no expert, it would seem they could command a deal to rival the Dodgers based on the Cubs’ strong fanbase and marketability. Ricketts paid 845MM and (in theory) could triple his money in about 5 years or so… Of course, even with several billion dollars at his disposal, I venture to say that the fine people of Cubs Nation will still be peeing in troughs in the Wrigley Field bathrooms for years to come. Anyway, back to the reality at hand… congrats to Magic and his group.
Too many people are underestimating the changing dynamic in baseball economics. TV rights are no longer just a revenue stream, they have become the business model (in a sense, the tail wagging the dog). The Angels and Rangers recent deals suggest the Dodgers could easily see a TV rights fee of $150-200 million. Of course, if the new ownership group decided to form an RSN, the potential payout could be even greater (not to mention shielded from revenue sharing).
Keep this in mind: the Yankees get about $90 million from YES and own a 34% stake in an RSN with annual operating income (not revenue) of $224 million. There are many factors that make sports programming so coveted, and baseball has more than any other sport. The value of that content can not be overstated, and I am sure that’s a big part of the $2 billion price tag.
I recognize that, however signing arguably baseball’s best hitter (who will be a very visible local presence), in tandem with a frontline starter, provided excellent leverage for the Angels. I don’t see signing Hamels or Cain as enough leverage to create that value. Even so, let’s say the Dodgers get 20-years and $3 billion. I highly doubt that such a deal would be structured with equal yearly payments. I envision a scenario with a fixed rate in 2014 and subsequent nominal increases through the end of the contract, which would drag NPV down.
Don’t forget that you can assume you will be able to sell the team at some point in the future, which would have to be factored into the cash stream. Let’s say you assume the team will generate a cash flow of $50 Million a year and after 10 year you will sell. How much would you have to sell for to make a profit?
If you sell for “only” 1.5 billion, you break even. If you sell for 2 billion, you have a 500,000 profit. If you consider it likely you will sell for more than 2 billion, you will have lots of profit.
Comment by Dan in Philly — March 28, 2012 @ 1:24 pm
Most of the recent transactions came at a premium to the Forbes valuation, because Forbes looks at them as businesses and in reality most owners are willing to overpay to buy into the club. I think it’s around 16% (that’s from recollection), which it’s still a big premium, though only about 400MM rather than 600MM
This is very astute. The only thing I would point out is the revenue sharing shield. In practice, I think it’s correct to say there’s shielding, but in theory MLB forces the clubs to attribute a fair value for the TV rights (evaluated by a third party) in their revenue
Forbes’ $1.4BN valuation was based on estimates they would be sold for between $1.3BN and $1.5BN. That is all. When a team is sold right before Forbes publishes, then the sale price is the value (Cubs).
MLB monitors the fair value or rights, but that’s not what I meant by shielding. Rather, the equity stake in an RSN becomes a separate profitable business that owners can enjoy without sharing.
Of course, that doesn’t mean teams won’t undersell their rights to some degree. Are the Yanks rights only worth $90 million? Even though NYY only owns 34% of YES, it still makes sense to take less if the team’s 34% of the amount not paid to the Yankees is more than the amount that would have to be shared.
their tv deal with wgn expires in 2014. their deal with CSN (of which the cubs own 25%) expires in 2018 or 2019 (depending upon which source you read). wgn televises these days about 60-70 games or so.
Until we see an owner take a loss for a team when he/she/they/we sell it, I’m not sure we can tell if it was an overpay or not. McCourt bought the team for 500 some mill in the economic uptick of the early 00’s, and then flipped it, during a partial recession, for 400% profit. Not to mention the Dodgers have been in not great shape lately, and their stadium isnt too great either. It is quite clear that even at 2 billion, any baseball team seems to increase rapidly in value year to year, and this investment could pull a profit merely in net value in the next ten years.
The fact that the Dodgers went for this much money indicates (at least to me), that the group that purchased it were making more than a business decision, and are willing to take on substantial risk in order to own a team, something that has to be a dream of many a billionaire. What I am trying to say, and doing a bad job at, is say that sports teams appear to be more billionaire play things that mostly make money, rather than a corporation out for the largest profit possible.
Not to mention the Dodgers have been in not great shape lately,
That’s a good point, McCourt tried to maintain a 3 million gate with sharp discounts and high tolerance for drunken louts. The new guys may see easy fixes (i.e., the boxes, parking ingress and egress) to upgrade the experience so they can sell 3 million tickets at luxury prices.
And with Magic on board, they could probably get L.A. to build a monorail network terminated at Chavex Ravine, all at public cost.
It really is ridiculous that teams use the threat of moving to get public funding, or hell, don’t even have to threaten anyone to get public funding. The city of whatever throws in money to a private corporation, which reaps all the profits (sure, hotels and restaurants profit, but really?). The owners know full well how to manipulate money out of people just because their company has a cool logo and plays a game for profit.
This is the Dodgers, who have a stadium near downtown LA we’re talking about, in the biggest media market in the U.S.
The Angels, with a stadium 1 hour south of there, and a fanbase that’s geographically distinct, just pulled in $3bn. There’s no way the Dodgers aren’t able to negotiate an enormous premium over what the Angels have negotiated.
The Angels have always been second fiddle in SoCal baseball, and they still are despite Arte’s competence and Frank’s incompetence. I could easily see the Dodgers securing a $4-5bn/20 year deal. The LA fanbase is that much more rabid and the value of regional media is that much more valuable.
If 20 yr/$3bn creates an NPV of $1.35bn, then 20/$4.5bn creates the $2bn pricetag. They only need $20/$4bn, and the rest of the value is in the club, stadium, and land.
Okay, since the consensus seems to be “it’s the TV money, this is totally worth it”, let me ask a few questions.
1. If the exploding value of TV contracts has fundamentally doubled or tripled the value of franchises in the last year or two, why were sale price estimates for the Dodgers in the low $1 billion range? Even after the Angels and Rangers landed their big TV deals, people were still speculating that the Dodgers would go for something less than $1.5 billion. Mark Cuban publicly said he wasn’t interested in anything past $1 billion. Why did everyone so badly underestimate the franchise’s value if it’s so easily explained by television contracts that were formalized months ago?
2. Were television rights packages just wildly undervalued for the last 10-20 years? It’s not like putting games on cable or starting your own sports network is a new concept. Were cable companies making money hand over fist broadcasting sporting events? Is there evidence that the ratings for sports events on cable are so much higher than other programming that it justifies the fees now being paid out to host those events?
3. We are continually hearing about the decline in television advertising revenue due to lower ratings as people have more entertainment options and more screens on which to view the things they want to watch. With so much movement towards mobile and the internet, are we sure that teams that are locking themselves into current business plans for the next two decades are actually making a smart move?
4. What evidence is there that this isn’t a speculative bubble? Pointing out that Frank McCourt made a lot of money by flipping the Dodgers doesn’t guarantee that the guy who bought the Dodgers is going to reap the same rewards? We’ve seen this kind of speculation crash and burn in nearly every other market in the world – why do we think baseball is immune to it?
“But buying the Dodgers now comes with a unique opportunity to launch a potentially lucrative regional sports network in the country’s second-largest market, or sign a new local broadcast deal with the current broadcaster, News Corp.’s Fox unit, which has already offered the team a 17-year extension valued at nearly $3 billion. (News Corp. also owns The Wall Street Journal).”
If the reports are right, they’ve already been offered a deal worth $176M per year. And that was while Fox had exclusive negotiating rights! There’s going to be such a huge regional bidding war between FOX and Time Warner. Don’t forget that ESPN may get into the bidding as well. And the Dodgers always have the option of saying, screw all of you, we’ll start our own regional network like the Yankees. I see them easily signing a $200M deal, and it could easily go up past $250M per year.
4.)I think this is definitely a speculative bubble. And, while McCourt and the Astros owners both made a killing in a nadir for their respective teams on the field, it doesn’t guarantee that the new ownership’s investment doesn’t crash and burn.
I guess only time will tell, but in my short term, minimal research brain I can’t think of teams selling at a loss for their owners in recent history. It might be because it is in the entertainment market, and just in the way that more people went to the cinema during the great depression, entertainment seems to weather financial storms much better than other markets.
In conclusion of my long winded rant, someone is going to come up with a loss because of this deal. It will be the owners if they don’t get the best TV deal, but it could very well be the TV company, who pays more than they ever profit from the Dodgers.
One thing to add (sorry), sports on TV are less susceptible to loss in viewers due to externalities, because the mlb, nfl, etc. all have done very well to protect themselves from people watching games on any other device than a tv or thru their own internet services. And the torrents that are cause a dip in Tv show and movie views aren’t relevant, because rarely does someone desire to download an old game.
Thanks for the link, Jon – I guess we can say goodbye to any hope of MLB revising it’s ridiculous territorial broadcasting rules. Without a fast and effective proxy service, how is MLB.com a good value again?
I’m beginning to hate big Cable more than I hate big Government..
The counter arguement to the ‘someone was willing to pay $2 billion so that must be what it’ worth.’ Is that they bought it at auction so by definition they were willing to pay more than everyone else in the market. Now as the owner, at present, we’re very certain that no one else would be willing to pay what they did, therefore, they’ve overpaid be definition.
The question is have they overpaid in the, ‘well if I can’t get more than what I paid for these Lakers tickets all just go and enjoy the game myself.’ kind of way, or have they overpaid in the A-Rod to the Rangers kind of way.
You’re also relying on profit and loss statements that are notoriously unreliable. You really don’t have a clue what kind of profits they are making or aren’t making. To me that’s the major problem when trying to apply standard accounting methods to such valuations and it’s why Forbes has been badly off in their valuations. There’s too many gray areas when it comes to getting actual numbers for anyone without the books in front of them to have any kind of certainty.
That said, it’s rumored that the Cohen bid was only $1.4 billion. If that’s the case then it does look like it was $700 million overpay.
As for the valuation of the TV rights Molly Knight was saying that YES did $400 million in revenue last year alone. I’m sure if the Dodgers were to set up a similar type of operation they could expect to get something in the same ballpark. As Weisman mentioned in his article there’s going to be stiff competition for those rights. Just as you saw an overpay for the Dodgers it’s entirely possible you’ll get someone just as desperate to overpay for those TV rights.
Comment by Night Manimal — March 28, 2012 @ 4:17 pm
1. I don’t think much stock should be put into sales price estimates you hear floating around for these types of things. Honestly, how many of us have a really well informed understanding of how the valuation of an MLB team should be constructed AND the information and tools to accurately perform it? The estimates that were floating around were more than likely based on pure speculation/journalist fodder. We also have no idea what Cuban’s motivations were to say he wasn’t interested above $1 billion … don’t teams and players play this game every off season?
2. A good point. But remember that TV ratings include DVR recordings. Most everyone will fast forward though commercials in recorded programing. With DVR and on-demand options becoming more popular I believe this does make sports more lucrative for cable companies since most people will watch sports in real-time and not be able to skip commercials.
3. No way to know this, but teams have to take the best offer on the table, right? What other option do they have?
4. I agree completely. Great Point. And it’s not just a bubble in sports valuations that you have to worry about … what if MLB has another strike or the economy tanks again? MLB franchises would feel the pain.
It wouldn’t surprise me if journalists were just using the poor Forbes numbers. Look at the sale price for Astros and compare it the Forbes valuation the year before. Same goes for the Mariners. I believe Geoff Baker reported that there were two valuations done recently on the Mariners in one of the owners divorce case. Naturally the one done by the wife was higher but the auditor in that case actually had a look at the books. Both valuations were still much higher than the Forbes valuation. The Cubs sold for nearly $150 million more than the Forbes valuation of 2009. As for Cuban’s numbers, wouldn’t it be in his self interest to talk down any valuation publicly before making a purchase?
As for the value in the rights themselves there’s been plenty of work done by lots of reporters recently. The main theme is that in the ever fragmenting viewing habits of TV watchers, live sports seems to be the one event that’s shown to have the ability to still draw large numbers of viewers on a regular basis. That’s pure gold for advertisers.
Comment by Night Manimal — March 28, 2012 @ 4:29 pm
One final thought…the Wall Street Journal reported the offer was 100% cash, but I’m not sure this means 100% equity financing. Sports franchises have relatively consistent revenues, especially if they auction off the TV rights for a long term contract. I would imagine, especially with Guggenheim Partners involved, that at some level quite a bit of this purchase is being done with debt financing. This, combined with low long term interest rates, could lower the WACC (weighted average cost of capital) and help stretch the valuation upwards
you assume that because the price paid and Forbes’ numbers were different, that Forbes was inaccurate. I think it is more indicative of a billionaire’s willingness to pay more than would be financially smart to own something as cool as an MLB team. like the phrase billionaire’s play toy
in response to your first part, I would think Forbes’ probably actually does have a pretty good idea of a teams value in the business world, it is their job to be good at such things. The discrepancy, in my opinion, comes from the willingness of owners to see the team as more than just a business purchase.
Kyle – Forbes like any other person without access to the books is just making a guesstimate plain and simple. No matter how skilled they are at making those guesses they are still just assumptions.
Considering that we’ve had 3 sales and a fourth franchise valued for sale in the last 3 years and all of them have blown away the Forbes valuations I would say that it’s far more likely that the people who actually get a look at the books know what they are paying for.
Billionaires while known to spend plenty on their toys are also usually very shrewd businessmen and don’t overpay for much. It’s why they are still billionaires.
Lastly, Sports owners are highly protective of their books just ask the Player’s Unions. If they aren’t getting an accurate read on them how likely is Forbes to? Also why do you think the Owners are so reluctant to show their books? Is it hide what bad businessmen they are or do they hide them because there’s a lot more profits actually there that they would have to share if the Players knew about it?
Comment by Night Manimal — March 28, 2012 @ 4:56 pm
I do agree with most of this. I do think Forbes aren’t just a bunch of dumbasses, so their valuations are more than likely grounded in fact. Also, I think Forbes is not making speculative valuation, as in they don’t take into account the TV deal that could happen down the road, while said TV deal was probably a big part of the reason the price got so high.
Nobody is saying the Forbes people are a bunch of dumbasses. Their valuations are still entirely speculative without access to the books. Considering that they don’t have access they do a decent job. That said, they’ve been constantly wrong.
Maury Brown who does great work on this subject did a great piece for BP on the Forbes and their valuations.
I did M&A work for a dozen years for a Fortune 500 company and I must say this discussion is most entertaining. It demonstrates that some people that understand evaluating baseball talent and franchise management very well often think they know everything there is to know about all things financial. I can assure you that isnt true. Let me try to summarize the situation as I see it though – and by no means do I KNOW what is going on since I have not had access to the books either.
If the reports that the other two finalists were unwilling to go over $1.3B are true I must assume that Walter and co. overpaid based on the return. Smart financial analysts dont just work for Forbes of Mr. Walter. But most likely they have another plan in place to utilize the assets to generate revenue streams or some synergy with another business revenue stream that everyone else overlooked or only applies to them.
This is what usually is at the root of a valuation difference this extreme. I would not be a bit surprised to see something out of left field (a football stadium perhaps?) work its way into this situation at some point down the road.
The only thing I can say for sure is that we dont know for sure. But the sort of differences in publicized evaluations that often accompany the overpayment for franchises due to a wide variety of reasons (status, TV deal futures etc etc) dont apply here. I think this discussion is insulting to those who do these sorts of revenue projections for a living and who by all reports were roughly in agreement with a value around 1.3B.
This bid is so far out of line with where the valuations seemed to logically be headed for an overpaid end price – $1.3B real value leading to to a $1.5B price would have been a good guess I would say – that something very different is in play. I mean the amount of the overpayment here was roughly the entire price of the Astros! That is not a small difference.
And the speed with which this was decided after owners approved the 3 finalists suggests that the winning bid was indeed way over the other 2 bidders so much so that dollar to dollar negotiations with all 3 parties were irrelevant. The winning bid was a clear choice that it seems like La Court wanted to jump at before they changed their mind.
But again I am only able to say this based on unconfirmed reports of bids, speculations, and those public estimations of value which who knows what is true? But I will say again the winning bidders better have a plan to grow revenues a lot more than is obvious or the Dodger fans are really going to come to hate them for being too cheap to spend on payroll when they have to pay off debt / equity holders first.
This is not a full explanation, but could have been worth 100mil: the Dodgers have two MARKETABLE superstars in Kemp and Kershaw that will be Dodgers for the foreseeable future. That is a type of player that is tough to find, and other clubs that were sold did not have these assets. The Cubs have Starlin Castro, but he’s a tier or two below, while the Astros had absolutely nobody. These two guys could easily have added 100mil (or potentially much more) to the franchise’s value.
Agree Kyle, I think we’re reaching the point where TV companies might be competing close to the margins. Heck I could see stations even using the sporting industry as a loss leader because of the hook for their other programming.
If you PV the TV contract you can get close to the $2.15 B Enterprise Value assuming that stadium revenue could meet payroll obligations. That doesn’t include the potential upside of building an NFL stadium in the parking lot.
Unlikely they will see huge payoff like Mccourt unless new stadium is build..but have to take into account the value of the land itself which could be worth +1B
The difference in the team valuation and their bid is the perceived value of the tv contract. Just look at the Wilpon’s SNY – which I’m sure McCourt did to drive up his price. These tv networks are extremely lucrative businesses, they’ll have a good chance of recouping their money relatively soon.
Comment by Ignorant Tool — March 28, 2012 @ 7:46 pm
1. Are you talking about the Angels and Rangers contracts? There’s a number of analysts who are saying the only way this makes sense is if they establish a RSN. That may well be their plan. If that’s the case, then it would explain why the valuations were all off.
2-3. The Forbes articles address TV cable rights really well. Essentially, the landscape has changed dramatically over the past 5-10 years. Advertising has become devalued for any program that can be DVR’d and commercial jumped. Live Sports can’t be DVR’d. Hence, all the advertising dollars are flowing towards live sports. On top of that, a baseball team has 162+ games to broadcast, which, by itself, can anchor a whole regional network. This is different than football, and even basketball. So baseball contracts are absolutely essential to the lifeblood of regional networks.
3. If anything, mobile/internet should decrease TV revenues. This would be an argument for locking in a nice big deal like the Angels/Rangers, not the opposite. It may be a point against an RSN. I’m not sure. Even still, your original point may be undermined by other trend information such as that mentioned in #2 above that we don’t know.
4. It may be. Who knows? The NPV values of the cable deals does point towards sustainability, but who really knows?
After spending 2.15 billion in cash, how much cash do they have to put back into the team. Also, you would expect a ROI of at least 100 million per year, so look for ticket prices and parking fees to increase, and maybe a hold on FA spending until the new TV deal generates additional cash flow.
As someone who works in investment banking (albeit middle-market, we do deals in $100-700 range, this is bulge bracket territory), I would love to see the DCF on this. I highly doubt it indicates the $2.15 billion price tag but at the same time I think you have to factor in the celebrity factor of owning the Dodgers, being able to be known around LA as the team’s owner, and the chance to personally hoist a World Series trophy. I’m not sure any EV/EBITDA analysis is really all that useful here, as it’s a very small sample size.
As a final note, does anyone know who was on the deal for the Dodgers? I know UBS did a lot of sports related stuff and were hired by the NFLPA, but given their recent struggles, I doubt they did this. I know Guggenheim was on buy-side, but I’m curious as to who advised the Dodgers.
Comment by Michael Scott — March 28, 2012 @ 11:24 pm
C’mon “colin” don’t mention your 2nd year in college finance stuff here. Let’s all make qualitative assumptions and speculate on possible developments like the true Saber enthusiasts we are =)
Also Dan in Philly has got the “termination” concept all wrong – the price paid is purely a summation of all future cashflows, estimated by EBITDA. It’ll be logically impossible to determine the future sale price when trying to determine the current sale price. Rather, the cashflows are forecasted into “perpetuity” after a reasonable forecast period.
Comment by Bryan__from NZ — March 28, 2012 @ 11:40 pm
Being a Yankee fan, this will surely spur the speculation that the Steinbrenners are going to sell. The whole payroll decrease by 2014 is but one way to maximise the sale price.
Also it’s important to clarify that the Yankee team’s parent company, Yankee Global’s 34% share in YES network profits of $220+ is calculated after the $90m rights fee has been paid to the Yankee team. IIRC, Riveraveblues said that the rights fee is subject to revenue sharing, but YES network profits are not. This’ll obviously open up issues of transfer-pricing to distribute YES network profits illegally to the Yankee team.
Comment by Bryan__from NZ — March 28, 2012 @ 11:51 pm
That’s not the point. The debt must be paid down, as the buyer acquires the seller’s debt, so it still factors into the equation. It is very important to note the amount of debt the Dodgers have, as if you subtract that part of the EV equation it would indicate the Dodgers only are worth about $1 billion,
Comment by Michael Scott — March 28, 2012 @ 11:55 pm
I believe that presently, due to the financing of the deal to buy the team from Fox, the Dodgers are not actually receiving anything from their TV deal. That would make whatever the new deal turns out to be entirely new revenue. That means the Dodgers will be worth not just a bit more due to the new Tv deal, but a tremendous amount more.
It’s tough to value a sports franchise using standard techniques because of the differential impact ownership has on the current business of potential buyers. All of the figures I’ve seen are just discounting cash flows, and putting the “value” at $1.4b or thereabouts. This is obviously less than $2b. But consider the potential impact of this high profile purchase, in LA, on the future profits of Guggenheim Partners. This is a huge (and growing) privately held investment firm. If investment banks know how to do one thing, it’s make a profit. OK, two things. They also know how to destroy a financial system.
Comment by Finance PhD — March 29, 2012 @ 11:31 am
I think the best way would be to use a discounted cash flow model. If we assume that this is an investment, what kind of return do you expect, even to break even? 2.15 B, even with a low ROE of say 5%, means the dodgers would have to earn a profit of 107.5 million per year. That actually seems pretty reasonable to me, with a decent TV deal, but most importantly the parking lots and stadium. However, if you ratchet that up to 12-15%, which is closer to what I’m guessing they’d target, you’re looking at something in the 260-320 million in profit per year (these numbers change depending on the percentage of debt in the equation. For this context, ROE= (Revenue-Expenses)/Purchase Price. If they took out a lot of debt, it’d be (Revenue-Expenses-Interest/debt payments)/(Purchases price-Debt). With a fair bit of debt, it’s very easy to hit the ROE targets, hence why a lot of venture capital firms do it.
So that’s an overly basic Cash flow valuation. You could do discounts of future payments, wonder how the onfield product will improve with better management and luck, all that jazz. I think that, generally speaking, it’ll depend how much McCourt keeps for what the Stadium is worth, cause the development rights there could be worth a ton. BUt just looking at the cash flow, if they run the franchise at all decently they’re not likely to lose any money, especially if the TV deal is worth $100 mill + annually.
Comment by piratesbreak500 — March 29, 2012 @ 11:56 am
God, yet another reason to work at BX, I would have killed to be able to work on that deal.
Comment by Michael Scott — March 29, 2012 @ 12:47 pm
Wasn’t it something like 40% more than the next best offer? How is that not an overpay?
I don’t think there’s much to be gained by discussing the DCF and whether or not the investors are going to be able to realize a descent return on their $2 billion investment. Everyone else making a serious bid had a DCF model too and the next best bid was only about $1.2 billion.
You can plug anything you want into a DCF and generate whatever answer suits your purpose, the key is to understand the inputs.
The “winners” are living with a LOT more risk today than anyone else was willing to take on in order to get this franchise. That should give Dodger fans and baseball fans pause.
These guys so radically misunderstood their competitors that they paid for an entire extra franchise.
As someone who also has worked in M&A for a number of years, I think you get most of this right, but miss two key elements:
1) There is no question that the potential TV payout is probably the biggest driver of this “overpayment”. If everything is above board, all bidders had to forecast/guess what this contract will be worth. Since, on a CF basis, this is probably the largest driver, the value attributed by each party will be heavily influenced on a) the actual value and length of the contract, b) assumptions, if any, for a terminal value on the TV contract (who knows what the face of broadcasting will be in ~20 years) and c) discount rate. The pre-tax difference between $4 billion / 20 years at a 6% discount rate with a terminal value of 10x CF and $2.5 billion over 15 years at a 10% discount rate with no terminal value is $3.4 billion(!) versus $1.5 billion. The difference there, alone, is basically the purchase price of the team!
2) You’ve neglected to factor in the hurdle rate of the different parties. Could it be that Magic et al were just willing to accept say a 6% return and Stevie only wanted above10%? Running very ballpark (pun intended) numbers tells me that by varying the assumptions used, you can easily toggle between the $1.3 bn and $2.1 bn.
I think the biggest thing a lot of people missing are how incredibly material the core assumptions driving this deal are to the value differential, especially in regards to the tv deal, and how each party can view them different while remaining reasonable.
You hit the nail on the head, much more concisely than I did in my reply just above. Except for the last sentence.
All we are hearing is conjecture and rumours about what the other bids were. Obviously the $2bn bid for the team + $150 for the parking lots blew everyone out of the water, but even knowing that, we really don’t know how much higher than truly was than the other bidders. There are a whole host of other factors beyond purchase price which can affect the true economic value of a bid. I think it’s very simplistic, and likely wrong to say that they “paid for an entire extra franchise”…
Maybe I’ve missed it here but has anyone addressed the idea that McCourt was in a position where he had to sell and how that could impact the assessments of the parties interested in the team?
There were multiple parties interested in the club which would push you back toward a true market price but the also all knew that McCourt was in a distressed position. Could the bidders varring perceptions on this issue and their assessments of their competitor’s views on it have also materially impacted what they were willing to bid?
My view bisonaudit, and i’ve seen similar situations, is that in an auction where you know there will be strong competition, the seller’s situation is far less relevant than an auction where there is little competition between bidders. I don’t think the fact that McCourt was in a forced sale situation had much of an impact on overall price at all. Especially for a marquee asset.
While you may be correct in theory, in practice I disagree due to the fact that up to date the value of buying a baseball club has had a premium above the expected cash flows. Any reasonable analysis of sale and purchase of baseball and football teams seems to indicate such a premium, so I don’t see why we can’t assume one for future purchases, as well.
Comment by Dan in Philly — March 29, 2012 @ 3:17 pm
Live sports can’t be DVR’d? I always watch on a DVR, even if it’s just 30-45 minutes after the start. Why sit through commercials when you don’t have to?
How will the purchase increase the earnings or value of Guggenheim? That’s just raw speculation. The only thing I see is the potential for Magic to put his food service co is for concessions. I’m not sure that’s worth much. Thoughts?
I’m guessing but that’s maybe $50 million addition revenue. Maybe? Not significant probably
Thanks for the compliment. I’m an investment banker and it would have made my career to be on this deal.
Running some quick numbers, and unless my assumptions are way off base, I actually don’t think it would be that impactful. Using 45,000 fans per game, $10 per fan concession per game, 10% cash flow margins and a 6-10% discount rate, the value of the concession business is somewhere between $50 million and $100 million.. so it would be a nice extra return, but definitely not what put Magic’s group over the top. I think the returns on concessions are nowhere near as good as people think, but for arguments sake, switching the margins to 30% would give a value of somewhere between $100 million and $200 million
You don’t buy an asset like this for income as much as for appreciation in the value of the franchise. It’s like a house, you buy it for 100K now and hope to sell it for 150K in ten years.
Like wise the Dodgers. The money men bankrolling the purchase believe that the Dodgers might be worth 2.5 or 3.0 Bill in ten years. It’s about the capital gains.