Are The Dodgers Worth $2 Billion Dollars?

This isn’t one of those articles where the headline is written as a question and then I attempt to answer the question in the post. This time, I really am asking a question that I don’t think I know the answer to, and I’d love to see a good discussion in the comments about the $2.15 billion price that Magic Johnson’s group just paid for the Dodgers.

Here’s what we know.

In 2009, Tom Ricketts bought the Chicago Cubs and Wrigley Field for $845 million. They got the team, the stadium, and a 25 percent stake in Comcast Sportsnet Chicago.

In 2010, Nolan Ryan and Chuck Greenberg’s group purchased the Rangers out of bankruptcy for about $575 million. The stadium was not included in the sale, but the Rangers had a new TV rights contract due, and were to negotiate a deal reportedly worth $3 billion over the next twenty years. I’ve seen that figure disputed, with estimates that it could be as low as $1.6 billion instead, but it was clearly a large contract for a lot of money.

Last year, the Houston Astros were purchased for $615 million, a reduced price negotiated to include their agreement to move to the American League as part of the deal. The Astros deal, as far as I can tell, did not include ownership of the stadium or a stake in any television station. However, the Astros and Rockets agreed to join Comcast Sportsnet Houston and have their games telecast on that network beginning in 2013, and the price reflected an opportunity for the team to increase their TV contract revenues in the short term.

Today, the Dodgers were purchased for $2.15 billion, which includes the team, the stadium (including the parking lots!), and the opportunity to negotiate a massive new TV rights deal beginning in 2013.

There’s a lot we don’t know, of course, but here’s my fundamental question – how did we get from three teams being sold for between $600 and $900 million over the last three years to one being sold today for three to four times those prices?

Yes, the Dodgers have a huge new revenue stream coming in with their TV contract, though I’m not sure I buy into the $300 million per year estimates that are being floated around as as a possible price point. Those numbers are based on what the Lakers got in their TV contract, and I haven’t seen much evidence that we can just take per-game payouts from one sport to another and apply them evenly, even within the same market. The Dodgers are going to get a lot of money from their next TV deal, but will it be enough to justify the massive premium that was paid for the franchise in comparison to what other teams have been selling for?

I honestly have no idea. I’m not in a position to say that this bid is too high, or that Magic’s group definitively overpaid. They obviously saw the books and had more access to the team’s financials than any of us do, and they’re not extremely rich businessmen because they lack the understanding of how to make sound investments. I’d just love to know what factors specifically allow the Dodgers to go for a 250% premium over what the Cubs were purchased for.

Explanations? Theories? Links to good, sound pieces on the fundamentals of the Dodgers finances? I’d love to see them in the comments.



Print This Post



Dave is the Managing Editor of FanGraphs.


Sort by:   newest | oldest | most voted
Earl
Guest
Earl
4 years 6 months ago

You have to also factor in the land around Dodger Stadium and possible plans to create a an entertainment area like L.A. Live around Staples Center.

Also, a football stadium could be constructed on the land near Dodger Stadium for a new NFL team.

Those factors add significantly to the purchase of the Dodgers.

colin
Guest
colin
4 years 6 months ago

How much are those reasonably likely or unlikely to happen and were they properly discounted for their probability?

Psst
Guest
Psst
4 years 6 months ago

but the land around the stadium stays with McCourt

Table
Guest
Table
4 years 6 months ago

Nope he’s a minority owner of the lots and Magic’s group can veto anything he does

Aggie E
Guest
Aggie E
4 years 6 months ago

These land development deals especially over the last few years all seem to fall apart.

colin
Guest
colin
4 years 6 months ago

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.

Dan in Philly
Guest
Dan in Philly
4 years 6 months ago

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.

Anon
Guest
Anon
4 years 6 months ago

You are not considering the time value of money…that’s why you have to look at discounted cash flows (as suggested by the initial poster)

Dan in Philly
Guest
Dan in Philly
4 years 6 months ago

True, but I didn’t want to overcomplicate the discussion. Factoring in the IRR and NPV and such doesn’t really change the point.

Steve Balboni
Member
4 years 6 months ago

I imagine the “da” in EBITDA are very valuable (even after IRC 1056 was repealed). Worst case scenario most of the purchase price is good will and they amortize $133,333,000 a year.

(Writing “goodwill” made me LOL: McCourt probably increased Dodger goodwill by 500%.)

Tim
Guest
Tim
4 years 6 months ago

you cant price something using a future sale price. It will add into your return but calculating a price only will factor future cash flows discounted to the current period

Chris
Guest
Chris
4 years 6 months ago

@SteveBalboni
Wait… “EBITda” is a real thing? I thought colin suddenly switched to Pig Latin.

dick
Guest
dick
4 years 6 months ago

you are the greater fool

Bryan__from NZ
Guest
Bryan__from NZ
4 years 6 months ago

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.

Dan in Philly
Guest
Dan in Philly
4 years 6 months ago

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.

ML
Guest
ML
4 years 6 months ago

You don’t discount ebitda, you have to reduce for capital expenditures (which could be significant) and borrowing costs (undisclosed)

Eric R
Guest
Eric R
4 years 6 months ago

Well, Forbes recent guesstimates had the Dodgers at $1.4B [which included the stadium and parking lots]…

Atleast Frank'sgone
Guest
Atleast Frank'sgone
4 years 6 months ago

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.

Anon
Guest
Anon
4 years 6 months ago

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

prm37
Member
prm37
4 years 6 months ago

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).

Stephen
Guest
Stephen
4 years 6 months ago

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.

Table
Guest
Table
4 years 6 months ago
soupman
Member
soupman
4 years 6 months ago

From the tidbits I heard, there may have been other offers in the same (or higher) range…so it sounds like Magic & Co. aren’t the only ones who valued the Dodgers that way.

So I take you as asking: ‘how long before the new owners recoup their initial investment (if ever)? – and how are those figures derived?’

mcbrown
Member
mcbrown
4 years 6 months ago

According to Bloomberg, the next highest bid was $1.3B, from the Steve Cohen-led group. So… yeah, $2.3B looks like a reach..

soupman
Member
soupman
4 years 6 months ago

jamie mccourt is probably pissed atm

Ignorant Tool
Member
Ignorant Tool
4 years 6 months ago

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.

Jon Weisman
Guest
4 years 6 months ago

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.

Will
Guest
4 years 6 months ago

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.

Anon
Guest
Anon
4 years 6 months ago

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

Will
Guest
4 years 6 months ago

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.

Rob
Guest
Rob
4 years 6 months ago

Yes indeed. Most of the media analyses are likely far underestimating the future revenue streams.

prm37
Member
prm37
4 years 6 months ago

And MLB’s media contracts (shared equally among the 30 teams) expire in 2013, which will create a huge bidding war between Fox, ESPN, Turner, NBC Sports, and more revenue to teams, enhancing value.

Jon Weisman
Guest
4 years 6 months ago

Sorry – that first line should say “$300 million”

Jack
Guest
Jack
4 years 6 months ago

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.

Steve Balboni
Member
4 years 6 months ago

The simple answer is “yes”, the team is “worth” what someone actually paid. While logical, it doesn’t contain the interesting or educational analysis provided by others.

Brian
Guest
Brian
4 years 6 months ago

Just like Barry Zito was worth $126 million

Bryan__from NZ
Guest
Bryan__from NZ
4 years 6 months ago

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.

Jon Weisman
Guest
4 years 6 months ago

Here’s some background information on the TV rights drama that I wrote in December.

http://www.variety.com/article/VR1118047107

marc w
Guest
marc w
4 years 6 months ago

That’s a great article, Jon – thanks.

fergie348
Guest
fergie348
4 years 6 months ago

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..

rdillon99
Guest
rdillon99
4 years 6 months ago

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.

Tyler
Guest
Tyler
4 years 6 months ago

The bankruptcy laws and McCourt’s divorce have a lot to do with this.

Joe N.
Guest
Joe N.
4 years 6 months ago

I’ve discussed a breakdown of baseball revenue streams and done some forecasting here:

http://battingcagehero.wordpress.com/2012/03/28/economics-of-baseball-dodgers-acquisition-a-likely-overpay/

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

Pat
Guest
Pat
4 years 6 months ago

Hypothetically, what would the Yankees go for if the Dodgers just went for $2 Billion?

Steve
Guest
Steve
4 years 6 months ago

Beat me to it, Pat.

Only Dr. Evil even knows the name of that number….

Omar
Guest
Omar
4 years 6 months ago

Probably four. Big ass stadium, own TV network, and huge legacy.

Jon Weisman
Guest
4 years 6 months ago

Joe N., I think your piece dramatically undervalues what the post-2013 Dodger TV rights are now worth.

Steve
Guest
Steve
4 years 6 months ago

Perhaps he factored in that the advertisers will only be willing to buy commercials between the 3rd and 7th inning…

Jon Weisman
Guest
4 years 6 months ago

Hey now, what an original joke!

Joe N.
Guest
Joe N.
4 years 6 months ago

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.

Jon Weisman
Guest
4 years 6 months ago

I’m not sure why you’re not sold on it, when it just happened 30 miles south of Dodger Stadium.

Joe N.
Guest
Joe N.
4 years 6 months ago

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.

jim
Guest
jim
4 years 6 months ago

hamels + votto, though….

Will
Guest
4 years 6 months ago

I can’t imagine the Dodgers signing a deal worth less than the Angels, and every indicator suggests it will be worth more, assuming of course the Dodgers don’t form their own RSN.

Also worth noting is that before last year, the Dodgers had averaged EBIT (not EBITDA) of $26 million for five years, according to Forbes.

Nivra
Member
Nivra
4 years 6 months ago

Seriously?

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.

Night Manimal
Guest
Night Manimal
4 years 6 months ago

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.

Aggie E
Guest
Aggie E
4 years 6 months ago

Word is LA is gonna sign Josh Hamilton away from Texas for 7 yrs 150 million…Sorry to see you go Josh

Omar
Guest
Omar
4 years 6 months ago

Well they’ll have to sink another 300M into the Dodger TV network, it’ll be totally worth it though, but it’s not as if the post 2013 TV rights are pure gold.

Jon Weisman
Guest
4 years 6 months ago

In December, the Angels signed a 20-year, $3 billion local TV rights deal. The Dodgers’ rights are worth at least that.

cubbluie
Guest
cubbluie
4 years 6 months ago

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.

larry
Guest
4 years 6 months ago

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.

zach
Guest
zach
4 years 6 months ago

What does McCourt pocket from this deal?

Joe N.
Guest
4 years 6 months ago

More than he should

gonfalon
Guest
gonfalon
4 years 6 months ago

amen to that, brother.

Scott Willis
Guest
4 years 6 months ago

I think I have seen that he should have roughly a billion left over after debts owed and the money owed to his wife.

Not sure exactly but still a lot of money.

Stoph
Member
Stoph
4 years 6 months ago

Could there be an element of competition having driven up the price? With 5+ serious bidders it is possible that the participants were more aggressive in bidding up than in previous sales.

Doesn’t explain such a significant difference, but could be a large factor.

Nathan
Guest
Nathan
4 years 6 months ago

You have to figure that there was a good amount of competition for ownership of the team, so nobody was going to get away only offering market value when there were so many other suitors.

Kyle H
Member
Kyle H
4 years 6 months ago

well, 2 billion was the market value. as in, the value the market dictated.

Kyle H
Member
Kyle H
4 years 6 months ago

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.

Steve Balboni
Member
4 years 6 months ago

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.

Kyle H
Member
Kyle H
4 years 6 months ago

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.

hmk
Guest
hmk
4 years 6 months ago

i told my roommate that the dodgers got sold for $2 billion and then asked him what he thought the yankees were worth. he said “$10 billion?”

Mike
Guest
Mike
4 years 6 months ago

Cool story, bro

Nivra
Member
Nivra
4 years 6 months ago

The WSJ has this blurb:

“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.

Bob Loblaw
Member
Bob Loblaw
4 years 6 months ago

The $2 billion figure includes the amount required to pay off the approximately $1.1 billion of debt.

colin
Guest
colin
4 years 6 months ago

That does not affect the value of what a third party is willing to pay for the company in a positive manner.

Michael Scott
Guest
Michael Scott
4 years 6 months ago

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,

Bisonaudit
Guest
Bisonaudit
4 years 6 months ago

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.

soladoras
Member
soladoras
4 years 6 months ago

The A-Rod contract wasn’t an overpay by the Rangers

Bisonaudit
Guest
Bisonaudit
4 years 6 months ago

Wasn’t it something like 40% more than the next best offer? How is that not an overpay?

channelclemente
Guest
4 years 6 months ago

$15.00 per bottle Miller light?

Anon
Guest
Anon
4 years 6 months ago

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

Kyle H
Member
Kyle H
4 years 6 months ago

I fell asleep halfway through this. More than likely the money was dealt from a briefcase, that had a lightbulb that turned on upon opening it.

Night Manimal
Guest
Night Manimal
4 years 6 months ago

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?

Kyle H
Member
Kyle H
4 years 6 months ago

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.

Night Manimal
Guest
Night Manimal
4 years 6 months ago

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.

http://www.baseballprospectus.com/article.php?articleid=16297

doug K
Member
doug K
4 years 6 months ago

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.

John
Guest
John
4 years 6 months ago

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.

Jc
Guest
Jc
4 years 6 months ago

How does Magic’s ownership of Sodexo Magic impact your analysis? Does he gain significantly if he can put Sodexo in for concessions at Dodger? Thoughts?

Incidentally, this is the best analysis here. There are some crazy posts about future sale price and making a profit if you sell the business for 75% of what you paid.

Thanks guys.

John
Guest
John
4 years 5 months ago

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

dormroomgm
Member
4 years 6 months ago

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.

Ben Natter
Guest
Ben Natter
4 years 6 months ago

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

pft
Guest
pft
4 years 6 months ago

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.

Michael Scott
Guest
Michael Scott
4 years 6 months ago

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.

Steve Balboni
Guest
4 years 6 months ago

The Blackstone Group ran the auction and advised McCourt.

Bisonaudit
Guest
Bisonaudit
4 years 6 months ago

Well when the winning bid is $2.1 billion and then next bid is apparently in the $1.2 – $1.4 billion range, that’s pretty easy money for Blackstone Group.

Michael Scott
Guest
Michael Scott
4 years 6 months ago

God, yet another reason to work at BX, I would have killed to be able to work on that deal.

Jon
Guest
4 years 6 months ago

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.

Finance PhD
Guest
Finance PhD
4 years 6 months ago

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.

Jc
Guest
Jc
4 years 6 months ago

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

piratesbreak500
Member
piratesbreak500
4 years 6 months ago

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.

Jc
Guest
Jc
4 years 6 months ago

5 percent is too low for a discount rate. If they wanted a 5 percent return there are alternatives to buying a baseball team.

Bisonaudit
Guest
Bisonaudit
4 years 6 months ago

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.

John
Guest
John
4 years 6 months ago

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”…

Bisonaudit
Guest
Bisonaudit
4 years 6 months ago

Yeah, that last bit was probably over the line.

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?

John
Guest
John
4 years 6 months ago

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.

JDub
Guest
JDub
4 years 5 months ago

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.

wpDiscuz