Selling The Astros: Pretty Good, Akshully

If you follow the business side of baseball or wear a 10-gallon cowboy hat all day, you may well know the Houston Astros’s owner, Drayton McLane Jr., is preparing to sell the franchise. Reports have diverged on what the final selling cost might be — anywhere from a paltry $650 million to a respectable $680 million.

Now that McLane begins to close the baseball chapter of his life, my knowledge of the wealthy elite informs me he will now spend the remainder of his days getting in shape whilst swimming laps in his massive vault of gold coins. While he readies his swimming top hat and alligator-skin booties, let’s take this time to reflect on McLane’s investment.

The outgoing Astros owner originally purchased the team in 1993 for $103 million (according to Forbes). The honorable Texan made his fortunes from Wal-Mart and — like most wealthy Americans — from his parents. Let us then play Investment Pretend! — the game little, aspiring investors play with their Paddington Bears in their expansive mansion bedrooms.

What if McLane, instead of purchasing the Astros, had just left his moolah in the ol’ company? Or, what if he decided to put it in a (generally considered) safer investment, General Electric? Or what about IBM, a long-standing powerhouse, who in 1993 was facing serious financial difficulties (i.e. a risky, high-upside investment)?

The Do Nothing approach (leaving the cash in Wal-Mart shares) would have earned McLane a real return of 7% (real meaning after inflation). His gamble on the Astros purchase earned a staggering 17-18% annually (again, after inflation)! Of course, this is just in capital gains; McLane may very well have been drawing revenue (or, likewise, seeing losses) on a yearly basis. Unfortunately, we may never know exactly how his accounts looked during that period.

Had McLane put his money in GE, he would have earned a modest 5% after inflation (had he sold his Pretend GE Stock before the the 2008 financial crisis, he would have made much more of a killing). IBM, on the other hand, came back strong and made millionaires out of gamblers. Had McLane put the heft of his financial powers into a near-failed IBM, he would have (a) been incredibly stupid and (b) amassed enough wealth to eat Platinum Flakes for breakfast and resurrect the dinosaurs just to hunt them back into extinction.

Granted, this is far from a complete survey of his financial options — just a fun-sized sampling. He could have easily done a million different things with his millions — but we can still say this pretty easily: Investing the Houston Astros was a wise financial decision. An 11% real return (the return he made after considering he could’ve made 7% via Wal-Mart) on any investment is straight robbery.

Of course, there’s a variety of reasons McLane can get such an absurd return:

  • The MLB has tightly controlled barriers to entry. Joe Millionaire has a very little shot at owning an MLB franchise. This means few competitors can come and take a market share away — and certainly no millionaire can just make a new baseball team and say: “These Springfield Isotopes will be now be in the MLB.”

    It doesn’t work like that — the MLB brings with it lucrative TV, radio, and advertising contracts, as well as long and profitable relationship with communities and the cultural history of America, Canada, and many other countries.

  • The Astros had an excellent run from the late 1990s to the mid-Aughts. On top of that, they are a not-young franchise (as in, they’re an expansion team from the 1960s) and have built strong ties with Houston area (as seen by they’re their [ARE YOU HAPPY NOW?!!?!] decent-to-good attendance).
  • The MLB seems to be peaking a little. The growth and success of MLBAM (Advanced Media) and the post-steroids era high may mean McLane is selling at the optimal time. Attendance is easing downward right now, but the season is still early.
  • I imagine finance nerds will shortly come from the woodwork, tossing pitchforks and financial calculators my way, claiming I’ve done it all wrong. That may be true, but we can all agree on this fact, no matter the final sale price: McLure made bank.



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    Bradley writes for FanGraphs and The Hardball Times. Follow him on Twitter @BradleyWoodrum.


    Sort by:   newest | oldest | most voted
    Dave
    Guest
    Dave
    5 years 16 days ago

    “amassed enough wealth to eat Platinum Flakes for breakfast and resurrect the dinosaurs just to hunt them back into extinction.”

    Outstanding Bravo. Great line.

    steex
    Member
    steex
    5 years 16 days ago

    “Now that McLane begins to close the baseball chapter of his life, my knowledge of the wealthy elite informs me he will now spend the remainder of his days getting in shape whilst swimming laps in his massive vault of gold coins.”

    I’m glad I’m not the only one who got his knowledge of the wealthy elite from Scrooge McDuck.

    Cass314
    Guest
    Cass314
    5 years 16 days ago

    Just out of curiosity, what would have happened if he’d put his money in, say, a broad index fund? What did the rest of the market do during the period?

    Adam
    Guest
    5 years 16 days ago

    Over the same period of time, the S&P 500 index has roughly tripled in price per share, from $435 to $1,357.

    http://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=3&c=1993&d=04&e=11&f=2011&g=m&z=66&y=0

    I’m too lazy to work out the math of the ROI.

    fang2415
    Guest
    fang2415
    5 years 16 days ago

    11%ish? Astros still looking good.

    Mitch
    Guest
    Mitch
    5 years 16 days ago

    Well, you forgot dividends in your financial option calculations…

    Definitely agree that capital gains have been the big source of wealth for team owners, though.

    Dan Summers
    Guest
    Dan Summers
    5 years 16 days ago

    You also forgot stock splits, which for Wal Mart has happened twice since January 1993.

    fang2415
    Guest
    fang2415
    5 years 16 days ago

    That sounds to me like it could be a killer for the Wal-Mart comparison. Still though, if my bank offered me a 17% annual ROI, I don’t think I’d throw them out of the office.

    joe
    Guest
    joe
    5 years 16 days ago

    No, if you look at a history of a stock the splits are already factored.

    Say if a stock splits 2:1, the historical stock price will be cut in half.

    Dustin
    Guest
    Dustin
    5 years 16 days ago

    One split being factored in that took place between 1993 and 2011 would mean that his ROI should have doubled. He would be holding twice as many shares as he originally bought and would get the price per share for that many shares, so double the money. If there were even more stock splits, his ROI could have been even higher.

    Dustin
    Guest
    Dustin
    5 years 16 days ago

    There has been 2 stock splits since 1993 The first one, which took place in February 1993, and the 2nd in March 1999.

    So his intial investment was $103 million at 16.28/share. That means he had 6,326,781+ shares. Split them twice and you get 25,307,125+ shares. Take that number by the stock price in April 2011, $54.98, and you get a total of $1,391,385,749.

    That is just a dollar total without inflation, dividends, etc. It is definitely a higher number than he is going to get with the Astros, meaning a higher ROI(so didn’t actually calculate the number). If we called the dividends from Walmart stock or the Astros income depending on which route he chose a wash, then he was not smart to get rid of Walmart.

    Timmy C
    Guest
    Timmy C
    5 years 15 days ago

    Joe is correct when he says that historical prices are adjusted to account for stock splits. If you use the charts on Google Finance, it will even show when they happened and how many shares you got. Otherwise there would be random spots on the chart where the stock price tumbles 50% in one day, which is not the case.

    Had you picked up a WSJ in 1993, it would have shown Wal-Mart’s price as $65.12 per share, not $16.28.

    Bradley’s math stands!

    Nick
    Guest
    Nick
    5 years 16 days ago

    McLure made bank? I remember him such some shows as Planet of the Apes, the Musical.

    CheeseWhiz
    Guest
    CheeseWhiz
    5 years 16 days ago

    I hate every ape I see, from Chimpan-A to Chimpan-Z!
    Oh you’ll never make a monkey out of me!

    My echo and bunnymen
    Guest
    My echo and bunnymen
    5 years 16 days ago

    If only people would quote the better show set 1000 years in the future.

    Jason B
    Guest
    Jason B
    5 years 15 days ago

    Discreet AND discrete! Now with more discretion!

    Patricio
    Guest
    Patricio
    5 years 15 days ago

    I love you, Dr. Zaius!

    Greg
    Guest
    Greg
    5 years 15 days ago

    Troy is exactly the sort of millionaire that MLB is committed to excluding from the owner’s club. Especially after those embarrassing personal issues. Maybe he can rebuild his reputation if he takes care to be seen associating with more human women.

    Kick me in the GO NATS
    Guest
    Kick me in the GO NATS
    5 years 16 days ago

    Due, what about dividends? Wallmart, IBM, and GE are significant dividend paying companies.

    joshcohen
    Guest
    joshcohen
    5 years 16 days ago

    GE’s annual dividend yield was roughly 6% (less in the 2000s, more in the 90s) for that time frame which, in dollars terms was roughly $1/share/year. if he started with 13.7 million shares, over eighteen years, that’s another ~250 MM in dividends. that’s if he chose not to do dividend reinvestment and instead filled his mcduck tower with gold coins. had he reinvested it in ge stock, it would obviously be more than 250 MM.

    Andrew Swartz
    Member
    Andrew Swartz
    5 years 16 days ago

    Baseball Nerds are not Allowed to Call Finance Nerds “Nerds”.
    Also I am assuming the overlap between the groups is significant. You are also ignoring the fact that Mclane probably had some operating profits in most years, Borrowed a portion of the 100M he paid from the bank to buy the Astros and unlike an investment in a Stock he was able to Depreciate the investment in the club which has value.

    Terence
    Member
    Member
    Terence
    5 years 16 days ago

    “Mclane probably had some operating profits in most years”

    As an Astros fan I can tell you that Mclane had operating profits in some years but not most. My dad (who is a CPA in Houston) and I were talking about this exact topic last week and he was working under the assumption that Mclane probably sunk another $100M in operating costs into the Astros (or exactly one Carlos Lee). Still a nice return on investment but not near as gaudy a number.

    Jason
    Guest
    Jason
    5 years 16 days ago

    “amassed enough wealth to eat Platinum Flakes for breakfast and resurrect the dinosaurs just to hunt them back into extinction”

    Great line. Second the comment from Dave.

    Can we basically surmise that owning a sports franchise is pretty much one of the best investments you can make?

    a) you will always have a market to sell into
    b) Barriers to entry are high, as you stated

    S&P would have given something close to 7.5/annual return if you factored in the dividends etc.

    Phil K.
    Guest
    5 years 16 days ago

    I think your calculation contains a typo. IBM has been hovering around $170, not $117, and the 52-week low is $120.

    Fat Spiderman
    Member
    Fat Spiderman
    5 years 16 days ago

    Not to be a dick, but really, “as seen by they’re decent-to-good attendance”?

    They’re = they are. Their = belonging to them. It’s really not that hard.

    Jason B
    Guest
    Jason B
    5 years 15 days ago

    Spiderman is a well-known grammar d!ck. Always has been since he got too flabby to fight crime and Mary Jane left him…

    Tim
    Guest
    5 years 16 days ago

    Imagine if he had bought Apple stock!!! he’d be a billionaire now for sure.

    Taylor
    Guest
    Taylor
    5 years 16 days ago

    As an Astros fan, I am obliged to observe that this is the only possible thing the franchise could do to merit good reviews right now. What a mess! Here’s hoping new ownership brings new and improved management.

    Zach
    Guest
    Zach
    5 years 16 days ago

    Fantastic article, I love the business side of things. :)

    DC
    Guest
    DC
    5 years 16 days ago

    I always appreciate an article on my (rightfully) forgotten ‘stros, but this article is wildly inaccurate on the return analysis side. Conservative rough estimate of dividend (non-compounding, non-inflation adjusted) and split adjusted returns are closer to:

    WMT: %500 ROI, including $100M in dividends paid
    GE: %3,100 ROI, including $1.5B in dividends paid
    IBM: %3,800 ROI, including $560M in dividends paid

    If you start assuming re-investment of cash as XIRR and other return calcs do, you are looking at enough scrill to buy the entire AL East (as in the actual franchises, although clearly that’d be a pretty poor investment move).

    As you mentioned, we’ll never know what sort of revenue Drayton was taking/hemorrhaging from the club, but if the Marlins’ books we got to see last year are anything to go by, i think its safe to say he wasn’t hurting for liquidity during his tenure as owner.

    Moral of the story, its always nice to start with $159,000,000…

    Antonio Bananas
    Guest
    Antonio Bananas
    5 years 16 days ago

    If you want to see something really insane look at how much Steinbrenner made off the Yankees.

    Phils Goodman
    Member
    Phils Goodman
    5 years 15 days ago

    “11% real return…on any investment is straight robbery.”

    Indeed it is. Professional sports grow ever more sickeningly profitable and exclusionary by the year. And it’s clearly not just driven by the players — it’s the whole package.

    Drayton McClane Jr.
    Guest
    Drayton McClane Jr.
    5 years 14 days ago

    There really was no skill involved in me making this hefty profit.

    I touched me number one dime and it brought me good luck.

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    Guest
    4 years 7 months ago

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