In Dodgers sale, high finance comes to sports
Sports can be an attractive topic on Wall Street, but the recent agreement to sell the LA Dodgers might be the most significant demonstration of the monetization of a sports operation.
The sale price of around $2 billion shocked the sports business world. In justifying the sale price, David Carter, director of the Sports Business Institute at USC, told the Wall Street Journal, “If you realize it's not a baseball deal first but rather a television and entertainment deal that also comes with a real-estate opportunity, then you can begin to scratch your way back toward justifying the price.”
The new buyers are financiers themselves and are structuring the deal like they would one of their investments. The biggest value in the purchase is the TV rights. The current rights expire in 2013, leaving the new owners with free reign to negotiate their own deal. The LA Times has an estimate as high as $4 billion for the sale of the broadcasting rights. However, should the team decide to create its own independent broadcasting network, the WSJ said the team could reap $300 million annually in subscriber charges to cable companies before even selling any TV advertising. It’s no wonder private equity firms were interested in buying a piece of the Dodgers. Just like a more typical corporate buyout, they are borrowing almost all the money needed.
Rich financial individuals already are making money with their ownership of sports teams, so it is only a matter of time before their private equity firms start investing. It comes as no surprise if you look at the fundamentals. Private equity is often after two things: undervalued or underperforming businesses to turn around or cash to exploit. Sports teams apply to both criteria. The TV money, like in the Dodgers deal, is their cash stream to tap into.
Sports teams can be natural targets as turnarounds, as wealthy individuals owning teams often don’t have profit maximazation as one of their top priorities. This comes at a cost to the fan. Private equity wants a return on their investment and might care more about balancing the books than a team’s success. Private equity firms also might only be interested in a short-term flip of the team, instead of a longer-term investment. Their motives for selling are purely financial, with zero emotional commitment. Imagine if a private equity firm bought an MLB team, signed many stars to expensive long-term deals, then cashed out when the team won a World Series. Or worse, if private equity buys a team, sells its players or properties, then pockets the money and walks.
We might soon see that happen.
TowerBrook Capital Partners bought a 70 percent stake in the NHL’s St. Louis Blues five years ago and already wants out of its investment. They couldn't agree on a share price with the other owner, so they forced a sale of the entire business and are putting St. Louis at risk of losing its team. While the sale of the team will have to be approved by the NHL, it will be interesting to see what shape the team is in at the time of sale, and who they are looking to sell to. TowerBrook owns everything from Jimmy Choo shoes to liquor stores and, to them, the Blues are nothing but another asset.
Bill Sayer is a financial analyst in the insurance industry and holds a degree in economics. A native of Upstate New York, Bill enjoys watching college football, the NFL, NHL and Premier League soccer from his home in Palmyra. Have a suggestion, link or question?