(Citrin Cooperman is a proud partner of Front Office Sports)
Steven Cohen, the billionaire hedge fund manager who recently ceased negotiations to buy the New York Mets, had a deal on the table for $2.6 billion for an 80.0% stake in the team. Based on the Met’s 2018 revenue -the most recent publicly available information, this would imply a 21.4x revenue multiple and a capitalization rate of 1.7%.
A capitalization rate is the implied rate of return that an investor would expect when investing in a given asset. A capitalization rate at this level is akin to investing in a 20-year U.S. Treasury bond (2.25% as of December 31, 2019) which suggests that investing in the Mets is very low risk.
The valuation of a typical operating business is based on one of two methods: the income approach or the market approach. The income approach is derived from the anticipated future returns of a business discounted back at a risk-adjusted rate of return. The market approach is based on multiples of businesses in similar industries and financial situations as the subject company.
Sports franchises are generally not valued using an income approach, as many franchises claim persistent operating losses and do not produce positive cash flow. Instead, valuations of sports franchises are loosely based on the market approach, where a multiple of revenue is applied. However, these valuations are more in the form of a strategic valuation (i.e. the value to a specific buyer) rather than fair market value (i.e. the value to hypothetical market participants) as transactions of prior sports franchises include premiums paid for the perceived “ego” or “trophy” value afforded to the new owner.
Many casual sports fans are familiar with Forbes’ annual valuations of sports teams. However, it is important to note that these Forbes valuations are based on a proprietary methodology and are more akin to price than value. There are some key differences between price and value. Value is driven by cash flows from existing assets, growth in cash flows, the quality of growth and risk inherent in the subject industry and the subject asset. Price is supply and demand.
Due to the exorbitant price of a sports franchise, the most likely buyer is an individual billionaire or a consortium lead by a high net worth individual. There are currently 621 billionaires in the U.S. (according to Forbes) and only 123 professional sports teams. Whereas a typical business owner would consider the expected future cash flows of an asset in determining its value, the billionaires who invest in sports franchises often do not receive a return in the form of cash year over year. Instead, they realize a return on their investment when it is sold. Therefore, supply and demand retains an important role in the valuation of sports franchises.
The information and insight in this article was provided by Jennifer Cohen, a manager in the Forensic, Litigation, & Valuation Services Practice of Citrin Cooperman.