When the Pac-12 Conference announced it was seeking a $750 million investment in exchange for a 15% stake in “Pac-12 NewCo” (a holding company that would control all Pac-12 media and sponsorship rights come ‘24), few expected there to be interest in the offering; there were serious questions about both the valuation ($5 billion) and exit strategy. But Sports Business Journal reported that the conference has received heavy interest from potential stakeholders and is in possession of “multiple bids based on a valuation of $5 billion or more.” That doesn’t mean Pac-12 schools should start spending their cut of a $700 million ($50 million will be allocated to operate NewCo.) capital infusion just yet, though. Commissioner Larry Scott has stated that the conference will move slowly on a decision and could opt to stay the current course (i.e. retain 100% control of their future media rights) with a windfall expected in ’24 (when their existing deals expire).
Howie Long-Short: JohnWallStreet heard from several sources that prospective investors were telling the conference that “$750 million is too much money to invest without having control” and that they viewed the offering as nothing more than a “bridge loan until the conference’s next round of media rights negotiations”, so we were surprised to hear from insiders at The Raine Group (working on behalf of the conference) that there are “4 or 5 formal bids valuing NewCo. between $4.5 billion and $5 billion.” Those bidders are betting that the value of digital/streaming rights will continue to increase and that live sports content will be “evenmore valuable in the non-linear world, than it was in the linear world.”
Even if one of the bids received were on the conference’s terms, with the financial needs of the member institutions varied (remember, 2 are private), there’s no guarantee Larry Scott will have the support needed to proceed; a history of promising deals (think: broadcast distribution with DirecTV) and potentially lucrative opportunities (think: investing in eSports) being struck down by university presidents with different agendas exists. Before the conference can decide on how to address the short-term revenue short-fall, the schools need to decide if they’re willing to make a long-term commitment to each other – certainly, no guarantee with USC intent on retaining optionality (including its potential independence) and UCLA receiving advice to follow them out the door. As it currently stands, the Pac-12 grant of rights agreement expires at the end of 2023. Without a re-commitment, there is no Pac-12 conference come 2024.
The Raine Group projects media rights revenues will increase +200-240% in ’24 (giving investors a 10-12% IRR on a $5 billion valuation), but for the conference to realize that large of an increase digital entities will need to find value in Pac-12 sporting events beyond football and men’s basketball. If you believe that they will, the conference should hold off on selling a stake in NewCo (would be just 8 or 9x ’24 cash flow), but if think revenues grow nominally (because the market for tier 3/4 sports will be limited) taking investment capital at +/- 20x today’s cash flow is a non-brainer. Of course, if the conference believes revenues will climb at least 4x, borrowing money is also an option. Ultimately, with USC flush with cash and hesitant to commit to the Pac-12 long-term (need at least 10 years on a debt deal, longer for equity), I don’t believe the conference ends up taking short-term capital.
Fan Marino: Assuming the schools decide to remain together (which I expect), the conference should withstand the temptation to take on investors. Sure, $60 million might help a program or two keep a high-profile coach, but it’s foolish to believe that the Pac-12 is underperforming in football and basketball because of a revenue short-fall. The conference isn’t winning in those sports because its flagship programs have struggled. USC and Oregon football have missed on head coaching hires several times since Pete Carroll and Chip Kelly took off for the NFL and Arizona basketball has been decimated by a series of false media reports. Secular issues also plague the conference (think: more talent in East). None of those problems are going to be solved with capital (not to mention $60 million doesn’t buy you much in college sports these days), so why not retain all future media rights revenues and hope to cash in – as Larry Scott has been promising – come ’24.
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