Bloomberg published a pair of stories this week indicating that with team valuations soaring, U.S. pro sports leagues have become concerned about the dearth of prospective investors wealthy enough to buy in. Scott Soshnick reported on Tuesday that the National Basketball Association was considering the formation of “a new capital vehicle that could purchase passive, minority interests across multiple NBA teams”, before writing on Thursday that the National Football League “sought input on possible changes [to bylaws that would make it easier for a billionaire to acquire principal ownership interest in a team] from a quartet of firms that have in various capacities participated in its franchise sales; Allen & Co., Inner Circle Sports, PJT Partners and Proskauer Rose LLP.” Last off-season, the league revoked a rule that had previously precluded the cross-ownership of NBA, MLB or NHL teams in markets home to an NFL club.
Howie Long-Short: The NFL is considering revamping its guidelines to ensure team valuations continue to rise. While the last few clubs to have sold have been “bottom quartile franchises” (see: Buffalo, Carolina) – which explains how the Nets managed to command a higher valuation than the Panthers – a source familiar with the details of recent team sales suggested that if one of the league’s marquee franchises were to hit the open market it would sell for upwards of “$5 billion and how many people can write the check necessary to buy that team?” Raising the debt limits (currently $350 million), reducing the amount of equity one needs to buy in (currently 30%) and sweetening inducements for limited partners are all ways for the league to grow the prospective investor pool.
Speaking of the Panthers sale, Soshnick noted that when the team was on the market back in ‘18, billionaires Ben Navarro and Alan Kestenbaum were both unsuccessful in their bids to acquire the franchise, but it remains worth wondering why just a handful of investors pursued the club. Our source attributed the tempered interest in the Panthers franchise to the Carolina market and the team’s existing stadium situation, which required a lot of work.
Some have suggested that while the list of Americans with the capital to buy a pro sports team with a $5 billion valuation is relatively short, on global basis there are no shortage of uber-wealthy individuals. While true, there’s certainly doubt as to how motivated someone with little interest in American football would be to buy an NFL team. Pro sports ownership remains a bit of a passion play.
As for the NBA, skepticism remains about its plans to develop an investment vehicle for the purpose of acquiring minority shares of individual teams. On the surface, the premise of providing team owners with more liquidity makes sense, but there would seem to be an inherent conflict of interest; if the league pays a premium for a limited stake in a franchise, it becomes less attractive as an investment and if the league buys in at a bargain rate, they’re failing to serve the L.P. The plan is to flush out the vehicles’ structure and terms at the league’s owners meeting on 9.20.
Speculation exists that the NBA is creating this ownership investment pool out of necessity – that there simply aren’t enough people willing to pay hundreds of millions of dollars for equity interest with no control. Our source says that’s not the case – that there’s no shortage of people who want to own a piece of a team, but if it were it’s unclear how the league’s involvement changes that dynamic.
It’s possible that the league believes institutional money will fill the limited partnership opportunities in its clubs and keep valuations rising. What’s less apparent is “why an institutional investor would want common equity in a team – they’re not going to experience double digit growth forever. Earning 7% on illiquid common stock is a tough hurdle for P.E. to get over.” Of course, the league doesn’t need to create a new investment vehicle to take public money; both MSG and Comcast currently have stakes in teams.
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