Bloomberg’s Eben Novy-Williams reported on October 11th that the National Football League is “considering drastically increasing the amount of money prospective owners are allowed to borrow.” The proposed change would increase the league’s debt limit from $350 million to +/- $1 billion, significant with NFL bylaws requiring principal owners to maintain at least a 30% stake in the franchise and team valuations now north of $2 billion. The increase would only be applicable to new acquisition financing, it would not enable existing ownership groups to take money off the table.
The NFL isn’t the only league concerned about the dearth of prospective investors wealthy enough to buy in. The NBA has discussed the formation of an investment vehicle that would buy minority shares in a collective of teams (the league also increased its debt limit by $75 million to $325 million in June ’18) and Bloomberg’s Scott Soshnick just reported yesterday (Oct. 16) that MLB is “now allowing investment funds to take minority stakes in multiple clubs.”
Howie Long-Short: High profile bankruptcies (think: Dodgers, Coyotes) have made pro sports leagues fiscally conservative, but skyrocketing team valuations (see: NFL teams +175% since ’09) and low debt limits are now hampering owners’ ability to find capable buyers and to get deals done at the numbers “everyone thinks these [teams] are carrying.” A source intimately familiar with team sales transactions suggested that the “paramount consideration [for this change] is what the league saw last summer with the Panthers deal. Obviously, Tepper had the balance sheet to do the deal on his own, but none of the other consortiums really did.” The lack of viable competition for the franchise contributed to Tepper paying “less than what the market expected [the team] would command.”
Raising the debt limit is the “simplest, most elegant solution to solving the largest problem in the sports M&A space” (i.e. a shrinking potential buyer pool); remember, the league already did away with its cross-ownership bylaw. And it should be noted that even with a $700 million increase our source said, “the loan to value ratio [for these teams] would be fairly conservative” (assumes 25% to 33%). He suspected that “there would be robust demand on the lending side to provide the product” – NFL teams are a safe asset.
The NFL has said it would not consider a financing vehicle akin to what the NBA has discussed. Concerns regarding “the perks of ownership, how an investor would get liquidity on the tail-end and how the league would go about establishing a fair valuation on stakes across a pool of teams” remain.
Equity syndication is a 3 potential solution for the NFL, but as it stands a limit on the number of owners a franchise can have and minimum hold requirements prevent that option from becoming a reality.
Some have suspected that the pro sports leagues are re-evaluating their investment guidelines to protect themselves in the case of a recession (yes, it does sound funny that a league looking to minimize risk would increase its debt limit as the economy heads south), but our source indicated that it’s unlikely a down market would keep team valuations from continuing to climb. He reminds that most buyers don’t have all their wealth tied up in the public markets and “at the end of the day, even though [stakes in pro sports teams] are sound economic investments, there is an element of them being trophy assets; and there is limited availability.”
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