With the number of U.S. coronavirus cases spiraling out of control and widespread access to a vaccine months away (even if the FDA were to approve one before the end of the year), the possibility—if not likelihood—of another round of lockdowns must be considered. The big four leagues all seemingly managed to survive the financial challenges COVID-19 brought on in 2020. In fact, several recent clubs (including the Utah Jazz) sold above their estimated worth despite the losses incurred over the last nine months and the uncertainty that remains. But conversations with a pair of well-respected sports financiers raise the specter that additional shelter-in-place orders would be damaging to the sports ecosystem. Teams would be forced to slash expenses to the bone, an abundance of LPs would be forced to sell (likely at a discount) and there might even be a temporary setback in franchise valuations.
Our Take: To be clear, the long-term prospects for each of the four major U.S. leagues remain strong. But pockets of weakness within each seem inevitable if the 2021 sports calendar at all resembles the 2020 version. Major League Baseball commissioner Rob Manfred told Sportico his league lost between $2.8 billion to $3 billion in 2020 (figuring $100 million per club on average). If we assume the NHL, NBA and the NFL each lost in the ballpark of $1.5 billion, ownership across the four leagues collectively lost somewhere north of $7 billion this year. Broadcast and gate revenues won’t rise dramatically in 2021 (despite the Golden State Warriors’ plan to bring Chase Center back to 50% capacity), so even if the leagues managed to pare back on expenses, another lockdown means a collective loss of at least $12 billion over two years.
While some owners will be unfazed by a second straight year of unanticipated operating losses (think: David Tepper, Steve Ballmer), others will undoubtedly have a tougher time covering the $50 million to $100 million shortfall. It’s believed many organizations have tapped out their debt capacity to ride out the initial COVID-19 wave. NBA and NHL owners remain at the greatest risk due to the timing of their seasons. Look for the most distressed club owners to trim expenses (including player payroll where possible) and make a capital call—or issue new equity (think: selling off additional LP interests)—to get their franchise through the next year. Many believe they simply need to weather the storm and that the pot of gold remains on the other side of the rainbow.
If controlling interests are going to hit the market—and both of the financiers we spoke with thought they would with another lockdown—the opportunities are most likely to be in levered franchises in weak markets. That could mean a temporary setback in team valuations as the uber-wealthy individuals capable of buying sports franchises typically look for trophy teams in a big city (like Steve Cohen and the New York Mets) or for a particularly good deal on their purchase. To command a premium in a small market, the ownership group often needs to find a local buyer (like the Miller family did with Ryan Smith in Utah). It’s hard to envision a team selling at too great a discount. The leagues are going to do everything in their power (think: relaxing the debt limitations) to protect team valuations.
Clubs that make capital calls are going to have LPs exiting because some investors won’t want (or be able) to take on the additional risk at a time when many are experiencing struggles in their primary businesses. One of the financiers estimated that between new equity issuances and the secondary market opportunities that would come to market if there is another round of lockdowns, $4 billion to $6 billion worth of limited ownership stakes could turn over across the ecosystem within the next 12 months (above and beyond the normal flow). The abundant supply of equity interests should benefit the likes of Arctos Sports Partners and Dyal Capital Partners, private equity funds intent on buying up sports ownership stakes.
The capital call risk, anticipated short-term losses and illiquid nature of an LP stake at a time when the market is flooded with them will almost certainly result in steeper minority discounts than we saw pre-pandemic. How steep remains to be seen. While one of our industry insiders suggested there would be “blood in the streets,” the other indicated if the stake wasn’t drawing a high enough price “[the LP would] just sell some public equities; there are plenty of alternative financing options [available too].”
It’s worth noting that unlike in European soccer, there is no real risk of a big four sports team “folding” in 2021. The various leagues would tap into the collective capabilities of their owners to create some sort of league financing vehicle that would serve as a bridge to a post-COVID era before they allowed a franchise to fail.