Historically, the public markets have undervalued pro sports franchises. Sportico’s Brendan Coffey recently wrote about how both Liberty Braves (BATRA) and Madison Square Garden Sports (MSGS) are trading significantly below their intrinsic value. So, it’s fair to wonder why sport-, media- and entertainment-focused SPACs (like RedBall Acquisition Corp. and Sports Ventures Acquisition) are exploring opportunities to purchase sports teams. Conversations with several SPAC insiders have indicated that while pro teams have not made for good public companies over the last decade or two, a change in market conditions and/or the public listing of a club with a strong underlying business and more control over team revenues could alter the narrative.
Our Take: Investments in pro sports teams—whether they are public or private—can be pretty good if the investor plans to hold on to the club for an extended period of time. That’s because the real growth in franchise valuations comes in big pops—like when a team constructs a new stadium—not on a year-to-year basis.
The problem for shareholders of publicly traded teams is once the growth from those rare material events steadies out, clubs tend to grow at the same pace as league revenues. In today’s market—where investors value companies’ growth prospects—3% growth YoY (like you might see in the NFL) may not make for a particularly exciting investment opportunity. Investors tend to look for companies capable of growing +10-20% on an annual basis or dividends/stock buybacks if revenue growth is going to be slower (in which case there would need to be some excess distributable cash flow).
Pro sports teams—at least those in America—tend to grow at the rate of league revenues because they lack control over their greatest revenue streams (a result of the leagues’ structure). So, don’t be surprised if the sports-centric SPACs end up acquiring international franchises with more control over their revenue base (and, by proxy, their upside). An EPL franchise in the right market might fit the bill. It should be noted that RedBall is currently engaged in conversations with Fenway Sports Group (owner of the Boston Red Sox and Liverpool F.C.).
The challenge for SPAC principals interested in acquiring pro teams will be that they only have two years to put investor funds to work before they have to return the money (and also lose their own investment). It remains to be seen if the various sports-centric SPACs will be able to find attractive acquisition targets in such a short period of time. However, the fact that team sales are relationship-driven should work in their favor. Many of the principals associated with the SPACs eyeing pro teams maintain deep rolodexes, having spent years in the business.
With the capital markets rising, a result of historically low interest rates, investors are looking for high growth opportunities. But it stands to reason that if/when market conditions change and investors begin to prioritize stability over growth, publicly traded pro sports teams will become a more attractive investment option. The stability they offer from a revenue standpoint (think: guaranteed television contracts), combined with the collectible value they hold (think: there are only 32 NFL franchises), would in theory make them a safe place to store value during a market downturn.
There’s also an argument to be made that public investors simply want good companies, with good attributes (think: cash flow positive, good management, strong shareholder rights) and that the pro teams currently trading on exchanges simply aren’t sound businesses. If one doesn’t believe Jim Dolan will ever sell the New York Knicks and Rangers, doesn’t trust the former Cablevision CEO to run the company and understands that MSGS shareholders have no tag-along rights (meaning Dolan can sell his shares at a premium and shareholders aren’t guaranteed to be a part of the transaction), it’s easier to understand why the company trades at a discount. Presumably if Dolan had plans to sell the team and shareholders were entitled to tag-along rights, share prices would increase dramatically.
It’s fair to wonder how the $200 million to $500 million SPACs we’ve seen formed intend to buy a pro sports team (or teams, in RedBall’s case). SPACS are able to do deals significantly greater than their size (three to 20 times bigger) by involving a second round of investors (PIPEs, private investment in public equities) in the acquisition.