The $8 billion valuation being discussed for Red Sox owner Fenway Sports Group may make going public by a merger with blank-check firm RedBall Acquisition Corp. seem like an easy choice. But history shows that sports teams have a mixed record of success in the stock market, especially if investors are offered business as usual. Yet if Fenway Sports owner John Henry and RedBall’s Gerry Cardinale can navigate the public markets—and fellow owners loath to disclose financial information—they may push sports into a new era of wealth and innovation.
“The primary reason is greater access to capital. The public route really opens up the capital-raise process where a group with cachet, with background in the industry, can access larger dollar amounts in a short period of time and go execute on a strategy. And as you open things up for more people to have access to a brand, that grows your fan base,” said Sean Clemens, Director and Principal of Sports Banking at Park Lane, a Santa Monica, Calif., bank not involved in the transaction. “We’re excited to see how it plays out.”
RedBall and Fenway are discussing bringing 20% of FSG public at a total enterprise value (equity plus debt) of $8 billion. RedBall declined to comment. If successful, Fenway Sports would be the highest-profile sports group to ever go public. Its assets of the Red Sox and Liverpool FC—one of English soccer’s “big five” that dominate revenues and titles—as well as ownership of Fenway Park and NASCAR team Roush Fenway Racing rival the portfolio of Madison Square Garden Sports, the entity that owns basketball’s Knicks and hockey’s Rangers.
“Sports franchises over the past 60 years have appreciated more rapidly than the S&P 500; why not make it possible for people to invest in this asset that keeps growing? They will create a vehicle through which tens of thousands of Americans will have a greater emotional attachment to Boston Red Sox,” said Andrew Zimbalist, a sports economist at Smith College. “The owners could use this cash flow to help them with all the real estate they have around Fenway and put additional money into the franchise.”
The traditional reason sports teams don’t go public is that fellow owners don’t want the transparency required by regulators. Yet it may also be because sports teams traditionally don’t give equity market investors what they want: a clear investment story.
“Investors want one of two things: value or growth. Value is something like a yield or steady cash flow or something that I’m buying really cheaply. Give me growth in the form of growing your business, changing your story, more profitability, innovation. The idea being that there is the ability to produce greater and greater profits over time,” said Vikram Mansharamani, a Harvard lecturer, hedge fund manager and author of the book Think For Yourself. “Given the fickle nature of sports fans in some sense, and the dedicated devotion on the other hand, I’m not sure where [sports teams] come out.”
That ambiguity shows in the market values of existing publicly traded teams. The Knicks and Rangers are valued at $4.7 billion (debt plus market cap), a level generally considered to be below their value at a private sale. Likewise, the Atlanta Braves have an enterprise value of $2 billion that falls short of the New York Mets’ $2.4 billion, which Steve Cohen will pay pending final MLB approval.
Previously traded sports teams also show market indecision. The Cleveland Indians went public at a $148 million enterprise value in 1998 and slumped to as low as $85 million within a year before a private buyer rescued shareholders by paying $320 million. The Florida Panthers went public in 1996 at $125 million, but controlling shareholder Wayne Huizenga felt the team was a drag on grander designs to own resorts and he sold the Panthers out of the publicly traded business in 2001 for $101 million. The most successful publicly traded team? Probably the Boston Celtics, which went public in 1986 at $18.50 a share and ended up returning $27 to shareholders by its 2003 sale. However, its 46% return lagged behind the more than 300% return by the broad stock market over the same period.
Adding to the challenges for a sports team in the public markets is that Fenway Sports Group would have some more difficulty attracting institutional ownership that provides long term support for share prices. At an $8 billion market value, Fenway Sports even conceivably could be in the hunt to join the S&P 500—except that the S&P requires 50% of shares to trade freely. With $11.2 trillion indexed or benchmarked to the S&P 500, Fenway’s expected decision to issue only a minority of shares to the public cuts it off from a large source of shareholder support. Similarly, many investment funds avoid stocks that have untraded super-voting shares, which Henry would almost certainly create in order to retain control over the teams.
There is some question about whether RedBall and Fenway could even get the company public. Public ownership would have to be approved by owners, something that investors shouldn’t assume is coming. “If Fenway Sports does it, then Yankees Global Enterprises is going to want to. And Mark Walters will want to [with the Dodgers] and so will Tom Ricketts with the Cubs. If you’re a small-market team and all your big-market competitors have access to the public markets and are able to raise public debt, you’re going to get crushed,” said one executive at an investment firm who asked not to be identified because the firm has business with MLB clubs. Small-market teams would likely demand a hard salary cap as a trade-off for voting to let others go public, something the Players Association would be unlikely to accept, the executive added.
Still, the surging valuations of sports teams may prod owners to find a way to involve publicly traded entities more, explained economist Zimbalist. “There are fewer and fewer people with the wherewithal to put down $3 billion to buy the Red Sox, as opposed to $600 million like what John Henry paid. If you can go public, you can call on people whose annual income is $20,000 to buy a piece of it. As long as it’s structured in the right way, I think it’s in the leagues’ interest to move towards this.”