There may be no fans in the seats, fewer eyeballs on the screen and lots of debt piling up, but as the recent sales of the Utah Jazz and New York Mets show, demand remains robust for franchises in the major sports leagues.
“There’s an ego factor where individuals or a group of individuals are willing to pay a premium for a sport team because it sounds cool,” said Michael Mondello, a sports economist at the University of South Florida. The latest deals commanded premium prices to gain entry into the club. The Jazz, who lost in the first round of the NBA playoffs this year, are selling for $1.66 billion, while the last-place baseball Mets are fetching $2.4 billion.
There’s undoubtedly bragging rights in owning a sports franchise—it hits a sweet spot of fandom and vanity for many owners. For instance, few people in the Bay State know who Abigail Johnson is, let alone that she’s Massachusetts’ richest person—but everyone knows who Bob Kraft is, noted Victor Matheson, a sports economist at College of the Holy Cross. And the pool of potential buyers is rising too—from 2009 to 2018, the number of billionaires in the world rose 178% to 2,218. That corresponds to an almost identical percentage rise in NFL team valuations over the same period, according to an investor pitch provided not-for-attribution from a sports investment fund.
There’s an old joke that circulates in some form among pursuits with a high bar to entry: How do you make $1 million dollars in the wine business? Start with $5 million. Yet owning a major league franchise is more than a rich person’s vanity play. That may have been the case in sports once, but no longer. It’s been 8 years since any labor stife of note and, in the NBA and NFL in particular, team owners are all but guaranteed to turn a profit in a normal season. The reason is primarily because of media rights. They constitute a large pot of recurring revenues contracted out years in advance, making for relatively predictable income compared to ticket sales and concessions. Media rights, along with other multi-year products like suite sales and sponsorships, contribute 40% to 70% of a team’s revenues today, according to an investor presentation from a second investment fund, also provided not-for-attribution. That means, since 2001, year-over-year growth in the four major U.S. sports has been largely consistent within a range of plus-5% to 10%, compared to the stock market’s whipsaw between losses up to 37% and gains as high as 32% in that time. The widespread expectation is that tech giants like Amazon, Google, Apple and others will only increase bidding for rights in years to come.
While the Jazz and Mets prices seem healthy, they reflect an even stronger environment for sports teams, according to a buy-side executive who asked not to be named because their fund is raising money. “The next two years are going to be pretty tough in sports. The Mets bid incorporates hundreds of millions in losses until you turn that franchise around. And bidding $1.66 for the Jazz is really like paying $1.8 billion pre-pandemic.”
Others argue that ever-rising values can really only be counted on with franchises that rise to the level of cultural icons—think the New York Yankees or Toronto Maple Leafs. But for those dozen or so teams that meet that bar, the sky is the limit, another sports banker said. “If Jimmy Dolan ever put the Knicks on the market I could have 14 or 15 bidders all with huge checkbooks—and I have one guy who has told me he’ll outbid all of them by $150 million. That’s for a team that doesn’t even know what the playoffs are.”
There’s a third, often-overlooked pillar supporting team values: taxes. Despite ever-rising team values, franchise owners get the benefit of claiming depreciation—the convention that something becomes less valuable over time, originally meant to account for factory equipment wearing out. One NFL owner who acquired a team since the turn of the century said in a not-for-attribution conversation that depreciation and other tax benefits were a significant factor in his math—Uncle Sam essentially provided him a one-third discount, the owner said. (Depreciation typically is clawed back in part by the IRS on a sale, however).
Chuck Baker, co-chair of O’Melveny and Myers’ Sports Industry Group, also cited positioning around taxes as a motivation for some buyers. “There may also be an uptick in sales now as current owners anticipate capital gains tax rate increases,” he wrote in an email. “Teams are still able to sell at a premium for several reasons [including media rights]. In addition, most of us believe that once there is a widely available vaccine, fans will return to stadiums and arenas so game day revenue will rebound.”
Ultimately, there’s far more evidence teams are a good investment than not—missteps by buyers are few and far between in recent decades. Between 1969 and 2006, North American sports franchises returned an average 16% price growth annually, seemingly unaffected by operating profits and losses, according to research conducted in part by USF’s Mondello.
“Professional sports teams historically have always had bargaining power, typically in resale, because there are a limited number of teams,” explained Mondello. “Owners may not make money when they buy them and run them, but they certainly make it on the sell side.”