Endeavor (NYSE: EDR) recently announced its entrance into the Minor League Baseball business with the introduction of Diamond Baseball Holdings (a company that plans to “support, promote and enhance the sport of baseball through professional management, best practices, innovation and investment”) and the news it had signed purchase agreements for nine Professional Development League clubs. It is reasonable to wonder why Endeavor would want to own and operate MiLB teams. Some lower-level clubs—and a few at the higher levels—have been losing money (many others are just breaking even), and with their respective MLB affiliations only guaranteed for 10 years, it is possible that any/all of the clubs could be worth a fraction of their current valuation come 2030. But Mark Shapiro (president, Endeavor) is confident Major League Baseball will see the value it brings as an operator ensuring long-term affiliation for DBH clubs. And he believes with MLB now in control of national revenues, and the Endeavor platform capable of materially growing revenues at a local level, investments in MiLB will “drive meaningful growth in the Owned Sports Properties segment.” As we recently noted, the OSP segment—led by the UFC—has anchored Endeavor’s P&L and share price growth over the last nine months.
JWS’ Take: While some lower-level MiLB clubs have been losing money, that can in part be blamed on a broken overall minor-league system, as well as some bad markets, ballparks and operators. There is optimism among the remaining affiliated owners that with MLB now in control of national revenues (think: media rights), clubs will be able to realize their potential off the field.
Endeavor will be announcing the purchase of OKC Dodgers, the AAA affiliate of the Los Angeles Dodgers, later this morning—bringing its total to 10 clubs, including a pair of Class-A affiliates (Braves, Giants) and one High-A affiliate (Yankees). But Shapiro said unlike some others operating at the lower levels of the minor leagues, none of the clubs it has signed purchase agreements for are cash-flow negative. “All of the businesses are break-even or profitable, and we clearly believe [as a collection] there is material upside.”
DBH believes it has the roadmap to recognize that upside. Shapiro pointed to the value the Endeavor platform has helped create for the UFC since first investing in August ’16. “Licensing, by way of merchandise sales, is up significantly,” he said. “Sponsorship is up five-fold. All of our UFC events year-to-date have been sellouts and we’ve seen a meaningful increase in our ticket yield. The value of our domestic media rights deal with UFC is up substantially, while our international deals are collectively up 80% over the prior deals. And on top of that, we have NFTs, crypto and our social media deals through Facebook and TikTok. When you take that recipe and apply it to Minor League Baseball, where you control teams that have iconic histories, brand equity and fans residing in major cities in the U.S., that lines up to be a formula for success,” he said.
The company expects to close on two or three more purchases in the coming weeks. From there, the plan is to reevaluate the landscape before continuing with its roll-up strategy. “We’re not going to go on any kind of buying spree. But, we are going to jump into other MiLB clubs we think are ripe for significant returns,” Shapiro said.
Expect those clubs to be affiliated with marquee MLB markets in what Shapiro called “highly desired DMAs, like Los Angeles, Chicago, New York.” Though these MiLB teams “might sit in other cities, they are connected and affiliated to those major cities,” Shapiro said. “Once you achieve enough scale, you can build an attractive model for advertisers and marketers—particularly in the summer months when sports content is at a lull in the United States.”
Endeavor declined to discuss the specifics of the 10 purchase agreements to date. But Shapiro did say he would characterize the acquisitions as “opportunistic” in nature. It is not in the company’s DNA to overpay—or even to pay a premium for—the assets it acquires.
Shapiro explained that DBH’s investment thesis revolves around building scale across MiLB and leveraging the EDR platform to maximize the clubs’ revenue opportunities. “Just think of Endeavor as a whole—all that we own, represent and partner with,” he said. “We have a media division for content distribution. We have a sponsorship division that does hundreds of millions of dollars in sponsorship sales across our owned and partner properties. We have a digital group and a social group. We have representation through WME. We have sports organizations like the UFC, PBR [Professional Bull Riders] and Euroleague, which allow us to get in the door every day with big-name, blue-chip sponsors and brands looking to build and engage audiences. We’re in music, culinary and fashion. You can turn on all the spigots of Endeavor and materially entertain the baseball fan in ways that previously hadn’t been done in some of these towns. So, we’re going to turn all the lights on to entertain our audience and build engagement.” FWIW, Endeavor takes a similar approach to all of its other sports properties (think: PBR, Euro League, Miami Open).
DBH will also lean on the broader Endeavor network to help drive local revenues (think: EDR is Learfield’s largest shareholder). Shapiro pointed out that the sports marketing agency has “a similar geographic reach and presence. We will certainly look for opportunities to partner at scale for businesses around our various teams in college and minor league baseball.”
As we noted a year ago, some MiLB owners were fearful MLB would at some point try to take them over—presumably for pennies on the dollar. While those concerns likely still exist, especially among those with poor facilities or in markets that do not make sense for Major League Baseball, Shapiro said it isn’t a concern for his company. “Endeavor is tied to Major League Baseball across various businesses. They are one of our best partners. They are very aligned with our strategy and are extremely supportive. MLB has long-term deals with the teams and we anticipate them extending our deals if and when the time is right. I think Major League Baseball will very much entertain that, given what we plan to do in architecting and executing significant growth across the minor league platform over the next decade.”
In fact, he believes there will be opportunities for the company to work with MLB to “monetize assets across various content verticals” (including streaming, linear, NFTs, social and digital).