Back in December 2019, Monumental Sports & Entertainment owner and CEO Ted Leonsis made the case, in this newsletter, that platform sports businesses were intrinsically undervalued. He argued that the sports enterprises drive value in the same way software companies with rich multiples do, and thus they should be valued in kind (think: 8-12x the top line vs. a lower multiple of EBITDA). Since that time, the pandemic pushed domestic team owners to reconsider their strategy (see: greater emphasis on personnel and operating efficiency); there has been an influx of private equity within the sports ecosystem; and club valuations have continued to rise.
In an interview with JWS last week, Leonsis said those developments have made it “inevitable that you will see this platform idea or this roll-up idea pick up steam and that some companies will go public.”
JWS’ Take: The Monumental executive expects two types of sports enterprises to gain momentum over the next decade. “One is truly platform and geographically based, where [ownership is] essentially able to lead and manage [the] enterprise leveraging skills, talent and infrastructure,” he said. MSE (Washington Capitals, Wizards, Mystics, Capital One Arena, etc.) and Maple Leaf Sports & Entertainment (Toronto Raptors, Maple Leafs, Toronto FC, Scotiabank Arena, etc.) are examples of platform sports businesses.
The other more closely resembles a Wall Street roll-up. The ownership group will purchase “multiple teams in different locales and multiple businesses related to sports, and bring [them] all together [under] a holding company,” Leonsis explained. Fenway Sports Group (Boston Red Sox, Liverpool FC, and co-owner of Roush Fenway Racing) and Harris Blitzer Sports & Entertainment (New Jersey Devils, Philadelphia 76ers and Crystal Palace FC) are notable examples.
On the surface, it may be difficult to see the synergies that exist behind a roll-up. But like platform businesses, the core idea is that “scale and a large pot of revenues are crucial to managing and leading winning sports teams,” Leonsis said.
While acquiring top talent does not always lead to on-field/on-court success, the more skill and capital a team has, the better its chances are. The same goes in business. Leonsis sees an increased focus on personnel, a byproduct of a challenging 2020, as one of the catalysts for the anticipated trend of platform businesses and roll-ups taking hold. “The more resources you have, the more revenues you have, the more you’re able to attract great people,” he said.
Club owners are also looking to run their businesses more efficiently in a post-COVID world. “Most teams are not profitable,” Leonsis said. But more and more of them are starting to recognize that if they “have more revenue streams, can manage [them] and leverage the infrastructure, [they] can get to profitability” (which is why some are looking around for assets to bolt on). The problem many clubs have is that, on their own, they are simply not large enough to generate meaningful EBITDA.
Building a valuable platform business or sports roll-up makes sound business sense. But it’s fair to wonder how those constructing them—or investing in them—will monetize those assets in the future. “If you’re generating a billion dollars [in revenue], and you’re valued at 10x, it’s $10 billion. Who is buying a $10 billion company? There’s like 10 people on the planet” who can afford that, Leonsis pointed out.
Private equity isn’t going to be the answer. While PE can provide controlling owners with some liquidity, or serve as an exit strategy for minority shareholders in a world where the prospective buyer universe is shrinking because of rising team valuations, “it doesn’t solve the problem of what happens if someone wants to sell everything,” Leonsis said. Remember, league rules prevent private equity from taking a controlling interest.
PE is not going to be the solution for an owner who wants to sell a platform business or sports roll-up in its entirety. But Leonsis expects it to be a catalyst for platform businesses and roll-ups to add assets. “In the bigger markets,” he said, “it’s going to drive a lot of new partnerships, mergers and acquisitions, because there’s so much change going on, so much opportunity and the stakes have gotten so high.” That’s because returns are now expected.
With nowhere else to go, “Several of these [platform or roll-up] companies, or many of these enterprises, will go public in the not too distant future,” Leonsis said. The rise of SPACs (which provide a viable alternative to a traditional IPO for companies to go public) and consolidation within the business ecosystem over the last 20 years (which has left a dearth of public companies) have helped to create an environment ripe for sports-related companies to list. “It will become like a class of equity,” Leonsis predicted, one that has “proven to be durable, growing and [is] attractive” to investors.
Historically speaking, pro sports teams have not made for great public equities—though the Braves (Nasdaq: BATRA) is up 10% since the MLB playoffs started. But Leonsis does not see that as being indicative of future results. He says times have changed. “Our financials and scale look like a [software company]. We can show analysts and investors this is how many season tickets [we] have and what the renewal rates are. These are our sponsorships, and these are our media deals. This is how they grow by contract. It looks like a SaaS business”—not the mom-and-pop business of yesteryear. For reference, sports enterprises likely need around $1 billion in annual revenue to be a viable public company.
Not everyone is convinced sports platform businesses or roll-ups will universally make for good public vehicles, though. While they may generate significant revenue, one sports banker, who asked not to be identified, cited the relative lack of profits they generate and the absence of an obvious growth driver as potential hang-ups for investors. Sports enterprises are “good businesses,” he said, “but is it an institutional, private equity-able business? Maybe. Not for sure.”
The public markets would also give PE investors a guaranteed exit strategy. Remember, “They are managing other people’s money, and they get in to eventually get out,” Leonsis said. If team valuations continue to rise, another institutional investor will be interested in scooping up the stake. But what happens if there’s a setback?