In yesterday’s newsletter, we highlighted a trio of sectors within the sports industry whose indexes have risen in value since the COVID outbreak (live entertainment, leagues and B2C sports betting). Today, we drill down on a pair of comp. groups with indexes that have experienced share-price depreciation over the last two years, including European sports teams and U.S. sports teams. John Hutcheson (managing director, head of Citi Sports Advisory) explained that negative share price performance was largely related to pandemic-related troubles, secular shifts in consumption of media and the recent market volatility.
JWS’ Take: The European team index has experienced the greatest value decline within the sports ecosystem since February 19, 2020 (-41%). That is not particularly surprising considering European football clubs, which tend to trade based on business fundamentals, have largely been in a challenged financial position for nearly all of that time. Remember, historically speaking, many teams operated with little regard for fiscal responsibility (think: overpaying players, taking on too much debt). So when the pandemic hit and revenues were slashed, “teams were losing money [and] they had debt and liability obligations to pay,” Hutcheson said. “In order to meet those obligations, a lot of them had to do capital calls, capital raises and rescue rights issuances, which increased equity dilution and put pressure on share prices.” No European club has lost more value over that time than Juventus. The team’s share price is down 57% since COVID began.
By contrast, the U.S. leagues were generally successful in managing the financial fallout from COVID (see: getting liquidity to the clubs). That’s why we never saw a slew of owners looking to exit, which would have driven asking prices down. While the sports hiatus did create some initial dislocation, with consensus Wall Street estimates projecting ’22 revenues and profits to outpace 2019, publicly traded U.S. franchises were generally back to trading at pre-COVID values in the back half of ‘21.
The recent market rotation, which has impacted pre-profit businesses and companies valued on revenue multiples the greatest, has hit the index hard, though. Madison Square Garden Sports (MSGS) shares have fallen ~10% since early November. The U.S. team index is down 16% since COVID began.
While there are just a few publicly traded U.S. sports teams, Hutcheson said they tend to trade at a discount compared with “where we see private deals getting done and third-party valuation estimates (see: Sportico’s NBA valuations). Rule of thumb for an NBA team is to trade 7-8x forward revenue. Baseball and hockey teams have historically traded at 4-5x.”
MSGS, which includes the Knicks and Rangers, currently trades at 6.5x ‘23 revenue. The Atlanta Braves are trading at 2.9x ’23 revenue. While both stocks look to be undervalued on a multiple basis, on an enterprise-value basis the larger disconnect is with MSGS. That is because few investors believe Jim Dolan will sell the teams, and having multiple assets across varying sports underneath the umbrella makes the company harder to value.
Historically speaking, U.S. teams dealt in private market transactions tend to beget the greatest valuations. “That observation remained true during COVID, where a flurry of deals got struck at very attractive multiples,” Hutcheson said. He cited control deals for the New York Mets (at 7x unaffected ’19 revenue estimates) and the Utah Jazz (at 7x unaffected ’19 revenue estimates) as examples. The supply-demand imbalance and “control premium” largely explains why private market sales often command a higher multiple.
The value gap between private-market deals and public-market deals tends to widen during periods of market duress. We saw it occur during COVID, and it remains true during today’s more recent market dislocation.
With North American OTT subscriptions climbing 51% in 2020 and another 20% in 2021, it would have been logical to assume the Citi team’s traditional media index would have declined in value over the last two years (even with most/all trying to shift to DTC streaming). But it actually climbed 7%.
That’s because the FCF the companies generate has helped insulate them from the ongoing market rotation. And Disney’s overwhelming success has helped to offset losses in value experienced across the remainder of the comp. group. As Hutcheson explained, Disney has “been a winner and re-rated over the past [two years], currently trading at 16.5x forward EBITDA.” Prior to making the move into technology and DTC distribution, the company traded at a much lower value paradigm (think: 10-12x).
While the traditional media sector has been flattish over the period, ViacomCBS (trading at 8.5x ’23 EBITDA, down from more than 15x in early ‘21) is an example of traditional media company that has not fared well in the rapidly evolving media ecosystem. VIAC has struggled in a competitive DTC landscape with a smaller profile, a thinner IP catalog and fewer marketing dollars to spend on customer acquisition. Paramount+ trails Netflix, Amazon, Disney+, HBO Max and Hulu in the streaming wars.