The Golden State Warriors made their lone trip of the season to Madison Square Garden Tuesday, barring a 2022 NBA Finals matchup, that is—hey, Knicks fans can dream! It was a historic night, as Steph Curry passed Ray Allen for the all-time record for 3-pointers made.
The Warriors and their two-time NBA MVP got the win and once again sit atop the league standings, but the Knicks squeaked out a victory off the court in Sportico’s second annual NBA franchise valuations. The Knicks, worth $6.12 billion, and the Warriors, at $6.03 billion, join the Dallas Cowboys ($6.9 billion) and New York Yankees ($6.75 billion) as the only $6 billion sports teams on the planet. The average NBA franchise, including team-related businesses and real estate held by owners, is worth $2.58 billion, up 9% versus a year ago.
NBA teams changed hands regularly in the first half of the last decade, including 13—nearly half the league—sold between 2010 and 2015, but there have been only three “control” sales since then. The most recent was Ryan Smith’s $1.66 billion purchase of the Utah Jazz in late 2020. While lead owners are not cashing out, a bevy of limited partners unloaded stakes in 2021 at lofty valuations, marking a new era for NBA team ownership with the arrival of institutional money.
For decades, NBA owners, as well as those in other leagues, ran their teams like mom-and-pop shops. They frequently played in antiquated arenas and relied largely on ticket and concession revenue to cover payroll. The NBA’s surge in popularity through the 1980s and 1990s triggered an arena-building boom and explosion in TV rights fees. A new crop of owners, who often built their fortunes on Wall Street or in tech, entered the owners’ suites and added a more aggressive business approach, but owning a team still remained more trophy asset than ideal asset to deploy capital.
The NBA’s financial matrix changed after the collective bargaining agreement signed in late 2011 and the TV deals that kicked off with the 2016-17 season. The $24 billion media contract with ESPN and TNT at a 200% annual increase marked a “catch-up deal,” according to media consultant Ed Desser, as the two previous renewals had terrible timing, shortly after Sept. 11 and then during the late 2000s mortgage crisis. Franchise values and profits have surged ever since.
Rising valuations have heightened the challenge for limited partners to find buyers wealthy enough and willing to buy stakes in teams controlled by someone else. In early 2021, the NBA unveiled its solution: Private equity and other types of institutional investors may own up to 20% equity in a single franchise, and a team can have up to 30% of its equity held by investment funds.
Dyal HomeCourt was the initial fund approved to invest in NBA teams, but Arctos Sports Partners was the first PE firm to take advantage of the new rules. This spring, it bought roughly 5% of the Warriors at a $5.5 billion valuation and later added 17% of the Sacramento Kings at a $1.84 billion price tag. In addition to the basketball teams, the Warriors and Kings both own valuable real estate portfolios, adding to the allure of those clubs. The Kings generate an estimated $40 million a year from its mixed-used development outside the arena, Downtown Commons. The Warriors own the Chase Center and real estate it was built on, along with an 11-acre mix of shops and restaurants, known as Thrive City, just outside Chase.
Two investment firms, Dyal (Kings, Phoenix Suns) and Sixth Street (San Antonio Spurs), also invested in teams during 2021. More deals are expected in the coming months. These funds are not investing for any of the intangible perks of owning a team; they are buying because they think at some point in the future, they will be able to sell their interest for a higher value.
“Sports provide a stable, recession-resistant asset class for long-term investors,” said Marc Ganis, co-founder of Sportscorp, in a phone interview. “Valuations have continued to increase over a 30-year period because the underlying assets of intellectual property—broadcast rights, merchandising, sponsorships, social media and internet—make the potential audience far larger and far broader geographically.” An added benefit: Sports offer a high degree of non-correlation with other assets, like stocks and bonds.
Adding institutional money into the NBA ecosystem has helped boost values by expanding the pool of buyers. The PE firms are also paying prices that are typically at a 10% discount to Sportico’s valuations for a control sale. Contrast that with the NFL, which does not allow institutional investment and where the average team is worth $3.5 billion. A package of minority stakes was sold in one franchise this year for estate-planning purposes at a roughly 30% markdown to a control sale valuation and in line with historic LP reductions.
The Los Angeles Lakers ranked third with a value of $5.63 billion, up 10% from Sportico’s prior NBA valuations. In July, the NBA approved Todd Boehly’s and Mark Walter’s investment in the team, a 27% stake previously owned by billionaire Phil Anschutz, who sold his stake right after the Lakers extended their lease at the AEG-owned Staples Center through 2041.
The transaction valued the LP stake at just over $5 billion and gives the new investors right of first refusal if the Buss family decides to sell its stake. Two months later, the Lakers announced a new jersey logo partner, Korean food brand Bibigo, in a deal worth $20 million annually, or the price Jerry Buss paid for the team in 1979.
The Showtime Lakers committed to Staples, but after two decades of getting third priority at the arena, behind the Lakers and Los Angeles Kings, fellow tenants, the Clippers, have one foot out the door.
The Clippers had the biggest gain in value of any franchise, up 20% to $3.16 billion. It was a historic year on and off the court for Steve Ballmer’s team. They made the Western Conference Finals for the first time and broke ground in Inglewood, Calif., on a new home arena, set to open in 2024.
At the groundbreaking in September, Sportico asked Clippers CEO Gillian Zucker to gauge the difference between owning a stadium and being a tenant. She replied: “What is the largest measurement that you can possibly think of?”
The Clippers announced a pair of long-term partners, Intuit and Aspiration, who committed a combined $960 million under sponsorship agreements, according to one source. Ballmer told Sportico that he expects his Inglewood venues—he also owns The Forum—to host more than 100 non-basketball events per year. “Those events are very important,” he said. “It’s important to the value of the sponsorships, it’s important to the value of the suites.”
The value of the Knicks jumped 13% after their first playoff appearance since 2013. The Knicks, owned by MSG Sports and controlled by the Dolan family, raised season ticket prices for the first time in seven years, something typically done only after a postseason appearance. TV ratings for Knicks games on MSG Networks, also controlled by the Dolans, rose roughly 45% last season, while the number of Knicks jerseys sold at Madison Square Garden through 16 home games this season already topped the tally from 44 games two years ago.
The team’s future revenue is trending up with renewals this year on major sponsorships with JPMorgan Chase, Lexus and Anheuser-Busch InBev. New partners include Infosys, BetMGM and Caesars Sportsbook.
“We love sports betting for what it simply does for fan engagement,” said MSG Sports president Andrew Lustgarten during MSG’s fourth-quarter earnings call. “It’s great for the business. … It’s great for the consumer experience at home and in venue. But that just is the tip of the iceberg.”
At $1.83 billion, the Atlanta Hawks had the second-biggest gain in value after the Clippers, up 19%, as season tickets, sponsorships and merchandise got a boost from the team’s unexpected run to the conference finals last spring. The team’s financial fortunes are also expected to benefit from the $5 billion real estate development, Centennial Yards, that is inching forward outside of State Farm Arena. Hawks’ owner Tony Ressler is part of a group of minority investors in the project.
The Phoenix Suns ($1.92 billion, +17%) and Indiana Pacers ($1.8 billion, +16%) also had big valuation gains. Like the Hawks, the Suns benefited from a surprise playoff run, as the club reached the NBA Finals after a full decade out of the postseason. Suns owner Robert Sarver is under investigation by the NBA for allegedly using a racial epithet in a conversation, but bankers see Phoenix as a strong NBA market that would attract significant interest if a control sale of the team hit the auction block.
The Pacers are undergoing a $360 million renovation of Gainbridge Fieldhouse that includes $65 million from the team and nearly $300 million from taxpayers. The finished product will put the team in essentially a new building. The Pacers also get $12.5 million in yearly funding from the government to help fund arena operating expenses. “That is a team whose lease arrangement with the public sector is the envy of 29 other teams,” said one banker.
The NBA’s pitch to incoming investors includes opportunities also available in other leagues—around gambling, streaming and digital. A key differentiator, however, is the international prospects, despite the league’s ongoing tension in China, where business has returned to pre-pandemic levels. In addition to the Bibigo investment in the Lakers, a Chinese electronic trading platform, Webull Financial, signed a sponsorship pact with the Brooklyn Nets worth $30 million a year, while Japanese e-commerce firm Rakuten extended its $20 million-a-year patch deal with the Warriors at an increase.
The 2021 patch deals signed by three of the four most valuable teams got the attention of Lustgarten. “While we have a current patch partner (Squarespace), when that patch comes to market, we believe there’s huge upside there, as the market seems to really move in that space,” he said during MSG’s earnings recap.
Beyond sponsorships, the NBA has just scratched the surface in regards to what it can do outside the U.S. with media rights, merchandise and licensing. “Our clients are bullish on the NBA, and its international business is certainly part of the reason,” said Steve Horowitz, co-founder of specialty investment bank Inner Circle Sports, in a phone interview. “Football, or soccer to us here in the U.S., may be the No. 1 sport around the world, but basketball is nipping at its heels, and the NBA has positioned itself well.” Unlike “football” with its various top-tier competitions, the NBA has a virtual monopoly on all of the best basketball talent in the world.
Fans and sponsors around the world have a major interest in the NBA, and franchise values also benefit from the global pool of potential investors, a phenomenon much more muted when it comes to the NFL or MLB. Forbes identified a record 2,755 people with 10-figure fortunes in its 2021 list of billionaires, but only one-quarter of them are based in the U.S.
“The NBA is the dominant U.S. league in terms of international investor appeal,” sports banker Sal Galatioto said in a phone interview. “People from all over the world want to invest in the NBA, and that’s a huge advantage.”
The addition of two more NBA teams is a matter of when, not if. Commissioner Adam Silver acknowledged as much at Sportico’s NBA event in January, saying it’s “inevitable that at some point [the league] will turn back to expansion. Successful organizations tend to grow over time.” Silver said $2.5 billion was “very low” for an entry fee. The last expansion franchise was Charlotte, which started play in 2004 and cost $300 million.
Seattle and Las Vegas offer the two most obvious destinations for new teams, while Mexico City, Louisville, Vancouver and other cities have been floated as possibilities. Existing owners will push for a pair of hefty fees in exchange for seeing their slice of future shared revenue shrink.
Nothing is imminent on the expansion front, and multiple NBA insiders think a timeline will be tied to the next round of TV contracts. If the league is able to lock in new media deals worth $60-70 billion, then the calculus changes, with entry price into the NBA club jumping from maybe $2.5-3 billion to as much as $4 billion—money that is not shared with the players under the CBA.
“It is going to be very choppy waters over the next couple of years with the revamping of the RSN model,” said media rights consultant Lee Berke in a phone interview. Networks are locked into long-term deals, but customers dropping cable has crushed their cash flow models. An expiring cable deal used to be nirvana for teams, as they readied for local contracts that often more than doubled. But this year, the Trail Blazers took a paycut in their move to Root Sports, according to one source. The Cavaliers extended their local rights deal at the same level as the prior pact. Flat feels like the new up.
The good news for teams is that the content remains extremely valuable, and they now just need to work out the distribution. Media consultant Desser draws the analogy to how ticketing options have evolved from just general seating to club areas, suites and packaged experiences. Your paper ticket has gone digital and can be sold through a secondary marketplace and these days may have an NFT attached to it. Fans will increasingly have options to consume games that cover streaming, linear TV, gambling and more.
Cushioning the blow on the local level is the anticipation of what the NBA’s next national TV contract could look like, as the current nine-year, $24 billion pact heads toward expiration after the 2024-25 season.
“I think the timing of the NBA media contract is auspicious because there should be more clarity on streaming,” said Desser. “It is a great opportunity that won’t come around for another decade, and there could be some pretty interesting bidding, especially when it comes to these streaming platforms potentially needing another infusion of oxygen.”
The NBA has done a limited amount with streaming to date, but Berke says that provides an opportunity, and he expects them to embrace streaming aggressively under the next round of deals. “There is a very competitive marketplace of well-funded media companies with multi-platform distribution that are looking for a sport that skews young and towards younger tech-savvy fans,” said Berke.
NBA insiders expect the next round of deals to more than double and don’t rule out a 200% bump, after factoring in streaming.