Search This Blog

Friday, September 3, 2010

Evaluating Valuation Methods

Forbes recently released its annual NFL Team Valuations. The Chicago Bears were cited as the team that had “fumbled away a fortune,” due to the mismanagement of the current ownership led by Virginia McCaskey and her family (Virginia is the daughter of George Halas). Forbes states that the Bears are worth $1.07 billion, making them the 9th most valuable team in the NFL despite having the second largest metropolitan area population (Los Angeles currently does not have a football team). In addition, Forbes claims that a new ownership group could potentially add $800 million in value to the team.

Block Six Analytics has two major problems with the Forbes article about the Bears – its valuation methodology and its estimate of $800 million dollars in untapped value. While the exact methodology is difficult to determine, it attempts to use some form of inherent valuation techniques to obtain its $1.07 billion value figure. Inherent valuation focuses on the amount of cash that corporate assets can generate for potential equity owners (or partners). According to its own estimates, Forbes estimates the Bears operating income to be $37.3 million (B6A disagrees with this estimate by almost $30 million). Forbes' failure to account for net income for the Bears is puzzling because the team does not own its stadium (more on that soon) so it lacks depreciation costs and tax information is publicly available. Even if you use the operating income metric, however, no standard discounted cash flow valuation model would give you a valuation over $500 million (email Adam for B6A’s model). This means that Forbes has created a minimum of $500 million in value for the Bears that does not appear to exist.

I will give Forbes the benefit of the doubt on the valuation methodology as it can be difficult to accurately value privately held organizations. What I do not understand is how new ownership of the Bears would unlock $800 million in new value. Sports teams generate revenue from four primary sources – in-stadium, media, merchandise, and sponsorship sales. The majority of media and merchandise revenue streams are shared between all 32 NFL teams. A new ownership group could increase viewership in the Chicago area that could generate more local television and radio money that would not be shared with other teams in the NFL. Forbes states that New England makes $4.5 million more dollars than the Bears through local media. By signing better players, the ownership group could increase Bears jersey sales, but the team would see only a small percentage of that revenue. These two areas combined would increase the Bears annual revenue by at most by $7-10 million.

Sponsorship revenue comes from two sources – league-wide sponsorships and team-specific sponsorships. While a new ownership group would have little, if any, impact on league-wide sponsorships, it could have a significant impact on team-specific sponsorships. B6A has estimated that the Bears earn around $24 million in team-specific sponsorships. If we estimate that a new ownership group could add 50% to the team’s sponsorship revenue (an aggressive assumption), then the Bears could generate $12 million in new annual revenue.

The rest of the new value has to come from in-stadium revenues. Current stadium revenues include ticket sales, luxury suite sales, concessions, and parking. The Bears currently sell out virtually all home games at Soldier Field so there is little that the team could do in terms of selling more tickets. The only option for increasing profit would be to increase prices – which the Bears did on virtually all tickets for the 2010 season. A new ownership group could potentially increase prices for all four of these revenue streams, but likely only by a relatively small amount. B6A estimates that the Bears make $77 million through in-stadium revenues. If the new ownership increased revenue by 25% (another aggressive assumption), this would produce another $19.25 million in annual revenue dollars in added value for the Bears.

Using these aggressive assumptions to populate the B6A valuation model, all of the above accounts for $260 million in additional value that could be created by a new ownership group. Not small potatoes but not $800 million either. Where would the approximately $540 million in new in-stadium revenues come from? The Bears would have to build a new stadium. Forbes rightfully claims that the McCaskeys made a terrible deal with the city because the team not only does not own Solider Field, but it has to pay an annual lease to the city and pay high city taxes on all revenues generated by the stadium. Forbes also correctly asserts that stadiums such as the new Cowboys Stadium and FedEx Field in the Washington D.C. area are what make teams like the Cowboys and Redskins so valuable. In addition, the Bears could secure a naming rights deal for a new stadium that could bring in close to the $20 million per year that FedEx pays the Redskins (although both the Giants/Jets and the Cowboys have been unable to sell naming rights deals for their new stadiums).

The only way for the Bears to significantly increase their value is through building a new stadium. Forbes argues that only a new ownership group, for example one led by Patrick Ryan, the former CEO of Aon Insurance, would have enough assets to secure the $1 billion plus in financing necessary to complete such a project. Clearly, Forbes does not read its own articles about how difficult it is for anyone to receive debt financing in the current financial climate especially with such a risky project as a new sports stadium. In addition, after spending $650+ million on the 2003 Soldier Field renovation (including $200 million financed by the Chicago Bears) the team would be unlikely to move from its present location. A publicly financed stadium is unlikely given the dire economic situation of most city and state governments.

This post show that you have to be careful when evaluating the valuations (try saying that 5 times fast) made by the “experts”. The Bears' ownership group has clearly allowed inefficiencies to occur that make the Bears less valuable than they could be for a new ownership group. A careful analysis of all potential revenue streams shows that there may be $260 million in untapped value for the Bears. People often wonder why an increasing number of sports owners have to sell their franchises within 10 years of purchasing them. If they paid inflated prices based on estimation techniques suggested by Forbes in its NFL Valuation article, it becomes pretty clear why this is the case.

Thursday, August 12, 2010

Could Politicians Learn Something From The Heat?

The most important story in basketball this NBA offseason is the signing of LeBron James, Dwyane Wade, and Chris Bosh by the Miami Heat. The most common criticism by basketball pundits of the signings (outside of the “The Decision” television special on ESPN to announce Lebron was joining the Heat) is the idea that these players took the "if you can’t beat ‘em, join ‘em" approach to winning an NBA Championship. How can these players essentially “chicken out” to form a super team? Why couldn’t they just win on their own? As Bill Simmons stated, it would be more fun if each superstar had his own posse and to continue to have shootouts at basketball’s version of the OK Corral.

A month later, George Packer’s article in The New Yorker about how dysfunctional the U.S. Senate had become over the past 1.5 years (and many would argue longer) spurred an entirely different debate. Democrats and Republicans seemingly cannot agree on anything. For example, Tennessee Senator Bob Corker voted for an amendment to the recently passed financial regulatory reform bill that would negate the part of the bill that he himself originally helped author (with Senator Mark Warner) on the creation of a fund that would help wind down large financial institutions. I mean, how can you vote against something you helped write? It doesn’t make any sense. Political pundits have assailed both parties for the damage caused to Americans on numerous issues because of this dysfunction.

So in sports you get blamed for forming a super team. In politics you get blamed for not forming any teams. Which is the better approach? Obviously, different situations call for different tactics, but one can’t help but think that the super team approach could actually work better in politics than in the NBA. While creating a “super team” would be difficult in Congress for a variety of reasons (I don’t have enough room in this post to describe them), what if President Obama formed a super team for his 2012 election? People have often stated that President Obama selecting Hillary Clinton to be his Secretary of State was the reincarnation of the Team of Rivals seen in President Lincoln's cabinet. However, Obama and Clinton were, in theory, on the same team as they were both Democrats.

What if President Obama were to follow LeBron James and Chris Bosh and form a super team with more of his Republican “friends”? What would this team look like? I could imagine a team with Governor Haley Barbour as the Vice President and with current Vice President Joe Biden agreeing to take a step down (or reduce his minutes, using NBA jargon) to Secretary of State . Mitt Romney could replace Timothy Geithner as Secretary of the Treasury and Tim Pawlenty could replace Tom Vilsack as the Secretary of Agriculture.

Clearly, this scenario is extremely unlikely for a number reasons (one being that Secretary Clinton is not going to just step aside and let Vice President Biden take over), but could more substantial legislation be passed in Washington with this super team? Would the political pundits go as bananas as the sports commentators? It’s hard to say, but it is sure fun to think about the possibilities of what could happen.

Monday, August 9, 2010

Forbes Fan Rankings Follies

Recently, Forbes magazine published an article titled "America's Best Sports Fans" in which the magazine ranked the fans from the teams in the NFL, MLB, NBA, and NHL. Any list like this is bound to cause controversy - especially one in which the Boston Red Sox are proclaimed to have the best fans. The author, Monte Burke, clearly understand this to be the case as demonstrated by the introduction to the article.

The main problem with these rankings, however, is not the idea of creating controversy by publishing this type of list. Who doesn't want to be able to compare the relative awesomeness of each fan base? Unfortunately, Forbes uses more questionable metric techniques than the BCS. This article seems to want readers to believe that, because Forbes used some quantifiable benchmarks, its list is more accurate than something the average fan could create. As ESPN's Lee Corso would say, "Not so fast my friends!"

Lets look at the Forbes' methodology. I have slightly modified the original paragraph to better fit into a list format (how very meta of me to list things in an article about lists).
  1. Measure the team's home and away game attendance, which indicates a team’s drawing power in its home market and nationwide.
  2. Determine merchandise sales (Numbers for the NFL, NBA and MLB were provided to us by Sportsonesource, a sporting goods industry analyst, and the NHL gave Forbes its own data).
  3. Rank each team’s in-market popularity, based on surveys of American sports teams by Turnkey Sports and Entertainment. Forbes ranked all of the teams, then took the top four from each of the four leagues.

For the each of the first two metrics, I will list the confounding explanations that show the difficulty using these measures
. Without knowing the methodology of the Turnkey in-market popularity surveys, it is difficult to determine the validity of this metric.

Metric One - Home and Away Attendance

  1. Using attendance as a metric at all significantly favors baseball teams. Baseball teams have 81 regular season games per year. If the average attendance is only 10,000 per game that means teams draw 810,000 fans. That is more fans than every NFL, NBA, and NHL team can possibly draw to their stadiums / arenas.
  2. The idea that a team's away attendance would show a team's strength is suspect on many different levels. How did Forbes determine that a team's fans were attending away games? The Red Sox play over 20 games a year against the Yankees. That means at least 10 games at Yankee Stadium - which has as average attendance of over 40,000 fans. Is it likely that those 40,000 fans at Yankee Stadium demonstrate the Red Sox drawing power?
  3. For many teams, attendance is driven by wins and losses. All of the teams listed in the top 10 have won championships in the last decade. Most teams ranked in the top ten have been perennial powerhouses in their leagues (Red Sox, Steelers, and Red Wings to name a few). Fans could simply be coming to stadiums because teams are performing well and not because they have a special interest in the team. The Miami Heat this season should prove this point.

Metric Two - Merchandise Sales

  1. When a fan buys a jersey, is he/she buying it because she supports the team or because she supports the individual player? For example, Tim Tebow has the number one selling jersey in the NFL right now. Are there suddenly a bunch of new Denver Broncos fans or is more likely that these people are Tim Tebow fans. I am willing to bet the latter is the case.
  2. Jersey sales are not the only item that contribute to merchandise sales (although it is probably the most significant driver of merchandise revenue). However, Forbes provides no evidence that they examined whether people who buy other merchandise are fans of the teams or the players.
Forbes Fan Follies makes it difficult to take these rankings seriously.