Two plus billion dollars is a staggering amount of money to pay for a professional sports team. While Frank McCourt may have had many faults as an owner, it appears like he (along with Major League Baseball) was a terrific salesman to command such a price premium for the Los Angeles Dodgers. If McCourt “only” paid $355 million for the Los Angeles Dodgers in 2004, why would the Magic Johnson-led ownership group agree to pay over five times as much for the Los Angeles Dodgers in 2012?
On the surface, it definitely appears like purchasing the Dodgers was a massive overreach by the new owners. In Forbes’ 2011 analysis of the world’s most valuable sports teams, Manchester United received the number one ranking with a valuation of $1.85 billion. The Dallas Cowboys followed the Red Devils with a $1.81 billion valuation. The New York Yankees were the most valued baseball franchise worth $1.70 billion. According to Forbes, the Dodgers new owners paid a 16% premium over the most valuable franchise in all of sports and a 26% premium over the most valuable baseball franchise.
Magic Johnson is certainly not a business novice. His success off the court, including investing in Starbucks franchises in inner city neighborhoods, at least rivals his success on the court. And the rest of his ownership group includes both savvy businessmen and experience baseball veterans like Mark Walter and Stan Kasten. So, what gives with paying the high sticker price?
Various media outlets have reported that television revenue is the reason the Dodgers had such a significant price tag. It has widely been speculated by different sources that the team will command at least $3 billion in regional broadcasts rights from Fox Sports or Time Warner over a 17-year period. The estimated $176.5 million in annual rights fees means that the Dodgers will make as much or more than all NFL teams do for broadcast rights of their football games.
Was this pending broadcasting rights deal alone enough to make the new ownership group’s investment worthwhile? B6A completed a discount cash flow analysis (DCF) to answer this question. A DCF evaluates the entire revenue and cost structure for an organization. It also allows for the use of a cost of capital metric that provides a quantifiable value of the risk associated with this type of investment. Each annual cash flow (how much cash an organization makes at the end of each year) is then “discounted” by the cost of capital. Future years cash flows are discounted a greater rate because the longer it takes for an organization to make money then the more risky that future revenues becomes.
The sale of the Dodgers also allows for a more accurate DCF analysis as compared to sales of other sports teams. Most sports teams are privately held companies that carry some amount of debt. This makes it more difficult to complete a DCF because it is challenging to get the financial information needed for a full analysis (privately held companies do not issue annual reports to the public). Despite being privately owned, the Dodgers have much more information available than the average sports team. The McCourts' divorce proceedings allowed for the public disclosure of the Dodgers recent revenue numbers. In addition, Deadspin published the income and cash flow statements of many baseball teams in 2010. We can use this information as a framework as way to estimate costs for the Dodgers. Finally, sale of the Dodgers was completed entirely with cash and with $400 million going towards retiring the debt that organization assumed while McCourt was owner of the team according to the Los Angeles Times. Therefore, we can examine the investment purely in terms of how much money the ownership group invested into the sale without worrying about its ability to pay back future debt.
The B6A analysis shows that Dodgers are worth currently worth $2.5 billion if the $3 billion television contract does begin as expected in 2014. This means that the new Dodgers owners should expect a 16% return on investment (ROI). However, various news outlets have reported that the broadcast rights price for the Dodgers could escalate to $4 billion dollars for the broadcasting rights of Dodgers games. If that were to occur then that means that Dodgers are actually worth about $3.3 billion and owners would expect 52% (ROI). B6A would happily provide how we completed are DCF to any readers who is interested in finding out more information. We would be happier, however, to be the new owners of the Dodgers right now given the expected ROI.
The Dodgers deal represents a fundamental shift that has occurred in evaluating the value of sports franchises. A common perception that exists is teams like the Cowboys and Redskins are worth more than other sports organizations because of their expansive stadiums. While these organizations do receive significant values from their venues, stadiums are becoming less significant than broadcasting rights in overall organizational value. The Dodgers can and should command a larger price premium than the Cowboys or Redskins because of their broadcasting rights deal. More importantly, the sale of the Dodgers could make the NFL reconsider its policy of having league-wide television contracts. While individual teams may suffer, a number of organizations would unlock a significant amount of value by having their own local broadcast rights deal. If the Dodgers receive the expected $3 billion for their new television agreement, one can only imagine what the New York Giants or Chicago Bears could receive for their broadcasting rights.
