The NFL’s Next Billionaire Owner Won’t Be a Person
Major sports franchises have turned profitable and valuations are soaring. Experts say private equity firms may soon take notice.
Owning a major-league sports team has long been a rich-guy status symbol — but it hasn’t always been a sound investment.
Just seven to ten years ago, almost none of the teams in the four major pro sports leagues — the National Football League, Major League Baseball, the National Basketball Association, and the National Hockey League — generated positive cash flow, according to John Moag, chief executive officer of sports investment bank Moag & Co. in Baltimore.
But these days pro sports franchises are bona fide profit engines. Now 87 percent of the teams in the four major leagues have positive operating income, including 100 percent in the NFL, according to Forbes.
And teams have the soaring valuations to prove it. Hedge fund titan David Tepper, founder and president of Appaloosa Management, agreed last month to buy the Carolina Panthers for a reported $2.2 billion. That would match the record price paid for a U.S. sports franchise: Tilman Fertitta, CEO and owner of restaurant giant Landry’s, bought the Houston Rockets for $2.2 billion last year.
Just five years ago, Forbes pegged only one NFL team’s value at $2 billion: the Dallas Cowboys. Now all but five football teams are worth at least that much. “America’s Team,” as the Cowboys are widely known, has a valuation of $4.8 billion, the highest of any sports franchise in the world, according to Forbes.
And the upward trend will continue, experts agree. “Profits and valuations will rise because revenues will keep going up,” says Moag. “Some people look at sports and say this is ridiculous, but valuations follow revenues.”
As price tags keep climbing, the barrier to entry becomes tougher, even for billionaires. That’s because leagues limit the amount of debt new owners can take on as part of their purchases. Enter private equity firms.
“You can’t be worth just $1 billion to buy teams now,” Moag points out. “One person may be willing to put in $300 million to $500 million, but where will the remainder of the money come from? He will dial for dollars, but that’s still a huge amount of money. The opportunity for private equity is tremendous — if leagues let them play.”
That may be a big if, experts say. Although private equity firms and major sports franchises may seem like a perfect match on paper, there are reasons such tie-ups aren’t more common. League rules almost guarantee that purchasers of teams will be individuals or groups of individuals. Every person or entity that acquires interest in a team has to be vetted and approved by the league. If it’s an entity, every owner within it has to complete application papers and submit them to the league for approval.
That has tended to rule out private equity funds. “They have so many investors, and technically all investors would have to be vetted,” says Robert Caporale, chair of sports investment bank Game Plan in Miami Beach, Florida. “That becomes a procedural nightmare.”
He and others can recall only one instance in which a private equity firm participated in a sports team purchase. In 2011, Tom Gores, CEO of private equity firm Platinum Equity, bought the Detroit Pistons along with one of his firm’s funds, Platinum Equity Capital Partners II. He took 51 percent of the team, and the fund received 49 percent. Then in 2015, Gores bought out the fund’s stake.
Other individuals in the hedge fund and private equity sectors have purchased teams too, but without the participation of their firms. In addition to Appaloosa’s Tepper, the list includes Josh Harris, co-founder of private equity titan Apollo Capital Management, who is principal owner of the Philadelphia 76ers and the New Jersey Devils; Joseph Lacob, a partner at iconic venture capital firm Kleiner Perkins Caufield & Byers and majority owner of the Golden State Warriors; and the owners of the Milwaukee Bucks: distressed-debt maven and Avenue Capital Group co-founder Marc Lasry, Fortress Investment Group’s Wesley Edens, and York Capital Management’s Jamie Dinan.
Tax considerations also have helped deter private equity funds, says Andrew Zimbalist, generally recognized as the dean of sports economists and a professor at Smith College. Individuals who own teams can amortize the value of their franchises, attributing 90 percent of value to intangible assets (or assets that are not physical) and goodwill (a premium paid for certain intangible assets during an acquisition). And if the team is owned by a partnership, or a corporation that is taxed like a partnership, that tax benefit carries over to the owners’ individual returns.
But private equity fund managers already have the tax protection of carried interest, so there isn’t the same incentive for them to buy a team as there is for individuals, Zimbalist says.
Still, the environment may be changing. Moag notes an encouraging precedent. From 1994 to 1998 the Ontario Teachers’ Pension Plan sank about $300 million into Maple Leaf Sports & Entertainment, owner of the Toronto Maple Leafs and the Toronto Raptors, and sold its 80 percent stake for $1.29 billion in 2011.
“That was a long hold, but a huge win for investors,” Moag says. “I think in many ways that’s the future. This is where a lot of the equity needs to come from.”
Caporale says the trend will develop once existing owners who decide to sell their teams discover they are unable to find individual buyers. “They will be the ones to start making arguments in the league that this needs to be allowed,” he predicts.
At least one major league, which Caporale declined to name, had consultants looking into the issue, and one of those consultants recommends letting private equity funds into the ownership business, he says.
“It’s unfortunate that they haven’t been allowed to participate over the last five to ten years, because they would have received great returns, probably better than some of the other companies they invested in,” Caporale notes.
Sports teams represent long-term investments, which can fit well with the private equity model. Experts say private equity firms will be eager to invest.
“It’s a high-growth industry, and the potential for solid returns on investment is high,” says Reena Aggarwal, a finance and business administration professor at Georgetown University’s McDonough School of Business.
Teams would represent an attractive new asset class for private equity funds — and a natural spillover, given that some private equity titans themselves own teams as individuals, she says.
Sports teams would especially make sense for the increasing number of private equity funds that are being established without fixed termination dates, notes Brent Lawrence, CEO of Accelerate Sports, a sports investment bank in Sacramento, California. Some private equity firms would do well to tie the purchase of a team to a real estate investment around the team’s stadium.
“If a private equity firm has a real estate side of the house, I could see them enter a project where they can create a sports-anchored, mixed-use development,” he says.
Caporale says that initially, team purchases involving private equity funds will probably be similar to the Gores–Platinum Equity deal to acquire the Pistons, with a fund backing an individual.
“The funds need to be cognizant of managing the team, so they would want someone involved who’s responsible for operations,” he explains. Further down the road, he sees private equity funds acquiring teams by themselves.
But not everyone thinks private equity firms will flock to buy teams. Some experts question whether teams’ cash flow is strong enough to appeal to private equity managers and investors.
“The NFL has predictable profits, but in other leagues it can vary across teams and markets,” says Sean Clemens, senior vice president at Park Lane, a sports banking firm in Santa Monica, California. “If the owners can’t leverage media rights, there might not be a cash cushion year to year.”
Phil de Picciotto, president of sports marketing agency Octagon, a Stamford, Connecticut–based subsidiary of advertising giant Interpublic Group of Cos., doubts teams’ ongoing profits would provide as income as attractive to private equity funds as other assets they hold, especially given the hefty sums the funds would have to pay for teams. Private equity firms would have to hold teams for a long period to enjoy bountiful returns, experts say.
“But what private equity is typically good at is turning things around, creating added value and then selling,” de Picciotto says.
What’s more, private equity firms and sports leagues may have a culture clash. “Leagues want consistency and owners who are in it for the love of sports, offering benefits to the community and supporting goals of the league,” he notes. “None of these are private equity qualities.”
Buying sports teams won’t necessarily spark enthusiasm among fund investors either, says Steve Horowitz, a partner at sports investment bank Inner Circle Sports in New York City.
“If it goes up, no one cares, and if it goes down, it gets you fired,” he says. “Everybody assumes it was a vanity play.” Institutional investors already own some of sports teams’ debt, and that makes more sense, according to Horowitz.
Could the stock market become an option for team ownership? Several teams went public in the 1980s and 1990s, including the Boston Celtics and the Cleveland Indians. But it didn’t turn out well for shareholders, as share prices lagged. Although the Green Bay Packers remain publicly held, they’re now an exception (along with the New York Knicks, the New York Rangers, and an Atlanta Braves tracking stock).
Sports leagues don’t want public ownership, because it means that more financial information from teams and leagues will be divulged, says economist Zimbalist. “They are worried that creates too much instability in management.”
Team owners also are reluctant to spill the beans on their finances. Going public involves securities law compliance, quarterly reports, and Sarbanes-Oxley requirements, such as CEOs and CFOs personally guaranteeing financial information, notes Lawrence of Accelerate Sports. And owners generally don’t need the cash that would come from an initial public offering.
Moreover, teams tend to be discounted on public markets from how they may be valued in private transactions, says Kurt Badenhausen, a senior editor at Forbes who specializes in the business of sports.
“Running a sports team is often antithetical to the way you run a public company,” he explains. “For a public company there is relentless demand to increase profits. But fans don’t want teams run that way; they want to win a championship.” And that often involves heavy spending by owners for star players.
But owners may eventually have an incentive to go public, some experts say. As team valuations continue to increase, shrinking the potential pool of buyers, owners who want to sell their teams might see going public as the most viable way of cashing out.
“The same thing that might encourage leagues to allow private equity fund ownership might also result in public ownership,” Caporale says.
So what has made so many teams profitable, paving the way for those valuation increases? Quite simply, television revenue. Dallas Mavericks owner Mark Cuban, when asked by Institutional Investor to name the most important factors in making a team profitable, responded: “Winning championships and having a good TV deal.”
The Mavericks won the NBA title in 2011. Their operating profit totaled $21 million in the 2016–’17 season, according to Forbes.
TV contracts at the national and local levels are bigger than ever. The NBA’s six-year national deal that began last year totals $24 billion, for example.
TV networks are willing to pay that kind of money because sports represent one of the few types of programming that viewers will watch live, rather than utilizing their digital video recorders to peruse games at a later time and bypass ads. Pro sports contests dominate ratings lists for TV programs. They accounted for eight of the ten most-watched programs in 2017, including six football games, according to TV-ratings tracker Nielsen Co.
“No one TiVos sports,” Moag says, referring to the brand of DVRs. “As a result, advertising spots are critically important. That’s why advertising is up in sports.” Sports programming attracts a broad demographic, particularly young males.
Of course, many sports fans are cutting back on their usage of traditional TV, opting for à la carte viewing options. This trend is hurting financial results at sports broadcasters like ESPN. But that doesn’t mean team owners have to worry about dwindling revenue from media rights contracts.
“I’ve been covering this for almost 25 years, and every year I hear that TV deals will have to be smaller,” says Badenhausen. “But we still haven’t seen any reduction for the top four leagues.”
Earlier this year the NFL inked a reported $3 billion, five-year contract with Fox Sports to broadcast a single game on each of 11 Thursday nights. That amounts to a whopping 43 percent annual gain from the previous Thursday night deal. And the league still has digital rights to sell for those games. Amazon reportedly paid $50 million to stream Thursday games last season.
Experts anticipate that rights fees will continue to climb. “Can they sustain these levels of increases? Probably not,” Badenhausen says. “But I don’t see the market for live TV sports collapsing anytime soon. Sports remain the No. 1 programming for people tuning in to watch live events.”
As viewers cut or shave their cords, TV broadcasters suffer, but that provides an opportunity for their digital brethren. Even if ESPN, Fox, and the other TV broadcasters shell out less for sports content, they may simply be replaced by online players. Amazon, Facebook, Twitter, and YouTube all have offered live sports streaming.
In addition, with most leagues operating under revenue-sharing agreements with players, owners wouldn’t bear the sole burden of a decline in TV revenue. “If TV revenue goes down, then player compensation goes down,” says Caporale. “So if all other numbers stay the same, teams may make less, but it won’t be catastrophic.”
Sports team owners also have benefited over the past five to seven years from labor agreements that have been more favorable to their side, reducing players’ share of revenue. In most cases, players were receiving more than 50 percent of the revenue, and now the balance is closer to 50-50.
“CBAs [collective bargaining agreements] have empowered leagues,” says Inner Circle’s Horowitz. “Every team in the big three sports and two thirds of the NHL should break even or better if they are run right.”
To be sure, this nirvana for owners may not last. “Players are mobilizing to a degree,” Badenhausen says. “They have seen the valuations of franchises really soar and teams become more profitable than ever. So I think they’ll really go after a bigger piece of the pie in coming labor agreements.” That obviously could affect profitability.
Another important factor in teams’ economic strength is stadium revenue — ticket sales and bookings for outside events, such as rock concerts. Teams have largely been able to maximize opportunities there, with most of them playing to capacity crowds, except in baseball, Badenhausen notes.
He and others are highly impressed with Dallas Cowboys owner Jerry Jones in this regard. “No one markets as well as the Cowboys, and that’s why they’re the most profitable team in the world,” Badenhausen says. Forbes estimates the Cowboys’ operating income for the 2016–’17 season at $350 million.
“Jones has expanded the Cowboys brand by bringing in more events to the stadium,” Badenhausen notes. In addition to concerts, AT&T Stadium, the home of the Cowboys, has hosted basketball games, college and high school football games, soccer matches, rodeos, and motocross and Spartan races.
Some owners, such as Ted Lerner of the Washington Nationals, have done well developing property surrounding their stadiums. “Team ownership is really a real estate or media enterprise,” says Octagon’s de Picciotto. “Sports just happens to be the platform of a much broader business.”
The sports revenue pie is due for a big shift in the future, some experts believe. That will come from sports gambling, which team owners and leagues have hoped to monetize for some time. The Supreme Court threw them a lifeline last month, ruling that all states are now free to legalize sports betting. It’s difficult to know exactly how the sports gambling market will shake out once it’s broadly legalized, but team owners would seem to have a huge opportunity to grab a piece of the pie.
Fans could become a lot more interested in watching their favorite teams’ games on TV and in person if they could bet on them. In addition, franchises could potentially sponsor gambling contests in their arenas and online. “There’s $100 billion of unregulated sports gambling,” de Picciotto says. “That will be the biggest pool of revenue ever when it’s regulated.”
All of these factors could appeal to private equity firms thinking about acquiring pro sports franchises. That said, team ownership isn’t all about finances. It also satisfies owners’ thirst for competition, desire to help the community — and vanity.
“It’s often been said that these are people who can walk into a restaurant and order anything they want, but no one recognizes them, so they become sports team owners,” says Steve Gans, a partner at Boston law firm Prince Lobel Tye and a financial adviser to soccer team owners.
Mavericks owner Cuban tells II that the community service element is the most important motivating factor for him. But there is something else.
“There is no other business that throws a parade when you reach the pinnacle of success,” Cuban says. “Google, Amazon, etc. will never have 500,000 people cram the streets to cheer their companies. I love parades.”