The $2 billion deal for the Los Angeles Dodgers is a home run for sports owners everywhere. The near five-fold rise in the value of the West Coast baseball team since it last changed hands in 2004 underlines a surge in the value of top sports franchises. Only gold comes close to keeping pace as an investment. Rising television revenue is bringing in more cash. But it’s the swelling ranks of the ultra-rich in search of trophy investments that’s stoking prices.
These new owners usually stem from the ranks of high finance. Last year, Apollo co-founder Joshua Harris bought basketball’s 76ers in Philadelphia while Tom Gores and his buyout firm Platinum Equity snapped up the Detroit Pistons. And only last month, hedge fund manager Steven Cohen bought a 4 percent slug of the Mets.
But Frank McCourt has scored the best deal so far from selling to a consortium including Guggenheim Partners and basketball legend Earvin “Magic” Johnson. The Dodgers’ owner, who paid $430 million for the team eight years ago and managed to keep control despite its bankruptcy last year, is walking away with a far better return than he would have earned elsewhere. Putting his money in the S&P 500 Index would have won only a 42 percent return. Gold fared better, up about 300 percent.
The Dodgers’ sale suggests that estimated valuations of other leading sports franchises now look conservative - by 25 percent or more, according to the consultant Sportsimpacts. National Football League team the Dallas Cowboys has probably soared roughly 12-fold since Jerry Jones bought it for $150 million in 1989, according to Forbes estimates.
There are some solid economic reasons for valuations to look healthy, not least swelling TV audiences. That emboldens sports networks to pay ever more for screening rights, especially for live games that are relatively immune to commercials-skipping DVRs. NFL owners, for example, expect a boost of up to 60 percent in TV revenue when current deals with CBS, ESPN and Fox expire in 2013. But most sports teams have mediocre cash flows, with the payoff coming mostly though capital appreciation.
With around 1,226 billionaires worldwide, there is an ever bigger buying base for prestige assets. But if they lose interest, or their fortunes falter, the price of sports teams will start to look like a bubble.
Read more at Reuters Breakingviews.