Wednesday, August 01, 2007

Is there a bubble in sports franchise prices?

Some comments from Arnold Kling on whether sports franchises make money.

In the post, Kling is asked whether sports franchises constitute a speculative bubble. After all, many owners lose money from operations and only profit from increases in the value of the franchise.

Kling responds that there is no bubble, with an argument that (boiled down) says that teams actually make money in terms of EBITDA (before interest on any debt). I agree with him that there's no bubble, but for different reasons.

For one thing, even if teams are profitable, there could still be a bubble – some of the tech stocks that crashed in 2000 were indeed slightly profitable. You don't need absolute losses for an asset to be overinflated.

But stocks are different than sports teams. Stocks have no consumption value, and are valued only for their ability to produce an income stream. Sports teams, on the other hand, are fun to own. My feeling is that it's that the consumption value of being a happy owner that keeps the prices high ... and I think the prices are reasonable, as I argued
here.

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At Friday, September 12, 2008 1:50:00 PM, Anonymous How To Select A Franchise said...

The $700 million franchise fee paid by Robert McNair to bring the 32nd NFL franchise to Houston is the highest price ever for a U.S. sports team, but sports business investment bankers are split on whether it will set a standard for future sports franchise prices.

"What it means is the value of NFL franchises is rising," said Sal Galatioto, head of the sports advisory group at New York investment bank SG Cowen Securities Corp., which advised Daniel Snyder on his successful $800 million bid to buy the Washington Redskins and their stadium. "The NFL is a juggernaut."

But Marc Ganis, president of Sportscorp Ltd., a Chicago firm that has consulted on sports team acquisitions, said, "It absolutely does not set a bar for future NFL values."

Houston was not just bidding against other groups for a franchise but was in the unique situation of "trying to knock the stars out of the eyes of owners who wanted to go to L.A.," Ganis said.

NFL owners have overwhelmingly approved McNair as the owner of the 32nd franchise, rejecting a $550 million bid by Hollywood superagent Michael Ovitz and a $500 million bid by billionaire Eli Broad and partner Ed Roski to bring the team to Los Angeles.

Steve Patterson, executive vice president of McNair's Houston NFL Holdings Inc., said the $700 million offer was not based solely on revenue streams, projected team value appreciation and profit margins. Instead, the bid was about securing what could be the last expansion team awarded by the NFL, about winning respect for Houston and about beating Los Angeles.

 

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