Anno accademico 2017-2018
Corso di Laurea Magistrale in Economia Aziendale
Curriculum “amministrazione e governance delle
aziende” (ex DM 270)
PRINCIPLES OF BUSINESS VALUATION
The Valuation of:
1) Sports Franchises2) Automobile Dealerships
Andrea Sagone
Managing Partner,
Cross Court Capital
November 2017
“The Valuation of Sports Franchises” Page 3 November 2017
Sports Franchises & the Entertainment Industry
Professional sports teams, usually part of wider franchises, are part of the
entertainment industry
Entertainment businesses seeks to maximize value in 2 ways:1. attraction of large audiences: The most important goal is to maintain and increase this
2. brand development and extension: Allows the franchise to have additional revenues
The economics of a sports team depend primarily on four variables:1. the relationship between the owner and the players
2. regulatory environment: specific laws and league regulations
3. broadcast and cable television contracts (in recent years the media is the first client of
franchises and/or sport leagues)
4. venue attributes
The valuation of Sport Teams can be carried out through:— the market transaction method
— the discounted cash flow method
These valuation methods would need to be adjusted on a case-by-case
basis
“The Valuation of Sports Franchises” Page 4 November 2017
Owner / Player Relationships (1/2)
In the United States, the largest team expense is player compensation.
This expense represents about 60 percent of team revenue
The growing level of player compensation is an increasing issue— team expenses are increasingly reaching unsustainable levels
In the U.S. leagues and team owners have tried to cope with this problem
by instituting salary caps and revenue sharing agreements
Nowadays, traded media companies own teams in quite all sports— In this way, sport leagues can offer future career opportunities to players and try to slow the
growth of cash compensation
— Also the use of ESOP induces star players to remain more on the same team
In Italy, player expenses are normally recorded as intangible assets and
written off over a pre-defined period of time— About 10 years ago, the level of annual write-off was so high that most soccer teams
couldn’t reach a profit. As a result, the well-known “Decreto salva-calcio” was issued,
allowing all soccer teams “ to impair” for capitalized players expenses and, so, to
restructure the firm.
“The Valuation of Sports Franchises” Page 5 November 2017
Owner / Player Relationships (2/2)
With reference to the owner / player relationship, the analyst
should understand:
1. the contribution that each player makes to his team
2. his contract terms and conditions
3. his ranking in terms of performance
4. his importance and attractiveness within the league
“The Valuation of Sports Franchises” Page 6 November 2017
Regulatory Environment: Specific Laws and League Regulations (1/2)
Laws and rules governing professional sports have a significant
impact on the process of valuating sports teams
These laws and regulations can be analyzed from three different
point of views:
1. organizational
2. revenue sharing
3. owner/player relationships
“The Valuation of Sports Franchises” Page 7 November 2017
Regulatory Environment: specific laws and league regulations (2/2)
Organizational issues
Antitrust laws allow leagues to enjoy exemptions. It means, for example,
team owners have the exclusive right to control the merchandising process
or other “uncommon” revenues (vs. “common revenues”)
Revenue sharing (“common revenues”)
In the U.S.A. the Sport Broadcasting Act was issued in 1961. It provides
for the league to negotiate “in concert” with television networks— National television revenues are divided among the teams, which receive the same amount
of television revenues. The amount is independent of the market share and by the success
(number of wins) of each sports team
There are also many other revenues that are not divided, such as local
televisions rights, cable TV rights, gate receipts— A great disparity between teams exists
Owner / player relationships
The analyst should understand the rules governing this relationship: free
agency, salary caps, player mobility
“The Valuation of Sports Franchises” Page 8 November 2017
Broadcasting and Cable TV Rights (1/3)
In professional sports, in the U.S., television revenues represent 60
percent of revenues from rights
Television rights not only permit professional sports franchises to
generate cash each year, but also to build and maintain powerful
brands
The demand for television sport content is increasing worldwide,
despite declining live sport viewership
What is the volume of national broadcast and cable TV rights?
“The Valuation of Sports Franchises” Page 9 November 2017
Broadcasting and Cable TV Rights (2/3)
Some examples of national broadcast and cable TV rights deals:
Some examples of national broadcast and cable TV rights deals:
UEFA got the sport’s richest clubs to signed a new Champions League agreement. The
accord runs from 2018 through 2021. A larger share of the annual billion-dollar prize
money, made up of television and sponsorship rights sales, will go to big teams like
defending champion Real Madrid, Barcelona, Juventus and Bayern Munich.
— UEFA’s annual commercial revenue for the Champions League and the second-tier
Europa League is 2.24 billion euros ($3 billion)
— Each of the 32 teams that qualifies for the initial group stage of the Champions
League gets a basic fee of 12 million euros, with incremental increases based on
results and the size of the national television market in the country they are based.
The biggest earner gets about 100 million euros
Agreement Sky/Italian Soccer League: “Platinum live” (rights for “Serie A” for seasons
2010-2011 and 2011-2012) = 580 million € per year. In 2009 “Conto TV” opposed a
motion to the “Corte d’Appello” and the motion has been accepted in November 2010.
The general meeting of “Serie A” contested the decision of the “Corte d’Appello”.
Recently, Conto Tv has presented an “interlocutory injuction” (ricorso cautelare) to the
Milan Court; the injuction has been rejected.
“The Valuation of Sports Franchises” Page 10 November 2017
Broadcasting and Cable TV Rights (3/3)
Why is it so relevant to know the amount of “revenues get” through
television rights?
Understanding the terms and conditions of the contracts between a
team (or a league) and the TV or radio broadcasters is a part of the
valuation process that cannot be ignored
It’s also important to remember that there is a big disparity in local
broadcast fees between teams
— The bigger the team becomes, the higher is the fee (in the U.S., local TV and
cable TV revenues make up between 11 percent and 16 percent of total
revenues)
“The Valuation of Sports Franchises” Page 11 November 2017
Venue Attributes (1/2) Venue = a venue is a place where an action or event has been arranged to
happen (Collins Cobuild “English Language Dictionary”).
In the Nineties the new frontier for sports teams was the exploitation of
real estate: building stadiums and arenas
Team owners are currently trying to pressure the cities where teams play
to have a new stadium or to renovate the existing one
New arenas can be used to set up additional events, like family shows,
religious meetings, corporate annual meetings, etc..
Why are stadiums and arenas so important? — Revenues generated by stadiums and arenas are not shared among other league teams!
In the U.S.A., the majority of NHL teams own or control their venues— This control allows sports franchises to enjoy other revenues resulting from venue
operations
— Venues with 100 events, or fewer, per year generate revenues that are adequate to pay a
small staff of full-time employees
— Venues with 250 events, per year, or more can obtain an economy-of-scale benefit: they
may, in fact, retain trained in-house staff, which is an important intangible asset and a
relevant source of revenue
“The Valuation of Sports Franchises” Page 12 November 2017
Venue Attributes (2/2)
Revenues $000s % of total
Premium seating 22.750 43,80
Ticket rentals 5.850 11,20
Concession sales 8.450 16,20
Novelty sales 1.300 2,50
Parking 3.900 7,50
Advertising 5.850 11,20
Other revenues 3.900 7,50
Total revenues 52.000 100,00
An example:
Statement
of Revenues –
New Arena
with Hockey
and Basketball
Teams
“The Valuation of Sports Franchises” Page 13 November 2017
Valuation Methodology (1/4)
The analyst first has to examine the market dynamics of the business
The sports market is unique. Its uniqueness arises from several factors.
The emotions sports teams evoke in their fans, in fact, make this business
different from others
The success of a sports business is measured not only in economic terms,
but also by the ability of team to lose or to win (and hence to win over
fans).
The primary approaches for estimating the value of a sports team are:— the income approach
— the market approach
The income approach
In an Anglo-American perspective, the most applicable income approach
method to value sports teams is the DCF method
Using this method the analyst can:— consider and analyze value drivers related with merchandising
— make reasonable assumptions about the possibility of maximizing these drivers
“The Valuation of Sports Franchises” Page 14 November 2017
Valuation Methodology (2/4)
The valuation process is developed trough the following steps:— Revenue analysis and financial performance (income, balance sheet, cash flow
statements)
— “benchmarking” of team revenues and expenses (side-by-side analysis)
— choice of a number of case studies of successful (or unsuccessful) teams;
— analysis of business scenarios
— building of the perspective cash flow, based on the selected scenarios
The variables to be projected are many and complex. Analyst should be
particularly sensitive to bias
What is the discount rate to be used?— It’s the weighted average cost of capital (WACC)
— To estimate the cost of equity capital, the Capital Asset Pricing Model can be used. What is
the right “beta” to use for sports team? It’s not possible to observe the movement of sports
franchise stock, because pure play or near-pure play companies are very few. For the U.S.
market an average of betas from the entertainment industry can be used (84 firms; beta =
1) and the betas of companies which profitability depends on sports (Nike, Reebok, Russell
Athletic, etc. – beta for the 16 shoes firms = 1,20).
“The Valuation of Sports Franchises” Page 15 November 2017
Valuation Methodology (3/4)
Market approach
The analyst may apply two methods within the market approach:— market transaction method (comparable transactions)
— traded company method (comparable companies)
With the market transaction method, the analyst (prior to applying the
multiple referred to the sample of comparative transactions) has to:— collect and analyze recent market transactions
— make adjustments on the basis of a comparative analysis between the market transaction
and the sports firm
The comparative analysis should be conducted considering:— size, location and demographic data on the different markets
— the possibility of scale economics
— local television agreements
— ownership of venue
— players contracts
— liabilities and obligations
— venue revenue splits
“The Valuation of Sports Franchises” Page 16 November 2017
Valuation Methodology (4/4)
The difficulty in applying this method is complicated by the
presence of buyer synergies which are often impounded in the
purchase price
With the guideline publicly traded company method, the analyst
should:
— select a sample of public companies, similar to the subject company
— gather and analyze publicly available date (market-derived pricing multiples)
— apply multiples to subject company parameters
The problem with this method is (i) that equity of sport teams is
often in private hands or (ii) sports teams represent only a small
part of public company’s business.
Which multiples are better to use? In my opinion:
— P/S or
— P/CF or
— EV/EBITDA
“The Valuation of Sports Franchises” Page 17 November 2017
Feasible Venue Development Projects
One of the most topical subjects (common in Italy) about valuation of sports
teams is venue development project feasibility
Venue project feasibility is judged in the same way as the practicability of an
investment project in the real estate industry: economic feasibility exists if “a
project obtains the required rate of return on the full replacement cost of the
individual assets employed”
Objectives of a project relative to a venue are to:— provide investors with an appropriate rate of return
— obtain brand expansion
— enhance core assets
In the U.S.A. (in the years between 1988 and 1996 alone) more than 80
percent of hockey and basketball teams carried out financial operations to
operate from a new venue (moving into a new one; constructing a new venue;
obtaining from a governmental entity a commitment to built a new one).
It’s important to point out that venue feasibility is not part of the valuation: the
analyst doesn’t have to seek the theoretical value of the project, but he makes
a recommendation about the possibility of the project.
“The Valuation of Sports Franchises” Page 18 November 2017
2) THE VALUATION OF AUTOMOBILE DEALERSHIPS
“The Valuation of Automobile Dealerships” Page 18 November 2017
“The Valuation of Sports Franchises” Page 19 November 2017
Reasons for Valuation
The most common purposes for valuation are
the following:— dealer succession. Because of franchise relationship, the
valuation of a dealership for estate and gifting purposes is very
common
— M&A transactions. Most dealerships are transacted directly
between existing dealers
— marital dissolution
— litigation. Valuations are used in disputes with manufacturers,
usually in the form of lost profit computations
— sale of dealership franchise: the selling dealer wants to obtain
an accurate value estimate before placing his business on sale
“The Valuation of Automobile Dealerships” Page 19 November 2017
“The Valuation of Sports Franchises” Page 20 November 2017
Analysis of the business (1/2)
An Automobile Dealership is likely to encompass several different
businesses (i.e. complexity):— new vehicle department
— used vehicles department
— parts department (retail and wholesale activities)
— finance and insurance department
— lease and rental department
Key functions are also— relationship with manufacturers
— relationship with key buyers
N.B.: in the U.S.A. most well-run dealership have net income that is less
than 2 percent of total revenues.
Relative to new and used vehicles departments, it’s important to point out
that the methods for acquiring and marketing these two types of vehicles
are very different. In recent years, gross profit from used vehicles has
increased
“The Valuation of Automobile Dealerships” Page 20 November 2017
“The Valuation of Sports Franchises” Page 21 November 2017
Analysis of the business (2/2)
Parts department: if well combined with service department, can have a
strong effect on firm profitability
“Back end” operations are able to increase business profitability, also in a
period of global crises (people spend their dollars to repair rather to
replace existing vehicles)
Finance and insurance department: it’s the one requiring the least
overhead and producing the largest gross profit
Largest dealerships may also have separate departments for lease and
rental sales
A very important driver for the success of the business is the relationship
with the manufacturer and key buyers
The most well-run dealership operate, on average, on after-tax net income
of less than 2% of total revenues!
“The Valuation of Automobile Dealerships” Page 21 November 2017
“The Valuation of Sports Franchises” Page 22 November 2017
Key risk areas
Environmental Issues – The analyst has to evaluate off-balance-sheet
liabilities (such as environmental contamination)
Franchise Agreement Terms – Terms and conditions of franchising
agreement can strongly affect value (such as the transferability of the
franchise)
Viability of the dealership location – the manufacturer is looking to have its
dealership located in the most profitable areas
Manufacturer relationship and manufacturer policies – the manufacturers’
policies on financing terms can greatly influence a dealership performance
and profitability
Economic issues – automobile industry is affected by historic and
economic events
Regulatory issues – the imposition of a luxury tax, for example, may
decrease the profitability of the business
“The Valuation of Automobile Dealerships” Page 22 November 2017
“The Valuation of Sports Franchises” Page 23 November 2017
Valuation methods
Excess earnings method
Income approach
— a simple capitalization of earnings or a discounting of future cash flows may not
reflect all the elements of the value of the business
Market approach method
— Limited information on transactions involving dealerships is available from
market databases; the size of the transactions is generally small and the
transactions may vary widely in their terms and prices
Empirical method:
— Adjusted net assets + blue sky
— Blue sky = multiple * normalized pre-tax, pre-LIFO earnings (between 1 and 3
times).
“The Valuation of Automobile Dealerships” Page 23 November 2017