MLB Team Values
A recent Forbes article reported the latest fair market value estimates of Major League Baseball teams. The team values ranged from the Miami Marlins at $0.980 billion to the New York Yankees at $5.0 billion. Forbes notes that…
“Our team values are enterprise values (equity plus net debt) calculated using a multiple of revenue. The multiples are based on historical transactions and the future economics of the sport and team. Revenue and operating income (earnings before interest, taxes, depreciation and amortization) measure cash in versus cash out (not accrual accounting) for the 2019 season.
Our figures include the postseason and are net of revenue-sharing and stadium debt payments for which the team is responsible. Revenues include the prorated upfront bonuses networks pay teams, as well as proceeds from non-MLB events at the ballpark. Ownership stakes in regional sports networks, as well as related profits or losses, were excluded from our valuations and operating results. Sources include sports bankers, public documents like leases and filings related to public bonds and media rights.”
A Closer look at Valuation
Forbes uses a common valuation method known as the market approach.This approach does not need a formal introduction since it is often used to develop residential real estate values when we buy and sell our homes. The underlying assumptions when applying the approach are less obvious. They include the following.
- There are enough market transactions to observe and they are current.
- The market transactions are comparable. In other words, the market transactions are in the same industry and impacted by the same market vagaries. If not, then adjustments may be necessary to effect comparability.
- The market transactions represent an arm’s length transaction. In other words, the market price was the result of an agreement between a willing buyer and seller.
This method can have its roots in another common valuation method, the income approach. In this approach, value is linked to how much money you can make by owning an asset. If a transaction is completed based upon a value developed using an income approach, then the market and income approaches are related.
Uncovering value using the income approach requires estimating four essential components. These include:
- the amount of future economic benefits
- the pattern of receiving the benefits
- the economic life of the benefits, and
- the risk of receiving the benefits.
Economic benefits are typically measured by revenue and some measure of income.
The resulting measure of value, after estimating these components, is equal to the calculated present value of future benefits. In this approach, it is important to note that a value estimate is more influenced by the receipt of recent benefits than benefits received further the future.
As noted by Forbes, “future economics of the sport and team” are relevant to the value of the MLB teams, or any sports team.
Let’s take a closer look at the coronavirus effect on these economic benefits and resulting team values.
Forecasting Economic Benefits
Important to the start of any estimate of value is forecasting revenue and expenses.
Timing related to the restart of sporting events and shifting opinions and behaviors of American sports fans ultimately impact the economic benefit measures and lead to swings in team values.
Season and conference tournament cancellations and postponements will have an immediate and measurable impact on these benefits, of course, but for how long? Resuming sporting events will depend upon the timing associated with controlling the coronavirus.
Will these forecasted benefits also be impacted by sports fans losing interest and substituting other past times or will interest revert quickly to historical levels? Insight into answering this question and related demographic data are offered in the SSRS/Luker on Trends Sports Poll.
A review of responses to a couple of survey questions about fan behavior demonstrates the importance of this input to forecasting benefits and value.
- Even after the postponement of seasons, more than 50% of all Americans still said they wanted to watch sports to take their mind off the news. This demonstrates that recovery from the current decline in benefit measures are likely short-lived and will recover to historical levels after sports resume.
- Historical levels of viewing interest by AVID fans is likely to recover after sporting events resume. Viewing interest by other fans may represent a possible loss given higher interest in other activities such as Offline, TV/Movies, Online and Video Games, but any loss here represents a small portion of the viewing market.
- Age demographics show that young Americans (ages 18–34) are more likely to have greater interest in other activity options compared to 35–54 and 55+ older fans. Likely, the longer it takes for sporting events to resume, the greater chance the young folks will find other things to take its place and impact benefit measures.
This brief review of the robust survey results offered in the SSRS/Luker on Trends Sports Poll points to some fan base dwindle by age group and fan type, but also points to a relatively quick return of interest upon resuming sporting events.
The delay in resuming sporting events plus uncertainty of fan interest returning impacts the pattern of receiving future economic benefits and the risk of receiving those benefits. Recall that the weight of receiving benefits early in a forecast has greater value influence than benefits received later in the forecast. The early benefit right now is much lower than expected. Further, the Sports Poll responses point to an increased risk of fans returning to historical habits. It is apparent that team values currently face a decline.
Keep track of these survey results that continue to be updated during the social distancing caused by the coronavirus at SSRS/Luker on Trends Sports Poll and IPSCIO’s comments.