The other night I was minding my own business, checking the Athletics’ player payroll numbers on Cot’s Contracts/Baseball Prospectus. (This is what I do at night whenever I am not watching an A’s game or vintage re-runs of “Antiques Roadshow.”) I came across two interesting tidbits of information. In the preamble on the Athletics’ page, Cot’s/BP noted, “Forbes Magazine valued the club at $321 million in March, 2012.” Further on, it stated, “Forbes Magazine valued the club at $468 million in March, 2013.”
Holy Toledo! In one year, according to Forbes, the A’s value jumped $147 million, or 46%! What the heck happened? Stomper must have won the lottery! To find out more I went to the source, the Forbes magazine’s piece, “Baseball Team Valuations 2013,” by Mike Ozanian, published March 27. Here’s the link:
The upshot of the story? Major League Baseball seems to be rolling in dough. Stomper did not win the lottery, but Lew Wolff and John Fisher won’t have to scrimp on meal money any time soon.
Of course, we already knew that.
There’s more. In 2012, MLB’s revenue rose 7% while operating income (earnings before interest, taxes, depreciation, and amortization) fell 9% because of rising player and stadium costs. Valuations of all 30 teams rose dramatically (22% in one year, average) in large part because of the emergence of three new revenue generators: the new national TV deal which will distribute an average of $52 million annually to each team, the rise of baseball’s Advanced Media operations (MLB.TV, MLB.com, and apps), and the MLB investment portfolio which Forbes values at $40-$45 million per team. (The portfolio is the dough MLB made from flipping the Expos into the Nationals, plus a cut from the Central Fund.)
Forbes’ estimates an MLB team is worth, on average, $744 million. The Athletics are 28th out of 30 teams in terms of valuation; the Giants are number seven. (Forbes’ assessments do not include local broadcast and sponsorship deals.) Since baseball does not disclose financial statements, I just assumed Forbes’ numbers were guesstimates based on the scarce public sources, but author Ozanian swears he used non-public, “inside” information provided by team executives, league executives, bankers, and other moles.
Still, I was curious why the Athletics’ value jumped so dramatically, more than any other team. The Forbes article noted that the A’s annual revenue had jumped to $173 million, a figure that includes a $30 million subsidy from revenue sharing. That number seems a little high to me, but what the heck do I know? Let’s assume the estimate is close. That jump in revenue doesn’t explain the explosion in the team’s worth. Think of your personal net worth. Is it based on what you make annually? No, it’s based on what you keep, what you own.
Then Ozanian comes clean:
Our team valuations are enterprise values (equity plus debt) and are calculated using multiples of revenue. Thus while teams value MLBAM and BELP on their balance sheets on a “cost basis,” which understates their true value, we incorporate market value estimates for those assets.
Whoa! That’s quite a statement, chock full of pretty fuzzy concepts. Ozanian does mention “using multiples of revenue” for his calculations. That’s certainly a traditional measurement. Back in the day, the standard for business value was five times annual revenue. If your revenue was $100,000, sale negotiations would start at $500,000. But that was a long time ago. There have been a couple of major economic meltdowns since 2000. Since then, a leverage avalanche (debt) has skewed the value of every asset class (stocks, bonds, real estate, fine art, baseball teams, etc.), making the game of asset evaluation very dicey.
What exactly are “market value estimates?” What is the time frame involved? Believe me, timing is everything with market value. Are the Forbes valuations based on what a team would bring today? Is that time frame even relevant? If Lew Wolff decided to dump the A’s right now, how long would it take for money to change hands? A year, easy, especially at the pace of Bud Selig’s Blue Ribbon Committee. A lot can happen in a year, folks.
The thing that really gets my knickers in a twist is the use “enterprise value” as a means of valuing a franchise. I went to Investopedia for some clarification:
Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company's debt, but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value. The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation.
Does that sound right? I am no accountant, but that seems odd to me. I can see the theory of enterprise value functioning in rising markets. But markets go down, too. If enterprise value (equity PLUS debt) is valid, why are banks foreclosing on underwater homeowners? Under the “enterprise value” theory, new buyers/speculators should pay the owners for their “equity” plus what they owe, right? A guy owes $400,000 on a house he bought in 2008 for $600,000. Two years later, he needs to sell. Will a buyer offer him $600,000, his theoretical equity plus his debt? Not bloody likely. Okay, $400,000 then, the value of his debt? Sorry! In a distressed market, the buyer will offer as little as the desperate owner (or banker) is willing to take, whatever that amount might be.
I don’t know who Forbes or Investopedia considers an “acquirer,” but many of the acquirers I know consider debt, not an asset to be purchased, but a mistake to be avoided. I learned a lot about the “acquiring” business from the late Nick Kouretas, a Greek who used to buy distressed properties in San Jose. Many years ago, I interviewed him for the San Jose Business Journal. Nick was reputed to be a mob guy, and he loved the reputation. But he admitted the farce to me. “C’mon, Greek mafia guys? In San Jose? That’s ridiculous,” Nick said “But, remember, if I don’t like your story, you might end up cemented in a birdbath somewhere.”
About buying stuff, he said, “Yeah, guys with suits come in here all the time quoting me this and that. So I tell ‘em a price and they are shell shocked. They whine to me, ‘That price won’t even cover what we owe!’
“Your debt is your problem, your mistake,” Nick said. “If I pay you what you owe, then I’m makin’ the same dumb mistake!”
Another consideration: How often does a team change ownership? Not often. The market for a MLB team is highly-leveraged (lots of debt) and thinly-traded. In markets like that, anything can happen. Valuations can jump, or collapse, furiously based on a lot of factors. Sure, Magic Johnson and his merry band can come along and pay $2.15 billion for a franchise. Interestingly, Forbes values the Dodgers at $1.615 billion, one half billion less than the purchase price. That is some shrewd negotiating there, Magic! And you didn’t even get control of the parking lots!
Maybe I’m a pessimist and a skeptic (maybe? maybe!?) but I see many plausible eventualities that could affect the Athletics’ value negatively:
The U.S. economy rolls back into recession. (1st quarter 2013 GDP growth at 1.8%, barely above stall speed!)
Baseball players go on strike. (The Players Association reads Forbes magazine and demands a much bigger cut of the action!)
Bud Selig retires. (He appoints a committee to study the problem, however, and remains Commissioner forever!)
San Jose loses its lawsuit. (MLB, and the Giants, tell Lew Wolff, it’s Oakland or the highway!)
Billy Beane retires. (Billy decides to open a soccer boutique in Tarzana!)
The A’s hit another five-year fallow period. (After being cut 18 times, Daric Barton becomes General Manager!)
I have no idea what the A’s are worth. My point is, neither has Forbes. What constitutes the Athletics, really? What does the club own? The A’s have a brand name, a piece of a closed shop called Major League Baseball, and a bunch of contracts that will expire shortly. Don’t get me wrong. That’s a lot, and I would love to have a piece of that action. But how do you assess its value, given the vagaries of markets in the world we live in? Markets are based on perceptions. If Magic Johnson walks into the room, maybe the A’s are worth $1 billion. But what happens if a guy like Steve Schott is the only qualified buyer?
Here’s another sneaky, skeptical suggestion: Maybe Forbes’ perception of the A’s value increased because they won the American League West Division. Who knows? (For some reason, the Heisenberg Uncertainty Principle comes to mind.) If you think valuation of the Athletics is as easy as Forbes magazine suggests, then you might want to consult Steve Forbes himself.
Forbes, Inc. is a private business that was once regarded as a multi-billion dollar media empire. Then, suddenly, the world changed, the value of print media plunged, and Forbes, the company, had to divest itself of assets (including Investopedia and its Manhattan headquarters) just to pay the bills, including debt service. (Fortune magazine, Forbes magazine’s rival, gleefully revealed the details of Forbes’ distress.) Did Forbes get “enterprise value” for its hastily-sold assets?
What do you think?