Olivier Larochelle

The Business of Sports: Why do billionaires invest in major league sports teams?

With the recent announcement of the purchase of the Phoenix Suns for US$4 billion, billionaire Mat Ishbia has made NBA history with the largest team acquisition transaction to date. Eighteen years ago, when the previous owner, Robert Sarver, bought a majority stake in the Suns at a value of $401 million, very few people would have guessed that the team would have been resold at 10 times its original value in such a short time. That may seem like a remarkable investment, which it is, but it’s not rare in this industry. For example, earlier in 2022, a group of investors paid $4.65 billion for the Denver Broncos (NFL), while the team’s previous owners purchased the team for just $78 million in 1984.  

Although unfortunately not easily accessible to the general public, the professional sports industry is among the most lucrative and coveted investment opportunities available. Over the past 40 years, the value of each team in the four major U.S. sports leagues (NFL, MLB, NBA, and NHL) has increased exponentially, at an average rate that far exceeds that of inflation and the S&P 500. This type of investment has proven virtually impervious to the crisis, recessions and other disasters that have at least slowed down growth in other sectors. To show the magnitude of the situation especially in the last decade: 25 franchises were valued at $1 billion in 2010 according to Forbes, while today more than twice as many franchises are worth at least $3 billion. Along the way, 7 franchises have doubled their value since 2016 alone.  

According to Sportico, from 2012 to 2021, the average value of NBA teams increased by 387%. Even more impressive, for NHL teams, it’s a growth of 1,112% since 1996. In the figure below, we can see this explosion of the increase in franchise value between 2007 and 2016 for cities with at least one team in each of the major leagues. 

Figure 1: Profit of sports teams in different cities in the United States between 2007 and 2016

                                                                 

All worth more than $3 billion, the 50 most valuable sports franchises in the world are worth a combined $222.7 billion, which is 30% more than a year ago. For the curious readers, here are the leagues in which these 50 teams are, as well as their total value. 

Figure 2 : Distribution of leagues in which the 50 most valuable sports franchises compete

Unsurprisingly, American football occupies a large proportion of this top 50, nor is it surprising that the most renowned teams in the various soccer leagues are included considering the popularity of the sport internationally. In 2022, the 10 most valuable sports franchises were as follows, with the Dallas Cowboys unsurprisingly topping the list.

Figure 3 : The 10 most valuable sports franchises in the world

Note that despite the NHL’s growth, none of its teams is represented in the top 50. Its most valuable franchise is the New York Rangers (owned by the Madison Square Garden Sports Group, which also owns the New York Knicks NBA team) at $2.2 billion. The Montreal Canadiens are still in third place in this league with a value of $1.85 billion.

But what kind of people buy a concession?

As you can see, nowadays it takes a lot of capital to afford a top sports team. Many of them are billionaires who got rich in business in another sector, or a group of investors. Some of the best-known examples are Steve Balmer, former CEO of Microsoft, who currently owns the Los Angeles Clippers, and Rob Walton, son of the founder of Walmart and owner of the Denver Broncos.

Today, these owners invest not only to win championships, but also to earn a return. In order for sports franchises to generate so much money and continually increase in value, there are several factors that must be considered. While the goal is to maximize profits like any other business, the revenue and operating costs in the professional sports industry are unique compared to other industries. In addition, it is a seasonal operation due to the nature of the major leagues.

Revenues

First of all, we all think of tickets sold to the public to attend games as being one of the main sources of revenue. However, depending on the league, only 10-40% of the overall revenue comes from in-person sales items, which include tickets and merchandise (jerseys, caps, etc.). On the other hand, franchises also make a lot of money through sponsorship, i.e., by selling companies the rights to sell items that represent their team. The leagues in which these teams play do the same, and redistribute the money raised equally among the teams. For example, the NBA signed an 8-year, $1 billion deal with Nike to become the exclusive apparel supplier for the league and its 30 teams. In fact, a franchise seeks to monetize itself as much as possible. Other common examples are the addition of advertising patches on players’ jerseys, or the naming rights to a stadium.

However, the biggest source of revenue in the high-performance sports industry is undoubtedly television rights. The major networks pay huge amounts of money to the major leagues to broadcast games. For example, Fox, NBC and CBS paid $27 billion to the NFL for the rights from 2014 to 2022. Moreover, this amount does not include what other partners like ESPN and DirecTV pay. The NFL then redistributes the revenue evenly among the teams. Not only that, but the rise of alternative media companies, including Amazon, Facebook and YouTube, is predicted to lead to record increases in media rights revenue in future contracts. Teams, on the other hand, can also establish contracts with local channels, as the Montreal Canadiens do with RDS and TVA Sports, among others. Teams that call major cities like Los Angeles and New York home benefit greatly from this type of contract.

Of course, there are other sources of revenue, but the ones mentioned above are the main ones. The advantage of this diversified revenue model is that when an unfortunate event occurs, as was the case with COVID-19, which prevented teams from welcoming fans into stadiums for several months, there is still a way to remain profitable.

Expenses

As far as expenses go, the main one is of course the money paid for players’ salaries. In the NFL, MLB, NBA and NHL, teams are subject to salary caps or luxury tax penalties in an attempt to ensure a level playing field, so on average the range of player expenses as a percentage of total revenue is around 50% depending on the year and league. Other major costs are the salaries of the remaining staff, advertising and stadium expenses.

In short, during the 2016-2017 sports seasons, Forbes estimated the operational profitability of each of the four major North American leagues from the cumulative earnings before interest, taxes, depreciation and amortization (EBITDA) of all teams. The results presented in the figure below therefore show that the NFL is the most profitable league, while the NHL is the least profitable.

Figure 4: Total revenues and profits of teams playing in the four major leagues

Some other factors will have a positive impact on financial performance, such as a team’s success. First of all, when teams qualify for the post-season tournament or playoffs, it implies a longer season and therefore more games and more revenue. Also, the professional sports industry has the particularity of having a loyal consumer base (the fans), which is not the case for a normal business of goods or services that can easily lose consumers to a competitor. So, when a team is successful, it attracts new fans, often in the region in which it operates, and that can only be a good thing. In the long run, a winning team is a team that increases in value. That’s what every owner wants.

Why are the rich interested?

Today, the motivation behind owning a team is more pragmatic than in the past. Indeed, it can be a good way to open the door to other opportunities by getting closer to the communities in which these billionaires may have business interests. It is also a way to be immersed in an industry where it is possible to connect with other wealthy business people with similar business interests. It is also an excellent investment. For example, the average NBA team is worth 15% more than it was a year ago; the S&P 500 is down 15% over the same period. Given the limited number of assets available (major sports franchises) and the growing number of potential buyers (billionaires), when a team becomes available for sale, there is tremendous competition and buyers are found very quickly.

In conclusion, it has been said that no professional sports team, regardless of its financial health, has ever generated enough revenue to justify its sale price. Yet their value continues to rise. This is because this industry is a “Rich Guy Club”. Much like we collect baseball cards, billionaires collect sports teams. It is on this basis that franchises do not need to be valued at a reasonable amount. Like any luxury item, the main characteristic of owning a professional franchise is that few people can own one, which above all, brings prestige.

 

References

Toptal. (2018). Professional Sports Franchise Valuation. https://www.toptal.com/finance/mergers-and-acquisitions/sports-franchise-valuation

The Ringer. (2022). What’s Behind the Exploding Prices of Pro Sports Franchises? https://www.theringer.com/sports/2022/11/28/23472636/sports-team-franchise-valuation-sale-prices

Roundhill Investments. (2021). How Do Professional Sports Teams Make Money? https://www.roundhillinvestments.com/research/prosports/how-do-professional-sports-teams-make-money  

Forbes. (2022). The World’s 50 Most Valuable Sports Teams 2022. https://www.forbes.com/sites/mikeozanian/2022/09/08/the-worlds-50-most-valuable-sports-teams-2022/?sh=293a7f75385c

Syracuse University. (2017). Why Billionaires Keep Investing in Major League Sports. https://onlinegrad.syracuse.edu/blog/billionaires-invest-major-league/

Insider. (2017). Billionaires are buying sports teams for different reasons than they used to. https://www.businessinsider.com/billionaires-turning-attention-to-sports-ubs-says-2017-10

Luxury Viewer. (2021). Why Do Billionaires Buy Sports Clubs? https://luxuryviewer.com/why-do-billionaires-buy-sports-clubs/