The Misvaluation Of Sports Assets: Investors Need To Look At The Real Value Drivers

How do you truly value a sports team? It’s a question that’s become even more pertinent when you consider the stratospheric heights that valuations have reached over the past few years. Look at the Manchester United saga; the Glazers have courted plenty of suitors to part with $6bn of their hard earned cash in return for one of the mos§t recognisable sports brands in the world, ranging from Britain’s richest man, to sovereign wealth funds from the Middle East. The numbers border on incredulous, particularly when you consider that the value of the club has soared by more than 30 percent in the last year. Is it undervalued? Is it overvalued? Or just misvalued?
Here is the issue: sports teams, let’s call them assets, are still being audited using traditional valuation methodologies which focus on revenue, market size and brand value. This is too simplistic and doesn’t analyse the other factors that contribute to the success - and value - of sports assets. Let’s take a look at what the real drivers of value are in the sports industry.

Evolving Ownership And Skyrocketing Values

In the past three years, we’ve seen a shift in the typical profile of a sports owner; it’s no longer the single ultra-high-net-worth families or entities - instead we’ve seen more diverse, minority ownership structures. This, in part, has been driven by skyrocketing valuations, making it incredibly difficult for these assets to change hands to another single entity. Chelsea Football Club's $3.2 billion sale is a good illustration of this trend. 

The pandemic also showed just how resilient sports can be; while the rest of the world stopped, the majority of sports went on. Sure, ticket sales took a hit but fans, often at home under lockdown rules, still had an insatiable appetite for sports content. Balance sheets shifted, with technological advancements like connected TV creating new revenue streams for sports assets off the field. In came new, alternative, investors who saw an opportunity to ride the coattails of the content juggernaut. The net result? Valuations went through the roof. 

The Shortcomings Of Traditional Valuation Methods 

Sports assets are traditionally valued based on the sum of values from revenue generated by the team, the franchise’s market size and location, the value of the associated real estate, and the overall brand value. Precedent transactions and relative comparables also play an important role in valuing sports assets. These factors are undeniably important, but they often fall short in capturing the asset's full potential. The 'trophy asset' phenomenon, where the value detaches from financial fundamentals - more so than with other asset classes - and the lack of transparency in deal transactions complicates the valuation process even more. Specifically, the traditional approach fails to consider the cultural significance, brand capital of athletes and general fan engagement, all of which are becoming increasingly important today. 

The Real Value Drivers: Elite Athletes And Cultural Significance

Professional athletes' individual brand capital is a crucial, often ignored, value driver. We need to look beyond shirt sales (even if PSG did manage to shift more than a million Messi shirts after signing him), and instead look at their influence on fan and sponsor engagement. This is immensely valuable, especially among Gen Z-ers, who engage more with athletes than clubs - and the value of a particular sports asset is directly correlated with the level of fan and sponsor engagement. On top of this, the cultural value and relevance of sports assets are equally significant. The global reach of sports franchises, fueled by streaming and social media, has expanded fan bases, making cultural relevance another hidden but key value driver.

Let’s take two examples and crunch some numbers to illustrate this: the Phoenix Suns and the Savannah Bananas. 

In 2023, Mat Ishiba, owner of United Wholesale Mortgage, and Justin Ishiba, CEO of Shore Capital Partners were approved to buy a 57% stake in the NBA Team Phoenix Suns and WNBA Team Phoenix Mercury for $2.28B, valuing the franchise at $4B. For the 2022-2023 season, the Phoenix Suns generated $366M in revenue and $15M in EBITDA, valuing the franchise at ~10.9x revenue or ~267x EBITDA. Multiples of this size may seem outlandish when comparing them to the value of other asset types but, as I mentioned, the value of sports assets is more complex. A major consideration in the valuation process was the profitability of the media rights associated with the team and league, including the NBA’s deal with ESPN and Turner Sports for U.S. broadcasting rights. Another consideration was the agreement that any revenue generated within a 90 mile radius of the NBA’s venue belonged to the franchise, making demographic analysis - the population size of the metropolitan area of Phoenix, roughly 5 million people - an important piece of the puzzle. The team has also been able to attract top talent such as Chris Paul and Devin Booker, increasing the team’s probability of reaching playoff or championship games. All of these considerations are specific to sports assets and can never be overlooked.

On the other end of the spectrum, the Savannah Bananas, a lesser-known baseball team, demonstrated how a unique business model and social media presence could drive value: their approach was selling tickets for $25 (including a seat and unlimited hotdogs, hamburgers, and soda), making parking free, and barring advertisers from entering the ballpark. In 2023, this small town team that plays in a league with little to no media coverage was able to sell out a 87 game world tour, generating roughly $10.1M in ticketing revenue. On TikTok, the Savannah Bananas have more followers than any MLB team, standing at 7.7 million followers compared to the Yankee’s 1.2 million. This resulted in a valuation of $28.1M, proving there are assets worth looking at in non-Tier 1 teams across the world. While the Bananas have an atypical style of sport and conducting business, an analysis of their mass following, ability to create demand in the market for a different type of sport experience, and surprising financial success makes them one of the most interesting baseball properties in the U.S.

Some Tips For Investors In This Space To Grasp The Full Picture

So, how do you accurately value your sports assets? That’s for you to decide. However, there are a few things below that you can bear in mind when trying to gauge what fair value is, whether it’s a multi-billion dollar NFL franchise, or Little League Baseball. 

Be creative: valuing the current and projected revenue streams of a business is often more straightforward than valuing its brand capital and other intangible assets - so you’ll need to use reasonable creativity in your methodology when assessing the latter. Research or seek help where needed to understand the right metrics to look at for specific assets.

Pay attention to the cultural context: things are changing fast when it comes to sports consumption by fans and the media. New technologies are always emerging that are changing the athlete and consumer experience around sports - and your valuations should coincidently adapt to these market evolutions. Plus, while teams have predominantly stayed apolitical, many athletes and clubs now use their platforms to stand up for various racial, social, and environmental causes, which can influence the valuation of a particular asset.

Don’t forget about regulation: you’ll also need to consider the specific regulatory landscape of the league or market. Issues like salary caps or spending limits, ethical considerations, and fair competition norms play a significant role in determining an asset's value.

Feel confident in your research: overall, you need to deeply understand the business model of the underlying asset, regulatory environment of the league and media rights, and the value of the intangible capital your asset has. If you don’t feel comfortable with those aspects, partner with people and companies who do.

The primary and secondary markets for sports have never been more active, meaning sports assets have never been more valuable. But as the industry evolves, so must the valuation methodologies, incorporating all kinds of cultural and branding elements to reflect more accurately what a team is actually worth - I believe it’s down to new investors to change the game, and establish a better way of trading sports assets for the 2020s.