Baseball Ownership Has Become a Lot More Than Dollars and Sense
Has the world gone mad or are the Seattle Mariners really worth $80 million?
The Mariners have been a lousy team playing under a depressing dome before relatively few fans since their birth in 1977. Can’t Congress invoke the Gramm-Rudman budget-deficit reduction law to force that price downward into sanity?
Put it this way: If a genie granted your wish for a fortune of $80,000,000, would you rush out to Seattle to buy a team that even one-time co-owner Danny Kaye couldn’t make entertaining?
Jeff Smulyan and his partners, including the august Morgan Stanley investment house, did. Maybe Smulyan, president of Indianapolis-based Emmis Broadcasting, was listening too much to Emmis’ 24-hour sports radio station WFAN in New York, and got a bad case of baseball pneumonia and franchise-buying flu.
But he isn’t ashamed of the investment. Smulyan knows the emmis --it’s Yiddish for truth-- about buying into boom-time Major League Baseball: There are only 26 teams, so if you want a seat on the Ownership Luxury Exchange, if you truly want to feel the glory of being a sports mogul, you have to pay very dearly.
“The price we paid is a lot like the prices we see in broadcasting,” said Smulyan, 42, whose company owns 11 radio stations. “People say it’s the Greater Fool Theory, but we looked at the revenues and we had an idea of what we’d have to pay. Our bottom line is anything that so many people have that much interest in is a good business.”
For all of Smulyan’s analysis of the Mariners’ finances, he admitted: “I don’t know if (setting the price) was as much science as it was instinct.”
The Mariners may never turn into as successful a long-term investment for Smulyan as they were for George Argyros, who paid $13.2 million for the team in 1981. The Newport Beach real estate magnate--worth $290 million, according to Forbes magazine--sextupled his purchase price. To match that, Smulyan would have to make the Mariners worth about $485 million. And that’s the emmis .
Despite the seeming absurdity of the Mariners’ price tag, the $80-million figure is in line with other recent sales: Last year, the pre-revival Baltimore Orioles were sold by the estate of Edward Bennett Williams, the late Washington attorney, for $70 million to financier Eli Jacobs, R. Sargent Shriver and Oriole president Larry Lucchino, and early this year, the pre-Nolan Ryan Texas Rangers were auctioned off by oilman Eddie Chiles for $80 million to a partnership led by George W. Bush, son of President Bush.
“I can’t imagine that in a year’s time, the Mariners became worth more than the Orioles,” said financial consultant Larry Greenberg, who has advised on the financing of Joe Robbie Stadium and the Hoosier Dome and believes it folly to make team evaluations. “There’s a failure of logic somewhere. I think it’s insane.”
Even if selling baseball teams is as illogical as Wall Street on a frenzied triple-witching-hour program-trading day, it remains a functioning supply-and-demand market. When a major-market team goes up for sale, watch the centimillionaires line up. Then observe the values rise.
Virtually every new sale sets a floor for the next one. Witness the escalation of team values over the last few years when the Cleveland Indians went for $45 million in 1986, the Minnesota Twins for $45 million in 1984, and the Detroit Tigers for $50 million 1983. Only the $80 million paid by Nelson Doubleday and Fred Wilpon for the New York Mets in 1986 matches the current lower rung of estimated values.
So what would happen if the New York Yankees, reputedly the most valuable franchise in sports, went on the block?
If Peter O’Malley--whose father Walter became principal owner of the Brooklyn Dodgers in 1950 and moved them west in 1958--wanted to sell the family business, what could he get?
In an attempt to put a fair market value on all 26 teams, estimates were received, and then averaged, from several accountants and financial consultants familiar with team values.
The estimates show a broad vista of values: from a low of $85 million for the Indians up through $120 million for the Kansas City Royals and $145 million for the Toronto Blue Jays to an Everest-like peak of $200 million for the Yankees--for whom principal owner George Steinbrenner and partners paid $13.1 million in 1973.
“Any time you give values, it’s from a certain point in time,” said Steven Matt, manager of appraisals and valuations for Arthur Andersen & Co. in Dallas, considered by many the leading appraiser of team values. “Lots of things change with a sports team that causes values to change. You can have significant changes in your player payrolls, due to new contracts and trades. You can sign new local media agreements. Looking into the future, changes in free agency or arbitration eligibility could dramatically affect team values.”
It’s ironic that a team’s value can be enhanced by having little or no debt, no losses, a low payroll and few highly paid players. The combination may practically be a formula for last place, but a buyer may see so much upside potential in inheriting a team without financial problems, that he or she may pay the very expensive piper.
So the market frequently doesn’t make sense. Success doesn’t always breed the highest values. But sometimes it does.
And then again, values can be set simply by how badly the centimillionaire wants a team. And with the prices so high for a team, only the wealthiest need apply. Nine baseball owners appear on the current Forbes magazine list of the 400 wealthiest Americans. They are worth a total of $7.9 billion, or an average of $877 million each.
Consulter Bruce Bingham of the accounting firm Peat, Marwick, Main & Co., who works with teams, and management teams of stadiums and arenas, said: “What we’re dealing with is a market that’s out of balance and has been for quite a while. The pride that individuals have in team ownership skews, alters and renders very difficult a fair market evaluation.”
Even if the going price for a sports team appears inflated by generous “ego premiums,” analysts carefully examine several conventional areas of valuation:
--Attendance: Has the team had a consistent record of drawing well? Mighty as the Oakland A’s are now, fans haven’t always come in droves, whereas the Dodgers’ and St. Louis Cardinals’ values are perennially high because their attendance is always high.
--Local market: How big is the team’s market? Can it draw millions from a metropolitan area, as in New York and Chicago, or does it have to struggle to lure fans from several states, as the Reds do in Cincinnati? In sports team valuation, teams in Los Angeles and New York get the top spots because of their market sizes and potential for big TV deals.
--Broadcast media: How much is the team getting in TV, cable and radio rights? Value is added if the team is close to negotiating a new deal with the prospect of increased millions coming in the near future.
--National revenues: More cash is coming to teams by way of national media agreements, plus marketing and licensing deals negotiated by the commissioner’s office.
--Record: Has the team been successful on the field? Has it been a contender? Has it appeared recently in the World Series? Perennial contenders such as the New York Mets retain high value for their record, among other factors.
--Stadium: Does the team have too many cheap seats or is it adding higher-priced club and luxury seating? Is it building a new stadium with better, more expensive seating and state-of-the-art concessions, such as in Chicago, for the White Sox, and Baltimore?
--Lease: Is the team’s current lease lucrative? Is it getting too little from a long-term lease that it can’t get out of? Is there an escape clause? Is there a chance of getting out of a lease and moving? Does the team get an equitable share of parking and concessions revenues?
--Personnel: How large is the team’s payroll? Does it have a bevy of players signed to long-term guaranteed contracts? How many players are eligible for free agency and salary arbitration? Does it have deferred payments to players no longer active or on the team? What’s the quality of its front-office staff?
--Comparable value: What have other teams recently sold for and are they in similar markets?
Even with baseball’s recent prosperity, buying a team is still not the best of investments. Prospective owners know that, which is probably why they have made their millions in other businesses. The year-to-year return is mediocre at best, and the money would do better invested in treasury bills. It’s only when the owners cash out that they discover capital appreciation, or more simply, a killing.
Said one consultant: “These organizations cannot support a reasonable rate of return to investors, which is why these franchises are not typically financed with debt. It doesn’t yield a lot.”
And then along comes ego. Analysts can come up with an estimate based on solid, cogent financial analysis, then add on the ego premium.
How badly does a buyer want a team? How much of an ego premium above the book value of the Dodgers would someone pay to own the premier team on the West Coast and one of the best stadiums in all of sports?
Without the ego premium, how else can one fully explain why Donald Trump has been heard to offer upward of $250 million for the Yankees? Or why George W. Bush would buy the Rangers, in part to step out of his father’s shadow and use the team’s reflected glory as a political springboard?
“There’s a lot of emotion you can’t put a dollar figure on,” said Gene McHale, former president of the Yankees and now president of American Sports Associates, a Long Island-based consulting firm.
“You go through the emotions of looking at the cash flow and the rate of return you think you’ll get--and then you make a deal that makes no sense. Why do people do it? I guess they think there’s a future. People see higher cable rights and see values increasing. You look at the future and you think you can make a big deal by selling.”
Prospective owners looking beyond their ego and at baseball’s current financial situation see factors that substantially hike team values.
The most important event in team valuation in the past year was the signing of the new four-year contracts with CBS-TV and ESPN cable network that will go into effect next season. Worth $1.5 billion together, the deals will more than double, to about $14 million, what each team nets in national and cable TV revenues.
The Mariners, for instance, were valued by Matt at $58 million in early 1988. Just before the team was sold to Smulyan, Matt raised his estimate to $76.1 million--primarily because of the value of the CBS and ESPN deals.
The single biggest factor affecting one particular team--the Yankees’ 12-year, $500-million cable deal with the MSG Network--raised the team’s already league-leading value into the stratosphere.
Put it this way: If the Yankees drew no fans and got nothing from concessions, Boss George would still get nearly $50 million a year just for putting a team on the field. No other team could so easily pay its current player payroll, and then easily sign free agents Mark Langston, Rickey Henderson and Hubie Brooks.
“The MSG deal makes a huge impact on the Yankees’ value,” Matt said.
Both the Orioles and Blue Jays have chalked up considerable growth in value since last year.
The Orioles’ stunning turnaround, from the worst team in baseball in 1988 to second place in the American League’s Eastern Division in 1989, means greater value. So does the prospect of moving into a new stadium in 1992.
For the Blue Jays, moving into the Toronto SkyDome in mid-1989, besides winning the title in the American League East, means more value. The shift from Exhibition Stadium, a football stadium with bad baseball sight lines, to their new home, brought great exposure, their first season with attendance of 3 million and the prospect of 4 million in the future.
If the A’s and San Francisco Giants’ values of $85 million seem low, consider that this is the first year in their joint histories that each drew more than 2 million fans at the same time. In fact, it was the Giants’ first year over that magical attendance level, and the second time for the A’s.
A World Series victory for either the A’s or Giants may not automatically mean a noticeable increase in value, however. Success may mean more attendance, media rights fees and advertising revenues in the following seasons. But it can also portend a higher payroll, more long-term player contracts and, because of the unlikelihood of repeating as league or World Series champions, lesser success on the field. A lot depends on how a front office maximizes the positive and keeps the cash flowing in good times and bad.
Jerry Reinsdorf, the Chicago real estate mogul who bought the White Sox in 1981 with Eddie Einhorn and other partners for $19 million, is astounded by the prices paid for teams. It doesn’t make much sense to him. “When I went to school, they taught me the value of an asset is the discounted value of its future income stream,” he said. “If that’s true, there’s no way teams would be worth what people are selling them for. Team values are being overestimated. It just befuddles me. We may be operating under the Greater Fool Theory. The fallacy is that you eventually run out of fools.”
Apparently, the supply is still abundant. ESTIMATED VALUES OF MAJOR LEAGUE TEAMS
Baltimore Orioles: $100,000,000 Boston Red Sox: $130,000,000 California Angels: $145,000,000 Chicago White Sox: $115,000,000 Cleveland Indians: $ 85,000,000 Detroit Tigers: $110,000,000 Kansas City Royals: $120,000,000 Milwaukee Brewers: $ 85,000,000 Minnesota Twins: $ 95,000,000 New York Yankees: $200,000,000 Oakland Athletics: $ 85,000,000 Seattle Mariners: $ 90,000,000 Texas Rangers: $100,000,000 Toronto Blue Jays: $145,000,000 NATIONAL LEAGUE
Atlanta Braves: $ 85,000,000 Chicago Cubs: $135,000,000 Cincinnati Reds: $ 90,000,000 Houston Astros: $105,000,000 Los Angeles Dodgers: $175,000,000 Montreal Expos: $100,000,000 New York Mets: $175,000,000 Philadelphia Phillies $140,000,000 Pittsburgh Pirates: $ 85,000,000 St. Louis Cardinals: $140,000,000 San Diego Padres: $ 85,000,000 San Francisco Giants: $ 85,000,000