When Sports Teams Step Up to Plate, Don’t Expect Home Run
No one ever sold Bob Feller short--at least when he stood on the mound. But soon Wall Street will decide how to value the Cleveland Indians, the team on which Feller pitched himself into the Hall of Fame.
The Indians plan a public stock offering, a noteworthy event because Cleveland will be the first IPO by a major-league baseball team since the sport’s owners changed the rules last year to allow the sale of minority stakes to the public.
But if you’re looking at Cleveland as a potential investment, step out of the box and think twice about it, because the Indians’ financial prospects and the spotty record of the handful of other sports stocks suggest the Cleveland Indians Baseball Co. will disappoint.
The team is offering 4 million shares at $14 to $16 apiece under the proposed symbol CLEV, and nearly all of the $60 million or so in proceeds would go to a partnership led by the family trusts of the team’s current owner, real estate developer Richard E. Jacobs.
No matter that Cleveland is once again fielding a strong team and leads the American League’s Central Division. (What better time for an IPO?) A reading of the Indians’ prospectus shows that its growth outlook doesn’t look encouraging even if the team again reaches the World Series this fall, as it did last year and in 1995. (It lost both times.)
Moreover, of the few professional sports organizations that have publicly held stocks--excluding giant entertainment firms such as Walt Disney Co. (ticker symbol: DIS) that own sports teams--even fewer have rewarded their stockholders with gains that keep pace with the broader market.
The exceptions lately have been those related to the red-hot, expanding sport of auto racing. More about them in a moment.
In other words, if you want a team’s shares as a souvenir or for bragging rights, jock stocks have appeal. But from an investment viewpoint, an index mutual fund seems more sensible, analysts said.
“You better be doing it thinking, ‘This is a stock certificate I want to hang on my wall,’ ” said Dean Bonham, president of the Bonham Group in Denver, a sports and marketing consulting firm. “To date, the purchase of these stocks has been more analogous to buying merchandise, like T-shirts, than for investment purposes.”
And don’t get the idea that if you buy the Indians’ stock, as part-owner you will be entitled to send missives to the coaching staff about who’s batting in the cleanup spot. Even after the offering, Jacobs will have near-complete voting control of the club.
The problem for investors: It’s hard for teams to keep generating the growth that translates into big returns on their stocks. McDonald’s Corp. (MCD) or Coca-Cola Co. (KO) can constantly find more places to sell their products, but sports clubs have a set number of home games, stadium seats, customers, broadcasts, etc.
Higher ticket prices, promotions and postseason play can generate some growth, but those sources have their limits.
Take Cleveland. Last year, the Indians went to the seventh and deciding game of the World Series before losing to the Florida Marlins. In other words, they played until the last game of baseball’s season. How can they top that in 1998?
“The Indians can only sell ballgames in one spot, and that’s Cleveland,” said Bill Miller, editor of Inside the Ownership of Professional Sports Teams, a guide published by Team Marketing Report in Chicago.
To be sure, one can also invest in sports via the big conglomerates that own teams, but those are stocks that reflect an array of entertainment properties, not just sports. They include Disney, which owns the Anaheim Angels in baseball and the Mighty Ducks in hockey; Rupert Murdoch’s News Corp. (NWS), which just bought the Dodgers; Tribune Co. (TRB), which owns the Chicago Cubs, and Time Warner Inc. (TWX), which picked up the Atlanta Braves baseball team and Atlanta Hawks basketball team when it bought Turner Broadcasting System in 1996.
Among the other “pure plays” in sports stocks, it’s true that hockey team owner Florida Panthers Holdings Inc. (PAW) has doubled in price since its chief, billionaire Wayne Huizenga, took the team public at $10 a share in late 1996.
But take a second look. Most of the gain came within three months after the IPO. In the 15 months since, the stock has dropped 25% while the benchmark Standard & Poor’s 500 index has shot ahead 38%--even though Huizenga has added resort hotels and other properties to the Florida Panthers’ business.
It’s been worse for holders of Orlando Predators Entertainment Inc. (PRED), which runs the “arena football” team of the same name. (Arena football is a cousin of the National Football League.) The stock went public in December at $10, promptly fell like a dropped pass to $3, and is only now starting to recover. (It closed at $4.88 Monday.)
A pioneer of sports IPOs is the Boston Celtics basketball team, which went public in late 1986 at $18.50 a share. But the Celts exemplify the downside of sports stocks. At a recent $20, the shares are little ahead from 12 years ago.
To be sure, the team pays a handsome dividend that currently yields 5% a year. That’s helped bolster the Celtics’ total return over the years, but even by that measure Boston has achieved only half the gain of the S&P; 500.
If a club’s growth is limited, why do these companies and millionaire individuals keep buying them? In some cases it’s ego gratification. Other owners expect to turn a substantial profit when they eventually sell their teams, even if they don’t generate big operating profits in the meantime--and they often don’t.
The entertainment giants also are using sports to cross-fertilize their cable, broadcasting and promotional holdings, as exemplified by cable magnate Ted Turner and his Atlanta teams.
And the conglomerates’ deep pockets are one reason analysts expect more baseball teams and other clubs to go public, because they’ll need the extra cash to stay in the hunt for all-star players, who demand ever-higher salaries.
“When people like Jacobs have to compete with conglomerates like Disney and Time Warner, one of the ways they can do that is by going public,” Bonham said. Going public also allows owners to tap a roaring stock market and raise millions of dollars without having to borrow--or give up control of their teams.
The Minnesota Twins and Pittsburgh Pirates are among those reportedly weighing a public stock sale as well, as is the Calgary Flames hockey team. The NFL’s Green Bay Packers recently sold stock to the public, but it isn’t intended as an investment--the offering was to have fans help fund improvements. The stock can’t be sold, except back to the club.
Auto racing also has been selling shares and, owing to the sport’s national profile and soaring popularity, they’ve been good investments lately.
Leading the pack are companies involved with NASCAR, the sanctioning body for stock-car racing. They include Speedway Motorsports Inc. (TRK), whose tracks include the Charlotte Motor Speedway; International Speedway Corp. (ISCA), which runs the Daytona International Speedway, and Dover Downs Entertainment Inc. (DVD), with tracks in Delaware and Tennessee.
Dover Downs, its stock having leaped 42% so far this year, also recently agreed to buy Grand Prix Assn. of Long Beach Inc. (GPLB), which runs the annual Long Beach event.
But racing stocks are the exception.
As for the Indians, last year the team earned $22.6 million on revenue of $140 million, a sharp gain from the $10.2-million profit it posted in 1996 on revenue of $114.2 million. The numbers partly reflect the Indians’ popularity--Jacobs Field is sold out for the third year in a row--but it also includes last year’s postseason play and $9.3 million that represents Cleveland’s share of the fees paid by newly created expansion teams.
The IPO, with a $15-a-share price, also values the Indians at only about 14 times last year’s per-share earnings (on a pro-forma basis, which accounts for the stock sale as though it had occurred last year). That’s far less than the price-earnings multiple of 26 that Wall Street assigns the S&P; 500 based on last year’s earnings.
Even the team notes that “much of the Indians’ local revenue potential has already been realized” and that more gains in earnings and revenue “if any, are likely to be substantially less” than in recent years.
National revenue apparently won’t lead the way, either. Revenue from national TV and radio broadcasts of Indian games, along with Cleveland’s royalties from Major League Baseball merchandise, amounted to only 12% of the Indians’ total revenue last year, the prospectus shows.
And the cost of fielding the Indians--mostly players’ salaries--totaled $66 million last year, a sharp 24% increase from the prior year. If the Indians expect to have the talent to stay at or near the top of their division, the figure isn’t likely to drop much. That’s baseball.
Times staff writer James F. Peltz can be reached at firstname.lastname@example.org
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Stocks ‘n’ Jocks
The Cleveland Indians baseball team is one of the few professional sports franchises to plan a public offering. The history of other sports stocks (excluding the bullish auto-racing shares) shows they often struggle to match the broader market:
% chg. Ticker Monday in last Stock Sport symbol close 12 mos. Boston Celtics Basketball BOS $20.00 -25% Championship Auto Racing Auto racing OPW 19.06 +19* Dover Downs Entertainment** Auto racing DVD 32.63 +84 Florida Panthers Hockey PAW 20.88 -15 Grand Prix Assn. of Long Beach** Auto racing GPLB 19.25 +71 International Speedway Auto racing ISCA 31.25 +53 Orlando Predators Football PRED 4.88 +7 Speedway Motorsports Auto racing TRK 28.75 +23 Standard & Poor’s 500 +32
*Change since company went public March 10
**In March, Dover Downs agreed to buy Grand Prix Assn.
Source: Bloomberg News