Franchises: Where Smart Money Is

What is a pro sports franchise worth? And are the people bidding for some of the most famous teams in America completely out of their minds?

At last sighting, potential buyers for the Washington Redskins were begging for a chance to offer a half-billion dollars or more to anybody who’d accept it. They didn’t care if they spoke to Morgan, Stanley, Dean, Witter or the left tackle. Somebody, please, take my $500 million.

Of course, when the bidding gets more serious, perhaps this week, the final figure may be $600 million or higher. Why not? The Cleveland Browns--an expansion team, which, from a certain perspective, does not actually exist yet--was recently sold for $530 million. Shoulder pads and players are extra.

Last week in the Bronx, rumors were flapping--perhaps not quite flying yet, but trying to become airborne. George Steinbrenner may be close to selling his New York Yankees to Cablevision for $600 million. Or $800 million. Or $1 billion. Depending on whose gossip you believe. What’s wrong with $1 billion for a sports team? That’s what Manchester United is going to fetch.

When you look at such astronomical sale prices, perhaps you can understand why, for the last 25 years, no sensible fan, journalist, politician, player, agent or union official has ever taken at face value anything that an owner has said about how he was “losing money” or “couldn’t continue to do business without a salary cap” or “needed a new stadium to keep from leaving town.”

The big payday is at the end of the rainbow, when you sell that baby.

Now you also know why the NBA lockout is going to be so tough to settle. Players and their representatives see the plausible purchase prices of baseball and football teams. They know the popularity of their own NBA sport. They can do the math. And that simple arithmetic is truly staggering.

Let’s take the Yankees case as an example of what goes through the minds of any potential franchise buyer, including those now trying to figure out how high to bid for the Redskins. Everybody says that Steinbrenner “paid” $10 million for the Yankees and therefore he’ll soon make 60 or 80 or 100 times his money. Dream on. George III’s killing is much bigger than that.

Steinbrenner went to a bank and borrowed as much of that $10 million as he could. How did he meet the interest payments? He took it out of Yankee revenues. What a deal! A sports owner puts down 20 percent of the purchase price, borrows the rest and gets the fans to make his interest payments.

Along the way, an owner gets tax breaks from depreciating the original value of the franchise, including his players--as though they were turbine engines.

That’s not the end. The toughest part of figuring out the true return-on-investment of a franchise is getting a handle on what is called the “present-day value” of the income stream generated along the way. Steinbrenner spent plenty of those dollars over the years. But what if he’d reinvested every penny at prevailing interest rates? That’s how business people figure it out.

“Considering the present value of all the cash he’s taken out of the team, and all the taxes he’s saved, as well as the appreciation of the franchise itself, my best guess is that George Steinbrenner will make about 3,000 times his original investment,” said one baseball management insider last week.

So now you know why John Kent Cooke, Howard Milstein, Dan Snyder, Ted Forstmann, David Bonderman, Mort Zuckerman, Ted Lerner, Andrew Penson and Peter Angelos were lined up to make their seemingly astronomical preliminary bids for the Redskins.

One of the most serious bidders may well be Orioles owner Angelos. In sports, baseball is known as the lousy business, football the great one. Angelos knows it. Let’s say he buys the Redskins for $500 million. He’ll probably put $80 million of that up front. But, because he’ll bring in partners, he’ll only pay about half of it himself. Offsetting that, the Redskins have an annual cash flow of $45 million to $55 million a year before interest and taxes.

So, what would Angelos own? He’d have a cash cow that could finance the money borrowed from banks. There might even be enough left over to take several million dollars out of the team each year. And he’d own a stadium that cost Jack Kent Cooke $180 million to build. Plus, he’ll have depreciation writeoffs, while the team increases in value every year, even if only at the same rate as inflation.

So belly up to the bar, big spenders. Ultimately, what are the Redskins worth?

If you think that $120 football tickets, $100,000 corporate luxury boxes and $1,500-courtside NBA seats are a sign of a sports bubble that will be pricked by the next serious recession, stock-market crash or other economic calamity, then you would have no interest whatsoever in the Redskins, the Yankees or even the Toledo Mudhens. You’d think all these high bidders are nuts.

However, if you assume the next 20 years of American pro sports will be basically prosperous, then, in an asset sale, the Redskins may be a bargain at $600 million. Just think of Steinbrenner. He got a return of hundreds of times his money. Or maybe even thousands of times his initial investment. Despite owning a team in a sport with runaway salaries, a ferocious union, a World Series-killing strike and worse demographics and TV ratings than the NFL.

Hmmmmm.

Gentlemen, what are we bid for this 2-9 team that’s in a six-season slump?

Do we hear $500 million? How about $600 million?

Going once, going twice and sold for ... holy cow ... $700 million!

And the ludicrously extravagant winning bid has been submitted by . . . somebody a lot smarter than you probably think.