Aswath Damodaran 1

THE  SPORTING  BUSINESS:  VALUE  

AND  PRICE  
Aswath  Damodaran  
 Let’s  start  with  a  few  reality  checks  
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1.  It  is  easy  to  value  a  sports  franchise.    

2.  It  is  difficult  to  price  a  sports  franchise.  
3.  Forbes  does  not  value  sports  franchises.  It  prices  them,  
and  through  no  fault  of  its  own,  it  prices  them  badly.  
4.  If  you  are  an  investor,  don’t  invest  in  a  professional  
sports  franchise.  You  may  have  a  beTer  shot  if  you  
invest  in  semi-­‐professional  sports  franchise.  
5.  If  you  are  a  trader,  you  can  get  rich  “trading”  sports  
franchises,  if  you  can  predict  the  drivers  of  prices  (and  
they  have  liTle  to  do  with  financials).  
Aswath Damodaran
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 Price  versus  Value:  The  Set  up  
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Drivers of intrinsic value

- Cashflows from existing assets Drivers of price
- Growth in cash flows - Market moods & momentum
- Quality of Growth - Surface stories about fundamentals

Accounting
Estimates THE GAP
Is there one?
INTRINSIC Price PRICE
Value If so, will it close?
VALUE
If it will close, what will
Valuation cause it to close?
Estimates

Aswath Damodaran
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 The  determinants  of  value  
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What is the value added by growth assets?

Equity: Growth in equity earnings/ cashflows
Firm: Growth in operating earnings/
What are the cashflows
cashflows from When will the firm
existing assets? become a mature
- Equity: Cashflows firm, and what are
after debt payments How risky are the cash flows from both the potential
- Firm: Cashflows existing assets and growth assets? roadblocks?
before debt payments Equity: Risk in equity in the company
Firm: Risk in the firm’s operations

Aswath Damodaran
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 DCF  as  a  tool  for  intrinsic  valua\on  
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Value of growth
The future cash flows will reflect expectations of how quickly earnings will grow in the future (as a positive) and how much
the company will have to reinvest to generate that growth (as a negative). The net effect will determine the value of growth.
Expected Cash Flow in year t = E(CF) = Expected Earnings in year t - Reinvestment needed for growth

Cash flows from existing assets

The base earnings will reflect the
earnings power of the existing Steady state
assets of the firm, net of taxes and The value of growth comes from
any reinvestment needed to sustain the capacity to generate excess
the base earnings. returns. The length of your growth
period comes from the strength &
sustainability of your competitive
advantages.

Risk in the Cash flows

The risk in the investment is captured in the discount rate as a beta in the cost of equity and the default spread in the cost
of debt.

Aswath Damodaran
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 The  determinants  of  price  
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Mood and Momentum Liquidity & Trading Ease

Price is determined in large part While the value of an asset may
by mood and momentum, not change much from period to
which, in turn, are driven by period, liquidity and ease of
behavioral factors (panic, fear, trading can, and as it does, so
greed). will the price.

The Market Price

Incremental information
Since you make money on
price changes, not price levels, Group Think
the focus is on incremental To the extent that pricing is
information (news stories, about gauging what other
rumors, gossip) and how it investors will do, the price can
measures up, relative to be determined by the "herd".
expectations

Aswath Damodaran
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The  Mechanics  of  Pricing  

Market value of equity Market value for the firm Market value of operating assets of firm
Firm value = Market value of equity Enterprise value (EV) = Market value of equity
+ Market value of debt + Market value of debt
- Cash

Step 1: Pick a Numerator = What you are paying for the asset
CHOOSE A
multiple Multiple = Denominator = What you are getting in return MULTIPLE

Revenues Cash flow Book Value

Earnings
a. Accounting revenues a. To Equity a. Equity
a. To Equity investors
b. Drivers - Net Income + Depreciation = BV of equity
- Net Income
- # Customers - Free CF to Equity b. Firm
- Earnings per share
- # Subscribers b. To Firm = BV of debt + BV of equity
b. To Firm
= # units - EBIT + DA (EBITDA) c. Invested Capital
- Operating income (EBIT)
- Free CF to Firm = BV of equity + BV of debt - Cash

Other criteria, PICK

Step 2: Choose Narrow versus Broad Similar market cap Country, Region or subjective & COMPARABLE
comparables sector/business or all companies Global objective FIRMS

Risk Growth Quality of growth SPIN/TELL

Step 3: Tell YOUR STORY
- Lower risk for higher value - Higher growth for higher value - Higher barriers to entry/moats for higher value
a story - Higher risk for lower value - Lower growth for lower value - Lower barriers to entry for lower value

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 Aswath Damodaran 8

THE  VALUE  OF  A  SPORTS  

FRANCHISE  
 The  Drivers  of  Franchise  Value  
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National TV/ Radio Local TV/Radio
Revenues Revenues

Merchandising Overall team Revenues

Revenues Player Expenses

Minus
Gate Receipts & Administrative
Revenues from games Team Expenses Expenses

Media Revenues
(TV, Radio & Other)
= Other operating
expenses
Team Operating Income
Franchising & Other
Advertising Minus

Taxes

= Legal Risks
After-tax Operating Income/ Cash flow - League wide
-Team specific
Debt Ratios
Discount back at

Operating Risks Cost of Capital (Discount Rate)

City/State Subsidies

Value of Team

Aswath Damodaran
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 Revenue  Breakdown  across  Franchises  
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Aswath Damodaran
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 EBITDA  Margins  across  Franchises  
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 Player  Expenses  across  Franchises  
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Aswath Damodaran
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 Valuing  the  Clippers  (2014)  
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Aswath Damodaran
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 Aswath Damodaran 14

THE  PRICING  OF  A  SPORTS  

FRANCHISE  
 The  Pricing  Problem  
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¨  Accoun\ng  Earnings  is  fic\on:  

¨  Differences  may  be  difficult  to  control  for:  

¨  Transac\ons  are  infrequent:  

Aswath Damodaran
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 MLB  Team  Transac\on:  History  
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Aswath Damodaran
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NFL Team Transaction History

Aswath Damodaran
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NBA Team Transaction History

Aswath Damodaran
 Pricing  the  Clippers  
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Aswath Damodaran
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 The  BoTom  Line  
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¨  We  talk  about  sports  as  a  business  but  it  is  not  run  like  
one.   While   decisions   in   every   business   are   skewed   by  
behavioral   quirks,   decisions   in   sports   franchises   are  
more   affected   by   hubris,   greed,   price   and   ego   than  
almost  any  other  business.  
¨  The  pricing  of  sports  franchises  may  always  run  ahead  of  
their  value,  because  there  are  only  a  limited  number  of  
franchises   for   sale   and   more   than   enough   wealthy  
people  who  are  willing  to  pay  a  “play  toy”  or  “celebrity”  
premium  to  buy  them.  
¨  Don’t  invest  in  a  sports  franchise  as  a  value  proposi\on.  
You   can   make   money   trading   franchises,   if   you   can  
forecast  mood,  momentum  and  celebrity  ego.  
Aswath Damodaran
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