Introduction
The Boston Celtics are now up for sale after winning their record 18th NBA title. With an estimated whopping valuation of USD$5.12B (up 1,322% from 2002), there’s no wonder that there is buzzing interest in the market amongst investors eager to capitalize on their recent championship success and robust financial growth. Their remarkable rise in valuation underscores the significant economic impact of sports franchises, a strong reflection of the lucrative potential of the sports industry.
Trends and Issues
1. Salary Caps
- The English Premier League’s Profit and Sustainability Rules (PSR) enforce financial discipline by forcing clubs to balance their income and expenditure, with a cap of ￡105m (USD$135m) set for each team to spend over a 3 year cycle.?
- The NBA imposes a soft salary cap to promote parity and prevent large disparities in spending. However, effectiveness might be limited as teams can pay an additional luxury tax should they want to exceed the salary cap. In the 2023-2024 season, 29 out of 30 league teams exceeded the salary cap.
2. Rise of sports franchises selling minority stakes
- Nearly every major league, including the NBA, NHL and MLB allows private equity (PE) funds to own passive minority stakes in their teams. Minority stakes bring in additional capital for the team, increasing liquidity for owners. Due to lack of control, minority stakes are often sold at hefty discounts to market value, further providing incentives to buyers.?
- Earlier this year, Ineos founder Sir Jim Ratcliffe acquired a 27.7% stake in Premier League team Manchester United for ￡1.31B, including 25% of the club's Class B shares and 25% of its Class A shares.
3. Volatile Share Prices
- Sports teams' share prices can be volatile and often underperform compared to broader market indices like the S&P 500. For example, Manchester United and Juventus have seen fluctuating share prices.
Listed Sports Teams
There are a number of publicly-traded professional teams, more notably:
- Manchester United F.C (NYSE: $MANU): An English Premier League team known for its global fan base and significant commercial success, with a market capitalisation of USD$2.834B.
- Juventus F.C ($JUVE.MI): An Italian Serie A team known for its rich history and success,with a market capitalisation of USD$1.03B.?
- New York Knicks and New York Rangers (NYSE: $MSGS): Representing the NBA and NHL respectively and institutionally backed by publicly-traded entity Madison Square Garden, with a market capitalisation of USD$4.77B.
- Borussia Dortmund ($BVB.DE): A prominent team in the Bundesliga, with a market capitalisation of USD$454M.??
How do sports franchises make money?
- Broadcasting games on television and streaming platforms generates significant income. The NFL, for example, earns 66% of its revenue from league-level revenue streams, mainly due to national media arrangements.
2. Merchandise Sales
- Selling team-branded merchandise such as jerseys and memorabilia provides a steady income stream, and sometimes even a substantial windfall. Manchester United netted an astonishing ￡187m in revenue purely from the shirt sales of Portuguese footballer Cristiano Ronaldo in a short span of 10 days.?
- Sponsorship and advertising deals with major brands bring in substantial revenue. Teams often have multiple sponsors for different aspects of their operations, from jersey sponsors to stadium naming rights.
Profitability of Sports Teams
- Winning seasons, championships, and star players can make or break a team’s profitability. Conversely, major athlete injuries and relegation can negatively impact stock prices and investor confidence.
2. Market Size and Fan Base
- Teams in larger markets with dedicated fan bases, like the New York Knicks, tend to be more profitable.
3. Revenue Sharing
- Different leagues have varying revenue-sharing models. For instance, the NFL’s profit-sharing approach ensures a more balanced distribution of revenue.
4. Brand Value
- The global appeal and brand strength of teams like Manchester United and Juventus play a significant role in their valuation.?
Valuation
- Steady rise in valuation of sports leagues, heavily driven by increased media rights, sponsorship deals and global fan engagements. The NFL remains the most valuable major league over the past 10 years, recording a strong CAGR of 15.3%.?
Compounded Annual Growth Rate (CAGR) across major leagues from 2018-2022
Top 5 most valuable sports team (Source: Forbes 2023)
Only 2 teams from outside America are featured in the Top 15 sports teams by valuation, namely Real Madrid (La Liga) at USD$6.1B and Manchester United (Premier League) at USD$6B.?
Costs of running a team
1. Wages and transfer fees
- Player salaries: Highest cost category across all sports leagues and teams, accounting for up to 90% of a team’s revenue. With star-studded athletes like Stephen Curry being paid a whopping USD$52M/year for 2023-2024, teams are often pressured to balance the immense cost of wages with other expenses to maintain a competitive roster.
- Transfer fees: Competition to secure the best players in the market drives up fees and enhance financial burden
- Staff salaries: Beyond the players, coaching staff and support personnel command significant wages, one example being Golden State Warriors head coach Steve Kerr drawing an annual salary of USD$17.5M.?
2. Rent and maintenance of home arena
- A typical NFL stadium costs about millions to maintain per year from field maintenance to facility upgrades
3. Equipment and supplies
- High recurring expense as athletes require top-notch equipment to train, and regular replacement of items is made to ensure peak performance and safety?
Conclusion
Navigating the economics of sports, from strategic player salary management and leveraging media rights to understanding the impact of team performance, is essential for investors, managers, and fans to ensure financial success and sustained competitive advantage.
Tembusu Wealth Management is a multi-family office based in Singapore. If you would like to explore tailor-made yield or wealth management solutions out of Singapore, please reach out to us at [email protected]
Nothing herein constitutes investment advice - suitability of any investment or product will vary from person to person. Tembusu Wealth Management is a division of Tembusu Partners which is regulated by the Monetary Authority of Singapore.
