Monday, March 01, 2010

Industrial Sabotage at Manchester United? 

When I first saw remarks like those I'm about to quote, I let it pass with an oblique comment (in the Portsmouth post from last week). But industrial sabotage -- driving down the price of a company in order to take it over more cheaply -- is a crime, is it not? If so, why would anyone connected with a takeover bid make the claims that a Mr. Keith Harris has allegedly made to Sky Sports News?
Representatives from law firm Freshfields and investment bank Goldman Sachs, among others, are understood to have been involved in the secret meeting.

Informally known as 'the Red Knights', the group held talks regarding a potential offer to buy out the Glazer family, who are unpopular with United fans.

...Keith Harris, who has been involved with the group considering a potential takeover, recently called on supporters to start boycotting matches in an attempt to force the Glazers' hand.

Harris said last week: "Turning up to games 10 minutes late and things like that just doesn't do the job.

"The green and gold protest is fabulous, a symbolic and significant message to the owners. It is like the white handkerchiefs in Spain. But that won't force the Glazers to sell to us.

"However, if enough people - and I am talking about thousands - stop turning up to matches and do not renew their tickets, then that does it. The supporters have to hurt the Glazers in their pockets.

..." would not talk about this if I didn't have full confidence in our ability to raise the money to do this. I never talk publicly unless I have confidence. Getting the money together is the easy bit.

"But we can't make an offer until the Glazers are placed in a position where they are forced to consider it."
People, do the world a service and educate me! This stuff can't be credible, can it?

Update: Here's a story from the BBC where you can view and listen to Mr. Harris speak on the subject.

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Friday, June 12, 2009

Noll: Coyotes to Hamilton in 2010 

The focus of this story is on Roger Noll's view of the Phoenix Coyotes bankruptcy, and the likelihood that Jim Balsillie's offer to purchase the team and move it to Hamilton, CA will emerge as the final outcome. It's a discussion worth reading in its entirety. Here's a snip:
All parties in the Coyotes court challenge are waiting for a ruling from Judge Redfield T. Baum on a process for determining what additional amounts Balsillie may be expected to face on top of his $212.5-million purchase fee in relocation/indemnification costs. Noll believes the figure could be $60 million, but there has been some suggestions it could be as much as $400 million, which would include compensation for the Maple Leafs and Buffalo Sabres.

Baum has indicated he expects the relocation fee to be "reasonable and fair."

Noll believes that Balsillie's lucrative offer will be the only one on the table on June 22 when the bankruptcy court is set to determine who the bankrupt franchise should be sold to. The NHL has stated there are four other interested groups, including the Toronto Argonaut owners, who are considering making bids that would keep the team in Phoenix.

"If (Balsillie) really is the only bidder, he is going to get the team. And it's going to be in Hamilton," Noll said.
The notion of a $400m relocation fee -- in the NHL? in this economic environment? -- strikes me as patently ludicrous, but who knows, the NHL could have strong contractual language protecting quasi-exclusive territories. Does anyone know where the $400m figure comes from?

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Monday, September 29, 2008

Franchise Value of the Cubs 

I was quoted in a recent Chicago Tribune story on the value of the Cubs franchise.

Wrigley Field casts a long shadow as prospective buyers review the Cubs' confidential financial records and prepare the next round of bids for the stadium and team.

At issue is not whether the Cubs will remain at the beloved, 94-year-old ballpark, but how much it will cost to preserve and enhance Wrigley. The price that the franchise and stadium fetch will depend largely on how much more revenue can be wrung out of Wrigley.

"The franchise value is a guess on what future profits will be," said Phillip Miller, an associate professor of economics at Minnesota State University-Mankato, who has studied baseball economics. "If you have to gut the place in the extreme case, that would affect the value."

Bidders aren't publicly discussing their plans for the stadium because the sales process is ongoing. But their concerns go beyond maintaining the stadium in a safe condition. Fans and players have expressed the desire for more modern amenities, such as a larger clubhouse and more space for concessions and bathrooms, without losing the vibe and charm of the old ballpark. If a new owner has to privately finance such improvements, fans could see higher ticket and food prices, and even the stadium's sacrosanct name replaced with a corporate sponsor.

Fans would bear higher prices partly because of the honeymoon effect associated with renovations that improve the fan experience, but better amenities for players wouldn't directly affect the prices fans pay. If anything, it could attract more players to Wrigley, possibly decreasing the salaries the Cubs pay at the margin (a compensating differential).

Cross-posted at Market Power

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Thursday, July 24, 2008

$1 billion and counting for the Cubs 

From Danielle Sessa at Bloomberg:

The Cubs' sale price is likely to exceed Dan Snyder's 1999 purchase of the Washington Redskins of the National Football League for $800 million, the most paid for an American sports team. John Henry's $700 million purchase in 2002 of the Boston Red Sox, Fenway Park and the majority of a regional-sports network is the most spent for a baseball team.

England's Manchester United soccer club was sold to Malcolm Glazer in 2005 for $1.45 billion and is the most ever paid for a sports team.

Cuban Among Bidders

Billionaire Mark Cuban, owner of the Dallas Mavericks who made his fortune by selling his Broadcast.com to Yahoo! Inc., will continue in the bidding process, though the identities of the four other groups weren't known, the Sun-Times reported. John Canning, chairman of Madison Dearborn Partners LLC, considered a favorite because of his friendship with baseball Commissioner Bud Selig, was not among the groups advancing to the next round because his offer fell short of the $1 billion mark, according to the newspaper.

...The Cubs may not be worth as much money if the team doesn't come with the ballpark, said Andrew Zimbalist, an economics professor at Smith College in Northampton, Massachusetts. The club owner may not be able to make improvements to Wrigley that will boost revenue, or the owner might have to share that money with the landlord.

I agree with Zimbalist. Bi-lateral monopoly (the Cubs away from Wrigley are just another team, Wrigley without the Cubs is hard to fathom) creates contractual problems which reduce the wealth of both parties. Hence, absent political considerations, the stadium and the team should be jointly owned and managed. (I'll wager Zimbalist said something like this, but it is too dry for the regular media).

This position creates a puzzle though. If the Cubs are worth more with the stadium, why are they not jointly owned & sold? Must be the subsidy angle. But that suggests a welfare reducing distortion - issues related to the improvements mentioned above - which is not much discussed, if at all, in the literature on stadium subsidies.

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Wednesday, July 16, 2008

Could the Steelers' sale be a tax issue? 

From today's WSJ Opinion Page:
One of the league's iconic teams, the Steelers have been owned by the Rooney family since 1933. The five sons of the original owner, Art Rooney, control 80%—and they are getting into their 70s. With the team's value estimated at $700 million or more, the 45% federal death tax rate could put each brother on the hook to the IRS for tens of millions of dollars.

That may be more than they can afford. NFL franchises have appreciated quickly in the past decade, and the more a franchise goes up in value, the greater the challenge for estate planning. While a given brother's share of the team may be worth more than $100 million on paper, that doesn't mean he or his heirs have half again that much in cash to fork over to the IRS.

Daniel Rooney, the eldest brother who runs the team, is offering to buy his four brothers out of their shares. He has said he will do "everything possible to ensure my father's legacy" and keep the team in family hands, and in Pittsburgh. Good luck to him. Challenging Mr. Rooney's offer to buy about a third of each of his brothers' stakes now with more down the road is hedge-fund billionaire Stanley Druckenmiller, a man with considerably deeper pockets.

Adding urgency to the Pittsburgh transaction is the prospect of a Democratic President in 2009 who opposes repeal of the death tax and wants to raise the tax rate for capital gains. Barack Obama has promised to raise the rate from 15% to at least 25%, and perhaps the Clinton-era peak of 28%. The artificial timeline adds appeal to a buyer like Mr. Druckenmiller who has the dough to complete a transaction before the end of this year.
The estate tax certainly gives an edge to buyers other than the elderly Mr. Rooney. I haven't read much about the other four brothers. They might not see things the same way. Legacies can be costly to protect, and this is no longer their father's NFL.

Also in today's WSJ, an article on the cost of the Beijing Olympics. Here are the opening paragraphs:
China's record spending on the Olympics, estimated to total $42 billion, is a big sum for a developing country to put into a two-week sports show. While much of the money is going into infrastructure projects with long-term value, at least some of the spending is drawing criticism for wastefulness.

The tab for China's massive Olympic projects -- ranging from a $3 billion airport terminal to the $500 million "Bird's Nest" National Stadium -- dwarfs the Athens Olympics budget of $15 billion, which helped drive Greece into debt. London, host for 2012, is already embroiled in controversy over its Olympics tab.

In Beijing, few details are being spared. Along Jing Shun Lu, a formerly dusty road in the capital's suburbs, the government spent $30 million for an Olympics facelift, including trees, flowers and an ornamental wall. The road is a secondary access route to the city's airport, and near the rowing venue. People who used to live along the road have been given a small sum in compensation and forced to move.

China can afford the financial cost of the biggest Olympics in history. The bill amounts to a small fraction of the country's gross domestic product, expected to be nearly $4 trillion this year, and corporate sponsors have underwritten some of the costs. Moreover, most of the spending isn't going toward running the Games, but toward roads, subways and airports.

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Sunday, March 02, 2008

The Rate of Return on Sports Franchises 

Over on Newmark's Door, economist Craig Newmark discusses a recent New York Times article by Joe Nocera about why bad team owners want to own professional sports teams. Both the Nocera article and Newmark's comments make for interesting reading. The argument comes down to this: Nocera claims that even bad owners of lousy teams make big money from capital gains when they sell the team; Newmark points out that the rate of return in Nocera's example (prototypical bad owner Donald T. Sterling bought the LA Clippers for $13.5 million in 1981 and the franchise is now worth about $300 million according to the most recent Forbes estimates) are not that great in the context of the stock market.

I want to add a couple of points to this debate:
  1. They both mention operating losses claimed by pro sports teams. These must be taken with a grain of salt, if not treated as complete fabrications. It has been more than ten years since Paul Beeston's famous quote: "Anyone who quotes profits of a baseball club is missing the point. Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss and I could get every national accounting firm to agree with me." Both of them should know better than to pay any attention to claims of operating losses, until hard evidence proves otherwise.
  2. They both argue about the Forbes franchise value estimates that come out every year. These estimates are consistently lower than the actual sales prices of franchises.
Several of us here at the Sports Economist have published recent papers on sports franchise values. Rod Fort's 2006 paper in the International Journal of Sport Finance and Phil Miller's 2007 paper in the Journal of Sports Economics jump immediately to mind. Both these papers focus on MLB, and the Miller paper uses the Forbes franchise estimates. For what it's worth, Mike Mondello and I have a new paper coming out in the next International Journal of Sport Finance that analyzes franchise sale prices over the past 38 years. We find that the rate of return on the average sports franchise, adjusted for changes in quality, was about 16% over the period 1969-2006. That is well above the 10.56% rate of return on the S&P 500 with dividend reinvestment over that period that the Political Calculations web tool spits out. So on average, all sports team owners were making a hefty rate of return on their investments.

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Saturday, February 02, 2008

The Weak Dollar and Franchise Values 

The US dollar has depreciated significantly against other currencies over the past several years. Currency depreciation has a differential effect on an economy. For example, manufacturers who export their products abroad benefit, as their goods are cheaper in foreign markets, while manufacturers who purchase raw materials from abroad are hurt because they face higher input prices. US citizens living abroad who get paid in some foreign currency also benefit from a weaker dollar (not that I know anything about that.)

Currency exchange markets seldom affect the sports world. North American professional sports leagues that have teams in both the US and Canada are one exception to this. Canadian-based NHL, NBA and MLB teams have to pay their players in US dollars. In the 1990s, when the Loonie was trading under seventy cents to the dollar, Canadian NHL teams struggled financially, as their payroll costs were significantly higher than US based competitors. A number of Canadian teams moved to the US, and the Canadian government considered subsidizing Canadian NHL teams.

The financial environment is quite different now. The chart below shows the Canadian dollar-US dollar exchange rate over the past five years. The Loonie has been trading roughly at par with the US dollar since last fall, and some analysts predict that this exchange rate will persist for some time.


A recent New York Times article points out that the value of Canadian NHL teams surged in the latest Forbes franchise value estimates, and that Canadian NHL teams appear to be attractive purchases for foreign investors. These events are not surprising, given that Canadian NHL teams have seen their payroll costs drop significantly relative to their US competitors.

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Tuesday, July 03, 2007

Report: Selig Squashed the Jacque Jones Deal 

The New York Daily News reports on why the Cubs' Jacque Jones has been left twisting in the wind:

According to various baseball sources, it was Bud Selig who kiboshed that trade of Jacque Jones from the Cubs to the Marlins last week - and not a matter of the Cubs simply having second thoughts. Seems Selig deemed the money the Cubs were to absorb on Jones' contract as excessive. Apparently, the pending sale of the Cubs has prompted a "no more debt" edict from Selig, which may explain why there have been no further contract talks with free agent-to-be Carlos Zambrano. The fact that John Canning Jr., the billionaire CEO of Madison Dearborn Properties and a close friend of Selig's (with an 11% stake in the Brewers) has emerged as the potential frontrunner in the Cubs' ownership sweepstakes may also explain why the commissioner doesn't want any more onerous contracts at Wrigley in the aftermath of the Tribune Co.'s wild spending spree last winter.

I am not convinced that if Selig blocked the trade, he did it to keep the franchise value low for his friend. The values of franchises are related to the expected future profits of the club (assuming that both buyers and sellers are motivated solely by profits). In the simplest case where a seller and a buyer have the same information, are pure profit maximizers, and have perfect foresight, the seller would never take less than expected profits and the buyer would never pay more than expected profits. This drives the franchise value to be equal to expected profits. In reality, people don't have perfect foresight and can be motivated by things other than profits, driving a wedge between franchise values and expected profits. The ability to "play poker" in negotiations also matters. But expected profits still matter.

Taking on more debt, all else equal, obviously lowers the value of the franchise. But all else is not equal because taking on more debt can translate into a better club, which can increase long-term profits. The effects offset.

Moreover, not allowing this trade can lead to a lowering of the franchise value of the Marlins as well. They presumably felt they would be better off (i.e. more profitable) by having Jones on their roster. Why would he stiff the Marlins and the Cubs for the benefit of his buddy?

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