Is This The Peak For Sports Team Valuations?
Ownership stakes in 4 NBA teams have changed hands within the last 18 months. That's over 13% of the league. What do these billionaires know that we don't?
In the final few weeks of 2023, it was announced that billionaire Mark Cuban was selling a majority stake in the Dallas Mavericks at a $3.5 billion valuation. Cuban has owned the franchise since he purchased it in 2000, for $250 million. Not too shabby. Mr. Cuban is not alone either. Over the last 18 months, ownership stakes in four NBA teams have changed hands, that’s over 13% of the league! Interestingly, the league may be about to triple its revenues again with a new media deal. So what do these billionaires know that we don’t?
As I mentioned in my piece last week, NBA franchise valuations have been steadily rising ever since the league began selling its broadcasting rights to media subscribers.
“TV executives realized that not only were sports great for selling advertising, they were also a great tool to entice customers into bundles that allowed them to sell the rest of their programming. This created a flywheel effect where more sports on television networks brought more cable subscribers which meant more revenue for television networks, part of this revenue was reinvested into the same sports leagues and thus leagues continued to grow. A symbiotic relationship.”
The data above shows average NBA franchise valuations since the turn of the millennium. In 2014, the league announced a 9-year $24 billion dollar deal with ESPN and Turner Sports, which exploded the league’s annual media rights revenue from about $966 million to $2.6 billion. This was no doubt a catalyst in a very rapid rise in average franchise valuations.
In fact, since 2015, the average franchise valuation upon a change in ownership stake is approximately $2.3 billion. That number keeps rising the more recent the data gets; with a post COVID-19 pandemic value of $3 billion and a 2023 valuation of $3.4 billion.
Even more staggering is the revenue multiples that these NBA franchises are transacting at. Since the last media deal was signed, franchises are transacting at a 8.6x revenue multiple on average, a number that becomes 9.3x when accounting for just post pandemic transactions and 10.1x in 2023. This is virtually unheard of in most fields besides the high margin software industries. In fact, in 2023 the average software M&A multiple was “just” 7.0x. NBA franchises are trading at a rich premium.
Last week, former Golden State Warriors minority owner Chamath Palihapitiya made the prediction that US sports team valuations had peaked in 2023. This sentiment is consistent with the recent sale transactions we’ve seen in the NBA recently. The Charlotte Hornets, Dallas Mavericks, Phoenix Suns and Milwaukee Bucks have all seen ownership changes within the last 18 months and this trend may continue. Time will tell if the outgoing owners sold at the top. Until then, let’s assess the nature of the market.
Tailwinds
1. The NBA has a youthful fanbase.
Over the years, the NBA has made a dedicated effort to capturing the mindshare of the younger, social media native generation. By showing game highlights on Youtube, partnering with social media pages like HouseofHighlights and generally viewing highlights as marketing for the league, rather than material worth copyright striking, they have developed a heavy presence on the platforms that young fans use everyday worldwide. The data shows that the median age of NBA viewers (42) skews younger than the NFL (49) and MLB (57). This younger fanbase growing and developing greater purchasing power would be great for future league revenues.
2. Global Interest
NBA players are very recognizable. You know when you’re watching LeBron James. You may not know when you’re watching Patrick Mahomes. This presence and visibility has allowed the league to capture and maintain a vibrant global audience unlike other American sports leagues. The NBA is the most followed sports league on social media with over 200 million followers on all platforms.
In China, one in four adults say they are avid NBA fans. It is in fact the most popular sports league in the republic. Recognizable Chinese stars such as Yao Ming and Yi Jianlian helped generate this engagement, as well as the NBA’s broadcasting and social partnerships with Chinese social apps WeChat and Weibo. As more players from around the world make it into the league, we can imagine the NBA maintaining this playbook and growing their audience even further.
Finite Number of Teams
There are only 30 NBA teams. There are, however, more than 30 billionaires who want to be NBA franchise owners. Simple supply and demand tells us that there will always be willing buyers ready to pay a premium for the privilege of being an owner. That aside, the popularity that comes with owning a pro sports franchise is a step above just being wealthy. As we’ve seen with billionaires in recent times, popularity is a scratch they’re willing to pay to dollar to itch.
Headwinds
1. Media Rights
The NBA’s success has long been tied to their broadcasting partnerships with media partners. ESPN pays the NBA, the NBA pays the players, viewers pay ESPN and all of us are better off for it. However, technological advancements and the rise of streaming have brought about existential threats to traditional media broadcasters. In a recent interview, outgoing Dallas Mavericks owner Mark Cuban said “I’m not worried about this media deal, I’m worried about the next one”. If traditional media are unable to bid for these media rights like they once did, the NBA may be forced to look for partners in streamers like Amazon, Apple and Netflix. This uncharted territory is cause for uncertainty.
2. Upstart Competition
In 2022, Saudi-Arabia backed LIV Golf shook the sporting world by signing a number of golf’s top athletes to massive contracts, often multiple times their previous pay. The entity, financed by the sovereign wealth fund of Saudi Arabia has shaken up the golf world and recently announced a merger with the Professional Golfer’s Association of America (PGA) despite sports-washing and anti-trust concerns. Truly groundbreaking stuff. The soccer world saw something similar last summer, with multiple top players leaving their prestigious European clubs for Saudi wealth.
If the wealthy sovereign wealth funds of the world were to turn their focus to basketball, the NBA would have to fight to keep their top athletes on US soil. This is a proposition the league has never faced before, and thus begs the question. Is the league ready to lose its talent to the highest bidder?
My Take
The league is currently riding the crest of an all time high valuation wave. A variety of factors have made it such that these teams command very strong valuations from prospective owners who want to be part of a prestigious, finite club of franchise owners.
My bet is that the scarcity argument prevails, and the wealthy will continue to value these franchises very highly. Being a billionaire is one thing, being a successful sports team owner is another. Just look at their smiles during championship parades and while sitting court-side. The fame is intoxicating, you’re no longer just a hedge fund manager, or a shipping magnate, you’re a franchise owner of a team with millions of fans. When your successes can be broadcast on a global stage to tens of millions then it’s a hard proposition to say no to, if you have the dollars for it.
Who knows, in a few years we may see the first $10 billion dollar NBA franchise. I’d bet on it anyway.