Clippers sale: Bubble burst or new reality?

The pro sports valuation bubble officially hit a bursting point last week, when outgoing Clippers co-owner Shelly Sterling accepted a $2 billion bid for the team. The winning bid came from former Microsoft CEO Steve Ballmer.

Confusion reigned as the bids came in fast and furious early in the week, while at the same time Donald Sterling filed a lawsuit against the NBA for $1 billion. Eventually, language was included in the bid that would have lawsuits and punitive measures dropped, including the league’s lifetime ban against Donald Sterling. NBA commissioner Adam Silver and the notoriously litigious Sterlings managed to get done in one week what normally would take three months, and with the Sterlings was expected to get dragged out for perhaps years.

Ballmer, a longtime basketball junkie, had been involved in Chris Hansen’s bid to move the Sacramento Kings to Seattle. With lion’s-share financier Ballmer out of the picture, the prospects for a team in the Emerald City look rather slim for the foreseeable future. Ballmer has said that he won’t move the Clippers to Seattle, mostly because his $2 billion investment would be immediately be devalued upon relocating the franchise.

Even in the 2nd largest media market in the US, the $2 billion price has to be questioned. Sure, the Clippers are due a local boost when their TV deal comes up for renewal in a few years, and a national boost when the league’s TV deals get negotiated at the end of the decade. Those boosts still won’t properly support a $2 billion valuation. Forbes’ January valuation of the team was $575 million, based on $128 million in annual revenue, or 4.5X revenue. That’s already pushing things a bit, since it’s customary to value a team at 3X revenue. To justify $2 billion, the Clippers would have to realize at least $500 million annually, or a 4X jump from their current circumstances.

There’s no chance that such revenue will come from the new TV deals. The Clippers could get an additional $30 million a year from national TV, and another $100-150 million from Fox Sports West. Even so, that boosts their annual revenue to around $300 million, which would support a valuation of $1 billion. Of course, there’s no accounting for the competitive bidding activity that has surrounded recent franchise sales, so $1 billion would have to be considered a baseline, which was the case. Forbes’ Kurt Badenhausen laid out the case for why the team could fetch such a high multiple, but it still doesn’t quite add up.

The Dodgers sold for $2.1 billion, which came about because they too had a local TV deal up for bid. That bidding culminated in the birth of Sportsnet LA, the Dodgers-only regional sports network that will provide the team nearly $250 million per year. As one of the marquee franchises in the Southland along with the Lakers, a $2 billion sale price was considered enormous but not outlandish, especially when the value of Dodger Stadium and the 100 acres surrounding it are taken into account. The Clippers don’t have their own arena, or their own land outside of a recently built practice facility. They are mere tenants at Staples Center, and for the most part get the runt’s pick of dates and times at the arena. While the franchise has experienced a good run of success since they drafted Blake Griffin and traded for Chris Paul, Paul’s going to turn 30 next year and on-court success tends to be cyclical.

Ballmer will take over a team that has had few playoff appearances, let alone division, conference, or championship banners. He’ll look for ways to get the team to the summit, perhaps with an analytics-focused general manager. The Clippers are locked into their lease at Staples for another decade, so no new arena deal is in the offing – not that a new arena plan is emergent. Many in the media are calling for the Clippers name to be changed, its legacy tied to Donald Sterling’s long tenure as the worst owner in sports.

Then again, Ballmer may simply view the Clippers as a way to park $2 billion. Surely there are better growth strategies available, but when you have $20 billion and you have to diversify anyway, why not take on a franchise where you can reasonably expect the franchise growth to outpace inflation, where you’re virtually guaranteed to not lose money? Plus he’ll have a nice toy to play with. Ballmer attended many Sonics games as a season ticket holder when the franchise was in Seattle, and his old Microsoft colleague Paul Allen has long owned the Portland Trailblazers. If you’ve got the cash, it sure beats putting money into something boring like municipal and corporate bonds.

Should a 6X multiple become a new standard for franchise valuations or sale prices, it would grow the valuation bubble to enormous sums. The Warriors would be worth $1 billion, double the then-record 2010 purchase price of $450 million. The trend could quickly take hold throughout the rest of the NBA and spread the other major sports, where the Raiders and 49ers could hit $1.3 and 1.5 billion respectively, and the A’s could reach $1 billion. The market dynamics could be balanced out if a number of owners decided to cash out at the same time, so the leagues will be hard pressed to draw out any new franchise transfers in order to prevent a buyer’s market from breaking out, crazy as that sounds. The simple truth of the matter is that pro sports teams are exclusive and extremely lucrative, whether playing the long game or running the team annually. Budgets are fairly easy to work out and costs are incredibly well-controlled thanks to collective bargaining agreements and pools of centrally-derived revenue. Even paper losses can easily translate into profits at the end due to owner-friendly depreciation rules. You favorite team has turned into a part of some rich guy’s portfolio. The hedge fund guys started figuring that out during the recession, and it has only grown since. That’s the world we live in.

25 thoughts on “Clippers sale: Bubble burst or new reality?

  1. $2 billion for the Clippers? The A’s television rights deal pays them $45 mil. annually. The Clippers receive $25 mil. a year for their tv rights. It’s estimated that the Clippers earn $100 mil. a year profit – it would then require Balmer twenty years to break even.

    Even though the Dodgers owners paid $2.1 bil. for that team – the Dodgers owners receive $325 mil. a year through their television rights deal and also own Dodger stadium and its surrounding real estate. The Clippers lease out Staples center and do not own it. Pro sports teams values are going off the charts – $2 bil. for the Clippers is ridiculous though.

  2. I’m going to have to adjust my valuations for my 10 billion dollar plan, maybe it needs to be a 15 billion dollar one?

  3. Is 6x valuation the new norm? Nope.
    Then why did the Clips draw several bids over $1.2B?
    Location, location, location.

  4. A’s Fan you are correct, it is location, location, location. Another example of this is the Big 10 allowing Rutgers to join the Conference. Rutgers has a Football History worse than Washington State, in fact they have nothing except (along with Army) being the only Division 1 Football School located in the New York Television Market, and now the Big 10 Network has Carriage on Cablevision and Time Warner Systems. The Conference (except Rutgers and Maryland) is projected to make > $45m a year per School when their New TV Contract gets signed.
    The location, location, location is the biggest issue facing the A’s as well. I really believe its not just the Giants but MLB also wants the A’s out of Town as well. Why? The Giants reasoning is obvious (controlling the entire Bay Area Baseball Market), but expansion into a New Market (such as Portland, Oregon) from MLB’s Point of View, would mean more growth. We will see what happens about that soon enough.

  5. @David Brown: a new MLB commissioner might disagree with you. Moving the A’s from a large fan base to a small fanbase such as Portland would be bad business for MLB. (MLB already has too many struggling, small fanbase franchises – adding another would create more problems for baseball) The 2014 A’s will likely average over 24K per game at the dumpy Coliseum (very respectable for an old, obsolete venue) The A’s will average nearly 30K if they build a new ballpark at the CC site (likely doing even much better at Cisco Field in San Jose)The A’s problem is their ballpark – not a small fanbase.

    Also the A’s receive $45 mil. from Comcast for their television rights. If the A’s were to move to Portland, Sac., Vegas, etc. – they would likely receive no more than $18 mil. annually for a cable television rights contract – probably even less. Selig is evidently too dense to grasp these facts and evidently is a poor businessman. That’s why MLB owners are evidently looking for a different MLB commissioner – with perhaps more business sense than Selig. Favoring the Giants (who, although do well locally – have a bad national following and bad national post season viewer ratings) is a bad business move by Selig. The giants are not good for MLB – national networks who televise Giants games see plenty of red ink.

  6. I see this as a place to park 2billion dollars. That money may have just been sitting somewhere not doing anything anyway. I could be wrong, but has a team ever sold for less after initial investment? Also, if Ballmer was going to bid 1.5 maybe, paying $500 mil more really isn’t much money to him to know he secured the team. He’s paying a percentage of his overall wealth thats less than some pay for homes. He is obscenely rich.

  7. There’s only 30 of these toys (nba teams) that rich guys get to play with. It’s a far more exclusive club than real estate, or cars, etc.

    It’s not a ridiculous valuation IMO. It’s just where we’re headed in terms of franchise valuations.

  8. The pro sports valuation bubble officially hit a bursting point last week, when outgoing Clippers co-owner Shelly Sterling accepted a $2 billion bid for the team. The winning bid came from former Microsoft CEO Steve Ballmer . . .

    The pro-sports-value bubble burst last week when Shelly Sterling accepted a $2B bid for the Clippers. Microsoft CEO Steve Ballmer supplied the spear.

    Learn to write.

  9. He’s not writing to be witty, zoot. He’s writing to provide info and analysis.

    Your alternate opener isn’t nearly strong enough to warrant your haughty tone.

  10. xoot: Not only is your re-write worse from a writing standpoint, it also misuses the word “bubble.” A high bid doesn’t burst a bubble. It inflates the bubble. The bubble only bursts upon a sale at a low price.

  11. @ xoot
    I have always enjoyed your input to the conversation and have said as much several times, but man if you have that much of a problem with ML or his writing, which I find ridicules on you part, why even bother coming in here and comment?

  12. Sorry: “bother coming in here and commenting?”

  13. 100M-150M for the Clippers TV rights is low.

    Live Sports are all that is going keep Pay TV alive over the next 2 decades as with Roku, Amazon Fire, HuluPlus, NetFlix etc… are exploding causing the major networks to cringe.

    This on top of the fact devices are exploding everywhere on a worldwide basis. People overseas will be able to watch an NBA game on their mobile device if not already.

    The Clippers are in prime position to capitalize on their local market (20M+ people) and the international piece as well because of the mobile device explosion that is far from bursting.

    Lakers signed for 200M a year average in 2011 and the Clippers will match that and exceed it in 2016.

    Expect 225M-275M average and I except it to be an increasing scale over time as too many teams got locked in at rates today that will be so low at the end of their contracts it will horrible.

    At that rate they will be around 400M+ in revenue and that will grow over time even with bad teams. Valuation will eventually hit 2B over 5-10 years after, Ballmer will be more than OK.

    My thinking Ballmer wishes he overpaid for the Kings last year and signed a brand new TV deal in Seattle to compensate like he just did with the Clippers…..He is kicking himself.

    If he offered 1B for the Kings no doubt they would be in Seattle right now where he could take a limo to the games and not a private jet to LA.

    You live and you learn and Ballmer knows it after failing in securing the Kings, Bucks, and T-Wolves.

  14. Forgot to mention because of Live Sports; advertising dollars on Live Sports are skyrocketing because no can DVR through a live game.

    Versus if you watch a sitcome or network show you can DVR it and watch later with no commercials and not miss anything.

    Another reason why media rights are a long way away from bursting.

  15. @duffer

    I totally agree with your assessment regarding the A’s move to another market.

    While @David Brown’s argument sounds logical and has merit with respect to location, CURRENTLY, there is no viable and VALUABLE market for the A’s to move to.

    As I have commented many times…if such a market with high valuations, (i.e. TV market..possible high attendance figures etc….), existed…the A’s would be moving there at the end of this season or next and possibly Tampa Bay Rays would already be playing in that market….regardless of what their crappy lease and stadium represent.

  16. 2 things to keep in mind-what an owner is willing to pay for a team v. what makes business sense are 2 different things as recently evidenced by the Clippers sale and second- while the bay area may be an attractive 2 team market the bottom line is one of the teams is on welfare and will remain on welfare. I doubt that MLB would have any problem allowing the A’s to move into another market and continue to receive welfare while the gints would only get healthier by being the only team in a large market.

    Bottom line—if LW ever decided to sell, and SJ is locked out and Oakland isn’t able to provide any public money than I could absolutely see one of our billionaires step up and offer an outrageous price to get the franchise and locate them where they want—which is exactly what the gints motives have been all along–

  17. O/T: SJ vs greedy Frisco will be heard on 8/12/2014. Not sure why the 9th court pushes it back.

  18. A higher valuation means little to the A’s quest for a new ballpark, as financing isn’t the thing holding them back. It could be a game changer for the Raiders though. Assuming the Clippers sale indicates that true market value of sports teams generally is currently that much higher than Forbes thinks, that could be a huge boost for the prospect of a new NFL stadium in Oakland.

    Why not LA? Because the location of an NFL team is not nearly as important as the location of an NBA team. NBA TV revenue is mostly local and retained by the team. NFL TV revenue is mostly national and shared across the league. Oakland isn’t at nearly as much of a disadvantage fighting LA for a football team as it would be in any other sport.

    It’s not at all obvious that home team-retained stadium revenue would be dramatically greater in LA than in smaller markets, and TV and merchandise revenue is irrelevant. This is a big reason why LA hasn’t had an NFL team for nearly 20 years.

  19. @Alex: True, that’s why the A’s choices are likely narrowed to two locations: Cisco Field – due to a favorable federal court decision or an MLB commissioner with more sense than Selig (by default, the next MLB commissioner should easily be able to fit that critera) – or the CC site.

  20. xoot is such an asshole. That’s all.

  21. Okay, that’s not all. What would the Raiders be worth in LA?

  22. @Jeffrey I think they’d be worth more, just not that much more. Basically, it would be whatever added valuation reflects the difference in potential club seat and suite sales, which is the only NFL revenue that isn’t shared. Those revenue streams aren’t nearly as important in the NFL (with 8 home games and giant national TV contracts) as they are, say, in MLB (with 81 home games and mostly local TV revenue).

    The biggest things that differentiate big markets from small markets are their TV and merchandise potential. The fact those revenue streams are shared in the NFL explains why you can have a team in Jacksonville and none in LA for decades.

  23. @Jeffrey The Forbes list of NFL team financials mike2 linked to is interesting. Based on that list, except for a handful of teams at the very top the revenue curve between NFL teams is pretty flat and only loosely correlated with city size.

    Not sure how the Cowboys got so far ahead of everyone else within the constraints of the NFL’s revenue sharing, but assuming Forbes’ figures are remotely close it would be an eye opener that Dallas could perform so much better than New York.

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