Aswath Damodaran
THE
SPORTING
BUSINESS:
VALUE
AND
PRICE
Aswath
Damodaran
Lets
start
with
a
few
reality
checks
2
1.
2.
3.
4.
5.
It
is
easy
to
value
a
sports
franchise.
It
is
dicult
to
price
a
sports
franchise.
Forbes
does
not
value
sports
franchises.
It
prices
them,
and
through
no
fault
of
its
own,
it
prices
them
badly.
If
you
are
an
investor,
dont
invest
in
a
professional
sports
franchise.
You
may
have
a
beTer
shot
if
you
invest
in
semi-professional
sports
franchise.
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
nancials).
Aswath Damodaran
Price
versus
Value:
The
Set
up
3
Drivers of intrinsic value
- Cashflows from existing assets
- Growth in cash flows
- Quality of Growth
Accounting
Estimates
INTRINSIC
VALUE
Valuation
Estimates
Aswath Damodaran
Value
Drivers of price
- Market moods & momentum
- Surface stories about fundamentals
THE GAP
Is there one?
If so, will it close?
If it will close, what will
cause it to close?
Price
PRICE
The
determinants
of
value
4
What are the
cashflows from
existing assets?
- Equity: Cashflows
after debt payments
- Firm: Cashflows
before debt payments
Aswath Damodaran
What is the value added by growth assets?
Equity: Growth in equity earnings/ cashflows
Firm: Growth in operating earnings/
cashflows
How risky are the cash flows from both
existing assets and growth assets?
Equity: Risk in equity in the company
Firm: Risk in the firms operations
When will the firm
become a mature
firm, and what are
the potential
roadblocks?
DCF
as
a
tool
for
intrinsic
valua\on
5
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
assets of the firm, net of taxes and
any reinvestment needed to sustain
the base earnings.
Steady state
The value of growth comes from
the capacity to generate excess
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
The
determinants
of
price
6
Mood and Momentum
Price is determined in large part
by mood and momentum,
which, in turn, are driven by
behavioral factors (panic, fear,
greed).
Liquidity & Trading Ease
While the value of an asset may
not change much from period to
period, liquidity and ease of
trading can, and as it does, so
will the price.
The Market Price
Incremental information
Since you make money on
price changes, not price levels,
the focus is on incremental
information (news stories,
rumors, gossip) and how it
measures up, relative to
expectations
Aswath Damodaran
Group Think
To the extent that pricing is
about gauging what other
investors will do, the price can
be determined by the "herd".
The
Mechanics
of
Pricing
Market value of equity
Step 1: Pick a
multiple
Step 3: Tell
a story
Market value of operating assets of firm
Enterprise value (EV) = Market value of equity
+ Market value of debt
- Cash
Numerator = What you are paying for the asset
Multiple =
Revenues
a. Accounting revenues
b. Drivers
- # Customers
- # Subscribers
= # units
Step 2: Choose
comparables
Market value for the firm
Firm value = Market value of equity
+ Market value of debt
Earnings
a. To Equity investors
- Net Income
- Earnings per share
b. To Firm
- Operating income (EBIT)
Narrow versus Broad
sector/business
Risk
- Lower risk for higher value
- Higher risk for lower value
CHOOSE A
MULTIPLE
Denominator = What you are getting in return
Similar market cap
or all companies
Cash flow
a. To Equity
- Net Income + Depreciation
- Free CF to Equity
b. To Firm
- EBIT + DA (EBITDA)
- Free CF to Firm
Country, Region or
Global
Growth
- Higher growth for higher value
- Lower growth for lower value
Book Value
a. Equity
= BV of equity
b. Firm
= BV of debt + BV of equity
c. Invested Capital
= BV of equity + BV of debt - Cash
Other criteria,
subjective &
objective
Quality of growth
- Higher barriers to entry/moats for higher value
- Lower barriers to entry for lower value
PICK
COMPARABLE
FIRMS
SPIN/TELL
YOUR STORY
Aswath Damodaran
THE
VALUE
OF
A
SPORTS
FRANCHISE
The
Drivers
of
Franchise
Value
9
National TV/ Radio
Revenues
Merchandising
Revenues
Local TV/Radio
Revenues
Overall team Revenues
Player Expenses
Minus
Gate Receipts &
Revenues from games
Media Revenues
(TV, Radio & Other)
Team Expenses
Administrative
Expenses
Other operating
expenses
Team Operating Income
Franchising & Other
Advertising
Minus
Taxes
=
After-tax Operating Income/ Cash flow
Debt Ratios
Operating Risks
Legal Risks
- League wide
-Team specific
Discount back at
Cost of Capital (Discount Rate)
City/State Subsidies
Value of Team
Aswath Damodaran
Revenue
Breakdown
across
Franchises
10
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10
EBITDA
Margins
across
Franchises
11
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11
Player
Expenses
across
Franchises
12
Aswath Damodaran
12
Valuing
the
Clippers
(2014)
13
Aswath Damodaran
13
Aswath Damodaran
THE
PRICING
OF
A
SPORTS
FRANCHISE
14
The
Pricing
Problem
15
Accoun\ng
Earnings
is
c\on:
Dierences
may
be
dicult
to
control
for:
Transac\ons
are
infrequent:
Aswath Damodaran
15
MLB
Team
Transac\on:
History
16
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16
17
Aswath Damodaran
NFL Team Transaction History
18
Aswath Damodaran
NBA Team Transaction History
Pricing
the
Clippers
19
Aswath Damodaran
19
The
BoTom
Line
20
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
aected
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.
Dont
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
20
