Forbes MLB Team Valuations: O's Worth $1 Billion

[BradyBunch]

And then you give a long answer that tries to make simple things complicated.

Let me keep it really simple. Paying $75 mm for 10% of a company says one thing about its valuation. Paying $75 mm for 33% of a company says something different about its valuation. Paying $75 mm for a 10% stake that grows to 33% over time says a third thing about its valuation, and it's in between the other two.

It's not like the Nats have foregone their dividends while their stake is growing. To the contrary, they were entitled to 10% of the dividends when they owned 10% of the company, they're entitled to 17% now, and their percentage of the dividends goes up every year until it hits 33%. They aren't paying anything additional for that increase. And you'd rather have that than have 10% of the dividends forever.

I'm done arguing about this point.

They are forgoing x% of that 33% until 2023. That by definition is deferred equity. So their 33% wasn't bought for $75m but rather the total value of equity forgone for 23 years plus $75m. Its that simple but you seem to be missing this. No investor/owner or shareholder is gonna leave equity on the table unless its part of the agreement to finance ownership increases. Remember this was MLB's doing and there was no way owners would approve a $200 plus upfront payment for 33% ownership in MASN. Rather $75m and deferred equity is doable.

[Frobby]

They are forgoing x% of that 33% until 2023. That by definition is deferred equity. So their 33% wasn't bought for $75m but rather the total value of equity forgone for 23 years plus $75m. Its that simple but you seem to be missing this. No investor/owner or shareholder is gonna leave equity on the table unless its part of the agreement to finance ownership increases. Remember this was MLB's doing and there was no way owners would approve a $200 plus upfront payment for 33% ownership in MASN. Rather $75m and deferred equity is doable.

This is the reason that $75 mm doesn't infer a $225 mm valuation for a 33% stake in the franchise. It obviously infers something higher than that. But it doesn't infer $750 mm. That would be the inference if you were buying 10% and your stake was going to stay at 10%.

[weams]

According to the article, the value includes non-baseball assets such as RSN ownership.

I wonder how the events of Baltimore this year have changed the valuation? The losing season as well?

[Phantom]

I wonder how the events of Baltimore this year have changed the valuation? The losing season as well?

I highly doubt either of those things affected the teams value.

[Stotle]

I wonder how the events of Baltimore this year have changed the valuation? The losing season as well?

Not at all?

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[DrungoHazewood]

I highly doubt either of those things affected the teams value.

Not at all?

Yea, my first thought was not at all. But I didn't really have anything substantive to back that up.

[weams]

Yea, my first thought was not at all. But I didn't really have anything substantive to back that up.

Maybe the value of the cable contracts has decreased as well. I suspect because MLB is limited to 30 teams, that all franchise values will go up for the foreseeable future.

[DrungoHazewood]

Maybe the value of the cable contracts has decreased as well. I suspect because MLB is limited to 30 teams, that all franchise values will go up for the foreseeable future.

That's an advantage of a closed system like MLB. There's only so much top-tier baseball to go around, there's no realistic chance of the supply increasing. As long as the fanbase grows, the revenue grows, the franchises can't help but appreciate in value.

[OFFNY]

They are forgoing x% of that 33% until 2023. That by definition is deferred equity. So their 33% wasn't bought for $75m but rather the total value of equity forgone for 23 years plus $75m. Its that simple but you seem to be missing this. No investor/owner or shareholder is gonna leave equity on the table unless its part of the agreement to finance ownership increases. Remember this was MLB's doing and there was no way owners would approve a $200 plus upfront payment for 33% ownership in MASN. Rather $75m and deferred equity is doable.

This is the reason that $75 mm doesn't infer a $225 mm valuation for a 33% stake in the franchise. It obviously infers something higher than that. But it doesn't infer $750 mm. That would be the inference if you were buying 10% and your stake was going to stay at 10%.

You certainly did clearly explain about 4 different ways why the value was neither the investment divided by 10% nor 33% but somewhere in between, but he isn't going to concede his original point was off base despite the fact that you're right. He doesn't do that.

Even if the Orioles are 3 and-a-half games behind a team. They're actually 4 games behind them, because of the all-important win column.

[BohKnowsBmore]

Yea, my first thought was not at all. But I didn't really have anything substantive to back that up.

Valuation is generally based on discounted future cash flows. The only way they affect it is in terms of how assumptions driving revenue figures in the valuation model. So they probably do in some small way (I.e. A playoff season would have upped the base year revenue likely as well as propped up some fan-interest aspect of projections for the next two years or so), although not directly. Like, the valuation guys don't say "this team had 81 wins so $x"

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[weams]

Valuation is generally based on discounted future cash flows. The only way they affect it is in terms of how assumptions driving revenue figures in the valuation model. So they probably do in some small way (I.e. A playoff season would have upped the base year revenue likely as well as propped up some fan-interest aspect of projections for the next two years or so), although not directly. Like, the valuation guys don't say "this team had 81 wins so $x"

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If an investment group were looking to pry the Orioles away from the Angelos family with MASN unresolved, I could see a discount occurring because of the general perception of Baltimore as a fan friendly location. Also the fact that the team itself appears to be in a developmental doldrums at best. Not the W/L record or even that lack of a post season.

[spiritof66]

It's good to have more data, and I hope that Forbes and Bloomberg will improve their information and presentations on MLB in the future. I'm not too interested in the extent to which the values of all MLB teams continue to spiral upwards since I'm not interested in buying or selling one. What I am interested in is what financial resources each MLB franchise has and is expected to have, relative to one another, to devote to building their competing teams. That really should be the same as the relative values of these teams.

From my perspective, the Forbes valuations ae of limited use in comparing teams for two principal reasons. One is the ignoring of the value of franchises' rights in regional sports networks. Some teams have sold their cable rights at what was, at the time, market value; others have sold those rights to RSNs that they control at what we now know are bargain prices, building value in those businesses. To ignore the value of teams' interests in RSNs seems completely unjustified, and Forbes doesn't try to justify it. (Bloomberg values teams' interests in RSNs but doesn't explain where theose numbers come from. That's a little better, I guess.)

Another reason is that Forbes' (and Bloomberg's) valuations, by looking only (or so it appears) to each team's performance last year, appear to disregard a fundamental rule of business valuation. "It is basic valuation theory that the value of a business is equal to the present worth of the future benefits of ownership." Fishman, Pratt, Griffith, Wilson, et. al., Guide to Business Valuations, Vol. 1, page 2-4 (PPC Publishers, February, 1999), quoted in http://leeandrivers.com/the-double-dipping-concept-in-business-valuation-for-divorce-purposes/. (The treatise that's quoted is the leading general work on business valuation.)

The valuation of any business, including a baseball team, should reflect an assessment of how the business will perform in the future. Relying solely on data about past performance is appropriate only for a very mature, stable business, where historical data will reliably predict future performance -- as used to be the case, for example, with an electric utility. If Forbes showed that each team's revenues and profits had increased by the same factor in each of the past five or ten years, data from last year would be a reasonable proxy for future performance. But that's not the case. The historical data in each team's write-up, while hard to read and not analyzed by Forbes, seem to show different increases for each team, and no pattern to profits. Those variances, as I understand it, are why the valuation rankings change each year -- which is part of the hook for the Forbes article each year.

It simply is not the case that each ML team's future performances can be expected to track the pecking order of last year's revenues as reported by Forbes, or that those teams' futures should be expected to proceed in the same way. Some are in cities where population size and wealth are increasing; others are in cities that are stagnant or declining. Forbes says it made an adjustment for one dramatic example, the anticipated effect of the Braves' opening of anew stadium, but there are lots more subtle aspects of each team's future prospects that a proper valuation should reflect.

Moreover, virtually every business valuation is driven by the extent to which a prospective purchaser believes he can replicate or improve on past performance. That expectation will differ from team to team. If I were assessing the value of the Cardinals, I would be pretty confident that the regional fan base, civic enthusiasm and infrastructure the team has built over the past 80 or so years could be maintained, along with its on-field performance (at least, so long as the current divisional setup stays in place). I would feel pretty much the same way if I were looking at the Giants, subject to any concerns about declines in the local technology-driven economy and the potential move of the A's to a more competitive location.

If I were looking at the value of the Toronto or Houston franchise, I probably would conclude that the franchise has been underperforming, and that better management would broaden the fan base and increase attendance and cable revenues. (I've been saying this about Toronto, in the context of AL East competition, for the past few years.)

Conversely, if I were looking at the Royals or Pirates, I don't think I would expect the success and attendance over the past two years to be sustained for more than a couple of years. If I were looking at Tampa Bay or Oakland, my valuation would depend a lot on my assessment of getting a new stadium built or moving the team.

Projecting the Orioles' future business prospects is complicated. Metro Baltimore is the 22nd largest MLB market, and it competes in the AL East with teams from three much larger and wealthier markets. The Orioles have some advantages relative to some other teams that are likely to enhance future revenues (and value) relative to those teams, including OPACY, the team's deep roots in the city, and the MASN arrangement, but IMO the Orioles' future financial prospects will depend in large part on their ability to draw fans and TV viewers from metro Washington, which is MLB's 12th largest market (double-counting those with two teams) and one of its wealthier ones. The point is that, as for many teams, a valuation of the Orioles should consider a number of factors other than what their revenues and profits were last year.

What do the experts at Forbes or Bloomberg think about how these team-specific factors come into play and affect the value of each franchise? We don't know. Maybe some day.

One more specific point. There have been references in this thread to the value of MASN, some of which have projected that value from the value of a minority interest: that is, if 10% of MASN has a value of $10 million, then all of MASN is worth $100 million. I know virtually nothing about valuing of RSNs, but for most closely businesses (including cable TV systems) like MASN, there are large valuation premiums for controlling interests and discounts for minority interests. If 10% of a closely held company has a value of $10 million, the whole company might have a value of $70 million. I don't know why that wouldn't be true of MASN.

[weams]

<blockquote class="twitter-tweet" lang="en"><p lang="en" dir="ltr"><a href="https://twitter.com/OriolesHangout">@OriolesHangout</a> It should also be noted that team popularity and cable revenue is largely irrelevant because of how long term contract are.</p>— Camden Depot (@CamdenDepot) <a href="

">October 2, 2015</a></blockquote>

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[weams]

<blockquote class="twitter-tweet" lang="en"><p lang="en" dir="ltr"><a href="https://twitter.com/OriolesHangout">@OriolesHangout</a> Another major issue with MASN is that due to the lawsuit, there is a wide range of values depending on the outcome.</p>— Camden Depot (@CamdenDepot) <a href="

">October 2, 2015</a></blockquote>

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[BohKnowsBmore]

<blockquote class="twitter-tweet" lang="en"><p lang="en" dir="ltr"><a href="https://twitter.com/OriolesHangout">@OriolesHangout</a> Another major issue with MASN is that due to the lawsuit, there is a wide range of values depending on the outcome.</p>? Camden Depot (@CamdenDepot) <a href="

">October 2, 2015</a></blockquote>

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Especially problematic is that this is a pretty unique situation so it's even harder than normal to determine what the appropriate percentage is for the contingency reserve on masn revenue projections.

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