Sunday, March 26, 2006
Atlanta Braves: worth $400m?
Come on, admit it. We have all fantasized about being in charge of our favorite baseball team. Every year when we pick a fantasy team we ponder what life might be like as the General Manager of a ball club, resolving dilemmas like: deciding between A-Rod and Pujols, trading-off pitching and hitting, desperately trying to fill that last roster slot with the best sub-par hitter, wheeling and dealing the middle order, and picking up a rookie on waivers who (hopefully!) goes on to spank 30 homers, but probably doesn't. Even better, what about being an owner? Well, my team, the Atlanta Braves, is up for sale and I'd love to buy them. So how much will it cost?
Ultimately a baseball club is a business, just like any other company, and therefore we can value it using similar techniques. The method I'm going to introduce is called Discount Cash Flow (DCF) analysis. Don't be put off by the name, although investment bankers are paid hundreds of thousands of dollars to perfect DCF we will use it in its simplest form.
DCF values a business or investment by calculating the present value of all future cash flows. What does this mean? Suppose that I sell you a product, eg, a financial option, which can be sold this time next year for $100. How much would you pay for it today? $100? Well, no - our trusty friend from the 1970s called inflation means that $100 today is worth less this time next year. If inflation is 5%, $100 next year is worth $95 today. Therefore the maximum that you'd pay in this instance is $95 - less if you wanted to make a profit.
A business is similar except rather than generating a single payment it spits out cash year after year. If we know how much money our business generates in all future years, and also what the inflation rate is for each year, we can work out the maximum that we would pay for it. Ok, so much for the theory, lets see how it works in practice. We need to work out what the present value of all those future cash flows are. A good starting point is to work out what the current year cash flow is. To do this we need to know revenues and costs. Revenue minus cost equals profit and, for this purpose, cash. Technical note: this excludes capital expenditure (adjusting for depreciation / amortization) and changes in working capital. This is not necessary for a high level exercise like this but is academically accurate if we were doing a full valuation.
For a public company, one listed on the stock exchange for instance, annual reports give us all the information we need. However, ball clubs are intensely private companies which are loathe to reveal even a smatter of their financials. One approach is to ballpark (excuse the pun) estimate cash flow. We simply list all the revenues and costs and try to work out the size of each. Let's give this a go for revenue.
Revenues include: tickets, concessions, car parking, advertising, TV / radio rights, mechandising to name a few - I'm sure you can probably list many more. For the time being lets consider the first three. The Braves' attendance in 2005 was 2.6m. Estimating the average ticket price at $20 gives $52m sales from tickets. Adding in concessions - say a beer and a hotdog per person (total $10) - gives an extra $26m. Car parking? The Braves have 10,000 spaces. So lets say that 80% are filled up on average for each game. At $10 per car that is another $8m per game. Just from gamedays we have $88m. We could continue to go through this exercise and work out all other revenue sources - though we'd struggle a little with television revenue given that AOL are the current owners. Luckily Forbes produces an annual estimate of revenue for us. The last available data is 2004 where revenue was estimated at $162m. Given our initial gameday estimate of $88m, $162m doesn't seem too crazy. Actually you could argue that it is a little on the low-side given the intricacies of the TV contract (basically the Braves sell its TV rights at below fair value to inflate AOL's profit and reduce the Braves' - it is a complex subject that almost deserves of an article in its own right if it wasn't such a dull subject). For simplicity lets put a range on revenue of $160m-$180m - that seems about fair.
Ok, now on to costs which primarily consist of player and staff salaries, but also include general operational expenditure and minor league affiliates amongst others. This is easier to do - salaries are reported and fixed costs of running a ball club are easy to estimate. Again, for simplicity we'll take Forbes' figure of $146m. Lets do a quick sense check: payroll is about $90m leaving $50m for other costs - seems about right (I'm happy to trust Forbes as I haven't got the time to work it out).
Going back to our earlier equation we estimate cash flow (revenue minus costs) at approximately $15m-$35m.
This is just for one year, what we need to do is to project this over all future years. Sounds tricky, right? Well here we can cheat a bit. Given that we are only looking for a ballpark estimate we can use a perpetuity valuation technique. This means that we will base future cash flows on current year cash and a constant future growth rate. The formula relies only on three inputs: annual cash flow (calculated above), the rate at which to discount future cash flow and the growth rate in annual cash flow.
The discount rate should reflect two things: general inflation and riskiness of investment - the higher the risk the more we want to discount cash flows far out in the future as there is less certainty over them. Baseball is a stable industry so is reasonably risk free. A discount rate of about 10% is probably about right. Now what about growth? Again, given the many approximations in this analysis we can be reasonably rough and ready here. We'll assume that ticket prices increase in-line with inflation: say 3%.
The formula for perpetuity value is:
cashflow x (1 + growth rate)
discount rate - growth rate
Now we are in a position to work out how much to pay for the Braves. Plugging in the numbers we get a range from $225m to $530m - which is a wide margin (it goes to show you need to make sure your assumptions are as accurate as possible at the outset). How does that number compare to what other people are saying? The Forbes value is $380m, which is pretty much bang in the middle of where we are. Moreover, investment analysts expect a winning bid for the Braves to be in the region of $400m-$450m.
Back to my original question: how much would I pay for the Braves? Well, unlike a normal business, baseball is a uniquee industry with a number of factors which conspire to push up value. Firstly, it is an effective monopoly which is obviously a bonus for any business (witness the fight put up by the Orioles when the Expos relocated). Secondly, baseball inspires passion and loyalty. People are prepared to pay way over the odds for this which skews even the most rigorous analysis. So based on the above, the general price of recent ball club transactions, and the fact that the Braves is a very well run organization, I'd say that a value in the region of $400m is fair. In fact, if I had that sort of money burning a hole in my pocket I'd be sitting with my feet up, smoking a cigar, watching my mighty Braves winning the world series. Unfortunately I can only but dream!
Ultimately a baseball club is a business, just like any other company, and therefore we can value it using similar techniques. The method I'm going to introduce is called Discount Cash Flow (DCF) analysis. Don't be put off by the name, although investment bankers are paid hundreds of thousands of dollars to perfect DCF we will use it in its simplest form.
DCF values a business or investment by calculating the present value of all future cash flows. What does this mean? Suppose that I sell you a product, eg, a financial option, which can be sold this time next year for $100. How much would you pay for it today? $100? Well, no - our trusty friend from the 1970s called inflation means that $100 today is worth less this time next year. If inflation is 5%, $100 next year is worth $95 today. Therefore the maximum that you'd pay in this instance is $95 - less if you wanted to make a profit.
A business is similar except rather than generating a single payment it spits out cash year after year. If we know how much money our business generates in all future years, and also what the inflation rate is for each year, we can work out the maximum that we would pay for it. Ok, so much for the theory, lets see how it works in practice. We need to work out what the present value of all those future cash flows are. A good starting point is to work out what the current year cash flow is. To do this we need to know revenues and costs. Revenue minus cost equals profit and, for this purpose, cash. Technical note: this excludes capital expenditure (adjusting for depreciation / amortization) and changes in working capital. This is not necessary for a high level exercise like this but is academically accurate if we were doing a full valuation.
For a public company, one listed on the stock exchange for instance, annual reports give us all the information we need. However, ball clubs are intensely private companies which are loathe to reveal even a smatter of their financials. One approach is to ballpark (excuse the pun) estimate cash flow. We simply list all the revenues and costs and try to work out the size of each. Let's give this a go for revenue.
Revenues include: tickets, concessions, car parking, advertising, TV / radio rights, mechandising to name a few - I'm sure you can probably list many more. For the time being lets consider the first three. The Braves' attendance in 2005 was 2.6m. Estimating the average ticket price at $20 gives $52m sales from tickets. Adding in concessions - say a beer and a hotdog per person (total $10) - gives an extra $26m. Car parking? The Braves have 10,000 spaces. So lets say that 80% are filled up on average for each game. At $10 per car that is another $8m per game. Just from gamedays we have $88m. We could continue to go through this exercise and work out all other revenue sources - though we'd struggle a little with television revenue given that AOL are the current owners. Luckily Forbes produces an annual estimate of revenue for us. The last available data is 2004 where revenue was estimated at $162m. Given our initial gameday estimate of $88m, $162m doesn't seem too crazy. Actually you could argue that it is a little on the low-side given the intricacies of the TV contract (basically the Braves sell its TV rights at below fair value to inflate AOL's profit and reduce the Braves' - it is a complex subject that almost deserves of an article in its own right if it wasn't such a dull subject). For simplicity lets put a range on revenue of $160m-$180m - that seems about fair.
Ok, now on to costs which primarily consist of player and staff salaries, but also include general operational expenditure and minor league affiliates amongst others. This is easier to do - salaries are reported and fixed costs of running a ball club are easy to estimate. Again, for simplicity we'll take Forbes' figure of $146m. Lets do a quick sense check: payroll is about $90m leaving $50m for other costs - seems about right (I'm happy to trust Forbes as I haven't got the time to work it out).
Going back to our earlier equation we estimate cash flow (revenue minus costs) at approximately $15m-$35m.
This is just for one year, what we need to do is to project this over all future years. Sounds tricky, right? Well here we can cheat a bit. Given that we are only looking for a ballpark estimate we can use a perpetuity valuation technique. This means that we will base future cash flows on current year cash and a constant future growth rate. The formula relies only on three inputs: annual cash flow (calculated above), the rate at which to discount future cash flow and the growth rate in annual cash flow.
The discount rate should reflect two things: general inflation and riskiness of investment - the higher the risk the more we want to discount cash flows far out in the future as there is less certainty over them. Baseball is a stable industry so is reasonably risk free. A discount rate of about 10% is probably about right. Now what about growth? Again, given the many approximations in this analysis we can be reasonably rough and ready here. We'll assume that ticket prices increase in-line with inflation: say 3%.
The formula for perpetuity value is:
cashflow x (1 + growth rate)
discount rate - growth rate
Now we are in a position to work out how much to pay for the Braves. Plugging in the numbers we get a range from $225m to $530m - which is a wide margin (it goes to show you need to make sure your assumptions are as accurate as possible at the outset). How does that number compare to what other people are saying? The Forbes value is $380m, which is pretty much bang in the middle of where we are. Moreover, investment analysts expect a winning bid for the Braves to be in the region of $400m-$450m.
Back to my original question: how much would I pay for the Braves? Well, unlike a normal business, baseball is a uniquee industry with a number of factors which conspire to push up value. Firstly, it is an effective monopoly which is obviously a bonus for any business (witness the fight put up by the Orioles when the Expos relocated). Secondly, baseball inspires passion and loyalty. People are prepared to pay way over the odds for this which skews even the most rigorous analysis. So based on the above, the general price of recent ball club transactions, and the fact that the Braves is a very well run organization, I'd say that a value in the region of $400m is fair. In fact, if I had that sort of money burning a hole in my pocket I'd be sitting with my feet up, smoking a cigar, watching my mighty Braves winning the world series. Unfortunately I can only but dream!
