L.A. Clippers 63-Fold Return Beats Stocks to Bonds: Real M&A
Buying the Los Angeles Clippers looks like one of the best ways to have spent $12 million in 1981.
While the Clippers have had the worst record in the National Basketball Association during the 33 years that Donald Sterling has owned the team, he stands to make at least a 63-fold return on his initial investment. The gain for Sterling, who may be forced to sell after being bounced out of the league for making racist remarks, would beat every major financial benchmark -- from stocks and bonds to gold and real estate -- over the same period, according to data compiled by Bloomberg.
Even sports franchises with mostly losing records, such as Sterling’s Clippers, are soaring in value as broadcasters seeking coveted rights broker multi-billion dollar media contracts that help put teams in front of more people. On top of that, buyers are willing to pay a premium for access to the owners’ circle, an exclusive club with accompanying bragging rights.
“He’s been arguably the worst owner, not only in the NBA but in professional sports,” Michael Lysko, director of the sports management program at Southern Methodist University in Dallas, said in a phone interview. “Now in spite of himself, he’s got himself a pretty healthy return.”
NBA Commissioner Adam Silver last month banned Sterling from the league for life and fined him $2.5 million after the real-estate magnate was recorded asking a female friend not to broadcast herself “associating with black people.”
“The views expressed by Mr. Sterling are deeply offensive and harmful,” Silver said at a news conference in New York on April 29. “That they came from an NBA owner only heightens the damage and my personal outrage.”
Andy Roeser is taking an indefinite leave of absence as president of the Clippers, effective immediately, the NBA said yesterday. Sterling, who bought the team for about $12 million in 1981, couldn’t be reached for comment.
Silver said he expects to get the three-quarters vote of the 30-member NBA board of governors needed to force a sale. Potential buyers, such as Magic Johnson and Oprah Winfrey, may pay at least $763 million for the Clippers, according to the average of four estimates compiled by Bloomberg.
That means Sterling would get about a 63-fold return on his initial investment, better than the 17-fold gain of the Dow Jones Industrial Average (INDU) since 1981 and the 18-fold increase in a Bank of America Merrill Lynch index of investment-grade bonds, according to data compiled by Bloomberg.
Sterling’s return also would outpace the gains of the Standard & Poor’s 500 Index (SPX), gauges for commercial real estate, high-yield bonds and U.S. Treasuries, as well as gold, silver, copper, corn and oil, according to data compiled by Bloomberg.
The calculations for the Clippers don’t account for taxes or any additional investments Sterling might have made in the team.
Sports teams are a “pretty damn good” investment, Chris Bevilacqua, co-founder of sports media consulting firm Bevilacqua Helfant Ventures, said in a phone interview. “It’s hard to see sports properties not continuing over time to accrete value, especially when you’re talking about a global sport like the NBA.”
While National Football League and Major League Baseball teams have higher valuations on average, according to a 2012 report from WR Hambrecht + Co., NBA teams are already getting record sale prices within their sport. The Sacramento Kings got $534 million last year from a group including Tibco Software Inc.’s Vivek Ranadive. Last month, Fortress Investment Group LLC co-founder Wesley Edens and Avenue Capital Group’s Marc Lasry said they’re buying the Milwaukee Bucks for $550 million.
The Clippers are likely to go for even more than that, said Peter J. Schwartz, managing director of venture capital at Boston-based Christie & Associates LLC. While the team has the worst record in the NBA among franchises that have been around for more than 10 years, according to the league, its Los Angeles home carries a premium, he said. The Charlotte Bobcats have the lowest winning percentage since joining the league in 2004.
The Clippers “have been such a terrible team for so long that we wouldn’t even be talking about high figures such as this if they didn’t play in a major market,” Schwartz said in a phone interview. “Being second fiddle in Los Angeles is often a lot better than being the primary team in a smaller market.”
The Los Angeles area is the second-biggest media market in the U.S. after New York. When the Clippers’ local TV deal expires in 2016, competing bidders may drive up the price of the contract, making the team potentially even more valuable.
The Clippers also have been playing better recently. The team, with Blake Griffin and Chris Paul, made the NBA playoffs for the third straight season this year and has advanced to the second round, where it won game one against the Oklahoma City Thunder on May 5. Game two is tonight at 9:30 p.m. New York time.
All of that will help Sterling best even Frank McCourt’s five-fold return on the $2.15 billion sale of MLB’s Los Angeles Dodgers and related properties, the biggest deal in sports history. McCourt bought the team in 2004 and sold it in 2012.
“As crazy as those numbers might seem to you, it’s not an aberration when you look at sports in general,” Schwartz of Christie & Associates said. “All of that has been driven by the changing dynamic of media. Sports is live programming that everybody seems to want and pay a premium for, and it’s just raised the value of sports teams.”
With the rise of digital video recorders from companies such as TiVo Inc. (TIVO) and services such as Netflix Inc., (NFLX) more consumers are delaying program viewing and skipping commercials. People still prefer to watch sports live though, making the broadcast rights increasingly attractive to television providers competing for advertising dollars, said Sal Galatioto, founder of New York-based Galatioto Sports Partners, which helped sell NBA teams including the Golden State Warriors and Phoenix Suns.
“Everyone is beginning to realize that this is premier media content,” he said in a phone interview. “It’s one of the few types of content that advertisers really want. They have a tremendous following.”
The NBA’s contracts with Walt Disney Co. (DIS)’s ABC and ESPN and Time Warner Inc.’s Turner Sports, that pay about $930 million a year expire after the 2015-2016 season. It’s been speculated that the league’s rights fees may as much as double in the next agreement, said Ray Katz, an executive vice president at Source Communications and a sports business professor at Columbia University in New York.
Additionally, the NBA is benefiting from a growing international fan base that will help attract more sponsorship, media and merchandise revenue, said Rob Tilliss, founder of Inner Circle Sports LLC, which represented Apollo Global Management LLC co-founder Joshua Harris in his purchase of the NBA’s Philadelphia 76ers.
“The brand has absolutely exploded in popularity,” Tilliss said in a phone interview. “The NBA has really grown dramatically in terms of total revenue, and the rising tide has basically taken up all boats.”
The financial potential of a team is only one part of its estimated value in a sale, according to Michael Leeds, an economics professor at Temple University in Philadelphia. The rest is what he calls “the ego premium.”
“You’re joining one of the most exclusive clubs on earth and you’ve got this incredibly fancy new toy,” Leeds, who is also president of the North American Association of Sports Economists, said in a phone interview. The Clippers team “I can guarantee will sell for tens of millions of dollars more than it’s worth in a strictly financial sense.”
That’s part of why buying the Clippers in 1981 will pay off for Sterling financially, even if selling it comes with the loss of his reputation, said Lysko of Southern Methodist University.
“You’re getting a history-making, record-breaking return,” Lysko said. “It’s not because of anything he did. It’s because of everything that the league has done, arguably in spite of him.”
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