March 26, 2012

Bizball

Why the Forbes MLB Valuations Are Far From Perfect

by Maury Brown

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Full disclosure before I get started: on top of doing my thing here at Baseball Prospectus, I’m a contributor to Forbes SportsMoney. For a guy like me, writing about stuff like this (the business of sports) is, well… it’s a privilege to write for Forbes, one of, if not the, most established business outlets around.

For years, I have been tracking the annual valuations of Major League Baseball clubs that Mike Ozanian started with Financial World, which Kurt Badenhausen now co-authors at Forbes. They’re great as a “trending” measurement, but they have fallen short in terms of real accuracy.

This isn’t all Forbes’ fault. For those that don’t follow, here are the criteria for how the valuations are arrived at:

• Revenue and operating income are for the season prior. As a result, these numbers are a year old by the time the numbers are published. Additionally, they are net of revenue sharing and stadium debt service, which is a bit tricky since access to the revenue-sharing numbers are hard to come by.
• The value of the club is based on current stadium deal (unless new stadium is pending) without deduction for debt (other than stadium debt). This creates issues like we’ve seen with the Mets. In their case, multiple loans have been taken out to allow the club to be operationally sound. Just this past week, the club paid off their $25 million loan to MLB, plus a $40 million loan to Bank of America.
• Forbes claims that current club value is compared with latest transaction price. But that’s not entirely true. Late last year, Mike Ozanian wrote that bidding for the Dodgers would begin at $800 million, which jibbed with last year’s valuation to the dollar. By March, Forbes had the value of the Dodgers at $1.4 billion, which matches closely to multiple reports in the media. The massive increase—75 percent from the year prior—was due to the impending media rights deal. So, if Forbes is basing valuation on transaction prices, what changed?
• The valuations include stadium debt when factoring in debt/value. This is a key factor and is relatively easy to track based on bond payments. It can get tricky, though, when capital improvements to things such as video and ribbon board displays inside the ballpark are factored in. Forbes is then counting on sources to reveal whether clubs are going into debt to make these improvements or not.
• On their revenue projections, they’re using net of stadium revenues used for debt payments. This gets trickier still. Forbes isn’t rolling in stadium revenues that are used for paying debt, making it more difficult still to know how revenues are being directed.
• On operating income projections which are a form of profit, they are using minus earnings before interest, taxes, depreciation, and amortization or EBITA. This is standard for operating income and may also explain that while Forbes could be right on the money in a valuation, MLB could say that the true values are off by citing net income which is after EBITA and is a true form of profit.
• Forbes counts gate revenue, which seems nearly impossible to track these days and includes club seats. When you think about the secondary ticket market in place (think StubHub, etc.), calculating the gate gets to be a tough call. This has to be one of those “sources to Forbes” matters.

The actual valuation of the club gets busted out as follows:

• Sport: Portion of franchise's value attributable to revenue shared among all teams.
• Market: Portion of franchise's value attributable to its city and market size.
• Stadium: Portion of franchise's value attributable to its stadium.
• Brand Management: Portion of franchise's value attributable to the management of its brand.

Much like assigning value to a player, doing so with the value of a club centers around how a market is set. How many players can you rattle off that have been paid more than what can be garnered through objective analysis? Think tanks (such as BP) do a fantastic job assigning a value based upon past or projected performance. What no one has been able to do (yet) is calculate what a player’s value is in relation to the free agency market or a limited pool of talent in a given year. The Forbes valuations are much the same; a club sells for what the market will bear, not for a projected value.

Forbes might wish to add the following in to get closer still:

• Factor media rights in based upon the market and increase a club’s value as it nears renewing those rights. It’s interesting that Forbes increased the value of the Dodgers so incredibly based upon the pending media rights deal but does not have that listed as a valuation factor in its overall methodology. While Forbes does account for media rights in their overall profile for clubs that have deals that have been reached or pending (this year’s Dodgers, Padres, Astros, Angels, and Rangers all have snippets within their report), it’s hard to determine the percentage of increase related to those deals in the midst of the other data that’s not broken down. For example, the Padres see a 13 percent valuation increase that is partially tied to the $1.6 billion media rights deal that Jeff Moorad is trying to close. In the meantime, the Astros see a 16 percent increase that is partially attributed to the creation of Comcast SportsNet Houston. The Astros will own 46.384 percent of the network co-owned by the Houston Rockets and Comcast. Revenues could reach $80 million per year, which is right in line with the Padres deal.
• Factor in capital improvements to the ballpark. Forbes mentions the signing of Prince Fielder and paying down stadium debt in their breakdown of the Tigers, but they do not mention the massive video board that is being installed, which increases value further. The Cubs’ Budweiser Patio at Wrigley Field is another that comes to mind as a capital improvement that increases club value but which isn’t mentioned.

Maybe the best way to look at the Forbes’ valuations is relationship to actual sales. Below is a breakdown of recent club sales and the valuation Forbes had for the club in the year prior to the sale (Note: In cases where sales were reached shortly before Forbes published data, this view looks back at the year prior, as Forbes made adjustments in valuations. Examples of this are the pending sale of the Dodgers this year and the auction of the Texas Rangers that occurred in August of 2010 in advance of the March 2011 publication by Forbes where adjustments were made).

Source: Historical Forbes Valuations

Are The Forbes Valuations Worth Using?
The answer is easy: yes. While one can quibble with how the numbers are derived or their total accuracy in what the market will bear, in the end they are the best barometer out there (you can view this year’s breakdown of the numbers, released just this week, here). If one applies other analysis to the Forbes valuations, one can get a solid sense of where clubs are headed in terms of not only their value but their available resources for player payroll and other aspects of running the club. That said, as MLB goes, so do I: they are not the be-all-end-all.  Hard numbers are far too difficult to obtain for all facets of a club’s operations. As the leaked financial documents that came to light via Deadspin and The Associated Press show, “predictive analysis” and “reality” do not always match up. In that, it’s good to come back to using club sales and what players garner in the free agency space. Never underestimate what clubs are willing to fork over even if the numbers seem to say it’s too much. Whether it’s the Astros’ sale or the free agent contracts of Jayson Werth or Albert Pujols, it’s about what the market sets, not always actual value.

Maury Brown is an author of Baseball Prospectus. 
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