If the Washington Redskins Are Worth $800 Million
What are the Dallas Cowboys, the Houston Astros, and other Texas teams worth? A highly subjective analysis.
In May the Washington Redskins of the national Football League sold for $800 million—the highest price ever commanded by a professional sports franchise. So you might be wondering: How much are pro sports franchises in Texas worth these days, even championship teams like the Dallas Stars of the National Hockey League and the San Antonio Spurs of the National Basketball Association?
As in other states, it depends on the value of the future economic benefits that the team is expected to generate. To an owner, these benefits include team profits, his or her personal income from salary, enhanced profits in companies related to the team under the same owner, tax-sheltering opportunities, capital gains, perquisites, prestige, power, and plain old fun. Each of these items depends on how well the team is managed, the owner’s other businesses, and the owner’s personality, among other things. Thus, a franchise may be worth different amounts to different prospective buyers.
Further, because an owner can take some of his economic return in the form of improving the performance of his other business—for example, a cable channel—or can choose to earn some of this return on capital in the form of interest income rather than profits, the reported bottom line is not always a meaningful guide to a team’s true worth. For this reason, analysts often use a revenue multiple rather than reported profits to estimate value. The multiple chosen varies by sport and also by team, depending on the expected future performance of each.
The result is that two teams, each with $100 million in revenue, can have quite different market values. For instance, team A may be about to enter a new stadium with an expected revenue increase of $30 million per year and favorable lease terms or may be about to sell naming rights to an existing ballpark for $5 million a year. Team B, by contrast, may be stuck in an old stadium with no expected new revenue. In this case, team A will have a higher value, despite having revenues identical to team B’s today.
Likewise, if two teams had the same revenue but were in different sports, they would likely have different values. One sport may have just signed a new multiyear television deal under which revenue per team grows at 15 percent per year over an eight-year period. Thus, the current year’s revenue is by itself an inadequate gauge of the team’s future profitability. One sport may have also recently entered into a long-term labor agreement, guaranteeing labor peace with restrictions on the growth of player salaries, while the other sport is on the verge of a long player strike. Here, too, the projected profitability of the two sports will diverge substantially and, hence, so will the value of the two teams.
With all that in mind, I have estimated the value of seven pro sports teams in Texas: the Texas Rangers and Houston Astros of Major League Baseball; the Dallas Cowboys of the National Football League; the Spurs, Dallas Mavericks, and Houston Rockets of the NBA; and the Stars of the NHL. Note that I have estimated the value of the team’s assets, not its equity; that is, I’m not considering the amount of team debt, which is privately held information.
The Texas Rangers
Consider what baseball did for George W. Bush. In 1989 Bush contributed approximately $600,000 toward the estimated $86 million purchase price of the Texas Rangers. He owned roughly 1 percent of the team but was selected as one of its managing general partners. In the early nineties, with his father in the White House, he was actively involved in derailing the efforts of Ohio senator Howard Metzenbaum to lift baseball’s anti-trust exemption. He was also involved in developing the plans for a new baseball stadium in Arlington, a project that he himself has acknowledged was in part a land play. For his efforts, Bush had a deal with his partners that his ownership share of the team would rise to near 10 percent.
Getting the new ballpark and control over the 270 acres of land around it entailed a lot of politicking. First, a referendum on contributing $135 million in public money toward the $191 million construction cost had to be approved by the voters. Second, state legislation was needed to grant Arlington bonding authority. Third, the Arlington Sports Facilities Development Authority (ASFDA) had to be created and endowed with the power of eminent domain. With that accomplished in April 1991, the ASFDA condemned a certain number of acres around the ballpark site (depending on whom you talk to, anywhere from 11.7 to 13) and offered the owners $817,220 for them. The owners sued, and it was ultimately determined that the land was worth $4.98 million. No matter; the condemned acres became part of what former Rangers president Tom Schieffer calculated were 60 acres owned by the team. In addition, the team was granted control over 210 more acres around the park along with an option to buy the land.
In 1994 the Bush ownership group got a loaded new ballpark with a sweetheart lease. The Ballpark in Arlington has 126 luxury suites rented on an annual basis and 10 to 15 more sold on a per-game basis, plus 5,386 club seats that each sell for more than $1,200 per season. The Rangers contributed or raised a total of $56 million toward the $191 million construction cost, and much of that, along with the annual rent, comes back to the team through various channels. The Rangers’ venue revenues at the Ballpark in Arlington were upward of $80 million in 1998, compared with venue expenses of only $5.5 million.
Ballplayers produce more revenue in newer facilities, even when they perform at the same level. Team owners with new facilities can make more competitive bids for the top players and enhance team quality. Improved on-field performance along with the cachet and comforts of a new park set the franchise on an upward cycle. The result in the case of the Rangers was that the value of the franchise more than tripled, and the investors in the Bush group saw the value of their equity multiply. George W.’s $600,000, for instance, became nearly $15 million.
The team’s current owner, buyout mogul Tom Hicks, is similarly poised to experience growth in the $250 million investment he made in 1998. First, baseball’s popularity has surged since he bought the team, thanks largely to last season’s heroics by Mark McGwire and Sammy Sosa; the new network TV contracts that will be signed after next year should grow handsomely. Second, Hicks plans to sell multiyear stadium naming rights for perhaps as much as $100 million. Third, the Rangers’ annual rent is scheduled to drop by $1.5 million in a few years, after the stadium’s bond obligations are met. Fourth, Hicks wants to package his radio and TV entities with the Rangers and the other pro team he owns, the Dallas Stars, which would at the very least generate more competition for his sports programming, appreciably raising his local media revenue. Fifth, the land development around the ballpark—if handled properly—offers the prospect of more than a modest return. (An oddity: According to the City of Arlington, the Rangers’ acres are appraised at $5.43 million, on which the team paid 1998 property taxes of $34,697. Hicks, however, has said that of his $250 million purchase price, the value of the land earmarked for development was $50 million. Something may be off.)
Exactly how much the Rangers are worth depends on the success and organizational structure in Hicks’s forthcoming land development and media projects. It also depends on Major League Baseball’s ability to deal with its financial and competitive imbalance problems and avoid a player strike after the 2001 season. With team revenue around $120 million and rising, a current value in the neighborhood of $280 million to $300 million seems reasonable.
The Houston Astros
DraytonMcLane, Jr., bought the Houston Astros in 1992 for a reported $115 million. Playing in the Astrodome in 1998, the team generated approximately $85 million in revenue. Even without a new stadium in the year 2000, the standard industry sales-price-to-revenue multiple of two would suggest that the franchise today would be worth about $170 million.
If the construction schedule is met, the Astros will be playing in a state-of-the-art facility next year. Enron Field will have a retractable roof and 42,000 seats and will cost at least $248 million to build (68 percent of which is coming from public coffers). There will be, in all likelihood, higher attendance at higher ticket prices, plus more luxury and club seats, more signage, more concessions and merchandising income, and so on. The Astros will reap all revenues generated at the new stadium, and the estimated venue costs will decrease from $8 million to $7 million a year. Look for the new park to increase team revenue by $25 million to $30 million a year and for the value of the franchise value to jump to at least $250 million. Thus, the value of McLane’s investment will have more than doubled in less than ten years.
The Dallas Cowboys
There’s no question that the cowboys have been the NFL’s premier team during the nineties. The team has led the league in revenues over the past two years, with the Washington Redskins a close second. According to George Hays, the Cowboys’ vice president of marketing: “If the Washington Redskins can sell for $800 million, then the Dallas Cowboys are worth more than $1 billion. We are a hell of a lot more profitable than they are.” There may be some hyperbole mixed in with Hays’s hubris, but he’s not far off.
Consider the following. In the past few years Cowboys owner Jerry Jones successfully challenged the NFL’s attempt to monopolize company sponsorships in certain categories. League rules prohibit teams from having local deals with companies that compete with pro football’s national sponsors. Nonetheless, Jones signed deals with Pepsi, American Express, and Nike, despite NFL deals with Coke, Visa, and other apparel manufacturers. The Pepsi deal alone was worth a reported $40 million. Jones said that his local deals are not between the team and the companies but the stadium and the companies and, hence, did not violate league policy. Jones ultimately prevailed.
Then there’s Texas Stadium, which has approximately 400 sold-out luxury suites. No other stadium in pro sports has more than 212 suites. Some of the ones at Texas Stadium sell for as much as $1.5 million over the term of the lease. Jones’s Texas Stadium Corporation gets all that revenue. Indeed, except for parking, the corporation’s master lease gives it all the revenue generated at the stadium, with 8 percent going back to the City of Irving as rent. Now Jones and the city fathers are in discussions to finance a $200 million expansion and renovation of the stadium, including an increase in seating capacity to more than 100,000, a grass field, and a retractable roof.
Another factor working in Jones’s favor is the abundance of network TV revenue. Starting with the 1998 season and going through 2005, the NFL’s new TV contracts will bring in an average of $2.2 billion a year divided among 31 teams, or almost $71 million per team annually. The four-year deal that ended with the 1997 season was less than half that size.
Then there is what might be called the NFL’s economics of labor peace. As league revenues from the media and new stadiums skyrocket, labor costs are controlled by the salary cap, set at 63 percent of “defined gross revenues.” The latter is a term of art that excludes certain stadium revenues. Thus, labor costs don’t grow as rapidly as revenues, and profits grow disproportionately. Even better, the current collective bargaining agreement goes through 2003 and, judging by past experience, is likely to be extended before it terminates.
Combine this happy state of affairs with the extensive revenue sharing by NFL owners and the resulting competitive balance on the field and you’ll have some insight into why NFL team values are doing a good imitation of the loftiest of Internet stocks. If the league could just find some way to stop being sued every other week, it may be officially designated an investment nirvana.
So would the Cowboys really sell today for $1 billion? I doubt it. One important advantage that the Redskins have is Washington, D.C. The owner of the Redskins, who can invite members of Congress and White House power players to his stadium suite, automatically becomes a power player of his own in the nation’s capital. That’s what economists call psychic income and what psychologists call ego gratification. There’s also the opportunity to influence legislation that may benefit one’s other investments.
But maybe Jones could get $900 million for the team. Not too shabby, considering that he bought the franchise in 1989 for about one sixth that amount.
The Dallas Mavericks
If the NBA used the same system as British soccer, with the top teams in a lower league rising to the next highest league the following year and the bottom teams in the higher league falling to the next lowest league, the Mavericks would be playing NCAA Division II basketball by now. Yet their woeful on-court performance notwithstanding, the Mavs’ value increased from $13.3 million in 1979, when they entered the NBA as an expansion team, to $125 million in May 1996, when they were purchased by a group that included Ross Perot, Jr., Roger Staubach, and Fred Couples.
Perot and the others have three important factors working for them. First, beginning with the 2000-01 season, the Mavericks are slated to be playing in a new $300-million-plus arena northwest of downtown Dallas. They will share it with the Dallas Stars, and together the teams will contribute around $175 million to the construction cost. That expense will be covered, however, by the thirty-year, $195 million naming rights deal that the teams signed with American Airlines. The new 20,000-seat arena will contain 100 luxury suites and 2,500 club seats, compared with zero suites and zero club seats in Reunion Arena, where they currently play. Perot, with partner Tom Hicks, also plans to develop the surrounding land to include hotels, office space, and residential and retail properties. The arena should boost team revenue by at least 20 percent.
Second, the NBA signed a new four-year national TV deal with NBC and the TNT cable network starting with the 1998-99 season. The guaranteed average revenue per team is $22.8 million annually, compared with $9.5 million in the previous contract. Third, in January 1999 the NBA owners reached a collective bargaining agreement with the players after a protracted lockout. The settlement not only guarantees seven years of labor peace but also establishes a much firmer salary cap, at 55 percent to 57 percent of defined basketball revenue. Thus, as NBA revenues rise at their projected 12 percent per year over the next seven years and player salaries grow at the same rate or a bit slower, NBA profits are sure to increase rapidly. This is because the owners’ other costs, such as air travel, hotels, equipment, and front office personnel will likely rise at the economy’s rate of inflation: just 2 percent to 3 percent per year.
And maybe, just maybe, one of these years the Mavericks will be able to convert their early draft picks into a winning team. Look for the Mavs to be worth at least $200 million in their new arena.
The Houston Rockets
Leslie Alexander bought the Rockets in 1993 for a reported $85 million. Despite a modest payroll, he has managed to field a competitive team that consistently plays before sell-out crowds. Not a bad accomplishment, given that the top ticket prices at Compaq Center run $575 per game. Now Alexander wants a new arena, and Houston mayor Lee Brown wants to oblige him. Compaq Center was built in 1975 and has only eighteen luxury boxes, no club seats, and a modest capacity for basketball of 16,285. Alexander’s goal is to have the Rockets playing in a new arena after their current lease expires, in 2003. The first step is to get a referendum on this fall’s ballot.
In the meantime, the value of Alexander’s franchise benefits from the new NBA TV and labor deals as well as the ascendance of the WNBA’s world champion Houston Comets. The Rockets’ revenue runs about $80 million a year. Given the NBA’s sale-price-to-revenue ratio, which averages about 2.5 to 1, the team should be worth some $200 million—more if Harris County voters cooperate.
The San Antonio Spurs
In march 1993 peter holt and 21 partners bought the Spurs from Red McCombs for $75 million. McCombs had bought the team four years earlier for $47 million. At the moment, the Spurs play in the Alamo- dome, which has only 32 luxury suites and 3,172 club seats, and where the capacity is 34,215—the most in the NBA. The team keeps most of the arena revenue and pays rent equal to 6 percent of gate receipts. Still, Holt wants a new basketball-only arena (the Alamodome was designed to accomodate football, and the occasional college game is played there). So far his efforts to create a special tax increment financing district or call a referendum on a sales tax increase to finance it have been rebuffed.
To support his assertion that he needs a new facility, Holt says his team lost $1.9 million during the 1997-98 season. Take that claim with a cube of salt. First, two of Holt’s partners are Aramark and Clear Channel Communications. Aramark also happens to be the concessionaire and caterer at the Alamodome, and Clear Channel—part-owned by McCombs—owns the Spurs’ English-language radio broadcaster, WOAI-AM. WOAI can offer below-market rights fees to the Spurs so as to lower the team’s income and then make other arrangements to compensate Holt. Similarly, Aramark can claim a larger share of concessions sales, thereby reducing team income. Another partner is a bank holding company, and similar deals can be cut with the team’s debt. Second, Holt and his partners may receive healthy compensation for advising management, serving on the board, or capitalizing team operations with their loans rather than paid-in capital. Third, the $13.3 million average annual increase in the NBA’s per team national television revenue kicked in for the 1998-99 season, and the new labor agreement will provide a further fillip to the team’s bottom line. Of course, whatever the Spurs’ net income may be, Holt and his partners would always like it to be larger.
Without a new arena, the Spurs’ revenues should be around $70 million and rising. Their 1999 NBA championship will certainly deepen their fan base and increase the growth of team revenue. Their value today is perhaps $185 million.
The Dallas Stars
The stars are owned by tom hicks and are part of the new arena deal with the Mavericks. Hicks bought the Stars in 1995 for $85 million. Forbes estimates that they were worth $118 million at the end of 1998, but the synergies with Hicks’s emerging sports and media empire and the new $300 million American Airlines arena will lift the team’s value considerably. Winning the 1999 Stanley Cup will also help.
One important hurdle for the Stars will be the resolution of the NHL’s economic woes. The league’s diminutive national TV package and the absence of revenue sharing among the teams have created financial difficulties for several small-market teams. Until these problems are resolved at the league level, it is unlikely that the Stars’ value will exceed $160 million.