Donald Sterling, the now infamous former owner of the NBA’s Los Angeles Clippers, sold the franchise to former Microsoft CEO Steve Ballmer for $2 billion in August.
This sale comes as somewhat of a surprise to the sports world, since the recent sale of the Milwaukee Bucks for $550 million just earlier in 2014 set a record for the highest price paid for an NBA team. Transaction prices for NBA teams have generally risen in recent years. Part of this increase is due to the 2011 player lockout. After the lockout, player salaries were cut by more than $280 million per year, which increased the attractiveness of an NBA team investment for potential owners.
The growing worldwide popularity of basketball has also been a strong factor increasing the value of NBA teams. The 2012 NBA finals were streamed in 47 different languages, and the league estimated that 278 million fans followed the games. Ninety international media outlets aired the finals in 2013. The NBA is also the top sports league in China based on total fans on the NBA’s social media accounts. Basketball’s worldwide popularity is largely due to the international promotion of the sport by players and management, and the fact that 20% of the NBA’s players are from countries other than the U.S.
A preliminary draft valuation analysis of the Clippers prepared by Bank of America (“BoA”) provided details on other NBA franchise transactions from 1998 through 2014. Both the mean and median transaction value to earnings before interest, taxes, depreciation and amortization (“EBITDA,” adjusted to remove player payroll) multiples were 6.0x. The Bucks transaction had an EBITDA multiple of 6.9x. Based on information provided in the BoA report, a $2 billion sale of the Clippers implies an approximate multiple of more than 21.5x based on the Clippers’ EBITDA of $93.0 million (excluding player payroll) for the year ended June 30, 2013.
So the NBA market is growing rapidly and teams are being sold for record highs, but why is the Clippers sales price so much higher than other recent transactions? While it is normally not possible for a third party to understand a buyer’s priorities and primary value drivers, there are some factors that can be identified that help to support this price.
First, it is important to note that the Bucks play in the fifth-smallest market in the U.S., and the Bucks franchise is one of the smallest in the NBA, with only 13,000 households watching their games in the most recent season. In contrast, Los Angeles is the second-largest market in the U.S., and the city does not have a football team, which helps to increase fan concentration on basketball. The BoA report also shows that Los Angeles has the highest population per number of sports franchises in the country, which supports the fact that there is less competition for local fans.
In addition, the Clippers’ national television rights contract with Fox Prime Ticket, providing $30 million in revenue each year, ends after the 2015-2016 season. Given the increasing fees paid for the rights to televised sports, and the high attraction of the large Los Angeles market, BoA estimated that the Clippers could triple its current rights fees when the franchise signs a new deal. The Clippers will also sign a new local television rights contract, which is expected to significantly increase annual revenue; BoA estimated that the new deal could provide an additional $100 million in revenue each year. After accounting for these assumptions, BoA estimated that the Clippers’ EBITDA (excluding player payroll) will be $259.2 million for the fiscal year ended June 30, 2014, which represents a forward-looking transaction multiple of 7.7x.
Even after all of the above information is considered, determining the exact value for the Clippers, or any business enterprise, is never an exact science. A buyer’s emotions can also impact a purchase price, and this type of value driver is certainly difficult for a third party to anticipate. Countless qualitative and quantitative factors affecting a business, its industry and the overall economic environment must be taken into account in any business valuation, and every analysis is unique.
Schneider Downs has significant business valuation experience. For more information about Schneider Downs’ business valuation and other business advisory services, please contact Joel Rosenthal at 412.697.5387 or Tom Claassen at 412.697.5330.
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