Multiple sources recently announced that former Mircosoft CEO, Steve Ballmer, is working out a deal to buy the Los Angeles Clippers basketball for $2 billion. In January, Forbes published “NBA Team Value: The Business of Basketball,” displaying the value of each NBA team. The Clippers were previously valued at $575 million. Ballmer’s purchase of the time is almost 3.5 times what the initial value was thought to be. It is surprising to see someone bid that high for a team that was labeled as the worst franchise in professional sports by ESPN The Magazine in 2009. Since Donald Sterling purchased the Clippers in 1981, the team had the worst winning percentage of the four major American sports leagues.
If the Clippers can receive a bid for $2 billion, the most valuable team in the league should definitely be worth much more. As far as franchise value, the Clippers were ranked 13 out of 30 teams. The number one team was the New York Knicks, valued at $1.4 billion. If the Clippers sold for 3.5 times their previously listed value, the Knicks would be worth $4.9 billion. The entire Madison Square Garden Company (MSG) has a market cap of $4.1 billion. Not only does that include the Knicks, the assets of the company also include the New York Rangers, Madison Square Garden Arena and Theater, the Forum in Inglewood, Calif., The Chicago Theatre, and other smaller sports teams. The company also has no long-term debt on its balance sheet and operates Radio City Music Hall and the Beacon Theatre in New York City and the Wang Theatre in Boston.
Now it’s very difficult to see the Knicks being worth nearly $5 billion on its own, but the deal does show that franchises in major metropolitan areas like Los Angeles and New York will draw large amounts of interest and bring in extraordinary bids. It’s possible that the Knicks could be worth $3 billion based on the Clippers deal. Rich Tullo, director of research at Albert Fried & Co. said, “The market for premier sports assets in large sports markets is robust. In our view, the intrinsic values of MSG’s hard assets are worth about $6 billion.” MSG has rallied 3.3 percent on the news Friday, but its market cap is still low at $4.23 billion, a 30 percent discount to Tullo’s estimate.
To be conservative, I will take Tullo’s estimate for its hard assets as a value for the entire company, giving it a value of $77.80. The Knicks and Rangers are now estimated to be worth about $4 billion combined. The company lists the value of the property and equipment at about $1.3 billion in the most recent 10-k. That comes out to $5.3 billion based on the hard assets without considering cash flows. The company brought in free cash flow of $34 million and a net income of $140 in 2013. Those numbers make Tullo’s $6 billion estimate a fair value for the whole company.
The risk here is that sports teams seem to have fallen into the category of collectables for billionaires. That is why I am not falling into the hype of valuing the Knicks at $5 billion on their own. The price of the Clippers has been emotionally bid up. As soon as the story broke about the NBA moving to remove Donald Sterling as owner, many high-profile names publicly stated that they would be interested in buying the team. Steve Ballmer had to outbid other billion-dollar offers. He wanted a basketball team no matter the cost. Last year his bid for the Sacramento Kings was denied because he wanted to move the team to Seattle. The team was bought for $535 million, a record at that time. The Milwaukee Bucks were sold to hedge fund managers Wesley Edens and Marc Lasry in April this year for another record at that time of $550 million, about 36 percent higher than the Forbes January listed value of $405 million. It makes sense that the hedge fund managers would be more financially prudent with their purchase of the Bucks than the emotional bidding of the Clippers. One difference is that Sacramento and Milwaukee are not big market teams.
Instead of being businesses, most sports teams are prized possessions. The bidding for the Clippers reminds me of the art auction at Christie’s on May 13 of this year. It was a record sale of $745 million. All of this emotional buying has created a bubble in billionaire collectibles. When the bubble pops I think the most memorable quote will be from Asher Edelman, founder of ArtAssure, at the Christie’s auction, “I don’t know what money means anymore.”