We Bought the Atlanta Braves and You Can Too

Name a business that has a government sanctioned monopoly, enjoys annual growth rates in excess of 12% , has been around since 1869 and regularly convinces local governments to help pay for its large capital expenditures. The answer is a professional sports team, in this case a Major League Baseball franchise. The recent spinoff of tracking stock Liberty Braves Group (BATRA, Financial) from Liberty Media finally gives investors the opportunity to buy a major league baseball team, the Atlanta Braves, unencumbered by other unrelated assets. With the stock down about 15% since its spinoff on April 18, we decided it was a good entry point and added it to one of our stock portfolios.

Major league sports teams in the United States are great assets. They are protected from competition by a government-sanctioned monopoly and as such, their value tends to compound at rates above the long-term growth rate of the stock market. The NFL, as the US’ most popular sport has the highest growth rates, but baseball comes in a strong second with an average increase in franchise value of 12.4% over the recent decade. Given the monopoly nature of the league, it is highly likely this above average value growth will continue. So, let’s look at what we get when we bought the Atlanta Braves.

The Atlanta Braves

You get the team itself. The gold standard in major league team valuation is the annual Forbes list. The Atlanta Braves are currently valued at $1175 million. Atlanta is the ninth most populous metro area, but Atlanta is a “baseball” town like say Chicago or New York. The Braves valuation slots in at number 13 out of 30, which is right where you would expect it given the team’s home market.

You will also be getting a brand new stadium, SunTrust Park, thanks in part to a $392 million contribution from Cobb County taxpayers. While the new stadium will have fewer seats (41,500 compared to 50,000) than the old one, it will have more of what matters for the bottom line. The old stadium had just 400 premium seats while the new stadium quadruples that number to 1600. The Braves are also hiking ticket prices and requiring multi-year commitments for some seats. Additionally, the old stadium was designed and built as part of the 1996 Summer Olympics and envisioned as a largely temporary structure and thus, had substantial maintenance costs to keep the facility operating beyond its original projected lifespan. The new stadium is projected to have maintenance costs that are half that of Turner Field. There will also be a mixed use real estate projected, The Battery Atlanta, developed next to the stadium including residential, office, hotel, retail and event space.

Taking all this into account, we come up with a value of around $19 per share for the tracking stock.

Given that the stock currently trades close to $17 it may not seem like a lot of upside, but it is important to keep in mind two things. First, as we talked about earlier, sports franchises have historically compounded at above market rates, so we are buying a premium asset at a discount. Second, sports teams have historically sold at premiums to their Forbes valuation numbers. While some franchises are highly unlikely to be sold, for example we own Madison Square Garden Co (MSG), which owns the New York Knicks, and it is unlikely James Dolan would ever sell the team. John Malone, chairman of the company that owns the Braves, is a consummate dealmaker, selling the team wouldn’t be unthinkable. According to some analysis from earlier this decade, major league teams sold at an average of a 27% premium to their Forbes valuation. That would be about an extra $6 per share in value unlocked in the event of a sale!

Other Ways to Win

Right now, the Braves are terrible. Their record is 45-79 so far this year and they have a bloated payroll. Their current payroll stands at approximately $111 million with about $38 million of that in dead money (retained salary from players no longer on the team). Most of the dead money, along with other contracts, are set to expire at the end of this season, which gives the Braves $55 million to improve the on the field or improve the company’s cash flow off the field. While you would think a successful team would increase the value of the franchise, that may not always be the case. A graduate student found that winning had no appreciable effect on the value of a team. There are several likely reasons for this. Most leagues are constructed to attempt to enforce parity amongst the teams and this season’s loser can easily become next season’s champion. Teams are also typically bought by owners who desire them as a trophy asset and the team's record is inconsequential, thus valuation does not depend on a team's on-field success.

The MLB could also regain some lost popularity. Baseball used to be America’s sport, but now that crown has been taken by the NFL. However, the NFL has major issues with players suffering concussions and brain damage due to the violent nature of the sport. The MLB and NBA are mostly non-violent, non-contact (save for some hard slides in baseball and some technical fouls in basketball) sports. Could the MLB and NBA experience a resurgence in popularity if the NFL has to undergo drastic changes to game play in order to preserve players health? Sure, it is far-fetched and a low probability, but it is something to think about. But, I would much rather own an MLB or NBA team then an NFL team at this point!

In summary, the Liberty Braves Group tracking stock (BATRA, BATRB, BATRK) offers investors a chance to own a great investment with a wide economic moat at a reasonable discount. In a market where bargains are rare, the Atlanta Braves seem to be a compelling investment.

Disclosure: We own stock in the Braves.

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