In yesterday’s newsletter, we highlighted a trio of sports industry sectors whose indices have risen in value since the COVID outbreak (live entertainment, leagues and B2C sports betting). Today we explore a comp pair. groups whose indices have experienced share price depreciation over the past two years, including European sports teams and US sports teams. John Hutcheson (Managing Director, Head of Citi Sports Advisory) explained that the negative share price performance was largely tied to pandemic-related issues, secular shifts in media consumption and recent market volatility.
JWS review: The European teams index has seen the biggest drop in value within the sports ecosystem since February 19, 2020 (-41%). That’s not particularly surprising given that European football clubs, which tend to trade on business fundamentals, have largely been in dire financial straits for most of this time. Remember, historically, many teams have operated without worrying about financial responsibility (think: overpaying players, taking on too much debt). So when the pandemic hit and revenue was cut, “teams were losing money [and] they had debts and obligations to pay,” Hutcheson said. “In order to meet these obligations, many of them had to carry out capital calls, capital increases and rescue rights issues, which increased the dilution of shares and put pressure on share prices. .” No European club has lost more value in this period than Juventus. The team’s share price is down 57% since the start of COVID.
In contrast, the US leagues have generally been successful in managing the financial fallout from COVID (see: securing cash for clubs). That’s why we never saw a large number of owners looking to get out, which would have lowered the asking prices. Although the sports hiatus created some initial dislocation, with Wall Street consensus estimates forecasting 22 revenues and profits to top 2019, publicly traded U.S. franchises had generally returned to pre-COVID values by the second half of 21.
The recent market rotation, which has impacted nonprofits and companies valued at the largest revenue multiples, has hit the index hard, however. Shares of Madison Square Garden Sports (MSGS) have fallen about 10% since early November. The US team index is down 16% since the start of COVID.
Although there are only a few publicly traded American sports teams, Hutcheson said they tend to trade at a discount to “where we see private deals being made and valuation estimates by third parties (see: SporticoNBA ratings). The rule of thumb for an NBA team is to trade 7-8 times forward earnings. Baseball and hockey teams have historically traded at 4-5x.
MSGS, which includes the Knicks and Rangers, is currently trading at 6.5x 23 earnings. The Atlanta Braves are trading at 2.9x 23 earnings. While both stocks appear to be undervalued on multiple basis, based on enterprise value, the biggest disconnect is with MSGS. Indeed, few investors think Jim Dolan will sell the teams, and having multiple assets in different sports under the umbrella makes the company more difficult to value.
Historically speaking, US teams traded in private market transactions tend to command the highest valuations. “That observation held true during COVID, where a slew of deals were struck at very attractive multiples,” Hutcheson said. He cited control deals for the New York Mets (at 7x unallocated 2019 revenue estimates) and the Utah Jazz (at 7x unallocated 2019 revenue estimates) as examples. The imbalance between supply and demand and the “control premium” are a big part of why private market sales often command a higher multiple.
The value gap between private market transactions and public market transactions tends to widen during periods of market stress. We’ve seen it happen during COVID, and it still holds true during today’s most recent market dislocation.
With North American OTT subscriptions increasing by 51% in 2020 and another 20% in 2021, it would have been logical to assume that the Citi team’s traditional media index would have declined in value over the past two years ( although most/all try to switch to DTC broadcast). But it actually jumped 7%.
This is because the FCF generated by the companies has helped them to protect themselves from the continuous rotation of the market. And the resounding success of Disney helped offset the impairments suffered in the rest of the competition. group. As Hutcheson explained, Disney has “been a winner and reevaluated over the past [two years], is currently trading at 16.5x forecast EBITDA. Prior to moving into DTC technology and distribution, the company was trading at a much lower value paradigm (think: 10-12x).
While the traditional media sector was stable over the period, ViacomCBS (trading at 8.5x 23 EBITDA, compared to more than 15x at the start of 21) is an example of a traditional media company that does not hasn’t fared well in the rapidly changing media ecosystem. VIAC struggled in a competitive DTC landscape with a smaller profile, leaner IP catalog, and fewer marketing dollars to spend on customer acquisition. Paramount+ is following Netflix, Amazon, Disney+, HBO Max and Hulu in the streaming wars.
