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April 11, 2010

Squawking Baseball

Forbes' 2010 Team Valuations

by Shawn Hoffman

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Ahh, sports business nerds' annual rite of spring: Forbes comes out with its financial estimates for MLB—including franchise valuations, revenue, income, and the like—and MLB says the magazine is totally wrong. Well, after looking a little deeper at them a couple months ago, MLB is probably right; Forbes' valuation numbers haven't been terribly accurate as compared to actual sale prices, and you'd figure revenue and net income numbers would be even harder to guess.

But with that said, Forbes' annual report is still our best (by default) source for team-by-team financial data. As I said in February, they really shouldn't be used for any kind of rigorous analysis at the team level, but they're still certainly worth looking at—for broader, more generalized trends, if nothing else.

So let's dive in. Here were some interesting things I took away from this year's report:

The team valuations are too low. I guess this partly depends on how you define "value." Maybe the Padres, in a saner world where rich people don't pay huge premiums to own baseball teams, really are only worth $408 million. But in this world, where baseball is awesome, they were sold for $500 million only a year ago. The Rangers, meanwhile, are being sold at a $570-million valuation, which would be sixth on the list; instead, Forbes has them ranked 12th, at $451 million.

Clearly something's off. Given the sale prices of the Padres and Rangers, the median team value should be much higher than $406.5 million, and there are several teams (the Cardinals, Angels, Phillies, Giants, etc.) that really stick out as being too low. We know from prevous experience that Forbes has historically underestimated sale prices by about 8 percent, on average; but if we're willing to accept the Padres as a league-average team, then the difference is probably closer to 20 percent right now.

The Yankees were profitable for the first time in a long time. First time since 2002, to be exact. Now, we know that's only half the story; the Yankees have essentially been run as a loss leader for the ATM machine that is the YES Network. But Forbes had the team itself turning a $25-million profit last year, thanks to an 18-percent increase in post-sharing revenue. Their cost estimates went up as well, from $379 million to $416 million, despite relatively flat player expenses. But that's nothing, considering their gate receipts alone rose by over $100 million—or more than all but five other teams had total (!).

Total revenues were up, even without the Yankees. Well, sort of. On the one hand, if you simply eliminate the Yankees' $66-million increase, the other 29 teams are still ever-so-slightly up, by $13 million. But that's a really convenient way of looking at things. In reality, the Yankees were responsible for an incredible amount of the sport's business last year; it's impossible to say how much they paid out in revenue sharing, but if their gate receipts went up by $102 million, and total revenue only rose by $66 million, something's clearly got to give. (Or some Steinbrenner, in this case.) And that's not even counting the impact they have on other teams' home attendance numbers.

28 teams were profitable, led by—guess who—the Marlins. And in a shocking turn of events, there was the obligatory outrage. I've said this before: if the Marlins (or any other team for that matter) want to take advantage of the system and just take out as much profit as possible, that's their choice. Their long-term revenue potential—and therefore their franchise value, since potential team buyers almost always base their prices on revenue multiples instead of earnings—will suffer. Like it or not, as long as they follow the rules, that's their prerogative, much like it is on the other end of the spectrum with the Yankees, who people rag on for spending too much.

The bigger story here is that teams were apparently able to manage their costs well, in a year where that was absolutely essential. Forbes had player costs down about $25 million—or essentially flat—which is in line with other estimates. Only the Tigers lost a significant amount of money, although their revenue was actually up $2 million, which, if true, is probably the biggest surprise of any single number in this report. (Last June, a guy I know who works at a ticket re-seller called Detroit "the worst market in the history of the planet.")

The Mets' revenues were flat. That's amazing.
So amazing that I'm not really buying it. Technically,Forbes says they were up $7 million, but considering that they opened a new stadium and saw pretty good attendance (relative to capacity), that seems incredibly light. Forbes has their gate receipts up $20 million, and the marginal revenue sharing rate is 31 percent, so something else must have been slightly down. Any guesses? Sponsorships? Local media? Certainly not suites (although that may be counted in gate receipts). None of these are all that likely, so I'm dying to know how they figured this.

The Pirates come in last. Yes, I'm biased, whatever—the Pirates aren't the least valuable team in baseball. Pittsburgh can be an extremely robust sports market when their teams win (even if that team isn't a local religion)—the Penguins have sold out 159 games in a row (the equivalent of about four seasons), and were ranked 11th in Forbes' hockey report last fall. If the Pirates are ever good, they have a far higher earning potential than the A's, Rays, and Marlins, among others.

 Again, all of these numbers should be taken with a huge chunk of salt. We know they're far from perfect, and the few data points we have bear that out. But I don't think they're totally useless—on a general level, it's a good thing that they think the industry is profitable, and while their valuations are obviously too low, they're still a reasonable starting point.  

Shawn Hoffman is an author of Baseball Prospectus. 
Click here to see Shawn's other articles. You can contact Shawn by clicking here

Related Content:  Forbes

10 comments have been left for this article. (Click to hide comments)

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gluckschmerz

There is now a generation, or two or three, who think Pirates baseball is akin to bobbleheads, fireworks and concerts by Donnie Iris, Steve Miller and 38 Special. With each passing day the value of the Pirates is diminished. People interviewed tailgating before the game on Opening Day didn't care if the Pirates had a winning season. They were there for the party.

However, just one bobblehead giveaway this season: Andrew McCutchen. The Pirates brass doesn't want to have any more bobblehead days for Pirates who have already been traded away...

Shawn I know you remain open-minded and optimistic about the Pirates, but for those of us who are baseball fans and who live in Pittsburgh it sure is a miserable situation. I remember those Jim Leylan teams. The Pirates in the early 90s were fun to watch. But 1992 is now a long and distant (somewhat hazy...) memory.

Apr 11, 2010 06:51 AM
rating: 0
 
gluckschmerz

*Leyland*

Apr 11, 2010 06:52 AM
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krissbeth

Indeed, a culture of losing isn't restricted to organizations; it can leak out into the fan base. It took a lot of effort to lift the Indians and their fan base out of those doldrums and I still don't think they've fully recovered.

Apr 11, 2010 08:25 AM
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WaldoInSC
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"...the Yankees have essentially been run as a loss leader for the ATM machine that is the YES Network."

An "ATM machine" would be an automated teller machine machine. Much in the vein of "OPEC countries," "PIN numbers" and "please RSVP," it is redundant and repetitive.

Apr 11, 2010 15:56 PM
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amazin_mess
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shut up

Apr 11, 2010 19:17 PM
rating: -10
 
Brian24

I totally agree. I find that niggling redundancy annoying too.

Apr 13, 2010 11:40 AM
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greendrummer

Sean, you reluctantly had me until the end, when you stated that the Pirates have a higher earning potential than the A's (among others)

the same Forbes report that you just spent a page questioning shows that the A's are the only team in a two team market 'not' in the top ten in overall value.

Notwithstanding their potential to 'just' rise up in these rankings because they are the clear outlier in this franchise valuation trend, would not they be also the solid favorite to ascend to the Top 10 in MLB (as they once were in the early 90's)?



Apr 11, 2010 18:19 PM
rating: 0
 
BP staff member Shawn Hoffman
BP staff

A lot's changed since then, most notably that their crosstown competition has a great venue, and they have a terrible one. Look at the A's attendance from earlier in the decade when the team was good -- the Pirates would crush 2.1-2.2 million with a good team. And that doesn't even take into account that the PIrates have far better high-end inventory (suites, clubs, etc) than the A's do at the Coliseum.

Apr 11, 2010 19:27 PM
 
hessshaun

Mets guess.

I know there was a ton of backlash on the naming rights of their home that coincided with the bailout packages. In conjunction with the manner in which they financed the new stadium, obviously in the same market, it would not surprise me if they had to adjust some of the financial calculations. Ultimately, I am going to assume that they adjusted them so that profitability would not become a PR nightmare. Just a guess, but without the default loan swapping, I would say these numbers look more in line with what you are thinking they should be.

Apr 12, 2010 10:55 AM
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PeterBNYC

Shawn, thanks for an interesting set of comments on the Forbes List. I have been fascinated for years by the valuation of ball clubs. I suspect not a great deal has changed since the late 70's/ early 80's, when income tax considerations drove a lot of club acquisitions- Liberty Media's is a different type of tax avoidance, but still it's tax avoidance. What drove club finances back then was the depreciation (tax shelter) opportunity with player contracts; today, it may be as much with the new stadiums? The Reagan tax law changes, which (I kid you not) put an end to a lot of abusive practices, at least for a time, probably did not much affect baseball clubs, but I sense my information may be out of date in this respect. Nevertheless, (1) the clubs are predominantly owned by rich men, (2) rich men will tend to pay a lot of income tax, unless they can arrange their affairs so as not to do so, and (3) personal ownership of a major league baseball club (and its stadium) offers a lot of tax avoidance opportunities. Or am I wrong? Of course, the clubs still have to make money- i.e., generate free cash flow- but the business still, I believe, presents some attractive tax planning opportunities, no?

Apr 12, 2010 14:10 PM
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