Bills Sale Book's Most Important Number

[extrahammer]

So the team probably had a net profit of around $20 million last year. Good points.

 

http://www.forbes.com/sites/mikeozanian/2014/08/05/buffalo-bills-sale-books-most-important-number/

[Captain Caveman]

So if the new owner spends a billion dollars, it's a 2% return. It will likely be more than a billion dollars (especially any owner's contribution to a new stadium are included), but presumably the income should also rise with the next TV contract, and the team itself is also likely to continue rising in value.

[hondo in seattle]

Thanks for the link.

 

As mentioned in the article, many business people use factors of EBITDA (earnings before interest, taxes, depreciation and amortization) to determine the value of a business. For example, smaller restaurants may sell for 2x EBITDA while higher volume restaurants belonging to thriving chains might sell for 6x EBITDA.

The Bills EBITDA last years was $38 million. Even if we value it at 10x EBITDA, the value of the Bills would still only be $380 million. Strictly business wise, that ought to be (roughly speaking) the sale price.

 

Obviously, the true value of any commercial venture is the price the market will bear. But it's kind of amazing that business people will pay so much for an enterprise that nets so little. It would take Pegula a 34 years or so to make a $1.3 billion investment back. Buying a Taco Bell franchise has an immensely better ROI.

[Fingon]

Thanks for the link.

 

As mentioned in the article, many business people use factors of EBITDA (earnings before interest, taxes, depreciation and amortization) to determine the value of a business. For example, smaller restaurants may sell for 2x EBITDA while higher volume restaurants belonging to thriving chains might sell for 6x EBITDA.

The Bills EBITDA last years was $38 million. Even if we value it at 10x EBITDA, the value of the Bills would still only be $380 million. Strictly business wise, that ought to be (roughly speaking) the sale price.

 

Obviously, the true value of any commercial venture is the price the market will bear. But it's kind of amazing that business people will pay so much for an enterprise that nets so little. It would take Pegula a 34 years or so to make a $1.3 billion investment back. Buying a Taco Bell franchise has an immensely better ROI.

An NFL team seems to be more of a collectors item than actual business investment these days.

[KDIGGZ]

An NFL team seems to be more of a collectors item than actual business investment these days.

Yep! Nobody is buying an NFL team to get rich. They are already rich. They are just looking for bragging rights at this point

[A Dog Named Kelso]

Thanks for the link.

 

As mentioned in the article, many business people use factors of EBITDA (earnings before interest, taxes, depreciation and amortization) to determine the value of a business. For example, smaller restaurants may sell for 2x EBITDA while higher volume restaurants belonging to thriving chains might sell for 6x EBITDA.

The Bills EBITDA last years was $38 million. Even if we value it at 10x EBITDA, the value of the Bills would still only be $380 million. Strictly business wise, that ought to be (roughly speaking) the sale price.

 

Obviously, the true value of any commercial venture is the price the market will bear. But it's kind of amazing that business people will pay so much for an enterprise that nets so little. It would take Pegula a 34 years or so to make a $1.3 billion investment back. Buying a Taco Bell franchise has an immensely better ROI.

 

The initial investment of a professional sport team is somewhat irrelevant. The belief is that since it will appreciate exponentially it is better than having the money in other investments. So, a income stream of 20 million dollars a year is not bad. Who wouldn't like to get 50k back a year from your home while knowing (almost without fail) that your home is going up in value buy 100x when you decide to sell.

 

What you have to know is if the owner builds their own stadium that is where asset will lose money and not be recouped, This is one of the reasons the NFL has the public pay for them.

[Tyrod's Tailor]

The initial investment of a professional sport team is somewhat irrelevant. The belief is that since it will appreciate exponentially it is better than having the money in other investments. So, a income stream of 20 million dollars a year is not bad. Who wouldn't like to get 50k back a year from your home while knowing (almost without fail) that your home is going up in value buy 100x when you decide to sell.

 

What you have to know is if the owner builds their own stadium that is where asset will lose money and not be recouped, This is one of the reasons the NFL has the public pay for them.

 

I seem to remember hearing that "house prices don't go down" all throughout the 2000s. How did that turn out?

[BringBackFergy]

Who violated the NDA and gave this guy the info for this article??? Damn BonJovi!!!

[Captain Caveman]

It's hard for me to fathom that franchises will continue to rise in value as they have done in the last 20 years, but it's also an area of the economy that is extremely hard to predict. As the richest people continue to get richer, there will be people who will spend billions on a team, with very little (relative) return. At the same time, I think there is going to be a point where people (overall) decide to spend less on professional sports as entertainment.

 

In general, huge investments (e.g. 1.3 billion dollars) would be much less likely to increase exponentially than smaller investments. There's only so much room to grow.

 

The 100x increase you mentioned would bring the Buffalo Bills worth to 130 Billion dollars. That's Dr. Evil money.

[keepthefaith]

It's hard for me to fathom that franchises will continue to rise in value as they have done in the last 20 years, but it's also an area of the economy that is extremely hard to predict. As the richest people continue to get richer, there will be people who will spend billions on a team, with very little (relative) return. At the same time, I think there is going to be a point where people (overall) decide to spend less on professional sports as entertainment.

 

 

 

Very possible as most have to spend more these days on energy, food and health insurance. Leaves less for entertainment.

Edited August 5, 2014 by keepthefaith

[May Day 10]

the team has also been pretty irrelevant for 15-20 years. Turn that around and people will go nuts for them. break into primetime with a good team and they may see a wider fanbase who arent necessarily connected to WNY. People dig small markets who are good (GB Packers).

 

People here will go insane and buy anything and everything when the team is good again. The Sabres of 2006-07 proved that ground. Buffalo News Sabres Medallions anyone?

[Kelly the Dog]

Thanks for the link.

 

As mentioned in the article, many business people use factors of EBITDA (earnings before interest, taxes, depreciation and amortization) to determine the value of a business. For example, smaller restaurants may sell for 2x EBITDA while higher volume restaurants belonging to thriving chains might sell for 6x EBITDA.

The Bills EBITDA last years was $38 million. Even if we value it at 10x EBITDA, the value of the Bills would still only be $380 million. Strictly business wise, that ought to be (roughly speaking) the sale price.

 

Obviously, the true value of any commercial venture is the price the market will bear. But it's kind of amazing that business people will pay so much for an enterprise that nets so little. It would take Pegula a 34 years or so to make a $1.3 billion investment back. Buying a Taco Bell franchise has an immensely better ROI.

In 34 years your Taco Bell franchises will be likely worth the same it is now outside of inflation. In the last 34 years the value of an NFL franchise went up from maybe 30-40 million to 1.3 billion.

[Guffalo]

Interesting article linked from original post, http://www.forbes.com/sites/mikeozanian/2014/08/01/buffalo-bills-sale-has-turned-into-a-circus/

[CodeMonkey]

In 34 years your Taco Bell franchises will be likely worth the same it is now outside of inflation. In the last 34 years the value of an NFL franchise went up from maybe 30-40 million to 1.3 billion.

It would seem it went up for no economic reason. The bubble tends to burst on assets with a large overvaluation at some point as we have seen in recent history.

Was it Mark Cuban that was predicting a NFL crash not that long ago? While a crash would seem eminent based solely on the economics of the situation, as long as billionaires like to have swordfights with each other a NFL team should remain a safe investment.

[Kelly the Dog]

 

It would seem it went up for no economic reason. The bubble tends to burst on assets with a large overvaluation at some point as we have seen in recent history.

Was it Mark Cuban that was predicting a NFL crash not that long ago? While a crash would seem eminent based solely on the economics of the situation, as long as billionaires like to have swordfights with each other a NFL team should remain a safe investment.

They have consistently gone up though over the last 60 years. They made substantial jumps when certain TV deals were made and when certain owners paid a couple hundred million more than last sale. But it's been a steady rise and little reason to believe it won't continue.

[CodeMonkey]

Interesting article linked from original post, http://www.forbes.com/sites/mikeozanian/2014/08/01/buffalo-bills-sale-has-turned-into-a-circus/

That is an interesting take. If the trust has handcuffed potential new ownership as many believe, that certainly would keep the number of bids as well as the amount of the bids themselves down and would explain the desire to get Golisano and potentially others into the mix.

 

The trust may well have F'd themselves and Pegula could end up getting a pretty good deal out of it.

Edited August 5, 2014 by CodeMonkey

[8-8 Forever?]

Thanks for the link.

 

As mentioned in the article, many business people use factors of EBITDA (earnings before interest, taxes, depreciation and amortization) to determine the value of a business. For example, smaller restaurants may sell for 2x EBITDA while higher volume restaurants belonging to thriving chains might sell for 6x EBITDA.

The Bills EBITDA last years was $38 million. Even if we value it at 10x EBITDA, the value of the Bills would still only be $380 million. Strictly business wise, that ought to be (roughly speaking) the sale price.

 

Obviously, the true value of any commercial venture is the price the market will bear. But it's kind of amazing that business people will pay so much for an enterprise that nets so little. It would take Pegula a 34 years or so to make a $1.3 billion investment back. Buying a Taco Bell franchise has an immensely better ROI.

 

ummm... not quite. Lets mimic what Morgan Stanley and the bidders are doing:

 

(A) say the buyer holds the team 15 years and the EBITDA increases only 5% per year (because ticket prices go up and the gov builds him a stadium and that causes more revenue). Also, lets say the money our prospective owner is putting out to buy the franchise would was only going to get him maybe a 10% annual return otherwise (the markets being what they are now) : so , our owner will take the $38m of today's EBITDA cash flow and discount it at (10%- 5% ) = 5% (to account for the time value of money - just like your mortgage) for 15 years of cash flows. That result is $400M. that is what you would pay for 15 years of Buffalo Bills franchise cash flows.

 

(B) But this is only one part of the valuation. At the end of 15 years the team is sold again, presumably for at least todays EBITDA multiple, which appears to be something like $1.2B / 38M = 31x EBITDA, an amazingly high EBITDA multiple, but hey the NFL is a monopoly and their are only 32 franchises in the greatest sports league in the world. So, assuming the 38m today has grown 5% per year for 15 years, that means EBITDA 15 years from now is say, $80m in what would be the year 2029. $80m times 31 multiple = $2.5B value of the franchise 15 years from now. Seems reasonable if the league continues conservatively along its present pace. Now the value in today's dollars of $2.5B received 15 years from now is around $600M at our 10% discount rate (also known as the opportunity cost of capital -- the return your could have gotten by investing in things other than the Bills).

 

So, you add the $380m from valuation part (A) to the $600m from valuation part (B) and you get roughly $1B . So when you do the math the way investors do it, $1B for an NFL team is justified, not just a plaything. the investment actually pays off.

 

I am assuming the new owner either does not have to participate in the cost of a new stadium (simply leases it for his teams' use) or if he does, he makes a return on all stadium revenues sufficient to provide a attractive return on his investment in the stadium

[HopefulFuture]

Thanks for the link.

 

As mentioned in the article, many business people use factors of EBITDA (earnings before interest, taxes, depreciation and amortization) to determine the value of a business. For example, smaller restaurants may sell for 2x EBITDA while higher volume restaurants belonging to thriving chains might sell for 6x EBITDA.

The Bills EBITDA last years was $38 million. Even if we value it at 10x EBITDA, the value of the Bills would still only be $380 million. Strictly business wise, that ought to be (roughly speaking) the sale price.

 

Obviously, the true value of any commercial venture is the price the market will bear. But it's kind of amazing that business people will pay so much for an enterprise that nets so little. It would take Pegula a 34 years or so to make a $1.3 billion investment back. Buying a Taco Bell franchise has an immensely better ROI.

 

When it comes to a business such as an NFL franchise, you cannot look at the net return in dollars as the only value of the product. There are secondary values that aren't actually secondary. What they don't make back in monetary means across the span of the owners lifetime they make up for in other areas, such as leveraging ability on an asset that is sure to continue to rise in value, the ability to move in the political arena as a player at the larger the table for various issues and the over all prestige of owning such a product offers a great deal muscle flexing in some regional power plays as well.

[Ronin]

So if the new owner spends a billion dollars, it's a 2% return. It will likely be more than a billion dollars (especially any owner's contribution to a new stadium are included), but presumably the income should also rise with the next TV contract, and the team itself is also likely to continue rising in value.

 

Buffalo has the smallest TV market in the entire league.

 

This has been my point all along, it would take a new owner, assuming that he makes that much, 2%, every year, and it hasn't nearly been the case in past season as in 2012 I think it was only $12.7M or around there, which is much less, but it would take 50 years to recoup that investment.

 

So as investments go, this is why few bidders were interested. It's going to take a guy like Trump who cares more about being in the limelight, or Pegula, who has sentimental interests, to bid and bid high.

 

Also, until the news comes out that the trust has the option of not necessarily selling to the highest bidder, I'm going to be somewhat cautious with any optimism about the team selling to an owner that would definitely keep the team here, which seems to be only Pegula.

[A Dog Named Kelso]

I seem to remember hearing that "house prices don't go down" all throughout the 2000s. How did that turn out?

Thus why I added the "Almost without fail", nothing is a certainty. The point is, barring a catastrophe, the value of the franchise will rise or at the minimum stay the same.

Edited August 5, 2014 by A Dog Named Kelso

[Kelly the Dog]

 

 

Buffalo has the smallest TV market in the entire league.

 

This has been my point all along, it would take a new owner, assuming that he makes that much, 2%, every year, and it hasn't nearly been the case in past season as in 2012 I think it was only $12.7M or around there, which is much less, but it would take 50 years to recoup that investment.

 

So as investments go, this is why few bidders were interested. It's going to take a guy like Trump who cares more about being in the limelight, or Pegula, who has sentimental interests, to bid and bid high.

 

Also, until the news comes out that the trust has the option of not necessarily selling to the highest bidder, I'm going to be somewhat cautious with any optimism about the team selling to an owner that would definitely keep the team here, which seems to be only Pegula.

I think Buffalo has the smallest tv market in the league because they don't count Canada and southern Ontario in the ratings, and basically half of our area that would be ratings are two lakes and another country. It's not that we would have a huge one. But it's not really the smallest.

[A Dog Named Kelso]

It's hard for me to fathom that franchises will continue to rise in value as they have done in the last 20 years, but it's also an area of the economy that is extremely hard to predict. As the richest people continue to get richer, there will be people who will spend billions on a team, with very little (relative) return. At the same time, I think there is going to be a point where people (overall) decide to spend less on professional sports as entertainment.

 

In general, huge investments (e.g. 1.3 billion dollars) would be much less likely to increase exponentially than smaller investments. There's only so much room to grow.

 

The 100x increase you mentioned would bring the Buffalo Bills worth to 130 Billion dollars. That's Dr. Evil money.

 

How much did the Bills value rise in just 50 years? Jerry Jones bought the cowboys, basically staring the new sales cycle for the new guard, in 1989 for 140 million, I think they are worth 2 billion today .. 20x?

 

I was throwing out a multiplier, choose one, I chose one that was low (of the rise of the Bills). My point was if I know my house was going up in value by some multiplier and I had an extremely healthy annuity stream I would be pretty happy.

Edited August 5, 2014 by A Dog Named Kelso

[Captain Caveman]

Buffalo has the smallest TV market in the entire league.

 

TV revenue is shared, so I don't think that's relevant.

[l< j]

Buffalo has the smallest TV market in the entire league.

 

 

There is only one TV market.

 

ummm... not quite. Lets mimic what Morgan Stanley and the bidders are doing:

 

So, you add the $380m from valuation part (A) to the $600m from valuation part (B) and you get roughly $1B . So when you do the math the way investors do it, $1B for an NFL team is justified, not just a plaything. the investment actually pays off.

 

 

8&8 has a very important post about valuation. Thank you. Read it.

 

I seem to remember hearing that "house prices don't go down" all throughout the 2000s. How did that turn out?

 

Thus why I added the "Almost without fail", nothing is a certainty. The point is, barring a catastrophe, the value of the franchise will rise or at the minimum stay the same.

 

I would imagine that the public's appetite for funding stadiums will diminish, or has diminished already, and this will be reflected in a slower increase in value of franchises. Definitely linked, in my mind. However, scarcity (there are only 32, with expansion adding maybe 2 more franchises) will ensure that the values won't decrease in almost any scenario.

 

kj

[Hplarrm]

 

 

When it comes to a business such as an NFL franchise, you cannot look at the net return in dollars as the only value of the product. There are secondary values that aren't actually secondary. What they don't make back in monetary means across the span of the owners lifetime they make up for in other areas, such as leveraging ability on an asset that is sure to continue to rise in value, the ability to move in the political arena as a player at the larger the table for various issues and the over all prestige of owning such a product offers a great deal muscle flexing in some regional power plays as well.

 

 

Agreed. Folks seem to want to simply apply business rules which certainly apply well for considering whether to buy a Taco Bell or a Maconald's franchise or invest in the market. However, to do this is the same as applying the same rules for a purchase of a car, a house or a lottery ticket.

 

None of the three is a good investment under some circumstances, but really only the house is actually bought as an investment vehicle. A car depreciates the minute you purchase it, but really its more lik buying a toaster that has the side benefit of impressing friends, relatives, neighbors and yourself. By all means do not buy a car if you want to invest, but if it impresses the gal you want go for it.

 

The lotto ticket is also simply stupid as an investment, but compared to a movie ticket its a great purchase. $1 vs. #7. Extra costs for popcorn and a coke which may approach the price of the ticket vs. maybe you get more than twice the rush from buying two Lotto tickets (its more twice a stupid investment strategy), but it may give you more than 2 hours of entertainment if you get to spend as much as several days entertaining yourself with fantasizing how you are going to spend some huge mega prize (some like the drug like rush and disappointment of instant prizes, but sales really go up when the Mega drawing tops $100 million and you may even be able to get the communal bennies of buying tickets with a group. Again, the stupidest of investment strategies but god fun with a group on Friends.

 

Houses are traditionally considered a sound investment but we learned from the last market crash that even this is not always true.

 

At any rate, the lesson here is to realize that all the blatherings about EBITDA sound and are very learned, but really buying a normal business and buying an NFL franchise are simply such different things that the rules of one do not necessarily apply for everyone to the other.

 

The Bills bidding process is better analyzed and understood I think in terms of the goals of the participants rather than in applying analytical tools which are accurate when they apply but do not apply to this case in general or some bidders at all. This strikes me as far from a three ring circus (except maybe this describes the mind of the Wall St. journal columnist who does not understand.

 

Consider John Bon Jovi. He is a Jersey Boy who happened to hit it big with his music to the extent he now has a net worth over $300 million. Cool. He likely has this money out working for him in standard investment tools (which one hopes is diversified, he takes advantage of the benefits of time and compound interest where he can, and he avoids management costs of churning to the best extent practicable and minimizes tax bites to the best extent practicable. The end result is the vast majority of these assets ain't liquid but kick off enough income that he gets to play and have fun.

 

Still the new car he wants is an NFL team. He MUST have one if he can.

 

A basic problems is that an NFL team markets for about a billion and he has a third of that (even in non-liquid assets). Even tougher. if you want to parade around as the lead partner you need to own at least 30% of the franchise (a number not possible even with your substantial worth.

 

However, this is real life so there are things as JBJ I might do.

 

Toronto wants a team and there is a cash cow known as the Rogers family which wants in. They have the problem of not being American (different accounting for TV viewers and the fact the real cash cow are American TV networks makes this sort of weird) (Even worse Americans define themselves as an exceptional country and even though the Rogers are rich and fortunately are not Muslims they also ain't Mercans).

 

The desire of the Rogers for a franchise though and their huge cash reserves (and heavy liquidity with a lot of cash sloshing around from the regular cable subscription checks from the market) provides a great opportunity for Jersey born American celeb JBJ. If he can foster a business relationship which really is controlled by the huge Rogers cash but the numbers are presented to the NFL and the world (with appropriate NDAs) that JBJ is an eligible lead partner, he gets the big asset problem solved and Rogers really controls the deal with their large cash reserve, but JBJ gets to be the American front man.

 

A big goal for JBJ in all of this and Rogers is to build their business partnership and personal trust.

 

In addition, the JBJ/CA entity is bidding to be a partner in the NFL social compact. A bid allows for building these relationships.

 

One thing which appeared neat and convenient at first has actually now become a problem. JBJ wants to own (or appear to own and someone else puts up the needed 2/3 of billion he does not have) an NFL franchise. Jersey or NYC or even Philly would be great but ain't gonna happen. Buffalo initially appeared to have the advantage of being a franchise unpredictably though likely to happen soon on the market when the sole owner died. However, it is pretty clear to those who think about it that though Toronto is a bigger market than Buffalo, the lionshare of increased profit goes to the Toronto owner and not the NFL owners beyond their 1/32 of higher than Buffalo profits.

 

The NFL owners want are simple. The maximum profit from any individual move, and overall to expand NFL profits by selling the product to more eyeballs to increase the amount of $ the TV nets pay the NFL.

 

This being understood, the best choice for the current NFL team owners is not whether you get profits from Buffalo OR bigger Toronto. The best choice is to get money from both.

 

Look, the bottomline is that the NFL (which holds a contractual veto over who the Wilson Trust sells to) is for the NFL to get profits from BOTH (the already acquired profit the Bills produce AND also the potentially larger than Buffalo profits a Toronto franchise will produce.

 

The NFL ain't leaving Buffalo as this would mean simply walking away from the 100s of millions from the 45,000+ season ticket holders (they can be replaced but ain't moving to Toronto, the routinely 20,000+ individual ticket buyers, and the 100s of million in local advertisers (again they can be replaced but ain't moving to Toronto, the 100s of millions of $ in corporate welfare local, county and NYS government has and will pay for the Bills to remain (which MAY be replace in CA corporate welfare but the NYS money ain't moving.

 

The bottomline is that it actually is better for JBJ/CA to be involved in this deal (they build the partner experience between JBJ/CA and also build relationships and experience with the NFL which will be (swiftly we hope) realized when the NFL expands again.

 

The 3 ring circus of limited bidders in fact works to JBJ's advantage because he gets to do the NFL the favor of creating a bidding battle which forces up the Pegula price. However, the best outcome for this for JBJ to lose the bidding battle to Pegula. He builds his working relationship with the Rogers, he an the Rogers get an inside advantage with the NFL over other potential Toronto buyers when they emerge and actually the NFL owes him for bidding the Pegulas up.

 

JBJ wins, the NFL wins and the only loser if Pegula but again when you just sold an asset that gives you $1.3 billion sitting around you want to invest, buying an NFL team is a singular life defining investment you can make and really the EBTAblahblah rules do not apply to making th8=is judgment. Perhaps if I was using a home equity loan to chose a McDonald's or a Taco Bell they are relevant, but the big benefit of becoming a Ralph Wildon in the WNY community is a life defining thing which appears on no balance sheet and ultimately determines the true value of this investment to me.

 

[hondo in seattle]

In 34 years your Taco Bell franchises will be likely worth the same it is now outside of inflation. In the last 34 years the value of an NFL franchise went up from maybe 30-40 million to 1.3 billion.

 

As a partner in a Taco Bell franchise, I can tell you that your first statement isn't even remotely true.

 

Your second statement is interesting. The annual revenues generated by a NFL franchise don't justify the high price to purchase a club. You only really make money when you sell the team. It's an odd way of doing business and it requires you to gamble on the NFL remaining a hot commodity.

 

As noted, however, there is other value (beyond annual returns) in being a NFL owner. If I had Pegula's assets (what a dream!), I'd bid too!

Edited August 6, 2014 by hondo in seattle

[dollars 2 donuts]

I think Buffalo has the smallest tv market in the league because they don't count Canada and southern Ontario in the ratings, and basically half of our area that would be ratings are two lakes and another country. It's not that we would have a huge one. But it's not really the smallest.

 

I've been saying that for years, it stinks, and it is ridiculous that it isn't taken into consideration. In other words, Southern Ontario should count.

[May Day 10]

when people count statistics on Buffalo, including market size most of the time, usually only city limits are considered which seriously skews the numbers.