Sonic Submits Bid to Take TRK Private, “First Step” to NASCAR Roll-Up

SpeedwayMotorsports

Sonic Financial Corp. – the majority stakeholder in Speedway Motorsports Inc. (TRK) – has submitted a non-binding proposal to acquire all outstanding shares of TRK common stock, not already under the control of the Smith family (+/- 29%). The offer for $18/share – a 31% premium to Tuesday’s closing price ($13.94) – will now be reviewed by a special committee assigned by TRK’s board. Speedway Motorsports owns and operates 8 tracks that host NASCAR series races including Charlotte Motor Speedway, Bristol Motor Speedway and Texas Motor Speedway.

Howie Long-Short: Sonic’s bid for TRK comes just 6 months after NASCAR submitted its own non-binding proposal to take International Speedway Corporation (ISC) private. That deal remains in limbo with a class-action lawsuit (over the purchase price) holding it up. If both deals were to close it would leave Dover International Speedway (DVD) as the last publicly traded track on the NASCAR circuit. That’s noteworthy because the sport needs to cut down on the number of races it holds – “having so many events de-values the experience” – but as publicly traded companies, it’s difficult for TRK or ISC to justify agreeing to host less dates; they’re required to report financials quarterly to shareholders expecting gains.

Mark Coughlin – the founder of motorculture, inc. – suggests there’s “something larger [than a change to the race schedule] at play here. It’s likely the first step to an eventual merger between NASCAR, Speedway Motorsports and International Speedway Corp. If NASCAR can control the venues, the schedule and the media rights – in essence, own the entire sport – and keep the teams as independent contractors, the entity becomes that much more attractive to outside investors and its value goes up substantially.” Remember, there were reports back in Q2 ’18 that the France family was exploring a sale.

It’s important to point out that trimming dates from the schedule doesn’t necessarily equate to declining profits. The circuit would do well by adding some cost certainty. Back “in the late 80s, NASCAR was sanctioning just 28 races and its costs were significantly down. The cost of both travel and the cars has gotten out of control since. The idea that teams essentially need a car for every race track is absurd and if F1 teams can make due with only 4 engines for the entire season – they rev up to 15,000+ RMPs – there’s no reason NASCAR teams can’t get a V8 to make 500 reliable horsepower and have it last multiple weekends.”

Coughlin says it would be “pretty easy” for NASCAR to cut expenses. Sure, the “engines wouldn’t rev as high and it would mean that the millions teams are spending on these lightweight parts and valvetrains would go to waste, but you can buy great motors from any of the manufacturers that can easily produce 500 horse power and last tens of thousands of miles.”

There’s also a case to be made that “the value of the audience not at the track is greater than the one at it. 15 years ago, 70% of track revenues were generated from tickets and sponsorship; media rights comprised just 30%. Now, it’s the opposite.”

While both ISC and TRK are in talks to go private, there’s really no urgency in either negotiation. ’20 marks the end of NASCAR’s agreements with the tracks and teams, but because such a large portion of the sport’s revenues now comes from media rights – and the tracks are entitled to 65% of that money (some of it does go to the teams) – “the real deadline is ’24 when those deals come up for renewal.” 

I asked Coughlin who would make sense as a potential acquirer. He suggested “CAA, Endeavor and Silver Lake Partners”, but said to keep an eye on Comcast. “Remember, they had an interest in NASCAR and it could very well be that instead of buying media rights, a media company decides they want to own the property.”

Fan Marino: Coughlin makes the case that NASCAR is intrinsically undervalued as a sport, which makes the investment opportunity that much more attractive if there is a roll-up. “From where attendance and television viewership were to where it is now has been a steep decline, but NASCAR remains the #1 or #2 most viewed sporting event on television – despite often airing on cable – 38 weekends/year. They have an audience that every other motorsport – including F1 – would love to have [in the U.S.]

Much like the sport’s skyrocketing costs, NASCAR’s other core issue is self-inflicted. They need to do a better job promoting their owners and drivers. Coughlin says that “they’ve de-contented the show by trying to have total control over it. They don’t let the athletes show off who they are. In the glory days of NASCAR, the margins of victory were seconds, if not minutes; so, it’s not the racing. People complain about the technical aspects, but no one cares about that stuff except the hardcore fan. It’s the lack of personalities [preventing the sport from growing again].

The drivers also need to do a better job of promoting themselves. Back in the 90s, “drivers would come into the big markets 3 or 4 days before the race. They would be on every morning show and do an interview with every newspaper. They had appearances at auto parts stores and would go out with distributors every weekend. The schedule wasn’t any more rigorous then, but that type of activation doesn’t happen anymore. NASCAR needs to get these guys to realize that they have a stake in their own future and a responsibility to the league in which they play.”

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NASCAR Experiencing Attendance Woes, Great Racing Key to Resurgence

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Last Sunday’s Food Series 500 at Bristol Motor Speedway (BMS) drew just 38,000 fans (track seats 162,000) and Saturday night’s Toyota Owners 400 at Richmond Raceway didn’t fare any better; no more than 40% of the venue’s 51,000 seats were occupied (granted, 10K people were in the modernized infield or on the Chaos Corner Party Deck). Gate attendance has been a problem for the Monster Energy NASCAR Cup Series all season. The Daytona 500 was the only race among the first 9 to sell-out. While weather has been a factor the past 2 weekends, driver Clint Bowyer has attributed the fans’ decision to stay away from the track in droves to the cost of lodging for a weekend; hotels near NASCAR venues regularly mark-up rooms +/- 200% (to $300+) on race weekends. Speedway Motorsports Inc. (TRK, owns Bristol + 7 other NASCAR tracks) CEO Marcus Smith acknowledged that hotel pricing is a part of the reason fans aren’t showing up, but said he ultimately believes that “the key for a NASCAR resurgence” is great racing.

Howie Long-Short: BMS used to be “the toughest ticket” on the NASCAR circuit – selling-out 55 consecutive races between ’82-’10 – so seeing large portions of the grandstands closed off (no fans in the turns) made for a shocking optical.

Hotel pricing is the result of supply and demand – there are typically few rooms available in the area because the tracks are located in rural destinations – and the revenue generated on race weekends helps keep many of these places afloat for the year. Track owners could lower the price of camping on-site, but the costs associated with renting an RV for the weekend are roughly the same as what a hotel room would charge, so there’s little the series can do to reduce the costs of lodging. NASCAR races have long been costly to attend if you don’t live driving distance from the venue (and most fans don’t because of said rural location) – so this isn’t a new problem – it’s just getting more attention now because of Bowyer’s comments, which completely missed the mark.

Race promoters had no problem selling seats during the sport’s mid ‘00s heyday, but when the economy collapsed in 2008 a large portion of the fan base could no longer afford to attend races. While the economy has since recovered, many of those fans have never returned.

Part of the reason why is that NASCAR’s core fan base has aged out of the demographic that attends sporting events over the last 10 years. Just 21% of those over the age of 53 went to a sporting event within the last year. The NASCAR fan that grew up cheering for Dale Sr. throughout the 80s and 90s is now in their 50s and 60s.

NASCAR race attendance has declined, but any declarations that the sport is dying are premature. The races still draw +/- 3 million people on television each week (ratings are up slightly YoY) and Cup Series races are the top-rated sporting event on television most weekends over the first 8 months of the year. NASCAR’s current TV contract is worth $820 million/year (tracks keep 65%). As long as the value of live media rights continues to increase, the tracks will remain flush with cash.

Fan Marino: Critics of NASCAR will tell you that the series lacks excitement and that the outcomes are too predictable; a Joe Gibbs Racing (6) or Team Penske (3) car has won all 9 races this season. While the statistic is accurate, the criticism is off-base; the racing has been great, of late. The Bristol race had 21 lead changes among 9 drivers and Martin Truex Jr. held off a late charge from Joey Logano to win his first short-track race on Saturday night. That’s good news for the sport because Smith is right, the surest way to win back the fan is to consistently put a great product on the track.

Existing 5-year sanctioning agreements prevent changes from being made to the race schedule before the end of the ’20 season, but NASCAR officials are already said to be exploring the possibility of a shorter season come ’21. That’s a smart call, no sport needs a 10-month schedule (see: oversaturation); cutting down on the number of races makes the remaining ones that much more important. There’s also no reason for the series to visit so many tracks twice. Demand for tickets (and thus attendance) would increase if there was just a single race weekend in a given locale.

NASCAR would also be wise to explore some changes that would make the sport more appealing to the the next generation of fans (see: millennial/Gen-Z fan). Cutting race times (i.e. laps) to under 2.5 hours (currently can run upwards of 4) and outfitting tracks with Wi-Fi would be good places to start.

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The Case for a Fully Integrated Sponsorship Model

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NASCAR intends on replacing its current title sponsorship model with a multi-tiered offering (similar to the NCAA or IOC), to “make it easier for sponsors to work with” the stock car racing series, prior to the start of the 2020 season. NASCAR President Steve Phelps explained that the multi-tiered model is “far more efficient and allows our (50+) sponsors to activate intelligently against the assets that they have” because for the 1st time, the racing organization will package assets that have historically been negotiated individually. Tier-1 sponsorships, expected to pull in $20 million/season, are said to include $15 million worth of exclusive circuit and track promotion (think: race title sponsorships, TV signage) and a $5 million media spend. NASCAR has plans to include team specific assets in top-tier sponsorship packages, though it remains TBD how that will happen due to competitive balance concerns. Monster Energy’s contract as the Cup Series title sponsor expires following the 2019 season.

Howie Long-Short: Historically sponsors have bought I.P. from NASCAR, media from Fox and NBC, digital from NASCAR Digital Media, audio from Motor Racing Network and Performance Racing Network, did track deals with International Speedway Corporation and Speedway Motorsports Inc. (plus Dover, Pocono, Indy) and then negotiated their individual team deals  (remember: in Big 4 sports team/stadium IP is one in the same), so a fully integrated sponsorship model, where all assets can are acquired through NASCAR, certainly appears logical.

At $20 million/season, the cost of a single top-tier sponsorship (aka premier partners) rivals Monster Energy’s current annual spend and NASCAR plans to sign 5 premier partners. On the surface, it would appear NASCAR would be dramatically increasing sponsorship revenues, but under NASCAR’s old system the circuit owned the assets it sold. The new tiered model, “takes the assets of the majority of the stakeholders in the sport and packages them together”, so everyone (see: NASCAR, tracks, media partners) shares in the revenue generated.

Sponsorship revenue is going to grow, but Steve Phelps explained this move wasn’t fiscally driven. Phelps said, it’s about “finding long-term partners that are committed to this sport, committed to activating the sport and our drivers on whatever channels of distribution they’re doing business. That’s what we need to grow the sport overall, the revenue will follow.”

The tiered model is logistically more efficient and NASCAR is going to increase sponsorship revenues, so it’s fair to wonder why other pro sports leagues don’t operate under a similar model. The NFL, NBA, MLB and NHL are financially healthy, so there’s little reason for them to revamp what’s working, but smaller leagues and start-up leagues (think: XFL, AAFL, PLL) would seem to benefit from a fully integrated sponsorship model. I reached out to Michael Neuman, Founder, EVP and Managing Partner for Scout Sports and Entertainment, the in-house sports sponsorship and marketing division of Horizon Media (largest independent media agency in the world) to find which model he would advise his clients to pursue if they were launching a league today?

Michael: If you’re a new property and you’re trying to win over the traditional sponsors and the agencies they work with, I would recommend making the sponsorship and advertising opportunities as cost efficient, and as buying efficient as possible; the tiered model makes perfect sense.

Fan Marino: Samsung has renewed its top-tier partnership with the IOC through the ’28 games. While no formal terms were released, it’s been estimated that the IOC rakes in $50 million/year from top-tier partners. With Samsung on board through the Los Angeles Games, the IOC now has 9 of its 14 top-tier sponsors signed through the ’24 Paris Games; only Atos, Coca Cola (considered a near lock to be a NASCAR top-tier sponsor as well), Dow, GE and P&G have pacts set to expire after the ’20 Games. The willingness to commit so much money, so far out, speaks to the long-term confidence brands have in the Olympic movement (and to the requirement that they sign on for a minimum of 2 quadrennials).

It’s not just NASCAR and the IOC that are using fully integrated sponsorship programs. Following the ’20 Tokyo Games, a new entity called United States Olympic Paralympic Properties (USOPP) will be formed to negotiate sponsorships on behalf the United States Olympic Committee (all existing deals expire after ’20 Games), the U.S. Paralympic Committee, the Organizing Committee of Olympic Games, all national governing bodies and the participating athletes through ’28. I asked Michael Neuman why the USOC and US Paralympics were moving towards a fully integrated model?

Michael: Standard operating procedure when a city is awarded the games is for the host city, the NOC (National Olympic Committee) and the IOC (International Olympic Committee) to enter a joint venture with the power shifting from the NOC to the new JV, specifically to the host city organizing committee; the creation of USOPP is a simple consolidation of the marketing arms. 

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Champion Driver, Team President Robert Hight on the Business Side of Drag Racing

Robert Hight

With 2 races left in the NHRA Mello Yello Drag Racing Series Countdown to the Championship (their playoff system), Robert Hight is atop the leader board (11-points ahead of J.R. Todd). Aside from being a 2x champion driver, Hight serves as the President of John Force Racing (the team he races for). Robert was recently in New York and JohnWallStreet had the chance to sit with him to discuss how drag racing became a billion-dollar business, why NHRA has one of the youngest fan bases in sports and the importance of car sponsorships.

JWS: Drag racing has become a billion-dollar industry. Where is the money coming from?

Robert: It’s really driven through sponsorships and attendance. Fans have to come to the races and then we need them to tune in on TV. It (the sport’s economics) really changed when Fox Sports took over (the television contract in 2015) and our viewership grew by more than 70%, because you need eyeballs on your sport (to generate the big sponsorship dollars).

JWS: NHRA has one of the youngest fan bases among all sports properties. Why is that?

Robert: It fits the new generation. They (the fans) don’t have to sit in the stands and watch cars go round and round for 3-4 hours. There’s some racing, you go back in the pits – there’s some entertainment back there – watch some more racing; it just fits the attention span of today’s youth.

JWS: Is the NHRA business model so reliant on sponsorship that if a team were to lose a major sponsor, they would be forced to fold-up shop?

Robert: It costs $4 million to run a single NHRA Funny Car for a full season. We could not compete if we lost a sponsor, the hope would be to find a new one. Our organization signs long-term deals (to avoid that fate). We don’t sign year-to-year deals, it’s a 3-year minimum.

JWS: Nearly all NASCAR tracks are publicly owned. Is that the same with NHRA drag strips?

Robert: No, most of them are private – a lot of family owned tracks, but Bruton Smith owns quite a few of our events and honestly, they are the best events we go to. Beautiful tracks, beautiful facilities, very well run.

Fan Marino: Bruton Smith is the founder and CEO of Speedway Motorsports, a publicly traded company (TRK) that owns 9 racing venues (that hold NASCAR, IndyCar and NHRA events); Atlanta Motor Speedway, Bristol Motor Speedway, Charlotte Motor Speedway, Kentucky Speedway, Las Vegas Motor Speedway, New Hampshire Motor Speedway, Sonoma Raceway, Texas Motor Speedway and North Wilkesboro Speedway. Back in early August, the company reported Q2 total revenues had declined -2.4% (to $4.2 million) as the company “experienced poor weather during almost all of the events it held during the quarter.” TRK shares will open at $16.64 on Thursday (10.11.18), just north of their 52-week low.

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NASCAR Visits “Tricky Triangle”, Monster Energy and Busch Beer Activating

Pocono

JohnWallStreet is headed to Long Pond, PA this weekend for the Pocono 400 at the “Tricky Triangle”. The race is on Sunday, but Pocono Raceway is hosting a series of events throughout the weekend that NASCAR fans in the Northeast will want to be aware of. Monster Energy kicks things off today with “Free Can Friday”, a promotion offering fans who bring an empty of Monster Energy (MNST) drink (to recycle) free access to the day’s activities. These include a BMX trick show and the General Tire #AnywhereIsPossible 200 (ARCA Series race). On Saturday, the track hosts an Alex Bowman selfie session and the Pocono Green 250 Recycled by J.P. Mascaro & Sons (Xfinity Series race), before the Cup Series takes over on Sunday. That race starts at 2pm, but make sure to get there early; Clint Bowyar (10:45a), Jimmie Johnson (11:00a) and Kurt Busch (11:15a) are all doing Q&As at the Tricky Triangle Club (opens at 8a).

Howie Long-Short: Pocono Raceway, which has been family-owned since its inception in 1971, is one of just two NASCAR tracks (out of 25) that is privately-owned; Indianapolis Motor Speedway is the other. International Speedway Corporation (ISCA) and Speedway Motorsports (TRK) own a combined 22 tracks (13 and 9, respectively), while Dover Motorsports (DVD) owns the “Monster Mile”.

In early April, ISCA reported “revenue and earnings increased for comparable events” in Q1 ’18, despite a continued decline at the gate (admissions revenue -2.5% YoY). Shares are down 11.5% (to $41.70) since February 1.

In late April, TRK reported that a YoY decline in admissions revenue for Q1 events led to a -2.5% decline in total revenue (to $74.4 million). Shares have declined 6% since (to $16.70) despite the company touting the prospects of long-term future profitability from Q3 event realignment.

DVD didn’t hold any events in Q1 ’18, so there was little to report during its most recent earnings statement. The stock is currently trading at $2.10 – exactly where it was 12 months ago.

Fan Marino: For those passionate about their brand of domestic beer, Busch and Busch Light (BUD) are set to go head-to-head on the track Sunday. Kevin Harvick will be driving his #4 Busch Beer Ford Fusion for Stewart-Haas Racing, as he seeks his circuit leading sixth win of the season. Harvick’s SHR teammate and friend Clint Bowyar, winner of the ’18 STP 500 at Martinsville, will be behind the wheel of the #14 Busch Light Ford Fusion. They’ll compete with the loser “scheduled” (weather pending) to cut the infield grass at Pocono. Off the track, the two will battle it out throughout the weekend on social media and will appear on stage together on Friday at Pocono’s Infield Block Party.

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WSJ: Just 7 Ways to Publicly Invest in Sports, JWS: Not the Case

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The WSJ published a recent story asserting there are few ways to directly invest in sports, a notion we dispute. The article deemed just 7 publicly traded equities to be sports-related and based their conclusion, that fans are better off watching and playing sports than investing in them, on the performance of 2 exchange traded funds; one of which (FANZ) has beat the S&P since its July ’17 inception, which would seem to counter to their argument. The article cites Matt Hougan, the CEO of Inside ETFs, and his belief that most of the economic value within sports (ownership and player contracts) “comes in private transactions”, to support the author’s thesis; but fails to pay consideration to the revenue streams that support those contracts (and generate ownership profits). It’s worth noting that JohnWallStreet follows over 100 sports-related equities.

Howie Long-Short: Sports teams generate revenue from 4 sources; broadcast rights, ticket sales, sponsorships and merchandising. Several publicly traded equities use a similar business model; Churchill Downs (CHDN), International Speedway (ISCA), Dover Motorsports (DVD) and Speedway Motorsports (TRK), and thus should also be included on the list. Others, like Acushnet Holdings Corp. (GOLF) and Callaway Golf Company (ELY), are undeniably directly tied to sports; and no one would claim your basket was unfocused if companies like Nike (NKE), Lululemon (LULU) and Fitbit (FIT) were to be included. Oh, and don’t forget Activision Blizzard’s (ATVI) new esports league (Overwatch); their inaugural season starts today.

Fan Marino: The story names the New York Knicks, New York Rangers (MSG), Atlanta Braves (BATRK), Manchester United (MANU) and Borussia Dortmund (BORUF) as the teams you can purchase equity in. The Toronto Blue Jays, Toronto Maple Leafs (RCI), Juventus F.C. (JVTSF), A.S. Roma (ASRAF) and SS Lazio (BIT: SSL) are also all publicly traded.

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NASCAR FACILITIES ADDING NON-TRADITIONAL EVENTS TO CALENDAR TO SUPPLEMENT DECLINING ATTENDANCE REVENUES

As NASCAR attendance declines, racetracks have been actively working to add non-traditional events to their calendar, to supplement admissions revenue losses. Tracks located in major markets are having the most success, with Las Vegas Motor Speedway (TRK) hosting more than 1,400/year. The concert industry has been drawn to the massive facilities as the vast parking lots, camping areas and other existing amenities suit the needs of a music festival, but smaller events from women’s professional bowling events to American Royal BBQ contests have also found success at the unorthodox location. It should be noted that while no specifics have been given, even with 1,400 non-traditional events/year at Las Vegas Motor Speedway, the revenue generated from those events makes up less than half of the track’s annual revenue.

Tracks get creative in drive for new revenue

Howie Long-Short: Annual speedway revenues peaked in 2007 at $814 million. Revenues dropped all the way down to $661 million in 2016. These massive facilities cost money to operate and generate nothing when not being used. Why not try to book as many dates as you can fill?

Fan Marino: I’ve never attended an event besides a race at a NASCAR facility, but after watching Tennessee/Virginia Tech play the ’16 Battle at Bristol (TRK) in front of 153,000 people, watching a football game at one has been added to the bucket list.

TRK, DVD & CHDN Q2 EARNINGS RECAP

Speedway Motorsports (TRK), Dover Motorsports (DVD) & Churchill Downs (CHDN) have reported earnings for the quarter ending July 30th.  Below is a recap of each company’s earnings report:

Speedway Motorsports (TRK):

Reported increase in both revenue and net income for Q2 ’17, from same time last year (up to $.68/share from $.62/share). YTD revenue and income figures are also up from 2016.

  • Good News: Track rentals & ancillary broadcast rights generating more revenue. Attendance & fan interest is trending upward.
  • Bad News: Certain admission revenues are down. Management believes underemployment and the absence of a fiscally strong middle class are hurting numbers.

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Speedway Motorsports boosts revenue, income

Dover Motorsports (DVD):

Reported slight increase in revenue and net income for Q2 ’17, from same time last year. Reported earnings of $.14/share remained the same.

  • Good News: Increase in broadcasting revenue.
  • Bad News: Lower admissions revenue for Dover NASCAR weekend.

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Dover Motorsports, Inc. Reports Results for the Second Quarter of 2017

Churchill Downs Incorporated (CHDN):

Reported a 3% increase in revenue and 12% increase in net income for Q2 ’17, from same time last year. Reported earnings of $4.81/share, a 17% increase YOY, and $.30 higher than analyst predictions.

  • Good News: Increase in racing revenues from a strong Kentucky Derby week. Equity investments and organic growth lead to increase in casino revenues.
  • Bad News: Gaming company Big Fish Games saw net revenues decrease by $12.6 million.

churchill-logo-v2_1Churchill Downs Incorporated Reports 2017 Second Quarter Results

Howie Long-Short: I’m skeptical when companies are still blaming the economy/underemployment in 2017.

Fan Marino: Never been a NASCAR guy. Just can’t get excited by someone driving in circles…even if it is really fast.