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August 10, 2023

Sports Team Conglomeration Trend Picking Up Steam and Likely to Accelerate

The Qatar Investment Authority recently purchased a ~5% stake in Monumental Sports & Entertainment at a $4.05 billion valuation. Monumental owns the Washington Capitals, Wizards and Mystics, along with Capital One Arena, NBC Sports Washington, and a host of related assets.

Sportico

values the Capitals and Wizards at

$1.22 billion

and

$2.7 billion

, respectively.

In most industries, conglomerate constructs tend to depress the value of the parent co.’s underlying assets over an extended period of time; once the obvious benefits have been extracted. 

“Shareholders look at it like, ‘I can own the individual assets. I don’t want the asset allocation choice made for me. I want to diversify myself’,” Alex Michael (managing director and head of sports advisory, LionTree) said.

But that wasn’t the case with QIA’s investment in Monumental, and it generally hasn’t been across professional sports.

Since 2010, “transactions involving a larger group of assets [have sold] at a significant premium to transactions involving individual teams only,” Michael said.

It has become clear that sports conglomerate valuations are not behaving the same as those in other industries.

“If you look at the individual assets versus the agglomerated value, there is an extra value boost associated with having more assets [on an EV/LTV revenue basis],” Michael said.

There are several reasons why investors have been willing to pay a premium for a stake in a sports holding company.

Scarcity is one factor.

“There’s an appreciation towards just how hard it is to get these assets [in the first place],” Michael said.

There are also often operational and financial synergies between sports assets, and there can be leverage in some of the downstream monetization efforts too.

“In addition to other assets, Monumental owns the basketball team and hockey team in Washington. They play in the same Monumental-owned venue. They have the same people selling tickets and sponsorships. You can see how one plus one plus one could equal three,” Steve Horowitz (partner, Inner Circle Sports) said.

While there can be corporate synergies associated with non-sports entities (think: legal, corp. dev. HR), it is largely dependent on how the businesses are run and how disparate their focus is.

“In other industries, the core expertise can get diluted when they get into other businesses," Horowitz said.

Perhaps the most obvious reason is that sports conglomerates are largely privately owned (Endeavor is the rare exception).

That reality is in direct contrast to most mature industries. And “private entities, in good market conditions, can often raise money at valuations greater than the assets they already own,” former Goldman Sachs partner and NFL EVP Eric Grubman said.

Just look at all the SPACs that went public in 2020 and 2021.

That is because private market investors are, in part, buying the promise of future growth.

“When an entity like Monumental sells 5%, the investor is not only buying a 5% interest in the [underlying] assets, but also a 5% interest in the ability of [the platform co.] to go make more investments in the future for which that investor doesn’t have to put in any more money," Grubman said.

By contrast, over time, public market investors tend to want “growth plus some predictability. They want profit and cash flow, and they usually don’t want a management team to make acquisitions that are not directly connected to the core business,” Grubman said.

The passion for and desire to be associated with professional sports is another factor.

Sports team conglomeration is not a new phenomenon. Monumental, Fenway Sports Group, Kroenke Sports & Entertainment, and Harris Blitzer Sports & Entertainment were all created before the current run up in team values.

But the trend has picked up steam stateside in recent years. Haslam Sports Group, Tepper Sports & Entertainment, and Joe Tsai have all emerged on the scene over the last decade, and the established platform businesses have continued adding assets too.

And now there are a few firms, like RedBird Capital and Bruin Capital, using private equity’s asset management model (think: KKR, Apollo) to offer private market investors participation in a diversified set of sports opportunities.

Recognition that the premium exists may help to explain why.

“If [consolidation] is rewarded, then it becomes a virtuous circle,” Michael said.

Others begin trying to replicate the model and existing conglomerates gain the resources needed to grow bigger.

“The value accrued to the Sixers and Devils was helpful in Josh Harris buying the Commanders,” Michael said.

And once an entity has collected a few assets, it becomes easier to bolt new ones on.

“Size and scale beget the opportunity to buy more,” Michael said.

The pro sports leagues’ embrace of institutional capital and sovereign wealth funds has been a factor as well.

It’s simply more viable for a single group to purchase and operate multiple teams today than it was just a few years ago.

Michael anticipates the consolidation trend will continue in the years ahead.

“You could see substantial acceleration within five years,” he said.

Some will argue that’s not necessarily a good thing; that sports teams are civic institutions and should have locally based owners.

But the leagues value the involvement of these conglomerates.

“They know there is going to be a constancy and maturity to ownership if [the ownership group] owns other assets,” Michael said.

While it doesn’t make sense for a sports conglomerate to take its underlying assets public for the reasons cited above, an asset manager with a focus on sports and entertainment could eventually consider taking its cash-flowing management or platform company public (think: Blackrock).  

“RedBird or another firm with a similar construct could do it once they reach an attractive enough size, which some may have already done,” Grubman said.

That would be a different and presumably more attractive proposition.

According to the RedBird website, the firm has $8.6 billion in assets under management.

“As an interim step, [Gerry Cardinale] could certainly sell a piece of the RedBird GP interest to a sovereign wealth fund or insurance company–and it would sell at a premium to the underlying asset value, just like Monumental did, because that investor assumes Gerry will be able to continue doing what he’s done,” Grubman said.