The Dallas Cowboys: Are they America's team? The first $5 billion sports franchise ever?
Every year, Forbes puts out special issues where it values sports franchises, including not only US sports teams in football (the NFL), basketball (NBA), Major league baseball (MLB) and hockey (NHL), but also European soccer teams. These issues include Forbes estimates of team values with details about general operations, including revenues, operating income and debt. Forbes valued the NFL teams in its August issue and ranked the Dallas Cowboys as the most valuable NFL franchise, with a value of $3.2 billion.
There are two things to note about these valuations. First, they are valuations only in the loosest sense of the word, and represent Forbes' attempt to price the franchises based on recent transactions in the sport. In fact, the writer notes that the only recent NFL team transaction was the sale of the Cleveland Browns for $987 million and his pricing of the other teams in the list seem to be extrapolated from this transaction. Second, note that there is little correlation between team performance and value, with the New York Jets, who last won a Super Bowl when Richard Nixo was president, valued at 40% more than the Seattle Seahawks, who won the Super Bowl last year.
If you live by pricing, you die by it, and a few days after the Forbes valuations came out, the Buffalo Bills, a franchise that Forbes valued at $935 million was sold for $1.4 billion. That triggered this article in Business Insider where the writer used the Buffalo Bills transaction to hypothesize that the Dallas Cowboys could be worth $5 billion. The reasoning was as follows: given that the Buffalo Bills franchise sold for 1.497 times Forbes estimated valued, the writer hypothesized that all of the Forbes valuations should be marked up by the same proportion, yielding a value for the Dallas Cowboys of $4.8 billion. I know it sounds laughably simplistic to scale up the estimated values of thirty one football franchises based on one transaction, but it does strip away the façade of valuation from pricing and points to a practice that cuts across all types of investments.
Can a sports franchise be valued like any other business? Sure! It has revenues, expenses and cash flows, and the risk in the cash flows should find its way into the discount rate used on the cash flows. The figure below provides a generalized view of the drivers of value for a sports franchise:
The biggest difference between the value of a sports franchise today and three decades ago is in the media revenues (from television, radio and other media contracts), which have gone from being a smart part of revenues to the dominant component. Thus, to value a franchise, you have to get a measure of not only how much media revenue the sport (to which the franchise belongs) brings in, but how it is shared. Note that the NFL not only has the biggest television revenues (about $ 6 billion annually with a growing digital component) of any of the sports but also the most equitable sharing of that revenue, with each team getting an equal share of the national television contract. In contrast, baseball allows its franchises to keep a lion’s share of local television contracts, creating very large differences in media revenues between the teams that play in big media markets (New York, Los Angeles, Chicago) and those that play in smaller markets (Pittsburgh, Seattle).
It is the unique nature of television revenue sharing that makes it difficult to believe that on a intrinsic value basis, the Dallas Cowboys are worth 3.33 times what the Buffalo Bills are worth (or about $3.6 billion more). It is true that the Dallas Cowboys generate more revenues from secondary advertising, gate receipts and merchandise sales than the Buffalo Bills, but to justify a gap of $3.6 billion, the Cowboys would need to have additional after-tax operating income of about $300 million each year (or about $500 million before taxes), a tall order since their entire operating income in 2013 was $246 million (according to Forbes) and their revenues were only $560 million, in total.
The Pricing of sports franchises
If investors are more likely to price stocks than value them, this predisposition will be accentuated with sports teams, where you have pricing run rampant, with two additional noise factors. The first is that unlike stocks, where you have trading and current prices for large numbers of "similar" stocks, there are no NFL teams which a are publicly traded and the only prices we have come from the occasional transaction involving an NFL team (like the Buffalo Bills being sold this year). If you price thirty one teams, based on one transaction or even a few transactions, you run the risk of extrapolating from one transaction being over priced.
More generally, though, you may want to consider what goes into the pricing of a sports franchise. In addition to all of the fundamentals listed in the intrinsic value section (the television contract and other revenues, player expenses and operating income), I believe that there is a premium that buyers are willing to pay to control a team and be part of the conversation. After all, we would collectively pay no attention to Jerry Jones, if he did not own the Dallas Cowboys, and that media attention may be worth a great deal to someone who basks in it. (If that is a backhanded way of saying that Jerry Jones is narcissistic, so be it.) In fact, a few months ago, I considering this question in a blog post I had on Steve Ballmer buying the Los Angeles Clippers for $ 2 billion. I argued that even relative to other NBA team transaction prices, Ballmer was over paying (by about $ 1 billion) for the Clippers, but that he was buying an expensive toy in the process.
So, how would I price the Dallas Cowboys? Assuming that the new owners for the Buffalo Bills did not overpay, here are two simplistic assessments of the value of the Cowboys.