Sally Davitt is a Director in the Sydney office of KordaMentha. She knows nothing about sport, and is unlikely to agree to pay $2 billion for a basketball team.
Steve Ballmer, former CFO of Microsoft, has just paid $2 billion for basketball team, the LA Clippers:
'It's not a cheap price, but when you're used to looking at tech companies with huge risk, no earnings and huge multiples, this doesn't look like the craziest thing I've ever acquired.'
The offer was made in May, but the sale was delayed because of a lawsuit relating to the former owner, Donald Sterling (the 80-year-old billionaire whom the NBA banned earlier this year for making offensive remarks). The lawsuit opened up some fascinating insights into the valuation of the team, including a document from Bank of America Merrill Lynch ('BoAML') which provides a series of valuations assuming different multiples (both revenue based and EBITDA based). According to that document, a price of $2 billion for the Clippers represents a much larger valuation and a higher revenue multiple compared to other transactions for NBA teams:
Interestingly, the previous NBA sale transactions set out in the BoAML document suggest that, although the Clippers have a positive EBITDA, few other basketball teams sold over the last few years have been profitable at that level. This may be why revenue multiples are used in the preferred approach of the BoAML valuation – even though this does not represent the profitability or cash flow of the team.
BoAML say that the appropriate multiple range to apply is 5x–7x revenue, which is higher than historical comparable transactions due to factors such as:
- The 'trophy' nature of the LA Clippers
- LA demographics, including the fact that there isn't an NFL team in the city to dilute support for the NBA
- The Lakers (the rival LA team) 'going through a recycling period' [quite the insult -ed.]
In any event, $2 billion appears to be at the higher end of the range suggested by BoAML, and relies heavily upon the renegotiation of TV deals to increase its revenue by almost 100%:
So, if the TV deal does not result in close to a 100% increase in revenue, then the implied multiple in the deal is over 12x revenue (or 103.5x EBITDA!). This is much higher than the 5x–7x revenue multiple range suggested by BoAML.
Interestingly, the next two highest bids after Ballmer were for $1.6 billion and $1.2 billion. Also, in January 2014, Forbes valued the team at [only! – ed.] $575 million (valued on the 'current arena deal' – the exact basis of which is unknown).
Quite a difference to $2 billion. Can Steve Ballmer really see that much more value in the team than other bidders?
Maybe this transaction is an example of special value, where a specific person may place a higher value on an asset than the hypothetical purchaser assumed in assessing market value? [This is a favourite topic of discussion for the Forensic team here at KordaMentha – ed.]
In any event, with few teams making a profit, such large sums for basketball teams don't appear to make commercial sense. Perhaps this means that purchasers of basketball teams are looking for something other than cash flow from their purchase – maybe prestige?
But what is the value of this 'prestige', or can it even be valued? Could this 'value' simply relate to the ego of the purchaser and, in fact, the price paid by a self-confessed basketball nut was not at all related to 'value' in an economic sense?
Even BoAML expert Anwar Zakkour said in court 'None of us even believed we'd get to the $1.8 billion number, so that says it all.'
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
