How much is your team worth, 2008

April not only is the dawn of a new baseball season, it is also the time of year when Forbes allows us to swoon over its updated list of franchise valuations.

I’ve written extensively on this subject before. Here are a couple of articles looking at the pitfalls of the Forbes’ data. You can also find a better (but more difficult) method of calculating franchise value here.

Today I want to recap some of the issues I have with the accuracy of the data, and then turn our attention to the 2008 numbers to see what they reveal.

The Forbes problem

The folks who try to work out the worth of each baseball club are fighting an uphill battle. For a start, not much data is released into the public domain: On the revenue side, we have attendance numbers and a smattering of surveys about parking, ticket and sponsorship monies; on the cost side, we have payroll plus a couple of other pieces of ad hoc data with which to piece together a full income statement. The numbers are certainly clearer for revenues than for costs.

If you’ve learned anything from my other writings on this subject, it is that a proper estimate of valuation must be underpinned by an estimate of profits, not revenue. But an estimate of profits requires a deep understanding of costs, and, as we saw above, that’s where the most uncertainty lies. It probably isn’t a surprise, then, to find out that Forbes ignores this advice and uses (mostly) revenue multiples to determine value.

I reckon that the Forbes valuations are accurate within a margin of +/- 30 percent. That band might seem wide (and it is), but the fact remains that, without seeing the books of each and every club, it is nigh on impossible to even begin to work out the proper valuation.

Let’s have a look at the recently published 2008 numbers.

2008 data

Here is what the wizards from Forbes coughed up this year compared to last year:

                        2007, $m                       2008, $m
Team                    Value     Revenue   EBIT       Value     Revenue   EBIT
New York Yankees        1200      302       -25.2      1,306     327       -47.3
New York Mets           736       217       24.4       824       235       32.9
Boston Red Sox          724       234       19.5       816       263       -19.1
Los Angeles Dodgers     632       211       27.5       694       224       20
Chicago Cubs            592       197       22.2       642       214       21.4
LA Angels               431       187       11.5       500       200       15.2
Atlanta Braves          458       183       14.8       497       199       28.1
San Francisco Giants    459       184       18.5       494       197       19.9
St Louis Cardinals      460       184       14         484       194       21.5
Philadelphia Phillies   457       183       11.3       481       192       14.3
Seattle Mariners        436       182       21.5       466       194       10.1
Houston Astros          442       184       18.4       463       193       20.4
Washington Nationals    447       144       19.5       460       153       43.7
Chicago White Sox       381       173       19.5       443       193       30.6
Cleveland Indians       364       158       24.9       417       181       29.2
Texas Rangers           365       155       11.2       412       172       17.2
Detroit Tigers          357       170       8.7        407       173       4.6
Baltimore Orioles       395       158       17.1       398       166       7.7
San Diego Padres        367       160       5.2        385       167       23.6
Arizona Diamondbacks    339       154       6.4        379       165       5.9
Colorado Rockies        317       151       23.9       371       169       26.2
Toronto Blue Jays       344       157       11         352       160       -1.8
Cincinnati Reds         307       146       22.4       337       161       19.3
Milwaukee Brewers       287       144       20.8       331       158       19.2
Minnesota Twins         288       131       14.8       328       149       23.8
Oakland Athletics       292       146       14.5       323       154       15.4
Kansas City Royals      282       123       8.4        301       131       7.4
Pittsburgh Pirates      274       137       25.3       292       139       17.6
Tampa Bay Devil Rays    267       134       20.2       290       138       29.7
Florida Marlins         244       122       43.3       256       128       35.6

According to Forbes, year-on-year revenues are up 7.7 percent, whereas the worth of the average team is up 9 percent. You’d have thought that this discrepancy is explained by increased profitability; you’d have thought wrong: Total operating income actually fell by a shade less than 1 percent. How value increases under this scenario is anyone’s guess (Forbes must believe that future profitability will be higher now than under previous assumptions).

The movers and shakers

The franchise that enjoyed the biggest increase in value was the Colorado Rockies, at a 17 percent clip. Presumably they coined that value by reaching the World Series. Revenue last season jumped 11 percent, just slightly ahead of average, but the theory is that that the Rox will reap the rewards of increased attendance this season (and for several seasons to come).

The other teams that fared well were the White Sox and the Angels. The White Sox saw their profits grow by over 50 percent as they continued to benefit from their World Series win in 2005. The Angels, on the other hand, epitomised a trend that better play on the field translates to more lucre off the field.

Collectively, the eight teams that played October ball in 2007 saw their value rise by 12 percent. The Angels’ decision to add the “Los Angeles” tag likely had little to do with their gain.

What about the worst-performing teams? The value of the Washington Nationals rose less than 3 percent, but this followed an enormous increase a couple of years ago after the team relocated from Montreal. Expect the Nationals’ worth to accelerate now that the new ballpark is open (though you’d hope that the value of that asset, which is now complete, would be reflected in the data).

The team with the least revenue increase was the Tigers: Despite their reaching the World Series in 2006, revenue in 2007 grew only a couple of percentage points as the team failed to qualify for post-season play. Still, Detroit’s value rose 14 percent, presumably a lingering effect from the postseason halo.

Looking at profits, last year only the Yankees made a loss. This year, New York doubled that loss, and they were joined in the red by Boston, who went from $20m up to $20m down. Expect the Red Sox’s position to improve next year, since the 2007 accounts were blighted by the one-off payment of $50m for Daisuke Matsuzaka. Omit this and income looks healthy. How the Yankees continue to lose money yet still top the table in value is a mystery (hint: The answer is spelled “Y-E-S”).

Interestingly, the two teams that pocketed the most loot in 2007 were the Nationals and the Marlins. The Nationals’ income doubled from $20m to $40m (so how does value not grow????). Meanwhile, the Marlins trousered $36m, down slightly from last year but still good for the No. 2 spot. Apparently, the Marlins remain the least valuable franchise in MLB despite having a five-year payback on net worth!

Multiples

Here are the revenue and profit multiples, from highest to lowest valuations:

                         2008 Multiples
Team                     Revenue  Profit
New York Yankees         4.0      -47.6
New York Mets            3.4      30.2
Boston Red Sox           3.1      37.1
Los Angeles Dodgers      3.0      23.0
Chicago Cubs             3.0      26.7
LA Angels                2.3      37.5
Atlanta Braves           2.5      30.9
San Francisco Giants     2.5      24.8
St Louis Cardinals       2.5      32.9
Philadelphia Phillies    2.5      40.4
Seattle Mariners         2.4      20.3
Houston Astros           2.4      24.0
Washington Nationals     3.1      22.9
Chicago White Sox        2.2      19.5
Cleveland Indians        2.3      14.6
Texas Rangers            2.4      32.6
Detroit Tigers           2.1      41.0
Baltimore Orioles        2.5      23.1
San Diego Padres         2.3      70.6
Arizona Diamondbacks     2.2      53.0
Colorado Rockies         2.1      13.3
Toronto Blue Jays        2.2      31.3
Cincinnati Reds          2.1      13.7
Milwaukee Brewers        2.0      13.8
Minnesota Twins          2.2      19.5
Oakland Athletics        2.0      20.1
Kansas City Royals       2.3      33.6
Pittsburgh Pirates       2.0      10.8
Tampa Bay Devil Rays     2.0      13.2
Florida Marlins          2.0      5.6

From this chart, we can see that Forbes’ principle tool in rating teams is the revenue multiple, not the EBIT multiple. This approach is wrong on so many levels, but the decision to go this route is understandable: It is simpler and the data is more robust. Still, a full exercise would give us a lot more confidence.

There is a clear correlation between revenue multiple, success and value. Intuitively you might think this is right, but it isn’t. Surely successful clubs are worth more because they make more money? Yes, but why is a dollar collected by the Yankees worth more than a dollar collected by the Rays? One possible answer is brand value, but again we’d expect to find this value in either the top or bottom line. Suggestions in the comments section, please.

This correlation presupposes that investors in the open market are willing to pony up relatively more cash for big-market teams. Is there evidence for this? Unfortunately there are too few transactions to say. Undoubtedly, there is a premium for investors buying sporting assets, but why would this premium rise substantially for, say, the Red Sox over the Athletics?

The EBIT multiples look even more ridiculous. The average is 25x earnings, which is dot-com-esque. I won’t rehash the arguments except to say that EBIT is very hard to calculate precisely, especially in an industry with all sorts of off-balance-sheet arrangements. Suffice to say that if I could get the Marlins at 5.6x EBIT, I’d bite their hand off.

Final thoughts

We have to work with what we have, and unfortunately for students of the business of baseball, this is what we have. It’s better than nothing, and the revenue data is probably a fair yardstick. But putting faith in the EBIT numbers is dangerous, and as a result the final valuations are not much better than educated guesses.

As I said at the top of the article, the margin of error on these valuations is around 30 percent. Can we really accept that?

References & Resources
Thanks to Forbes for providing content for this column every year.