from Amazon
Wednesday, August 23, 2006
Yanks are Losing Money (need revenue sharing from Royals and Pirates)
I wish Bloomberg would have done an analysis of this, rather than just be a forum for the Yankees. And, I really thought they were going to, when they reported:
The Yankees this year became Major League Baseball’s first team worth more than $1 billion, according to Forbes magazine’s annual valuation published in April.
So darn close. At least, that’s more than most journalists would do.
I remember when the NBA had their labor troubles, and Jordan was sitting next to the Bulls owner at the negotiating table. And Jordan, tired of hearing about how all the teams are losing money said the right thing: “What about the capital appreciation?”. And the Bulls owner had the gall to say: “How is that going to put food on my table!”
In the short-run, it doesn’t matter that you lose money! You have to look at both your cash flow operations, and the value of the company itself. If you look at Amazon, Yahoo, and eBay in the younger days, they were losing money, gobs of money. But, that’s ok! Their market caps were skyrocketing. Eventually, they start to make money. The reason a company has the market cap it has, is based on the future earnings, discounted to present value. So, if Forbes is saying the Yanks are worth one billion dollars, that means that they expect that the future earnings of the company, discounted to today’s dollar, (plus whatever cash and assets they have) will generate one billion dollars.
As well, there’s no reason the Yanks have to lose all that money anyway. They choose to burn their money, by overpaying players. Maybe that’s part of the master plan, the mystique, of the Yankees. Maybe the reason they are worth so much is that they are telling the world that they are worth so much, making them more attractive.
All their cash flow “problems” are all part of the Yankees engine, that makes them what they are. It’s their cost of doing business. And, it’s making them worth one billion dollars.
This is an intersting debate. We all know that value (for a normal company) is driven by the present value of all future cash flows. Given that the Yankees have significant salary commitments to at least 2009, if not beyond, it is difficult to see how they can’t generate that much free cash flow before then. After that point the discount rate will start to ascribe less value to cash flow in later years.
How on earth does Forbes get a value of $1bn? I have no idea. That is 4x revenue—which is steep, no, vertical for any business. I am 99% sure that Forbes doesn’t do a DCF valuation. There is little way you could arrive anywhere near the $1bn mark with such a technique. I think their approach is based on comps.
Eitherway, given the size of the NY market, and the Sox’s $750m valuation in 2002, $1bn does feel about right. Given the size of the media market, NY strong fan base, commercial opportunities and success, turning at $50-$75m profit shouldn’t be a problem with a more “normal” pay-roll. That in itself would likley support a $1bn valuation.
One other thought is that they may be tossing in the value from YES network. This will be a significant cash generator that sits out any revenue sharing. It makes sense to the Yankees to try to deflate the revenue of the ball club and transfer it to other assets