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Friday, February 11, 2011
Help me with my financial math: Pujols share of Cardinals should be 15%?
According to Forbes, the Cardinals are worth close to (present day) 500MM$. According to me, Albert Pujols has some (present day) 200MM$ to 250MM$ of baseball life left. If the Cardinals simply gave Pujols 40% equity stake, is that a fair deal? I presume no, because of the tax implications.
The after-tax value of the Cardinals (if Pujols were to simply flip the shares, with presumably a cost-basis of 0 dollars) would mean say 20% of the value is lost (or whatever the tax rate would be). His present-day salary would be more like 100MM to 150MM$ in after tax money. So then, would 25%-35% be the fair price?
Let’s say that’s how it works. So, MLB has a total valuation of say 15 billion $, of which after tax it would be 12 billion$. Total player payroll is 3 billion$, of which after tax it would be say 1.6 billion $. This would mean that the players can forego their salaries (for this year alone) in return for 13% share in MLB. That after 8 years, MLBPA can own MLB.
But it gets better (maybe). If MLB has no player payroll to worry about, the valuation of the teams would skyrocket, giving them the best ROI since Microsoft’s early days. Instead of being worth 15 billion$, cutting 3 billion in expenses (annually) must increase the value of the company by, what, 30 billion$? So, now MLB is worth 45 billion$, but only because the players have salaries. Anyway, now, the players would only get 3.5% share (each year), and so, after 30 years, they’d own all of MLB.
This part makes more sense. It’s like the paying rent v mortgage conundrum.
Anyway, the only reason this works out so well is because of the guarantee of non salaries for players, and this is going to sustain itself. In the case of Pujols, his non-salary is only going to last while he’s playing. So, the Cardinals would receive a huge boost in franchise value for not having to pay his salary, but that value will die when Pujols retires. I’m a little stuck here. The Cardinals are worth 500MM$ because of expected expenses over the life of its company. If Pujols doesn’t take his 200MM$ in present-day salary, but provides that value, is that going to at least increase the Cardinals value to 700MM$?
Now, the new calculation for Pujols’share would be 100MM$/700MM$, or about 15% share of the Cardinals. (Bobby Orr was once offered 18%).
Did I do all this correctly? I’m a complete novice at this, so walk me through how a financial analyst on Wall Street would work this out.
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