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    The Sporting Business: Value and Price: Aswath Damodaran

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    vngopal
    Aswath Damodaran discusses the differences between valuing and pricing sports franchises. While intrinsic value can be estimated using discounted cash flow models, franchise prices are determined more by behavioral factors like mood, momentum, and ego. Transaction data shows prices fluctuating unpredictably over time and often diverging from estimated values. The limited number of franchises and wealthy potential buyers means prices may routinely exceed rational valuations.

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    © All Rights Reserved
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    The Sporting Business: Value and Price: Aswath Damodaran

    Uploaded by

    vngopal
    194 views20 pages
    Aswath Damodaran discusses the differences between valuing and pricing sports franchises. While intrinsic value can be estimated using discounted cash flow models, franchise prices are determined more by behavioral factors like mood, momentum, and ego. Transaction data shows prices fluctuating unpredictably over time and often diverging from estimated values. The limited number of franchises and wealthy potential buyers means prices may routinely exceed rational valuations.

    Original Description:

    Valuing a sports franchise

    Original Title

    Franchise Valuation

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    Aswath Damodaran discusses the differences between valuing and pricing sports franchises. While intrinsic value can be estimated using discounted cash flow models, franchise prices are determined more by behavioral factors like mood, momentum, and ego. Transaction data shows prices fluctuating unpredictably over time and often diverging from estimated values. The limited number of franchises and wealthy potential buyers means prices may routinely exceed rational valuations.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    194 views20 pages

    The Sporting Business: Value and Price: Aswath Damodaran

    Uploaded by

    vngopal
    Aswath Damodaran discusses the differences between valuing and pricing sports franchises. While intrinsic value can be estimated using discounted cash flow models, franchise prices are determined more by behavioral factors like mood, momentum, and ego. Transaction data shows prices fluctuating unpredictably over time and often diverging from estimated values. The limited number of franchises and wealthy potential buyers means prices may routinely exceed rational valuations.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 20

    Aswath Damodaran

    THE SPORTING BUSINESS: VALUE


    AND PRICE
    Aswath Damodaran

    Lets start with a few reality checks


    2

    1.
    2.
    3.

    4.

    5.

    It is easy to value a sports franchise.


    It is dicult to price a sports franchise.
    Forbes does not value sports franchises. It prices them,
    and through no fault of its own, it prices them badly.
    If you are an investor, dont invest in a professional
    sports franchise. You may have a beTer shot if you
    invest in semi-professional sports franchise.
    If you are a trader, you can get rich trading sports
    franchises, if you can predict the drivers of prices (and
    they have liTle to do with nancials).

    Aswath Damodaran

    Price versus Value: The Set up


    3

    Drivers of intrinsic value


    - Cashflows from existing assets
    - Growth in cash flows
    - Quality of Growth

    Accounting
    Estimates
    INTRINSIC
    VALUE
    Valuation
    Estimates

    Aswath Damodaran

    Value

    Drivers of price
    - Market moods & momentum
    - Surface stories about fundamentals

    THE GAP
    Is there one?
    If so, will it close?
    If it will close, what will
    cause it to close?

    Price

    PRICE

    The determinants of value


    4

    What are the


    cashflows from
    existing assets?
    - Equity: Cashflows
    after debt payments
    - Firm: Cashflows
    before debt payments

    Aswath Damodaran

    What is the value added by growth assets?


    Equity: Growth in equity earnings/ cashflows
    Firm: Growth in operating earnings/
    cashflows

    How risky are the cash flows from both


    existing assets and growth assets?
    Equity: Risk in equity in the company
    Firm: Risk in the firms operations

    When will the firm


    become a mature
    firm, and what are
    the potential
    roadblocks?

    DCF as a tool for intrinsic valua\on


    5


    Value of growth
    The future cash flows will reflect expectations of how quickly earnings will grow in the future (as a positive) and how much
    the company will have to reinvest to generate that growth (as a negative). The net effect will determine the value of growth.
    Expected Cash Flow in year t = E(CF) = Expected Earnings in year t - Reinvestment needed for growth
    Cash flows from existing assets
    The base earnings will reflect the
    earnings power of the existing
    assets of the firm, net of taxes and
    any reinvestment needed to sustain
    the base earnings.

    Steady state
    The value of growth comes from
    the capacity to generate excess
    returns. The length of your growth
    period comes from the strength &
    sustainability of your competitive
    advantages.

    Risk in the Cash flows


    The risk in the investment is captured in the discount rate as a beta in the cost of equity and the default spread in the cost
    of debt.

    Aswath Damodaran

    The determinants of price


    6

    Mood and Momentum


    Price is determined in large part
    by mood and momentum,
    which, in turn, are driven by
    behavioral factors (panic, fear,
    greed).

    Liquidity & Trading Ease


    While the value of an asset may
    not change much from period to
    period, liquidity and ease of
    trading can, and as it does, so
    will the price.

    The Market Price

    Incremental information
    Since you make money on
    price changes, not price levels,
    the focus is on incremental
    information (news stories,
    rumors, gossip) and how it
    measures up, relative to
    expectations

    Aswath Damodaran

    Group Think
    To the extent that pricing is
    about gauging what other
    investors will do, the price can
    be determined by the "herd".

    The Mechanics of Pricing


    Market value of equity

    Step 1: Pick a
    multiple

    Step 3: Tell
    a story

    Market value of operating assets of firm


    Enterprise value (EV) = Market value of equity
    + Market value of debt
    - Cash

    Numerator = What you are paying for the asset

    Multiple =

    Revenues
    a. Accounting revenues
    b. Drivers
    - # Customers
    - # Subscribers
    = # units

    Step 2: Choose
    comparables

    Market value for the firm


    Firm value = Market value of equity
    + Market value of debt

    Earnings
    a. To Equity investors
    - Net Income
    - Earnings per share
    b. To Firm
    - Operating income (EBIT)

    Narrow versus Broad


    sector/business

    Risk
    - Lower risk for higher value
    - Higher risk for lower value

    CHOOSE A
    MULTIPLE

    Denominator = What you are getting in return

    Similar market cap


    or all companies

    Cash flow
    a. To Equity
    - Net Income + Depreciation
    - Free CF to Equity
    b. To Firm
    - EBIT + DA (EBITDA)
    - Free CF to Firm

    Country, Region or
    Global

    Growth
    - Higher growth for higher value
    - Lower growth for lower value

    Book Value
    a. Equity
    = BV of equity
    b. Firm
    = BV of debt + BV of equity
    c. Invested Capital
    = BV of equity + BV of debt - Cash

    Other criteria,
    subjective &
    objective

    Quality of growth
    - Higher barriers to entry/moats for higher value
    - Lower barriers to entry for lower value

    PICK
    COMPARABLE
    FIRMS

    SPIN/TELL
    YOUR STORY

    Aswath Damodaran

    THE VALUE OF A SPORTS


    FRANCHISE

    The Drivers of Franchise Value


    9
    National TV/ Radio
    Revenues

    Merchandising
    Revenues

    Local TV/Radio
    Revenues

    Overall team Revenues

    Player Expenses

    Minus
    Gate Receipts &
    Revenues from games
    Media Revenues
    (TV, Radio & Other)

    Team Expenses

    Administrative
    Expenses
    Other operating
    expenses

    Team Operating Income


    Franchising & Other
    Advertising

    Minus
    Taxes

    =
    After-tax Operating Income/ Cash flow
    Debt Ratios
    Operating Risks

    Legal Risks
    - League wide
    -Team specific

    Discount back at
    Cost of Capital (Discount Rate)

    City/State Subsidies

    Value of Team
    Aswath Damodaran

    Revenue Breakdown across Franchises


    10

    Aswath Damodaran

    10

    EBITDA Margins across Franchises


    11

    Aswath Damodaran

    11

    Player Expenses across Franchises


    12

    Aswath Damodaran

    12

    Valuing the Clippers (2014)


    13

    Aswath Damodaran

    13

    Aswath Damodaran

    THE PRICING OF A SPORTS


    FRANCHISE

    14

    The Pricing Problem


    15

    Accoun\ng Earnings is c\on:


    Dierences may be dicult to control for:
    Transac\ons are infrequent:

    Aswath Damodaran

    15

    MLB Team Transac\on: History


    16

    Aswath Damodaran

    16

    17
    Aswath Damodaran

    NFL Team Transaction History

    18
    Aswath Damodaran

    NBA Team Transaction History

    Pricing the Clippers


    19

    Aswath Damodaran

    19

    The BoTom Line


    20

    We talk about sports as a business but it is not run like


    one. While decisions in every business are skewed by
    behavioral quirks, decisions in sports franchises are
    more aected by hubris, greed, price and ego than
    almost any other business.
    The pricing of sports franchises may always run ahead of
    their value, because there are only a limited number of
    franchises for sale and more than enough wealthy
    people who are willing to pay a play toy or celebrity
    premium to buy them.
    Dont invest in a sports franchise as a value proposi\on.
    You can make money trading franchises, if you can
    forecast mood, momentum and celebrity ego.

    Aswath Damodaran

    20

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