Forbes just published its latest valuations of MLS teams with the opening line “If MLS was a publicly traded company, now would be a really good time to buy,” a quote from Commissioner Garber. The rest of the article seems to endorse the Commissioner’s opinion. Most important of all, the article now values the 20 franchises at $3.7 billion, or $185 million each.
I have previously expressed my skepticism about the MLS business model, but only time will tell if this works out. Meanwhile, I made some comparisons with Forbes valuations of other clubs/franchises, to see what their figures imply about the relationship between the Forbes valuations and the track records of these businesses. Forbes published its first valuation of MLS franchises in 2007, ten years ago, so that is a good starting point. I’ve looked back at their valuations for the leading European soccer clubs as well as NFL, MLB and NBA.
Note that while the composition of the three US majors has not changed materially in a decade, MLS has added 7 franchises and lost one (Chivas USA), while fluctuations in the fortunes of European clubs has added new ones to the list while others have dropped out. Thus for the purpose of comparison I have selected the values only for the 13 MLS franchises that Forbes valued in 2007 and 16 European clubs that made both the 2007 and 2015 list.
The table below illustrates the current value. This shows how small MLS is compared to the major leagues. It is also loss making, as it was in 2007. Two commonly used standards for valuing businesses are earnings multiples and revenue multiples. Finance professionals prefer earnings – since these represent an actual return on the investment, but in the case of MLS there are no positive earnings to value. Revenue multiples are often applied to businesses which are not yet generating a profit yet but are expected to grow rapidly in the future, when they will have earnings.
Comparing European soccer clubs with the major leagues, note that the revenues and profits are not widely different, but that the earnings and revenue multiples are much lower. As I argue in Money and Soccer, this makes sense, since the system of promotion and relegation stimulates more economic competition and so businesses are more likely to dissipate profits in the pursuit of sporting success.
MLS has a very high revenue multiple, only exceeded by the NBA where the astonishing price paid by Steve Ballmer for the Clippers has obviously influenced the valuations decided by Forbes.
|most recent valuation $m|
|league||revenue||operating income||value||Revenue Multiple||Earnings multiple|
Now consider the growth since 2007. All leagues have grown revenues at a good rate, and while MLS has grown the fastest, that rate is not much faster than the rate of growth of the European clubs, from a much higher base. For example, 9% growth on $340 million is only $31 million, which 8% growth on $7,031 million is $584 million.
Of the leagues that generate any operating profits, all except MLB have grown at a healthy rate. Of course, MLS has no profits to grow. Using this information, the analysts at Forbes have decided to increase the valuation of MLS franchises faster than any of the teams in the US or Europe.
|growth since 2007||revenue||operating income||value|
The obvious question is “why?” The logical answer from the point of view of finance is that the Forbes analysts believe that the revenues of MLS are going to grow at a much faster rate in the next five to ten years than the revenues of any of these other businesses, and MLS franchises will finally turn a profit.
But what evidence is there to support this belief? MLS revenue growth has not dramatically outstripped that of the other leagues and shows no sign of doing so soon. The MLS franchises that existed ten years ago were loss making, and they still are today.
In the short term broadcast revenues will not change until 2022 at the earliest, and TV audiences are still small and not growing significantly (about 300,000 per game according to Sports Media Watch). The Premier League continues to draw viewing figures in the US that are roughly double those of MLS. Soccer on TV remains a minority interest in the US with little sign of a dramatic breakthrough.
Average attendance at MLS teams that existed ten years ago has also been modest, averaging 1.2% per year.
And then there’s the perennial economic problem with soccer. The US majors dominate their sports globally and hence are to a significant degree insulated from economic competition. MLS has no such luxury. It must compete in a global market for talent and compete with rival leagues in its domestic broadcast market. This is same argument which explains why the earnings and revenue multiples for European clubs are so much lower than those of the US majors.
All this says to me that Forbes is overvaluing MLS relative to others sports clubs and franchises. If this were a true market price, rather than the opinion of the Forbes analysts, I would issue a SELL recommendation.
Of course, may be the real answer is that American investors are like the wealthy individuals who have underwritten European soccer for decades, they are just doing it for the glory. In which case the sky’s the limit.