The Magical Power of Sports

by Ben Perreira

Word came in last night that a group led by Magic Johnson and longtime baseball executive Stan Kasten had been approved by a bankruptcy court to purchase the LA Dodgers from Frank McCourt. I have no idea what Magic is worth, and I’m sure he contributed a significant amount given that in the last couple years he cashed out on a 100+ unit Starbucks franchise and a minority holding in the Lakers. However, I imagine his name is at the top of the list because of his clout more than for his financial contribution. It makes sense, of course, given that people don’t buy sports franchises for traditional dividends. In sports, the main dividend is ego.

The value of a business is generally set at the present value of all future cash flows. Future cash flows, as anything in the future, can be quite difficult to predict. Owners expect a return on their investment at a rate greater than the market average. That could mean 10% or 15% or more, depending on the individual and what they benchmark their investment against.

Sports franchises have the luxury of not having to return dividends. A cash payout at the end of the year is always nice, but even the best teams (e.g., the 2010-2011 Dallas Mavericks) lose money.

In some ways, sports franchises employ a “greater sucker” method, in which an owner must find a greater sucker than him to buy the business at his own gain at some point in the future. McCourt and his wife paid under $400m for the team in 2004, incurred huge debt to the team and yesterday sold it for $2.3b. That means the value of the company grew 475% in nine years; Only Apple is supposed to make these kind of returns.

Teams make money, yes, though we generally don’t know how much because the only public sports franchise in the United States is the Green Bay Packers. (Team profitability, or lack thereof, was a huge source of contention in the NFL and NBA collective bargaining sessions last summer/ fall.) However, the main reason teams can command such huge sums when they change owners is because they are scarce. A team may go on sale once in a lifetime. Who cares about annual profitability when you can go around town telling everyone you own the Dodgers? I say this with only the smallest hint of irony. If you have the cash to otherwise support yourself (and all these owners do), why not buy a team and have some fun?