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Whopper sport deals, trophy assets and the ‘dean of valuation’
In July, the Washington Commanders NFL team sold for more than US$6 billion in the highest-priced sport franchise transaction in history. The deal amplified a trend that may baffle students of valuation – rising sport franchise prices increasingly detached from reality – but, according to valuation guru Aswath Damodaran, it illustrates an interesting modern phenomenon: teams as trophy assets.
Damodaran, who teaches finance at the Stern School of Business at New York University and is known as the ‘dean of valuation’, said the evolving status of sport as investment could change the game for the long term, while demonstrating how pricing can become detached from value.
“As the walls between sports and money have crumbled, we have become used to seeing mind-boggling numbers on sports transactions, whether it be in the form of broadcasting networks paying for the rights to carry sporting events or player contracts pushing into the hundreds of millions,” Damodaran wrote in a recent blog post.
“Even by those standards, though, the last few months have delivered surprises that have staggered even the most jaded sports-watchers.” In addition to the massive franchise deals and eye-popping player contracts – in one recent would-be deal, a Saudi soccer team offered French superstar Kylian Mbappe $776 million for a one-year contract – professional sport has seen major disruptions and existential threats, as well as upheaval in its broadcasting structures.
The record deal for the Commanders – “an NFL team with a decidedly mixed record on the field and a history of controversy around its name and owner”, according to Damodaran – is the latest example of a global pricing surge for marquee sports franchises that has “little or no obvious connection to team success on the field”. This shows in the list of most expensive sport transactions in history: the five highest-priced deals have occurred in the last two years (see chart).
Key to the valuation picture in this context, Damodaran explained, is the difference between value and price.
“While value is driven by familiar fundamentals (cash flows, growth and risk), price is determined by demand and supply, which, in turn, are driven by mood and momentum, behavioural factors that don’t play a key role in determining value,” he wrote. Things like collectibles and currency can only be priced; assets that are expected to generate cash flows in the future can be valued.
“In fact, almost every investment philosophy can be framed in terms of whether you believe that there can be a gap between value and price, and when there is a gap, how quickly it will close, as well as catalysts that cause that closing.”
Trophy assets, however, are a subgrouping “worth carving out and considering differently,” Damodaran said.
“A trophy asset has expected cash flows, and can be valued like any other asset, but the people who buy it often do so less for its asset status and more as a collectible. Powered by emotional factors, the prices of trophy assets can rise above values and stay higher, since, unlike other assets, there is no catalyst that will cause the gap between price and value to close.”
Trophy assets thus have emotional appeal that overwhelms their financial characteristics and are unique, scarce, and bought and held for nonfinancial reasons.
“Once an asset crosses the threshold to trophy status”, Damodaran said, it will exhibit certain characteristics, including looking overpriced relative to financial fundamentals and peer group assets that don’t enjoy the same trophy status.
“Second, and this is critical, even as price increases relative to value, the mechanism that causes the gap to close, often stemming from a recognition that you have paid too much for something given its capacity to generate earnings and cash flows, will stop working,” he said. “After all, if buyers price trophy assets based upon their emotional connections, they are entering the transaction, knowing that they have paid too much, and do not care.”
Finally, he said, the forces that cause trophy asset prices to change “will have a weak or no relationship to the fundamentals that would normally drive value.”
Sport franchises, which are scarce and hugely sentimental, are “the ultimate trophy assets”, Damodaran said. That means price tags for teams are going to keep going up.
“If you couple this reality with the fact that winner-take-all economies of the 21st century deliver more billionaires in our midst, you can see why there is no imminent correction on the horizon for sports franchise pricing.”
