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Winning Ways Will Pump Up The Value Of Rays
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Published: September 6, 2008
TAMPA - John Beamer, a Boston-based management consultant, writes about the economics of baseball for The Hardball Times, an online baseball magazine (hardballtimes .com). Beamer recently answered a Tribune reporter's questions about the value of the Tampa Bay Rays, now that they have achieved a winning season, and how major league teams are valued overall.
What are the key economic factors the Rays' current winning season could affect?
This is an opportunity for Tampa to possibly establish a stronger baseball franchise. Up to now it has been one of the weaker teams in the American League.
Ultimately it is a revenue play. More fans in seats as the division race goes down to the wire. Postseason games and TV revenue. There is a small benefit around attracting players to the club who could have an effect in future years. Baseball has a very high fixed cost of operating, so most benefits drop straight to the bottom line.
Is it possible to speculate what kind of value the Rays' turnaround so far this year will have?
Studies I have seen suggest that the impact of a good playoff run is worth anything from $30 million to
$50 million depending on the size of the club and how far you get. That is spread over 10 years so it accrues to $3 million to $5 million a year.
My view is that sustainable good performance is more what matters. Look at the Colorado Rockies. Can anyone claim that their triumph last year will reflect in $3 million a year for 10 years? Probably not. The Detroit Tigers, on the other hand, should sustain that and more. I guess the point is that it is all about building a viable, sustainable franchise.
What does it matter to a home town, or to fans, what a team might be valued?
Value of a team has little concern per se to a fan. What is more important to them is success - wins, divisions, pennants, World Series. Obviously those things directly link to value so although fans don't really care whether their club is worth $300 million or $400 million, they do care that the club has the financial power to compete and win.
So what's the best way to value a ballclub?
That's not an easy question to answer. The best way to value any asset, be it a ball club or a stock, is to use discount cash flow. DCF estimates what someone is willing to pay to receive certain anticipated future cash flow.
The problem with DCF is that it is complex and requires a lot of data. For instance, you need to derive a cash flow line and to do that you need to be able to state operating profits and understand the financing structure of the club.
Now for a public company that would be easy, but for a privately held ball club that is difficult because owners shuffle monies between entities so the bottom line numbers don't always reflect the true economics of running a ball club; this is done for tax reasons and to plead to the fans, government, whomever that baseball franchises are impoverished.
How does that way of valuing a team differ from Forbes magazine's annual baseball valuation listing?
Forbes uses what I call an adjusted multiple approach. What it'll do is to compare the revenue across all the ball clubs with each other and from that infer an implied value. Its exact methodology is secret and so I'm not sure if they use a revenue or profit multiple. My suspicion is the former. Also when a sale goes through, they'll adjust their benchmark data accordingly.
Forbes will also make a series of adjustments based on ownership and stadium debt that a club holds. It is an OK guesstimate of value about 70 percent of the time. But when you compare price to sale values quite often it can be 30 percent-plus or more. However, it is the best source of information that there is.
What does the Rays future look like?
The Rays have a great young team and must use this platform to establish a Southern counterweight to the Red Sox and Yankees. By building a team that can compete for the next five years ... they will be worth considerably more than a one-off run in the postseason.
Reporter Ted Jackovics can be reached at (813) 259-7817 or and tjackovics@tampatrib.com.
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