Manfred’s $2.2 Billion MLB Expansion Fee on the High Side, at Least for Now

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Major League Baseball commissioner Rob Manfred stated during a recent SporticoLive discussion on club valuations that the price tag for a MLB expansion franchise would be at least $2.2 billion. “If in fact these assets are worth an average $2.2 billion (Sportico’s average valuation), I think that’s kind of a lodestar in terms of where you would start in terms of evaluating expansion opportunity,” he said. However, a pair of sports bankers who asked to remain anonymous and Sportico valuation reporters Peter Schwartz and Kurt Badenhausen suggested the average team valuation is likely too high a starting point for the markets available. These experts said the league would be better off using the median club valuation rather than the mean as the price floor in discussions ($1.58 billion). As one of the bankers said, “If you are saying the average team is worth $2.2 billion, [to command that amount] that would logically mean the expansion team has to be in an average market. I would say there are no average markets left [without a team]. The markets left are smaller than average.”

Our Take: NBA commissioner Adam Silver has suggested $2.5 billion would be “very low in terms of the value at which [his league] would expand.” So, a $2.2 billion expansion fee for an MLB team sounds reasonable by comparison. But as Schwartz explained, “Expansion fees are typically in the bottom quartile, or maybe more recently the bottom third, of league valuations. An expansion fee that would immediately place a team [among the 10 most valuable clubs] doesn’t pass muster—and I’m bullish on MLB valuations growth.” At $2.2 billion, the expansion team would be the ninth most valuable franchise in the league.

It’s important to note Sportico’s $2.2 billion average team valuation includes the clubs’ related businesses. The average drops to $2 billion once those assets are removed from the calculation. But Schwartz says even $2 billion would be “kind of high” for an MLB expansion fee (placing the club in a tie with Washington as 12th most valuable). As Badenhausen explained, MLB’s average club valuation is not really an accurate representation of the worth of a middle-of-the-road franchise. There has been “a bifurcation in values with the big markets getting valued at much higher levels and premiums being added to those sales (see: Yankees $5.59 billion), to the point where [using] the average becomes tricky,” he said. Remember, a new franchise coming into the league is not going to be located in even a top 15 market. According to Nielsen’s new household figures, Portland (21st) is the largest viable market without a baseball team (excluding Orlando and Sacramento due to territorial restrictions).

The challenge with smaller markets is that MLB clubs rely more on attendance than teams in other sports. “Your season ticket holder base is very important because of the length of the season (81 home games). You need the support, and the smaller the market, the bigger that challenge becomes, because you just don’t have the population base to draw from,” Badenhausen said.

In addition, a banker said, “The local media contract is a big component of club earnings. So, a team in the 20th or 25th biggest market is not going to get the same sized [broadcast] deal as a team in an ‘average’ market.”

The $2.2 billion figure makes more sense if one views the expansion fee as an opportunity to buy into the league as a whole—owning 1/31st or 1/32nd of everything that entails (think: national media rights, equity investments)—as opposed to control over a single market (Adam Silver’s overarching thesis on expansion fees). “But at the end of the day, [a prospective owner] is buying into a market, [he/she] would have to build a ballpark (likely costing upwards of $800 million), and I don’t think a would-be buyer today would necessarily spend $2.2 billion for [a bottom third] market,” Schwartz said.

We say 1/31st or 1/32nd because when MLB does eventually expand they are going to add two teams. “Baseball can’t be 31 teams like the NHL is right now (note: hockey officially added Seattle as the 32nd team on Friday),” Schwartz said. From a scheduling perspective, “you can’t have one team sitting out an entire series at a time.” While putting a pair of clubs on the block at the same time would make them less scarce and in theory could drive down the cost, there would likely be more than enough wealthy individuals/groups interested in buying an MLB team that it would not have a dramatic effect on price.

Manfred has made it clear that MLB has no immediate plans to expand. The league intends to solve the stadium situations in Oakland and Tampa Bay and get through the next round of CBA negotiations first. So, while $2.2 billion may be rich for an expansion fee today, it is possible the league will be able to command that amount by the time it is ready to try and grow the pie again. As Schwartz noted, “Baseball team values with the related businesses have more than doubled in eight years.”

Perhaps the best argument for a $2.2 billion price tag today is that the next time MLB expands could be the last. MLB hasn’t added a new club in 23 years (Arizona and Tampa Bay entered in ’98), and logistically, expansion beyond 32 teams is viewed as tricky. “There’s a recognition,” Badenhausen said, “that there might only be two more baseball teams added over the next 25 years.”

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