Sportico released its 2021 MLS team valuations last week, and Los Angeles FC topped the list with an estimated worth of $860 million, around 10 times 2019 revenues. Surprisingly, that seemingly frothy revenue-to-value multiple was below the league average (12.2x).
Double-digit revenue multiples are typically reserved for high-flying tech stocks, not pro sports franchises (the average NFL team, for reference, trades at 6.4x). So, it is fair to wonder why savvy investors (like Ted Segal and the Wilf family) were willing to pay 13x and 10x, respectively, to pick up the Houston Dynamo and Orlando City S.C. (the league’s two most recent control transactions).
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Sportico valuations authority Kurt Badenhausen suggested the answer has to do with their belief in the growth prospects of soccer in the U.S., as well as scarcity value and the relatively low entry point to pro sports team ownership that MLS provides. “There are a lot of wealthy individuals that want to own a sports team, that can’t necessarily write a billion dollar check for an NFL, NBA or MLB franchise. But they can write a much smaller check and take ownership of an MLS team. And in terms of control stakes, there is not a baseball team, basketball team or football team on the market right now.”
Our Take: To be clear, Sportico’s valuations are designed to reflect what the market would bear for a given club if it became available, not a determination of what an investor should be paying for the franchise.
Many people look at the revenue multiples paid for Houston and Orlando City and believe the new ownership groups overpaid (both transactions were valued at around $400 million)—and perhaps, looking solely at current financials, they did. But there is little doubt any owner who wants to exit at their Sportico’s valuation would “get it, and it wouldn’t take a long time,” said one MLS club executive. He cited David Tepper, “one of the most successful investors of the past 100 years, paying $325 million for an expansion franchise with no IP, no [soccer-specific] stadium and no real estate in North Carolina [above and beyond what he owns with the Panthers],” as evidence smart money still sees MLS as a good investment—even at seemingly rich valuations.
It is logical to focus on the revenue multiple when evaluating a deal for an operating company (it is a tried and true method of getting to a valuation). But as the club executive explained, “Pro sports teams are less like widget factories and more like a piece of art that appreciates annually [despite the lack of revenues]. There is a true scarcity factor with pro sports teams that also must be accounted for.” Think of them as “living Picassos,” he said.
The transfer of wealth that has—and continues to—enrich the 1% has increased the pool of prospective buyers for sports teams and driven up MLS team prices. “There are a lot more people worth $800 million or a billion dollars today than there were 10 years ago,” the club executive said. “But most of them can’t afford to buy a baseball or basketball team for $1.5 billion or $2 billion. They can get an MLS team though, for $400 million, $500 million, $600 million dollars. Those are numbers these rich guys can still work with. MLS is hitting this sweet spot of what rich people can afford and still offering the cachet [that comes with major sports team ownership].”
You can argue about MLS’ place in the U.S. sports pantheon, “but soccer is still the most popular sport in the world, and [the league] is still in the most important sports country in the world,” the club executive noted.
Scarcity and feasibility aside, those buying MLS clubs at double-digit revenue multiples are believers in the growth trajectory of the league and the promise of soccer’s popularity in the U.S. (which presumably would also make Liga MX clubs desirable). While the level of talent in the league today trails the top leagues in the world, there is optimism that MLS can “close the gap over time. If they can, you’ll see more eyeballs and commercial dollars funneling into MLS,” Badenhausen explained. The bull case for MLS has the league outpacing NHL revenues and generating income in the same stratosphere as the NBA and MLB by 2050. For what it’s worth, Sportico’s Anthony Crupi reported the recent European championship final “delivered more viewers than each game of NBC Sports’ coverage of the Stanley Cup Final” and “also handily out-delivered nearly every game of the 2020-21 NBA season.”
Investors putting their money behind MLS clubs aren’t just looking at the growth opportunity, though. They are also attracted to the league’s “centralized system, which controls spending, and the lack of promotion and relegation,” Badenhausen said. While the top clubs in Europe generate significantly more revenue (F.C. Barcelona reported $1.1 billion in 2018-19), many teams lose money year after year. “If you believe in soccer and don’t want to lose $50 million a year trying to avoid relegation or get promoted to the top league, MLS is the safer bet,” he said. The risk of relegation helps to explain why the average EPL team trades at just four times revenue.
There’s an argument to be made that teams across the big four leagues should trade at higher multiples (which would make MLS’ 12.2x average look more reasonable). “You get into these multi-billion dollar valuations and the number of people who can afford to buy in dries up,” the club exec said. “Until the leagues shift to allow a percentage of ownership to be traded publicly (à la Manchester United), [the multiples can’t really go up much].”