Special Interest Purchasers

Special Interest Purchasers

Corporate business valuation in Toronto and Canada is based on the concept of fair market value.  Fair market value is defined as:

Highest price available, in an open and unrestricted market, between informed parties acting at arm’s length, under no compulsion to act expressed in terms of money or cash equivalents.

The open and unrestricted market component includes all prospective purchasers, including those known as special interest purchasers. Special interest purchasers are defined as those that are willing to pay a premium or higher price for a company due to reasons that include synergies and also emotional reasons.

Purchase of Milwaukee Bucks

Special Interest Purchasers

This past week, nba.com reported that the Milwaukee Bucks basketball team was purchased by two hedge fund billionaires, Wesley Edens and Marc Lasry for $550 million. The most recent valuation of the Bucks to be publicly reported was by www.forbes.com at $405 million in January 2014 (Forbes does not make its valuation calculation available, but reports many of the Bucks’ financial metrics at http://www.forbes.com/teams/milwaukee-bucks/).

The price paid by Edens and Lasry represents an approximate 36% premium paid above the most recent valuation, even though Milwaukee. This purchase is a perfect example of special interest purchasers.

On the surface, it doesn’t make sense that a purchaser would offer a price for a company well over its value. However, based on traditional corporate business valuation metrics and approaches, the price that Edens and Lasry makes mores sense after taking a more detailed look at recent transactions of NBA teams. A review of recent transactions reveals the following prices paid for an NBA team and the comparable forbes.com valuations in 2012:

The above table clearly shows that individuals have been paying for NBA teams at prices well above the most recent valuations. The question is why? The value of an NBA team must take into account many factors above and beyond the traditional financial metrics.

Market size is an important indicator of value. The Los Angeles Lakers, New York Knicks, and Chicago Bull typically are at the top of the annual www.forbes.com list of most valuable NBA franchises. The populations of each of the cities represent a larger market for TV viewers and corporate season ticket holders than every other team in the NBA (the Lakers have a TV deal for 20 years at $200 million per year, totaling $4 billion). The Lakers and the Bulls are established winners with a history of employing hall of fame players like Michael Jordan, Derrick Rose, Magic Johnson, and Kobe Bryant that are international celebrities. Each team has an international presence outside of its already large local media market

So why buy the Milwaukee Bucks? A team with a losing history in the past 20 years and a small media market with approximately 600,000 residents. The casual sports fan would have a hard time naming the most recent star player that played for the Bucks.

Edens and Lasry are clearly smart businessmen that would consider every possible risk when making such a large investment. Their purchase of the Milwaukee Bucks seems like an odd fit for their portfolio.

Why the Large Premiums?

Special Interest Purchasers

Recent events in the NBA landscape have made NBA teams a prized investment. The international presence in the NBA has gained fans worldwide, especially in basketball-crazed China. Players like Yao Min from China, Dirk Nowitzki from Germany, and Pau Gasol from Spain have had successful NBA careers. Canada’s recent explosion of young NBA talent can be attributed to the Toronto Raptors franchise inception in 1995 and Steve Nash’s success for the last 20 years.

The recent collective bargaining agreement leans heavily towards favouring the owners rather than the players, due to a hard salary cap both on teams and player salaries. League-wide television contracts with the major US TV networks provide guaranteed revenue sharing through 2016.

Espn.com NBA analyst and grantland.com columnist Bill Simmons wrote last week that the biggest reason for the recent prices of NBA teams is exclusivity. It is a classic example of an emotional price paid by special interest purchasers.

The world’s richest people have the ability to purchase anything and everything: yachts, exclusive real estate around the world, and a fleet of luxury cars. But only one club in the world limits itself to 30 members and provides the type of public adulation and ancillary benefits: the NBA. A previously unknown businessman can become a major public figure and celebrity overnight by purchasing an NBA team. It is the ultimate toy for the mega-rich.

Owning an NBA team also provides access to new business opportunities. Being a public figure can have both advantages and disadvantages, but for an investor, more exposure likely means the potential for more attractive investment opportunities.