Page 6 - M&A

S6 | MONDAY, OctOber 26, 2015 | Mergers & Acquisitions
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Navigating
The Purchase and Sale Of Sports Teams
By Jared F. BarTie, daniel a. eTna
and irWin a. kiSHner
Of all the trophy assets one can own, a professional sports team is one of the most coveted, exclusive and elusive. Sports team acquisitions have garnered head- lines over the past few years, with several recent team prices ranging in the billions of dollars. Since 2000, the top five U.S. team sales were at prices in excess of the billion dollar threshold, the highest being the $2 bil- lion sale of the NBA’s Los Angeles Clippers in 2014 and the $2 billion sale of MLB’s Los Angeles Dodgers in 2011. In New York, the NFL’s Buffalo Bills were purchased in 2014 for $1.4 billion. Not long ago, sports franchises were run like small businesses, with any net profit generated being an additional, but not always expected, benefit. Today, given rising acquisition costs and the lucrative revenue opportunities teams offer, they are run as sophisticated enterprises with the purpose of yielding profit for their well-heeled investors.
on the surface, the buying and selling of a professional sports team may seem like a regular M&A transaction. however, the many
Jared F. barTie is counsel, and daniel a. eTna and irWin a. kiSHner are partners, at Herrick, Feinstein, where they practice with the sports law team. ViVian Wang, an associate with the firm’s corporate team, assisted in the preparation of this article.
issues unique to the sports industry give these deals complicated twists that require extensive due diligence and the guidance of experienced counsel well-versed in a num- ber of areas specific to the sports landscape. Potential team buyers and sellers need to be able to navigate the transaction process under the watchful eyes of respective leagues and governing bodies, while negotiating a plethora of business and legal issues.
Supply and Demand
Before a potential buyer can initiate the process for making a team purchase, there must be a team available for purchase. how- ever, professional sports teams are limited commodities. within the four major leagues, there are only 122 teams. As team values increase, the pool of potential buyers who can afford to purchase them dwindles. with a limited pool of qualified potential buyers, competition among them is fierce, as teams do not change ownership often. This trend is common to all of the major leagues. For instance, the NhL’s Chicago Blackhawks haven’t changed ownership since 1954, the MLB’s Chicago white Sox since 1981, the NBA’s Indiana Pacers since 1983, the NFL’s Arizona Cardinals since 1972, and MLS’ New England Revolution since 1995. The limited supply and large demand further contributes to the rise in team valuations, thus creating a continuous cycle that drives team prices upward. on the infrequent occasion that a team is for sale, the transacting parties need
to ensure that they are adequately represent- ed at the deal table.
League Guidelines
Each major sports league has its own con- stitution and bylaws that set forth the pro- cess for transfers of team ownership. Before a team transfer can occur, buyers are vetted extensively and are required to submit to an in-depth background check process, which includes completing a comprehensive applica- tion, requiring the disclosure of personal, pro- fessional, and financial information. Depend- ing on the league and the circumstances, it is not uncommon for potential team owners to have their financial wherewithal confirmed via a forensic review process.
while each major sports league has its own criteria, the majority of the leagues impose restrictions regarding the number of investors that can comprise a buying group and have certain minimum investment requirements to be eligible for both majority and minority ownership interests. There are also specific requirements as to how much equity the lead investor must have to hold a controlling inter- est in a respective franchise.
while leagues generally prefer to deal with individual owners because of efficiency and to limit the discord that can exist among owners of a larger buying group, rising team valuations have limited the pool of individual purchasers capable of buying a major profes- sional sports team on their own. The exis- tence of an individual capable of purchasing a
team without the assistance of an investment syndicate has a preemptive effect on a buy- ing group, particularly in relation to a team bidding process. Leagues scrutinize and regu- late debt and equity structures, and impose debt limitations relative to their respective franchises. The financial stability of an owner group obviously affects the owned team, but also affects the strength of the league as a whole. Accordingly, leagues are careful to ensure that prospective owners have the resources to undertake team ownership, including related financial obligations.
The Stadium/Arena
one of the most valuable assets of a profes- sional sports team is the real estate associ- ated with the team—the stadium/arena, prac- tice facilities, corporate offices and parking facilities. Potential buyers should engage in diligent review of any applicable stadium- or arena-related lease to identify obligations that will be assumed on completion of a poten- tial transaction and to identify whether any potential development opportunities exist. A critical aspect of reviewing a team acquisi- tion opportunity is whether the facility where the team plays is owned by the team or a governmental authority.
In an era of modern stadium and arena development, potential owners will have interest in ensuring their facilities are main- tained as first-class professional sports ven- ues. If properly operated and maintained, stadiums and arenas can drive significant
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