Page 7 - M&A

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Mergers & Acquisitions | MONDAY, OctOber 26, 2015 | S7
revenue streams from fans that are increas- ingly looking for a total entertainment experi- ence. Potential owners should be aware as to whether they are responsible for facility improvements or whether the governmen- tal authority, if applicable, would cover the costs of improvements. If public support is anticipated with respect to stadium or arena improvement, new owners should gauge local government and community support for tax- payer funding.
In situations where governmental funding assistance has been provided (whether for initial construction costs or improvements), such assistance is often conditioned upon the team entering into a non-relocation agree- ment. Another important aspect of assessing the arena/stadium situation as it relates to a team acquisition target is whether the owner will have the right to operate the venue and have the right to retain the revenues gen- erated from such operation. For example, a team owner will want to know whether it has the right to book non-sporting events at the venue, all of which generate additional revenues for the owner. Accordingly, buyers should have a clear understanding of the terms of any existing agreement that might impose restrictions with respect to the use of a stadium or arena. Further, if multiple teams share a facility, potential buyers need to con- sider additional issues such as obligations to additional team tenants including scheduling concerns, sharing of costs and revenues, and venue promotional rights.
Expenses and Revenue Opportunities
Perhaps the most important aspect of the due diligence process in relation to assessing team valuations, is gaining a firm understanding of the various expenses and revenue-generating opportunities that come with owning the team. In terms of expenses, the main costs to owners are those related to player payrolls and servicing the debt on the team and the stadium/arena. Add luxury taxes for teams that exceed respective league salary cap limits, and an organization can become crippled from a cost perspective.
Prospective buyers should also pay keen attention to the revenue metrics of teams that are being considered for acquisition. Key revenue drivers include media rights, ticket sales, sponsorship and naming rights transac- tions, and concessions and merchandising.
Media Rights
Sports content is one of the last bastions of must-see live Tv. while ratings across televi- sion have been on a downward spiral for a variety of reasons—DvR and other record- ing options, the cord-cutting generation, and more variety with respect to Tv channels— the public’s thirst for live sports content has
Perhaps the most important aspect of the due diligence pro-
cess in relation to assessing team valuations, is gaining a firm understanding of the various expenses and revenue-generating opportunities that come with owning the team.
chasing team memorabilia? with stadium and arena food becoming increasingly gourmet in an effort to cater to sophisticated palates, prices for food have risen commensurately, creating increased revenue opportunities for team owners.
Merchandise sales have become more sophisticated with more quality products entering the market, many times with team stores resembling commercial retail locations. Teams generally outsource concessions func- tions to companies specializing in arena con- cessions, and are increasingly outsourcing merchandise functions, often times receiv- ing minimum guarantees in anticipation of future sales. As such, buyers should review and understand the financial opportunities and implications of existing concessions and merchandise agreements.
Closing the Deal
Following extensive due diligence by representatives of the potential buyer, the seller and the buyer negotiate the terms upon which the team will trade hands. Invest- ment bankers line up the financing; attorneys negotiate the terms and draft the purchase and sale agreement as well as any necessary consents, guarantees and covenants; and the respective league reviews the transac- tion in its entirety to provide its approval prior to submission to the existing owners of the respective league. Though the buyer and seller get to “Yes” in terms of agreement with respect to the transfer of ownership of a professional sports team, it is the exist- ing owners who have final approval as to whom is admitted into the exclusive club of team owners, with relatively wide latitude regarding their approval or disapproval of prospective team owners. The existing own- ers review the terms of the pending team sale transaction and vote whether to approve of the transaction. As a practical matter, by the time the transaction is submitted to the full owners group for a vote, the deal has been approved by a subcommittee of owners who work closely with the league regarding the pending transaction.
Conclusion
Buying a team is a complex undertaking. There are many issues potential buyers need to be cognizant of when considering, prepar- ing for, and executing such a transaction. The due diligence for a professional sports team M&A transaction involves in-depth investi- gation into a broad spectrum of important issues, directly and indirectly related to the team. In pursuing a team acquisition, the potential buyer must, in addition to engaging in extensive due diligence and negotiation, be ever mindful of complying with all applicable league rules and regulations.
not waned. In fact, ratings for live sports have seemingly been immune to this decline and in some cases, public demand for sports pro- gramming has increased in recent years. As a result, sports networks and distributors are willing to pay top dollar for rights to distribute team games on their respective networks. Team games are distributed over various media platforms, including local broadcast Tv, cable Tv and Internet streaming, the lat- ter of which is an emerging trend owners will want to keep an eye on.
Sports programming has been so lucra- tive that some teams have formed their own regional sports networks (RSNs) to distribute their content. In addition, potential owners can look forward to participating in substan- tial league-wide media revenue resulting from league agreements with content distributors to broadcast games. The recent fees associ- ated with sports team and league revenues have been the key drivers to the recent increase in team valuations.
In reviewing media-related agreements, a buyer should have an understanding of existing league-wide media agreements and the obligations and benefits to the league (particularly those that flow to the teams) as well as how the overall league agreement affects local media rights. Equally important is having an understanding of the local media agreement. In particular, there should be an understanding of the market territory covered by the agreement and any league-mandated out-of-market restrictions or related fees, broadcast preemption rights, copyright own- ership, distribution platform rights granted, whether the team or the respective network is responsible for production costs and whether the team or the partner network is respon- sible for selling advertising inventory—a sig- nificant undertaking, but also a significant revenue source.
Ticket and Suite Sales
Ticket sales, particularly season tickets, make up another significant portion of rev- enue for teams. Personal seat licenses (PSLs) afford long-term ticket revenue streams, by allowing fans to pay for a license that grants the holder the exclusive right to purchase season tickets to the specific seats covered by the PSL. other ticket products include partial season ticket plans, as well as group ticket sales (civic groups, schools, and religious institutions), and individual ticket sales. Also of significance are luxury suite sales, which
represent some of the higher-priced seating inventory within an arena/stadium
Both season tickets and suites are gener- ally subject to some term of commitment, and potential buyers should pay close atten- tion to committed inventory for purposes of determining contractually obligated income due to the team. Buyers should also closely examine other obligations stemming from suite licensees and ticket holders, such as obligations related to seat access regarding non-sporting events, parking requirements, unlimited food and beverage offerings or other perks.
Sponsorship Sales
Every major league sports team relies on relationships with companies and brands to form strategic alliances in the form of spon- sorships. Companies and brands pay to align themselves with teams for the goodwill asso- ciated with a respective team, its league and its players. Such alignment manifests itself in various forms, including signage affixed around an arena or facility, the branding of certain team programs, as well as club and hospitality areas within a playing facility. The most prominent form of sponsorship is the arena or stadium naming rights deal.
Naming rights deals yield significant long- term revenue streams for teams and provide high-profile exposure for companies and brands.
Potential owners need to understand the terms and conditions of existing nam- ing rights agreements given their economic value, but also because certain naming rights transactions, given their and the strength of the naming rights partner, lend them- selves to being collateralized for financing purposes. These agreements are generally the subject of heavy negotiation, particularly in terms of exclusivity, length of term, fees, and entitlements. Potential buyers need to be aware of these terms and ensure that they are able to fulfill the obligations under these agreements.
Concessions and Merchandise
Another revenue source familiar to many is sales related to food and beverage conces- sions and team merchandise, which probably represent the most familiar forms of team revenue for the average sports fan. who goes to a game and leaves without consuming a beverage, hot dog, bag of popcorn, or pur-
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