Sports teams: valuations tested as prestige purchases lose their shine

In sunnier days, captains of industry rushed to put their fortunes into sports franchises. Part of the motivation was the chance to join an exclusive club and score a trophy asset. But the investments worked out well too, as television and digital rights for games soared.

Now that stock markets are falling and interest rates are climbing, potential buyers are likely to be more wary of risk. Two prominent US sports teams are braving the environment anyway. Basketball’s Phoenix Suns has been put up for sale by its owner after his implication in a workplace misconduct scandal. The Anaheim Angels baseball team has also announced that it is seeking a buyer after 20 years of ownership.

Both paid in the low hundreds of millions of dollars and probably will get multibillion-dollar payouts. Earlier this year the Denver Broncos sold for a record price of $4.6bn while Chelsea Football Club changed hands for £4.25bn. Those records may not be broken for some time.

Several American sports leagues have recently auctioned off their media rights for vast fortunes. One American college football conference signed a deal with several networks to show games for $1.1bn per year, more than double the previous rate.

A similar increase was recorded in American professional football. S&P forecasts that annual cash flow at the sports TV network ESPN will fall 60 per cent by 2025 in large part due to the escalation in rights fees that it owes.

The multibillion-dollar price tags have naturally shrunk the universe of buyers, though the billionaire class is growing. It may be that the scarcity of sports teams props up their re-sale valuations. Institutional capital from the likes of specialist private equity funds such as Dyal Capital and Arctos Sports Partners has made teams into a more ordinary standardised asset class. But the creation of such an asset class requires economic returns beyond vanity. That sets up a potential disconnect between buyers and sellers.