How to Buy a Sports Team for Under a Hundred Bucks

Well, it’s curtains for Donald Sterling.

A court has decided that the sale of the Los Angeles Clippers by the longtime owner’s wife is legal, and the Clippers will now fall into the lap of former Microsoft (MSFT) CEO Steve Ballmer for a cool $2 billion.

The deal will accomplish many things: It’ll give the increasingly relevant Clippers some more buzz, it’ll make their free agency period a little easier, and it’ll also wick some sweat from NBA management.

But it also just made a sports investment on the other side of the country look a little better.

Rich People Buy the Darnedest Things

Ever since May, when Ballmer announced his $2 billion bid for the Clippers, Wall Street quants began breaking down the deal from the investor’s perspective and found that, boy, did Ballmer overpay. Bank of America, for instance, “valued the Clippers between $1 billion and $1.3 billion.”

Clearly, he should’ve waited for a dip before buying.

If you’re laughing, good — you get the point. Namely, Ballmer couldn’t care less what kind of value he got on the team, nor do many would-be owners. Professional sports franchises are increasingly becoming the playgrounds of the uber-rich: owners like Mikhail Prokhorov of the Brooklyn Nets and Roman Abramovich of English Premier League team Chelsea, who sink large amounts of cash looking not necessarily for returns, but championship prestige.

And it seems that each time a new team goes up for sale, the dollar signs keep getting bigger.

For instance, that $2 billion bid for the Clippers? It dwarfed the $550 million that Wesley Edens, Marc Lasry and others paid for the Milwaukee Bucks — and that was just back in April! Meanwhile, the Clippers bid immediately drove up some perceived franchise values of other teams, such as the $2.48 billion extra the Chicago Bulls would be worth, and the $3.35 billion extra the Lakers would be worth (based on what Ballmer paid).

Also benefiting? The New York Knicks — one of the few sports franchises you and I can get a bite of, via publicly traded Madison Square Garden (MSG).

Madison Square Garden (MSG) – A Boom in Wait

Madison Square Garden owns a host of big New York City assets, including the Knicks, the NHL’s Rangers and the WNBA’s Liberty, as well as Madison Square Garden Arena itself, MSG Media (a regional sports network) and even the Los Angeles Forum.

The Knicks are one of the biggest pieces of the MSG pie. According to Business Insider, the valuation of NBA franchises based on the sale of the Clippers would take the Knicks from Forbes’ valuation of $1.4 billion to $4.87 billion — a $3.47 billion improvement.

If you use Forbes’ estimates, the Knicks’ worth equates to 30% of the company’s $4.69 billion market cap. If you use the Clippers’ valuation as your benchmark, the Knicks are MSG’s market cap.

I think those numbers are goofy considering Ballmer didn’t care about valuation, but that’s the point: While many sports teams don’t change hands based on actual value, publicly traded stocks usually do.

Thus, every time a sports franchise (and the cable rights therein) fetches a bigger bid, the perceived worth of the Knicks – and thus MSG – goes up in some way. Because the market price for teams still is getting driven higher.

MSG stock itself has improved by 15% since Ballmer’s bid was announced, and there’s little reason to think similar vanity deals couldn’t continue buoying the Knicks and MSG stock for years. Charles Sizemore of Macro Trend Investor relays that we’re in an era of the nouveau super-rich:

“There are now 1,645 billionaires in the world with an aggregate net worth of $6.4 trillion. The Forbes 2014 billionaire list had 268 new names on it this year.

In other words, there are a lot of Steve Ballmers out there looking to throw money around on a trophy asset like a professional sports franchise.”

Moreover, it doesn’t just take a team sale to drive up MSG’s value. Merely signing big free agents, drafting marquee stars and generally gaining the perception that you have a legitimate shot at a title can boost a team’s value, via increased advertising, merchandising and ticket sales.

Take the Cleveland Cavaliers, whose signing of LeBron James nearly doubled the worth of the franchise to around $1 billion, according to valuation expert Peter Schwartz of Christie & Associates.

Granted, the Knicks can’t do that much more in free agency this year given a dearth of options and a ton of cash shelled out to retain Carmelo Anthony, but it’s something that could play out in years to come.

Bottom Line

This trend isn’t a lock, and it won’t give you a doubler in MSG in a couple of weeks. But there’s no traditional holding period for sports franchises, so it’s possible that we could see a rush of big-name teams go on the auction block, with bidding wars ultimately helping the value of MSG.

That’s because as long as there’s a host of egotistical billionaires looking for a shiny new toy, and as long as they keep jumping at every new opportunity, these sky-high bids should keep propping up MSG … slowly but surely.

Kyle Woodley is the Deputy Managing Editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley.


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