From: v_siede@pavo.concordia.ca (kaldis, bill)
Subject: Re: Why Owners Buy Teams
News-Software: VAX/VMS VNEWS 1.41    
Keywords: Independent auditors, fraud, finances
Organization: Concordia University
Date: Tue, 22 Dec 1992 03:57:00 GMT

     I have been following the thread between Ted Frank and King Banian 
with a great deal of interest and would like to throw in my two cents.  
Essentially their discussion revolves around baseball teams' non-player 
expenses - how big are they versus total revenues and therefore how 
profitable baseball as an industry really is.  The benchmark is the pre-tax 
figure reported by Financial World of $127 million.  The general consensus 
(except for King Banian) seems to be that the profits are a great deal 
higher ( I believe someone even guessed at $750 million).

     I would like to approach the problem from a different angle.  Let's 
look at what has happened to the selling prices of baseball teams over
time.  Over a long period of time, the free market prices of baseball 
franchises should reflect the underlying economics of ownership.  I.e., 
prices and profits will move in line with one another.

     In "Billions and Billions" by Andrew Zimbalist, there is a table that 
summarizes the sales of baseball teams since the turn of the century.

     Decade    No. of Sales     Avg. Price ($000s)
      1910s         6                585
      1920s         9              1,019
      1930s         4                673
      1940s        11              1,563
      1950s        10              3,516
      1960s        10              7,637
      1970s         9             12,622
      1980s        12             40,696

      In effect, we can view these figures as being equivalent to a 
business whose stock trades 4-12 times a decade in a relatively illiquid 
market.  The indicated compound growth rate is 6.3% - let's round it to 6%.
As I indicated earlier, growing market prices should reflect the growth of 
the underlying profits.  Thus, over the long-term we would expect a 
baseball team's profits to grow at 6%.  Clearly over the short-term, the 
earnings will bob around some - but the long-term trend is up.

      I think we all agree that baseball qualifies as an economic franchise 
in that it is relatively free from competition and can price its product 
aggressively.  Since there is no inventory and little physical assets 
involved with ownership, all the profits are distributable to the owners.  
This is in contrast to commodity businesses like autos and steel where a 
significant portion of "earnings" must be re-invested in new plant and 
equipment just to maintain competitive position - leaving very little cash 
earnings.

      Therefore, we can view ownership of a baseball team as being 
equivalent to owning a perpetual annuity set to grow at 6% a year.  If we 
apply a discount rate of 10% to determine the present value of the earnings 
stream, one could calculate that it would be appropriate to pay a 
multiplier of 25 times after-tax earnings. (This after-tax multiplier of 25 
translates to a multiplier on pre-tax earnings of 16).

      So now we have two major pieces to the puzzle - the value of 
franchises in the open market (I'd say about $100 million on average) and 
the multiplier on earnings appropriate to a business displaying the 
powerhouse economics of an unregulated monopoly.  The calculation gives us 
an average pre-tax operating profit of $6.25 million per team or 
approximately $160 million for major league baseball.

      This would seem to indicate that FW's estimate of $127 is reasonable, 
if somewhat understated by $30 million or so.  Given that in the short run 
earnings could bob around as costs and revenues could fluctuate slightly, I 
would guess that $130-$150 million in operating profit could be reasonable 
and I am in agreement with King Banian and FW.


Bill Kaldis
Concordia University - Montreal