In recent court testimony, Bank of America – Merrill Lynch (“BoA”) revealed its bid book (“Project Claret”) prepared for potential buyers of a NBA franchise, the Los Angeles Clippers (“Clippers”). We are going to analyze elements within the Project Claret document with a particular focus on the revenue estimate of the local media contract renewal in 2014.

Let’s look at BoA’s estimate of local media revenues primarily related to television content. BoA forecasted television rights payment in June 2014 year-end at $25.8 million from the current contract projecting it to $125 million for a new local media contract. Michael Ozanian of Forbes recently estimated the 2014 new contract amount to most likely be closer to $75 million. I agree with Mr. Ozanian for the following reasons:

  1. If the Los Angeles Lakers (“Lakers”), back in 2011, signed a local media television rights contract for $5 billion over 25 years, then the average is approximately $200 million a year. Typically these contracts have annual escalation clauses and if the total payout is $5 billion, then the amount in 2012 is close to $100 million for the Lakers. You need to escalate that to about $110 million in 2014.
  2. The television ratings of the Lakers are multiples of the Clippers and cable subscribers ultimately pay for the right’s fees. So if you are a sophisticated buyer of sports content, like Fox Broadcasting Company or Time Warner Cable, are you going to pay the same dollar amount for the Clippers as you did for the Lakers? The Clippers have ½ the television ratings of the Lakers (1.28 vs 2.72) in the current year. To quote a recent Variety article, “This is believed to be the closest the Clippers have come to the Lakers in television ratings since the 1999-2000 season.” Additionally, the Lakers experienced a very poor win/loss record in the 2013-2014 season. If one analyzed their historical results, the Clippers have less than 1/3 of the viewership as the Lakers (121,000 vs 390,000) last year.

Therefore, how much will the Clippers realistically get in 2014 with the new contract? $75 million is approximately 68% of our estimated Lakers deal amount and seems generous based on the raw ratings numbers. However, if we utilize the Forbes estimate of $75 million in 2014 and the other BoA revenue estimates for game admissions ($62.3 million) and other team revenue ($136.8 million), the total revenue estimate for the Clippers would be $274.1 million in 2014 versus the $324.1 million utilized in BoA Project Claret.

If one assumes a multiple of 5x revenues, which is the high end of multiples paid for an NBA team to date, the indicated enterprise value estimate is $1.370 billion, a far cry from $2 billion. Additionally, many times when dealing with estimates of future results (in this case an estimate of future revenue) the valuation multiple applied should be lower than actual transaction multiples. These multiples are calculated based on historical revenues, which are usually lower than future estimates.

It seems clear to us that based on the data available the $2 billion price from Steve Ballmer is a good deal for the Sterling Trust.

This article was originally published in Valuation Viewpoint, August 2014.

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