‘Platform’ Sports Businesses are Intrinsically Undervalued

JohnWallStreet

Forbes intends on releasing new valuations for all thirty-one National Hockey League teams tomorrow morning. Executives across the sports business landscape will use the estimates as a benchmark (there really is no viable alternative), but it’s widely accepted that the numbers the publication will put forth will be on the low-end (see: Mets recently sold for $2.6 billion, Forbes pegged the team’s value at $2.3 billion back in April). No clubs will be undervalued more so than the select few that operate as part of larger platform businesses (think: Capitals, Devils, Avalanche and Maple Leafs). While the world’s most valuable companies are assigned multiples “8x-12x their top line,” it will be an upset if a single NHL franchise is credited with 7x revenues (none were in 2018). That doesn’t sit right with Monumental Sports & Entertainment (MSE) CEO Ted Leonsis, who insists that there are sports entities driving value in the same fashion as the business world’s biggest successes - and thus should be valued accordingly.

Howie Long-Short: “Look at the world’s most valuable companies," Leonsis said. "They tend to fall into one of four categories; platform businesses, subscription based SaaS companies, local/social/mobile businesses and conglomerates.”

· Platform companies (think: Microsoft, Apple, Alibaba) start with a single business, brand or product, build out their core capabilities and then add additional businesses - all of which share services and leverage scale. 

· Subscription based software-as-a-service businesses (think: Oracle, Netflix) take products or services and turn them into annual, predictable, revenue streams.

· Local/social/mobile businesses (think: Starbucks, Uber) facilitate the sale of physical goods or services via a mobile device.

· Conglomerates (think: Procter & Gamble, Johnson & Johnson) are made up of a collective of brands and revenue streams all under a single corporate umbrella.

If one agrees that MSE can be described as a conglomerate with platform capabilities, a local/social/mobile component and a successful subscription business, then it can be argued the company should be valued in kind.

MSE is the parent company for six teams (see: Washington Capitals, Washington Mystics, Washington Wizards, Capital City Go-Go, Wizards District Gaming and Team Liquid) and three venues (Capital One Arena, The Entertainment & Sports Arena and MedStar Capitals IcePlex). The D.C. based sports and entertainment business is also invested in a pair of media networks (own 33% of NBC Sports Washington and 67% of Monumental Sports Network) and in Epic Games (think: Fortnite). In other words, the ‘conglomerate’ title certainly fits.

Describing MSE as a platform business would also be accurate. Leonsis cited the company’s relationship with Geico and its ability to bring the insurer on board as a naming patch partner for the Wizards, Go-Go and Mystics, as an example of how infrastructure can be leveraged across assets to drive value.

MSE has market demographics working in its favor (good news for a local/social/mobile business). With nearly 10 million residents, 8 research institutions, 3 international airports and a defined business community (think: federal government and technology), the DMV is one of just four “super-cities in North America” (along with greater New York, Los Angeles and Chicago). 

For a SaaS company to be successful, “70%-80% of the business must be recurring.” While MSE doesn’t sell software, they do have season tickets holders and the Capitals brought back 95% of their fan base this season (the Wizards returned 80%). And Leonsis says that “if you look at local sponsorship revenues (think: a 10-year arena naming rights pact with Capital One) or suite revenues” (note: suite deals run 5-years in length) and realize that the company has “secured over $2 billion in contracts (from blue-chip companies like William Hill and ESPN/DIS) with 3-5% annual increases than one could argue the MSE operation is more akin to a SaaS business than it is different.

Monumental currently generates upwards of $525 million in annual revenue and has plans to reach $1 billion through a combination of “organic growth (5%-7% YoY) and acquisitions.” Even if smart money follows Silver Lake into the space (see: recent investment in MCG), if platform businesses are going to be valued properly it reasons to believe that there will be some sports centric public listings on the horizon; there simply aren’t enough investors capable of writing a checks north of $10 billion. 

Fan Marino: MSE has seen its share of successes on the floor/ice, as well. The Capitals (2017-2018) and Mystic (2019) both recently won championships. 

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