The Sky's the Limit Bidding for the Browns and Manchester United sent franchise prices soaring

September 20, 1998

Jaws slackened, eyes popped and minds reeled on the evening of
Sept. 8 following the establishment of a momentous record in
sports. But this one had nothing to do with a Bunyanesque redhead
swatting a baseball over a fence. At 7:55 p.m. Central time,
shortly before Mark McGwire hit his 62nd home run, NFL
commissioner Paul Tagliabue emerged from the Grand Ballroom at
the O'Hare Hilton in Chicago and announced that Alfred Lerner had
submitted the winning bid for the Cleveland Browns, the league's
newest expansion team. The price tag, $530 million, was by far
the most ever paid for a sports franchise. This vastly
outstripped the previous record of $311 million that Rupert
Murdoch disgorged this year for the Los Angeles Dodgers and was
more than double the $250 million that Red McCombs ponied up for
an extant NFL franchise, the Minnesota Vikings, just last month.

There wasn't much time to adjust to the sticker shock. The next
morning BSkyB, a London-based satellite-television company
controlled by Murdoch's News Corp., unfurled plans to purchase
the Manchester United soccer club for $1 billion. That offer has
been accepted by the club's board of directors and now awaits
government approval. But while the purchase of the Browns and the
bid for Manchester United sent franchise values through the
retractable roof, the similarities between the two deals end
there.

Lerner, a billionaire credit card mogul from Cleveland, professed
no interest in owning a football team when Tagliabue announced in
March that the expansion Browns franchise would be available. A
bitter taste still lingered in Lerner's mouth from his last
dalliance with the NFL.

After buying five percent of the original Browns in 1986 to help
the chronically cash-strapped Art Modell retain his ownership,
Lerner was a driving force behind the franchise's relocation to
Baltimore in '96. Lerner used his connections in Maryland, where
he has substantial holdings, to secure a sweetheart stadium
agreement; the deal sealing the Browns' exodus was signed on his
private jet; and Lerner was sitting next to Modell's son, David,
when the genesis of the Ravens was announced at a press
conference in Baltimore. At the time, Lerner became such a bete
noire--a bete Brown, anyway--in Cleveland that he installed
bulletproof windows in his Mercedes and, like Modell, employed a
bodyguard after receiving a death threat. Then in August of last
year he sold his interest in the Ravens for $32 million.
Returning to the NFL couldn't have been further from his mind.
"There was no chance I was going to do this thing," Lerner, the
65-year-old CEO of MBNA Corp., the nation's second-largest
credit card issuer, told the Cleveland Plain Dealer last spring.
But when then San Francisco 49ers president Carmen Policy
contacted him about forming an ownership group in July, Lerner
said the opportunity was "just irresistible."

The NFL owners could barely contain their glee when they accepted
Lerner's bid. Not only would they split this windfall, but the
sale price also sent the value of their franchises soaring. If
Cleveland, an expansion team without national cachet, was worth
more than half a billion dollars, what could, say, the Dallas
Cowboys or the New York Giants command?

The owners weren't the only ones sporting ear-to-ear smiles. "The
golden goose didn't just get bigger, it laid a whole basket full
of golden eggs," said Gene Upshaw, head of the NFL Players
Association, who helped negotiate the current collective
bargaining agreement, which stipulates that 63% of a team's gross
revenues can go toward player salaries.

Just one day after the Browns deal was done, the Washington
Redskins were put on the block. Another team with a fervent fan
base and a brand-spanking-new stadium, and in a bigger media
market, the Redskins are expected to fetch at least as much as
the Browns. "It's simply outrageous," says an unsuccessful bidder
in the Browns derby. "It's awfully hard to justify paying money
like that for a football team."

Or is it? A confluence of factors made this a tantalizing
investment. First, Lerner will reap the fruits of the NFL's new
$17.6 billion television package, roughly $70 million annually.
Second, Cleveland's passionate and loyal fans ensure sellouts.
Most important, Cleveland is offering the most lucrative stadium
deal in football. When they take the field in 1999, the Browns
will play in a state-of-the-art, $280 million facility financed
almost entirely by public money. In exchange for the
bargain-basement lease of $250,000 a season, Lerner gets
virtually all revenue--from gate receipts, skyboxes, signage,
naming rights, etc.--generated by the stadium.

Still, is $530 million a fair price for an asset that is likely
to appreciate in the long term but unlikely to operate at a
year-to-year profit? Lerner can only say, "Ask me in five years."

If anyone can afford to overpay by $50 million or even $100
million, it's Lerner, a man whom Forbes estimates to be worth
$2.6 billion. One dividend of his purchase is redemption for the
civic sin of having helped sell the old Browns down the Cuyahoga
two seasons ago.

"I think this was an emotional issue," says a rival bidder.
"There's no way that team was worth more than $450 million, but
Lerner wasn't just buying a team. He was buying back his good
name in the community."

Lerner all but admits that guilt was part of his motivation. "It
was an act of conscience," he says.

Murdoch's bid for Manchester United is a different species of
transaction--part of his long-avowed strategy of using sports as a
"battering ram" for seizing control of television worldwide. Just
as Murdoch had allegedly never attended a baseball game before he
purchased the Dodgers, one underling acknowledges that soccer
isn't his area of expertise. No matter. Manchester United is one
of the world's most profitable sports franchises, expected to
finish as much as $100 million in the black this year, and it
consistently plays to SRO crowds at Old Trafford, one of
England's largest stadiums, where patrons can buy everything from
beer to financial services. Though it's contractually prohibited
from airing the team's games, Manchester United Television
broadcasts six hours a day of promotional tripe about the club
and will soon go to 24-hour coverage. The team owns restaurants
and conference centers and boasts a global fan base--the
franchise's monthly magazine, for instance, sells 25,000 copies
in Malaysia.

In 1996 BSkyB agreed to pay $1.1 billion to televise Great
Britain's aptly named Premiere League, which includes Manchester
United. Neither Murdoch nor his representatives returned calls
about his bid to buy the team, but as owner of the league's
marquee franchise, Murdoch now clearly has the leverage to
guarantee that BSkyB retains those rights when they expire in
2000. If the Premiere League's teams are ever allowed to
negotiate their rights individually, BSkyB will essentially pay
nothing to air Manchester United games. Moreover, if plans for
the ballyhooed European Superleague materialize, Murdoch will be
able to exert immense pressure to obtain those broadcast rights.

"Murdoch is who he is because he gets there before people slam
the door," says Neal Pilson, a former head of CBS Sports who's
now a TV consultant. "He got to Manchester United before the
Premiere League figured out what was going to happen with its
broadcast rights. [Murdoch's satellite services reach two thirds
of the world's households that have a television set.] If he can
make Manchester United the world's team, a billion dollars is a
pretty fair price."

Of course Murdoch--whose various companies also have a small
interest in the New York Knicks and Rangers and the Los Angeles
Lakers--isn't the only one to recognize the advantage of owning
sports franchises. Cablevision (Knicks and Rangers), Comcast
(Philadelphia Flyers and 76ers), Disney (Anaheim Angels and
Mighty Ducks) and Time Warner, the parent company of SI (Atlanta
Braves and Hawks and the NHL expansion Thrashers), all think of
sports as "content," to use the TV vernacular, a perpetually
renewable resource that provides unlimited programming. By
purchasing the Dodgers, for instance, Murdoch acquired hundreds
of hours of free programming for his regional Fox stations. "When
you own a team and you also own a cable outlet, you're simply
transferring money from one pocket to the other," says Ken
Shropshire, a professor at Penn's Wharton School of Business.
"That's what we're seeing in baseball, the NBA, the NHL and
possibly, on a much bigger scale, with Murdoch and Manchester
United." (The NFL is insulated from this trend by a long-standing
rule that only individuals may purchase teams. The incentive for
a media mogul to pursue a franchise is also blunted by his
inability to air regular-season games on regional TV.)

In addition to further blurring the lines between sports and
entertainment, the proliferation of media outlets owning teams
renders any franchise's book value essentially meaningless. "A
team may be worth only X dollars on paper," says Srinivas Reddy,
a marketing professor at Georgia, "but one of the few individuals
who have access to a cable system will pay three times that. The
playing field is no longer level."

An uneven pitch is particularly distasteful to Manchester fans
in Britain, who already pay $62 a month to watch their team on
Murdoch-owned cable stations and envision a time in the
not-so-distant future when United's games will be available only
on pay-per-view. Shortly after BSkyB's bid was announced, a
Manchester fan streaked across the field during a home game with
the message BUY THIS scrawled on his back and an arrow pointing
to his posterior.

Meanwhile, galvanized by BSkyB's bold stroke, Carlton
Communications, another British media giant that could vie for
the Premier League's broadcast rights, held exploratory talks
with England's second-most popular team, London-based Arsenal.
Another, unidentified media group met with directors of the Aston
Villa club. On Friday the Financial Times reported that ENIC
(English National Investment Company) was assembling a rival bid
for Manchester United, and on Sunday it was reported that Salomon
Smith Barney was brokering a bid for the team from an
unidentified client. If the analysts' estimates of Manchester's
annual profits are correct, BSkyB's purchase of Manchester United
for 10 or 11 times earnings would be a steal worthy of Peter
Minuit's.

All of which calls forth the question: How much higher can the
price tag for franchises possibly go? For now, it appears the
BSkyB is the limit.

COLOR PHOTO: DAVID LIAM KYLE If Cleveland is worth half a billion dollars, what could the Cowboys or the Giants command? [Cleveland Browns fans] COLOR PHOTO: CLIVE BRUNSKILL/ALLSPORT Murdoch is using sports as a battering ram for seizing control of TV worldwide.[Manchester United fan holding newspaper with headline reading, "STOP THE RED DEVIL"]
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