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Baseball’s Short Season Exposes Cracks in $1 Billion-Plus Values

(Bloomberg) — Major League Baseball makes its long-delayed return this week, kicking off an abbreviated 60-game season that promises fans some glimmer of normalcy during a most abnormal summer.

Things get underway Thursday night with the defending World Series champion Washington Nationals hosting the New York Yankees, and the Los Angeles Dodgers facing the rival San Francisco Giants.

Squeezing in a shortened season followed by a lucrative playoff schedule is critical to MLB, which lacks some of the financial guarantees of the National Football League and National Basketball Association and likely faces labor unrest next year. But even if teams are able to dodge another Covid-19 outbreak and complete the season, it won’t be baseball as usual.

Games will be played in empty stadiums without fans, depriving owners of a big chunk of their revenue. A dozen or so players — including big names like Ryan Zimmerman and Buster Posey — have opted out this year over coronavirus concerns. Rule changes such as allowing designated hitters in both leagues and starting extra innings with a runner on second base will likely test the patience of traditionalists.

“Baseball is faced with several fundamental issues, issues made more pronounced due to the pandemic,” David Carter, a sports business consultant and professor at the University of Southern California, said in an interview. “Combining the sport’s historic labor unrest, which may rear its ugly head again, along with the fact that the sport’s audience skews older than most, MLB has its hands full.”

Casting Doubt

All the uncertainties may also be starting to cast doubt on the value of the league’s franchises. Over the years, valuations have climbed to new heights, with five teams worth at least $3 billion each, according to the most recent Forbes estimate.

But with no fans in ballparks for the foreseeable future, the potential for lost television revenue and labor problems brewing, baseball faces unique financial challenges that may have prospective buyers asking whether the cost of acquiring a team is worth the uncertainty that comes with it.

“Baseball team values are a question mark,” said Marc Ganis, president of consulting firm Sportscorp Ltd. “There’s always been a gap between what somebody who is selling thinks a team is worth and somebody who might be buying thinks it’s worth. That gap is greater today. There’s an expectation among prospective buyers that there’s a meaningful reduction in value across the board.”

The sudden impact of Covid-19 on America’s pastime already appears to be affecting the sale of one of its premiere franchises. Hedge fund billionaire Steve Cohen offered $2.6 billion to buy the New York Mets before the deal fell apart earlier this year. Now bids for the team are in the $2 billion range.

Read more: Steve Cohen takes on A-Rod in push to buy New York Mets

The current uncertainty is a “significant part” of why bids are lower, Ganis said.

Social distancing has an especially pronounced effect on pro baseball because a large portion of team revenue — 40% to 70%, depending on the club — comes from stadium activities such as ticket sales, concessions, merchandise and parking. With no fans in the stands, that stream of money largely disappears.

Unlike the NFL and NBA, baseball lacks a revenue-sharing agreement with players, meaning teams concerned over their financial future may be hesitant to offer large, long-term contracts to stars.

Lockout Possible

The impact of teams’ lost revenue this season is already apparent. The Texas Rangers indefinitely furloughed 12% of employees last week, while the Miami Marlins, Cincinnati Reds, Seattle Mariners, Dodgers and Mets have also furloughed, laid off or cut employee salaries.

Compounding the pandemic’s effect, the collective-bargaining agreement between players and owners expires in 2021, setting the stage for a possible lockout next season. The struggles mean valuations are getting a reality check.

“There’s going to be a hit,” said sports economics expert Andrew Zimbalist, a professor at Smith College. “It might be somewhere between 10% and 20% for baseball teams that sell in the next year.”

“There’s a general malaise right now about the economy,” he added. “The emotional component that would normally lift a bidder to bid higher and higher prices, that component that would drive another bid, is flat now.”

‘Liquidity Pressures’

To be sure, sports franchises are long-term investments, and sale prices are tied to much more than just the financial health of a team. Sentimental value from billionaire buyers and the scarcity of teams for sale can drive prices higher. But experts agree the outlook for MLB is undoubtedly bleaker as the 2020 season finally gets underway than it was six months ago.

That pessimism is reflected in financial markets, where credit rating firms have expressed growing concern over the bonds financing several MLB ballparks. S&P Global Inc. recently cut the rating of Queens Ballpark Co., a subsidiary of the Mets that operates Citi Field, to below investment grade, and projected that game-day revenue for the Mets will fall as much as 85% this year from 2019 levels.

“The effects of the coronavirus have left stadiums facing significant cash-flow and liquidity pressures,” said UBS Group AG strategist Jeannine Lennon, adding that some MLB park debt is secured by ticket sales. “There’s a negative outlook for stadium finance with so much up in the air.”

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