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The Sports M&A Paradox

The Sports M&A Paradox

What influenced the sports business and team markets?
Photo by Brandon Magnus | Getty Images

2016 was a banner year for sports M&A activity, especially with respect to event, media, and marketing businesses. Some of the industry’s most coveted properties, such as the UFC, Learfield Sports, and Formula One, traded hands. In addition, properties in emerging categories like eSports (e.g., Team Liquid) and youth sports technology (e.g., SportsEngine), also completed transactions.

What drove this high volume of deals in 2016?

After analyzing the market, it appears that sports M&A activity was driven by a unique combination of i) frothy valuations, ii) new Chinese buyers, iii) large amounts of available capital, and iv) the emergence of hot growth business sectors, such as eSports, sports data, and youth sports technology.

Paradoxically, while the M&A market was very robust for sports media, marketing, and event businesses, it was extremely slow for U.S. sports teams.

Frothy Valuation of Sports Assets:

While official financial information for many of 2016’s high-profile transactions was not publicly released, published reports suggest that record prices were paid for a number of the key sports assets. Based on these reports, it appears that many properties sold for more than 12x EBITDA while some may have sold for as high as 20x EBITDA.

This strong market provided great incentives for asset owners to seek exits, especially financial owners. Interestingly, the sellers in 2016’s most high-profile deals were often times private equity firms (See table below). In virtually all of these deals, the buyer was a strategic company, which was potentially able to pay a higher price because of its ability to realize operating synergies.

New Chinese Buyers:

Chinese companies have become a major factor in the sports M&A market. Beyond their investments in European soccer clubs, companies such as Dalian Wanda Group have become major players in sports business M&A. This trend first became apparent when Wanda acquired World Triathlon Group (i.e., Ironman) in 2015 for a reported $650 million.

Many sellers now seek to bring Chinese bidders into their M&A auctions, and the existence of these new players adds to the perception and reality of the frothy market.

The buying spree continued in 2016, when Wanda’s Infront Sports & Media purchased a 51% stake in digital agency Omnigon and a group of Chinese investors acquired a controlling stake in MP& Silva. Many sellers now seek to bring Chinese bidders into their M&A auctions, and the existence of these new players adds to the perception and reality of the frothy market described above.

Large Amounts of Available Capital:

Cash for sports M&A transactions can be secured from a number of different sources, including i) cash on strategic company balance sheets, ii) equity investments, primarily from private equity companies, and iii) the debt markets.

In 2016, cash was often readily available from all three sources. Many strategic buyers currently have significant cash on their balance sheets and seek to earn a better return by deploying their capital.

Similarly, many private equity firms have large amounts of “dry powder” (i.e., capital they would like to invest).

In the case of UFC, private equity firms Silver Lake and KKR are reportedly helping WME-IMG pay the $4 billion purchase price for the asset. Finally, relatively low interest rates and available credit for strong properties is enabling debt financing to be a component in many of 2016’s sports transactions.

Emergence of Growth Business Sectors:

A number of high-growth categories in the sports ecosystem have driven significant M&A activity. Buyers viewed areas such as eSports, youth sports technology, and sports data as exciting areas of future opportunity. In some cases, the acquirers were large media companies seeking to enter new areas (as in the case of NBC’s acquisition of SportsEngine). In other deals, especially in the eSports team space, the acquirers were professional sports team owners that sought to capture the enormous audience growth of video game competitions.

“2016 Sports Industry Mergers & Acquisitions” | Source: Houlihan Lokey

The Sports Team Market Paradox:

While 2016 was definitely a robust year for sports business M&A, it was among the slowest year in recent history for U.S. sports team M&A. To the best of our knowledge, there was only one majority transaction in MLB, NFL, NHL, or NBA in 2016 (although there was significant activity in Europe/EPL). Given the strong health of teams in these leagues, there were no distress situations that resulted in transactions.

Unlike private equity holders, U.S. team owners generally do not seek five-to seven-year exits but instead seek to pass ownership of their teams to their families. However, as values of teams now reach record heights and new threats to the long-term business model begin to emerge (e.g., “cord-cutting,” decline in certain sports TV ratings), it will be interesting to see whether some team owners begin to cash out in 2017.

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About the Contributor: Chris Russo is a Managing Director at investment bank Houlihan Lokey, focusing on sports and media transactions. He was previously the Founder & CEO of Big Lead Sports which was acquired by USA Today Sports and formerly Head of Digital Media for the NFL.

To learn more about what will drive mergers and acquisitions, as well as increased venture capital in the industry, join us at Hashtag Sports 2018.

Statements and opinions expressed herein are solely those of the author and may not coincide with those of Houlihan Lokey.

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