Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

If you experience any difficulty in accessing Forsyth Barr Focus,
please call 0800 367 227, or e-Mail editor@forsythbarrfocus.co.nz for assistance.

 

SPORTING CHANCE

Sporting success, such as that enjoyed by the Black Caps or All Blacks, generates high levels of public support. New Zealanders’ sense of national self-esteem is closely tied to the success of its sporting teams.

Professional sport is now big business, with New Zealand’s major sporting codes and teams rapidly morphing from amateur entities into commercial enterprises. And like all businesses, capital is needed to support operational activity and future growth.

But outside of specific fixture related revenues, how easily can a sporting code translate this type of emotional commitment into long-term financial support?

Elsewhere in the world, access to investor capital has already become important for many professional sports such as the English Premier League, where franchise teams actively trade players for significant sums. Capital employed generally has the twin goals of improving on-field results and off-field financial performance.

In New Zealand, investment in sporting franchises is largely limited to a small number of individually wealthy investors, who have taken up private opportunities offered by sporting league owners (such as New Zealand Rugby or Football Federation Australia). Given the investment characteristics of the professional sporting sector, such investors are likely to have powerful non-financial motives for owning teams, with love of the game, self-publicity, ego, or a sense of civic responsibility, all likely factors supporting their ownership.

Globally, there have been many examples of professional sporting franchises undertaking Initial Public Offers to capitalise on the support of fans; however publicly traded sporting franchises have typically had a patchy track record in generating investor returns. Perhaps the most famous of these, Manchester United, has twice been listed on public exchanges, initially in London and then in New York. In both cases, on-market performance failed to match on-field success. In the case of soccer football in particular, privately owned team franchises funded by billionaire owners have inflated the value of sought after players, putting a strain on franchise capital structures, even with growth in off-field revenues such as team merchandise.

However, some sporting franchises with poor on-field performance have enjoyed great off-field financial results arising from lucrative merchandising, broadcasting or other sponsorship agreements. In these cases, teams have created a market resonance beyond their on-field activity, with affinity marketing playing a major role in generating commercial success. Included in this group are US teams such as the LA Dodgers, Dallas Cowboys and New York Knicks. While not publicly traded, these franchises offer a highly sought after fan experience and have maximised their commercial opportunities to grow revenue.

For commercial reasons, the private owner of a sporting franchise offering a public ownership stake will typically intend to retain majority control, with the goal of using the IPO solely as a means of managing the capital structure of the business.

Investors considering their participation will also need to consider that most publicly traded sporting franchises seldom pay dividends, with prospective capital gains historically derived from speculation on potential ownership changes. Overall, an investment is unlikely to generate an attractive return relative to other forms of tradeable security. It would seem that in the case of sporting investment, ownership of the team is an expression of loyalty and support, rather than of profit and governance.

Perhaps the best example of a sporting franchise which has successfully connected with its fan base to raise investment capital is the NFL’s Green Bay Packers, which first sold shares in the franchise in 1923.

In this case, the public offer is essentially of “community ownership”, as shareholders (in exchange for their investment) receive non-transferable shares which pay no dividends and offer no ticketing privileges. In fact, shareholder benefits are limited to an entitlement to attend the Annual Meeting and access to shareholder only merchandise. Funds raised have typically been used to upgrade facilities for the benefit of the team and its fans. If the franchise is dissolved, all profits and assets must go to community programmes and charities.

Another investment option is to buy the shares of a sporting company which owns professional sports teams. For example, Madison Gardens (NASDAQ:MSG) owns the NBA’s New York Knicks and the NHL’s New York Rangers, and has shown positive share price growth since its initial IPO in 2010.

Unlike professional sport where the difference between winning and losing is often the narrowest of margins, prudent investors are unlikely to chance their capital on an uncertain outcome. Therefore when it comes to investing in professional sport, investors will need to be aware that the emotional return generally offers more value than the financial reward.

By Gordon Noble-Campbell
Director, Private Client Services

This article was first published in March 2015