Posted by John Vrooman on Thursday, August 7, 2014 in National Football League.

Interview with Associated Press.

A prospective ownership group that includes rocker Jon Bon Jovi has conducted a feasibility study to buy the Buffalo Bills and build a stadium in Toronto. This raises fears that the group is interested in buying and relocating the franchise.

Not looking to you to confirm any of this.

Simply seeking general perspective on whether this – a feasibility study — this would be regarded as standard practice in sports franchise sales processes or indicate a prospective buyer’s intentions?

A feasibility study is standard practice and no cause for alarm in itself. But the study will evaluate the expected cash flow under a variety of Alternative scenarios and each scenario will be given a probability or risk factor from best case to worst case. For example the Bills would probably be evaluated by prospective buyers with scenarios of being situated in LA, Buffalo and Toronto in old and/or new venues.

The value of any asset is the risk adjusted cash flow derived from that asset. So each of these probability adjusted alternative futures would be part of the price for the Bills. For example the Bills true value with new stadium renovations could go for as high as $950 million- $1 billion in Buffalo (about 3.3 times expected future revenues) and also be valued at $1.5 billion in Toronto and even more in LA.

The Bills can escape their lease in 2023 and opt out early in 2020 with an early termination fee of $28 million, which is chump change compared to the value of the Bills in Toronto. The key factor here is that the Toronto TV market is about 4.67 times the size of Buffalo. More importantly to the League, the Toronto DMA (designated market area) of almost 3 million TV households is the 5^th largest market in North America compared to Buffalo at 55^th largest.

So all of these possible scenarios are embodied in the true value of the Bills franchise, and the two outcomes that carry the most probability weight are the Bills in Buffalo and the Bills in Toronto in new venues in either place by 2020.

The $28 million termination fee is chump change compared to the relocation fee tacked on the Toronto option by the rest of the League owners who will all want a piece of the action difference between the value of the Toronto and Buffalo markets. The expectation of a relocation fee or tax will lower the value of the Bills.

So the true value of the Bills where they sit in and newly renovated Ralph in Buffalo is between $900 million and $1 billion. The value of the Toronto Bills in a new venue by 2020-2023 would be at least $1.5 billion and the less likely value of the Bills in LA would surpass the Cowboys at $2.5 billion. So if the probability of the Bills staying in Buffalo or moving to Toronto is even at about 40% either way and the probability of the Bills moving to  LA into one of 3 possible stadium deals is 20% then the fundamental value of the Bills is about $1.5 billion and the auction price could jump 20% to $1.8 billion.  

A complete feasibility study explores all of the options and the expected weighted average price of the Bills internalizes the likelihood of all of the possible scenarios, including the possible move to Toronto and the unlikely move to  LA.

Vrooman’s quick feasibility study:  .4($1 billion) (Buffalo) + .4 ($1.5 billion)(Toronto) + .2($2.5 billion)(LA) = $1.5 billion + 20% irrational overbid = $1.8 billion expected price for the Buffalo/Toronto/LA Bills.

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8/7/14

1) By my count, 11 of the 16 newest NFL stadiums (including the 49ers’ new palace and the Vikings stadium that will open in 2016) have been funded in part by personal seat licenses. Why the trend — and does this mean it would be a likely piece of the puzzle for funding a new Bills stadium?

About one-half of the NFL stadiums built in the last two decades have used personal seat licenses (PSL). A PSL is simply the present value of a season discount over time. For example a $1000 season ticket is equivalent to paying $5000 up front for the right to buy the same ticket for $500 per season. In this case $5K is the present value of the $500 discount over time.

The advantage of PSLs is that they shift the cost of new stadiums to the fans who are the people who actually benefit from the team and the stadium, as opposed to the general state local and federal taxpayers who will never benefit from the project. The basic principle of venue finance is for the guys that benefit to be the same guys that pay no more or no less, and that principle holds true with PSLs.

The bad news about PSLs is that they often exclude marginal fans because they force season-ticket buyers to spend the highest price that they would pay. In economics this is called perfect price discrimination and it is similar to the airlines variable pricing schemes or dynamic pricing schemes now being used in the NBA, NHL and MLB. The good news is that nobody is forced to pay more than they really want, and the bad news is that the fan surplus is totally exhausted in the process.

In order for PSL schemes to work there has to be excess demand for tickets and the fans are somewhat insensitive to ticket prices (inelastic demand). So PSL schemes work best in the NFL for new expansion franchises or those existing teams with major season-ticket waiting lists. For example the Carolina Panthers used PSLs to pay for two-thirds of the cost of BOA Stadium in 1996 as an expansion franchise and the NY Jets and Giants paid for one-half of the $1.6 billion MetLife Stadium using $800 million in PSLs. When the process began the Jets had a season ticket waiting list of one generation, when the PSLs were almost all sold the waiting list was gone and the clubs had to lower ticket prices to sell remaining seats in the end-zone to keep from being blacked-out in their inaugural game in 2010. The basic rule in private stadium finance is to essentially charge half as many fans more than twice as much.

PSLs don’t work as well in leagues where the ticket demand has a high variance based on factors like price and team quality. In MLB, NBA and NHL by comparison the fan surplus is captured by dynamic pricing schemes where ticket prices vary directly with ticket demand. Dynamic pricing is the equivalent to PSL pricing in sports where the demand has a high variance. PSLs don’t work in these leagues an dynamic pricing doesn’t work in the NFL. The good news is that teams that contribute a significant private cost share use PSLs in the NFL and they use dynamic pricing in MLB. The bad news is that marginal fans are excluded if they can’t pony up the price.

2) Is there any other reason why PSLs are so popular with NFL teams, other than for funding stadiums? (After all, as I understand it, they are resold on the secondary market.)

PSL popularity is due to the ability to force season-ticket holders to pay up front and it shifts the performance risk to them and away from the club. PSLs are not a particularly good investment for that reason. There are secondary markets where the PSLs can be resold but the price of course reflects the quality of the investment. For example, the PSLs for the Pittsburgh Steelers (see attachment) grew at a compound annual rate of 20% to 30% over the decade since their issuance in 2001, while the PSLs for the New York Giants have declined in value since 2010. The reason is the original price was less than the PV of the season-ticket discount for the Steelers and more than the PV of the discount for the G-Men. The return also reflects the relative performance of the teams because team performance risk has been shifted from the club to the PSL holders. (In this way a PSL holders risk  is not any different than a season-ticket holders risk).

3) Roger Goodell has said the Bills need a new stadium — but he has never said why. We are presuming the league wants the Bills to have a new stadium to: 1) grow the team’s revenue, which benefits the entire league; 2) Maybe broaden the team’s market (a downtown Buffalo stadium would be much more accessible for fans from Toronto and Rochester) and 3) Solidify the team’s future and get us out of this era of 10-year stadium leases for the Bills.

Roger Goodell speaks for the other NFL owners and not for the fans or taxpayers of Buffalo/Erie County/Western NY. In a league that shares two-thirds of its revenues there is a major interest in the cash flow of all of the members of the exclusive club. Art Modell once said that the NFL owners are a bunch of fat-cat Republicans who vote socialist on football, and that is true for the TV rights packages and each of the new venues. Soon Jerry Jones and the parade of other “egalitarian” owners will show up in Buffalo just like they did in Minneapolis and Indy and other mid-markets to encourage public support (read public spending) for a new venues.

Goodell speaks for the League first and foremost because the profit margins of the teams in the cartel-league are interdependent. The more revenue a league shares the more the league in interested in other peoples’ business to insure that the amount they bring to the table is the same as the amount they take from the table.

To the League’s credit they discovered (in the aborted move of the Pats to Hartford) that it was also in their advantage to share private stadium costs in roughly the same proportion that they share revenues from the new venues. This is the G-3 now G-4 loan program where they will match the private cost share (up to a limit that varies directly with TV market size) paid by the club. The G-4 loans are paid back through the leagues share of club seat fees which is money they would have received anyway. The NY Jets and Giants each received $150 million in G-4 money from the League. So $800 million of the $1.6 billion MetLife came from the fans in the form of PSLs , $300 million came from the League in G-4 money and that left $500 million to be covered jointly by the 2 NY clubs.

Do you think those are probably the reasons why Goodell wants a new Bills stadium, or might there be others?

And what are the primary sources of additional revenue that come from a new stadium — and is there any way we can quantify the revenue increase that teams enjoy when they get a new stadium?

My general rule of thumb is that the value of a sports franchise increase by 25%-30% just by moving into a new venue. So the Bills playing where they sit in the renovated Ralph may draw an auction price of  $1 billion but would be worth $1.25 billion in a new venue in Buffalo. This is because the value of any asset is the present value of the risk adjusted net cash flow derived from that asset, and this is true for a NFL franchise. This is also what has driven the stadium revolution that has flipped almost every stadium in the NFL except the Ralph. The stadium revolution is now coming around for the second circle and the Bills will have to get on board in Buffalo or move to a new venue in Toronto.

The reason that the new venues are so valuable is two-fold. First the contractually obligated venue revenue is more certain and risk-free than traditional gate revenue. So the owners are trading the maybe for the sure. The venues are getting smaller and the luxury seat mezzanines are inserted like motels in the middle of the traditional bowl structures. Risk-free cash flow is more valuable that risky cash flow and the venues are cash cows.

The second reason originally discovered by Jerry Jones and the Dallas Cowboys and later by Bob Kraft and the Patriots is that gate revenue is shared 66/34 while venue revenue is not. So there is a strong incentive to trade share gate revenue for unshared venue revenue. Gate revenue is now less than 20% of NFL revenue before the stadium revolution began in the mid-1990s the gate was about a third of revenues. Unshared venue revenues from sponsorships, marketing, parking, concessions, luxury suites club seat fees has risen to 25% from about 10% in the mid 1990s.  This is the nature of the financial mismatch faced by the Bills in Buffalo.

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1) There has been much publicity about the three known bidders for the team (Donald Trump, the Bon Jovi/Toronto group and Terry Pegula). Based on previous sales, is it wrong for people to assume that they are the only three bidders? Could other, quieter bidders have submitted offers as well?

NFL owers have limited the size of the league to max franchise value regardless fan welfare. There may be silent bidders in this auction but this is is real big boy football and the bidders with enough chips to play the game are few.  Trump is probably blowing smoke so his prospects are dim (Trump previously sued the League in USFL v. NFL as owner of the New Jersey Generals) the real world bidders are reduced to 2, one based in Toronto and the other in Buffalo.

The NFL abhors highly leveraged deals and they have a 30% equity guideline (relaxed to 20/10 family/individual for longer term family ownership groups). Washington owner Dan Snyder’s purchase was delayed about a year in a similar estate sale (Jack Kent Cooke) because of its two thirds leverage ratio of $500 million debt for $750 million bid. The League also has a multiple ownership rule that restricts the multiple teams to one market. So this auction is really Toronto (Leafs and Raptors) v.Buffalo Sabres because of the cross ownership mix.

2) The Wilson estate appears anxious to complete the sale of the team as soon as possible, most likely for tax reasons. Can we expect a quick turnaround — that is, a sale by the NFL owner meetings in October?

Yes if these are the 2 bids (and there are no surprises from any of 3 LA groups which is doubtful) then the same could go down fast.. The NFL is the most thorough league is due diligence because they are essentially a thirds syndicate with extensive revenue sharing and risk diversification. So the approval make take time but not because of the power of the two apparent bidders but because of financial (debt/equity) structure of the deal.

3) The Bills’ 10-year lease includes a $400 million penalty if the team moves elsewhere except in 2020, when the the penalty goes down to $28.4 million for one year only. The lease also includes a provision allowing the county government to obtain a court order to prevent the team from moving. Are these provisions likely to affect the sales price of the team, and if so, how?

Yes but only for the Toronto group..the team would be moved in 2020 and the $28 million is chump change…and it would take that long to complete new stadium in Toronto anyway. There is also another more significant factor working v Toronto. The others owners will charge a relocation fee approaching $100 million (much higher in LA). Either group would probably have to build new venue by 2020 which would be publicly subsidized in western NY but privately financed in Toronto. Stadium costs are directly related to market size and public subsidy (especially in US) are inversely related.

This all goes into the net present value analysis that yields the feasible bid range. This means that although the Toronto TV market is the 5th largest in NA compared to Buffalo at 55th Tannenbaum (dont forget the ontario teachers pension fund) and Rogers (bon jovi is probably a front man like magic in LA) face significant side charges that could equalize pegula’s net cash flow in Buffalo…

The Toronto bid could approach $1.5 billion without these side costs of stadium and relocation fee…with pegulas bid slightly less at $1.25. The winning bid could top$1.5 all scenarios considered and these appear to be the only local heroes with enough big boy  pop to pull it off.

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