Posted by John Vrooman on Friday, August 1, 2014 in National Football League.

Interview with the Toronto Star.

I’m doing a story about the sale of the Buffalo Bills, and was hoping you might have some time to chat today about what might be some motivating factors for the league, the Wilson estate, and the advantages/disadvantages of the various bidding groups. I’ve spent the last while reading your paper on the economic structure of the NFL.

–-In standard business terms, the Bills (and heck, many other NFL teams) have valuations rather out of whack with their earnings, to put it bluntly. The Bills, for example, would be in a P/E ballpark of around 30 or 35 PE. Why, then, are they so sought after? Are they great businesses in other ways? Is it an ego thing for potential owners? Both?

I have often said that the NFL is the perfect portfolio investment. two thirds of the revenues are shared equally and the remaking one third is perfectly diversified because a team shares with other clubs whose fortunes have a perfectly negative correlation.

The revenue streams are almost risk free pure money.NFL franchise has monopoly power over fans and monopsony power over players. The NFL has the same collective power as a group. NFL franchises are a natural born sure thing..The Dallas cowboys are the most valuable club at $2.5+ billion US and they have been a mediocre .500…since the Bills last appeared above water in mid 1990s

–In an interview with The Associated Press, you suggested that the Bills would be worth substantially more in Toronto than in Western New York (I think around $300 to $400 million more, if memory serves). Is that largely because of the potential for more stadium-related revenue because of the bigger corporate base in Toronto? Better demographics in Toronto?

In the current NFL scheme once egalitarian owners are going for the last risk free money and that lies in luxury suites and club seats. Home gate revenue has been reduced to 15% of the total.. Its all about the corporate client and the TV market.. Luxury seat money is guaranteed win or lose…Toronto has the 5th largest TV market betwren Philly and Big D, and Buffalo comes in an NFL last at 55th. It doesn’t where an NFL club plays as long as I its in a new venue with a luxury seat revenue base filled with corporate clients dressed as fans.

–It’s widely perceived that the NFL looks unfavourably on the Toronto-based bid. Why is this the case, since the increased value of the franchise would also (presumably) have a positive impact upon the value of other NFL franchises? (Not that it would change their revenue streams — it would raise the market price for a team, which is good, presumably)

This is not true overall among NFL owners..This is a made for TV league. TV monopoly  money in the new deals has risen from $120 million per club to over $190 million. Meanwhile the monopsony (1 buyer) 48% salary cap has locked team payrolls at $133 next season…$60 million quick and fast risk-free easy money

–-Aren’t three rich guys, one of who’s a major shareholder and senior executive with a telecomms company, just the type of people the NFL would want as owners? (If not, why not)?

Sure of all the pro sports leagues the NFL is the most particular about club owners.. They abhor highly leveraged deals: Dan Snyder was approved after a year of due diligence search when he tried to buy the Washington club for$750 million and $500 million debt.

Cross league ownership is not allowed unless teams are in the same markets and the league has minimum general partnership shares. With all of these restrictions NFL ownership has become real big boy football….and owners need to have the financial pop to assume a major equity share and pony up the ante for this sure bet.

–-Operating in a bigger, richer market is also more expensive (whether we’re looking at  real estate costs, wages, or many other things). Are those higher expenses enough to offset the potential gains of being in a market like Toronto?

No, the cost side outside stadium costs are about the same.. Venue costs are directly related to market size and public subsidies are inversely related. So a new venue in Toronto would cost more than one in Buffalo and almost certainly be paid for by the club. (Canada and the U are vastly different on public subsidies for sports venues)…

This is why the net venue cash flow is a critical factor for the club to be moved to Toronto. Another major piece of the relocation  scenario is that the  other NFL owners will charge a hefty relation fee if the Bills are moved and we are not talking chump change. .The other owners will want a piece of the action gained from the difference in value in Toronto and Buffalo. This would be at least triple the $29 million relocation fees in the scramble surrounding the 1995 expansion.

–Do you think the NFL would like to be in Toronto? (if not with an existing franchise, perhaps by expansion)

Yes, but expansion is unlikely.. Relocation is the way and the Bills are the best shot. LA is the competition but there are several competing and self defeating groups in LA. Houston blew right past LA because ownership was united and tenacious. .offering $700 million when the other LA bids were less than $600.. There will be a significant wow factor in the winning bid for the Bills. And the amount of the bid will internalize all of the possible futures

–Some reports have suggested that there are only three groups which submitted bids for the Bills this week. Would this surprise you if it’s actually the case, given how infrequently NFL teams come onto the market? (Also, do you think it’s actually the case?)

No the number of players will be limited for the reasons mentioned above. This is big boy financial football and bidders had better bring all of their chips…

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What would you value the Bills at now, and what would they be worth if they moved to the Toronto area?

Where they sit in the newly renovated Ralph in the 55th TV market the Bills are worth just below $1 billion (bottom quartile) …in a new publicly subsidized venue by 2020 they could support $1.3 billion in western NY.  (New venue increases value 25%-30%)

If moved to new privately venue in Toronto by 2020…the Bills would be valued at $1.6 billion..Net relocation costs the

Bills could justify a bid of $1.5 billion by Tannenbaum, (Ontario Teachers Pension Fund?) and Rogers.

So Terry Pegula is expected to close at $1.3 billion or higher and Tannenbaum-Rogers-bon jovi at $1.5 billion or lower depending on stadium cost estimates.

Given the NFL rule that cross ownership is allowed only in the same market these groups reduce the bidding game to Toronto (Leafs) v. Buffalo (Sabres)…to support these bids both options will require (involve) a new venue for the Bills by 2020.

The weakness in Toronto could be game day attendance v. Buffalo but the gate is declining in importance  (home gate is only about 15% of total revenue.)..and Toronto’s strength is TV market size, new media  and strong corporate base which are  all increasing in importance.

Trump is probably blowing smoke and his bid will not be treated seriously. As previous owner of the New Jersey Generals Trump won an antitrust suit in USFL v. NFL and was awarded $1 in damages. This League has a long memory.

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Bon Jovi released an open letter to Bills fans. I’d note that A: he doesn’t name his partners and B: he doesn’t rule out moving to toronto — just says he’ll try to work with local authorities to find a stadium in buffalo area. Left unsaid is what happens if they don’t get one to their liking.

I am sure bon jovi and silent partners (gotta be rogers and mlse) are sincere but he also appears to be setting up an extortion triangle leveraging the relocation threat to Toronto into concessions for public funding from NY State and Eerie county.

Relocation to Toronto would involve the Bills franchise for $1.5 billion, penalty to buffalo $28/400 million, relocation fee to league (approaching $70 – $100 million) and new venue in Toronto approaching $1 billion. This would take total relocation costs to $2.5-$3.0 billion in Toronto.

So the value of Toronto to the league could be greater as an empty leg in an extortion triangle to leverage a new public venue in western NY.

This is how one half of the NFL clubs have used LA since the Rams and raiders left in 1995. Ironically LA has been more valuable to the league without a team than with a team.

Bon jovi does not have the wealth to pull this off this alone and so his group needs rogers and MLSE. But NFL allows multiple cross league owners only in the same town…so that pulls bon jovi back to Toronto, and locks terry pegula into buffalo.

Another weird twist in this gambit is the tole of Tim Lieweke as new prez of MLSE after moving over from AEG sports, one of the 3 groups that has a venue deal set up in LA.

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–Bills bids lower than thought? Do you expect the final sale price will be a lot higher?

I usually agree with Mike Ozanian on his revenue numbers, but I am not always convinced by his cost side, operating income estimates and especially his franchise value estimates which have proven to be systematically low. These reported bids are all too low and so is Ozanian’s estimated value of $935 million.

The equally shared national revenue received by the Bills and every other NFL club will alone approach $250 million in the financially relevant future. NFL V/R multiples (which approximate net present value of the cash flows) usually range from 4 to 5 times revenues. So based on the national share alone the value of the Bills shared revenues should generate a bid of $1.2 billion based on the NFL average multiple of 4.8. (4.8 x $250 million = $1.2 billion).

The lower bids may serve as evidence of uncertainty about a new stadium in Buffalo or Toronto and the additional lease avoidance penalty and relocation fees in Toronto, but the national TV revenue and NFL Ventures revenue is cold hard cash.  The NFL clubs can collectively diversify risk across regions and through time more efficiently than can local and regional governments. The rights to that certain cash flow stream are alone worth $1.2 billion.

Furthermore the negatives stadium costs and uncertainty should at least be a wash when compared to the mega-boost in unshared venue revenue in either Buffalo or Toronto. Toronto promises less cash flow at the gate than Buffalo but more to the League as the 5^th largest TV market in NA. The relocation penalties and fees could possibly equalize the alternative Toronto and Buffalo futures but the value of that NFL national cash flow is worth $1.2 billion easy money.

–How pissed off would the league be if the sale price were less than a billion, given that the Clippers were sold for $2 billion (granted, LA’s a bigger market than Buffalo, but still…)

The Clippers price is really not relevant except that there is always an irrational exuberance and winners curse involved in the winning bid. I had the Clippers value at $1.2 billion to $1.4 billion based on the new NBA TV rights and regional LA rights alone. The Clippers were valued at $800 million as the 3^nd tenant in the Staples Center, but a new NBA deal worth an anticipated $20 million more per club and a possible regional cable deal worth at least $80 million more than the current $20 million  (compared to the Lakers $180 million) for 20 years. So the sustainable value of the Clips is in the same $1.2 billion price range as I estimate for the Bills.

The League still has the final approval on all franchise sales. Dan Snyder’s purchase of the Washington Redskins from the estate of Jack Kent Cook was delayed because he tried to leverage the $700 million deal with almost $500 million in debt.  The NFL is the most due diligent of all of the Big 4 NA sports leagues and the new bid as well as the new bidder will be subject to further review.

The strength of the franchise is the access to the perfectly diversified shared NFL cash flow and the weakness is the unsettled stadium issue in both Buffalo and Toronto and the relocation costs unique to the possible move to Toronto. Trump will probably low ball his price and the only serious bidders are still Terry Pegula (Buffalo) v. MLSE (Toronto) and the successful bid will be well above $1 billion by the time the smoke clears.

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