Posted by John Vrooman on Friday, June 17, 2016 in National Hockey League.

Interview with Pittsburgh Post-Gazette.

• How rare is it in sports that a team previously put up for sale ended up winning the championship? I can’t find much on this.

It is not very common for a winning club to go on the market, as a matter of fact the reverse is more likely to be true. When a club is on the market value maximizing owners typically slash the payroll to reduce negative cash flow and increase the present value of the franchise.

NHL clubs can make money in the playoffs, but winning a championship is very expensive and usually a losing financial proposition. One of the key indicators that a sports club is on the market is a rapid decline in payroll to increase net cash flow and stoke the club’s value.

• You estimated development rights add up to about $100 million of the Penguins’ value, according to this article. Does that still hold true? How did you come up with that estimate?

The development rights are still valuable and in the case of the Pens they may be the difference maker. The estimate was a ballpark figure. I expected the Pens to go for as much as $700 million including the average base franchise value of $500 million, $100 million in development rights and an additional $100 million premium paid by the winner in a monopoly franchise auction.

This premium is called the winners curse because the ultimate buyer submits the highest bid and not the average bid, which is usually a fairly accurate estimate of the fundamental value of the club. In the case of the NBA LA Clippers for example the true value of the Clippers was probably $1.6 billion but the winning bid was a systematically biased $2 billion. Same was true for the Buffalo Bills with a value of $1.2 billion and final selling price at $1.4 billion.

• What else may affect the sale of the Penguins?

There are two additional factors adversely affecting the possible price of the Pens. The first internal factor is the unbalanced salary cap structure of the new Stanley Cup Champs. Almost one half of the estimated $74 million cap space is taken up by the top four Penguins not even including Fleury. This talent depth no doubt won Lord Stanley’s Cup on the ice but the resulting payroll structure of the Pens drives down its asset value in the open market.

The second external factor is the League’s simultaneous flirtation with ill-advised expansion into Vegas for a fee of $500 million and the flooding of the current franchise market with the Carolina Hurricanes for an estimated price well south of $500 million. This flooded market effectively removes the monopoly auction bias from the winners curse and deflates the expected price of the Pens to $600 million.

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. Can you expand on the very last point you make, regarding the flooded market?

Sure, on the auction bias: If there is only one seller and many buyers (monopoly auction) then there is a systematic upward bias in the price. For example in the LA Clips sale to Ballmer there were 3 bids: $1.2 billion, $1.6 billion and $2 billion. The average or mean bid of $1.6 billion was probably right on the money based on fundamental forces like cash flow, but the Clippers were sold to the highest bidder at $2 billion with an upward bias of $400 million.

The same would be true for the Pens if they were the only NHL team on the market, but they are currently one of 3 or maybe even four clubs available for a price much lower than the $750 million asked. This removes the monopoly power of the NHL or more specifically the Pens and drives the price down closer to the expected present value of its future cash flows.

Given the current salary structure of the Stanley Cup Champion Pens the fundamental franchise price could ironically be as low as the League average $500 million, and the open market price could be as low as $600 million including an $100 million bonus from development rights. The NHL expansion flirtation especially ill-advisedly into Vegas is hammering the Pens potential closed market monopoly price by removing their monopoly auction bias. The NHL is essentially competing against itself in Pittsburgh and Carolina by opening the market and costing the Pens possibly as much as $100 million.