Winner’s Curse

Posted by on Thursday, November 21, 2019 in National Football League, Sports Econ Blog.

Interview with Fox Business PDF 

-Traditionally, what has been the NFL’s stance or approach on private equity investments? It seems that the league has preferred to deal with individuals rather than firms in terms of ownership.

-Are we approaching a point where the NFL would consider allowing a private equity firm to take a major stake in an actual franchise – if only because the price is getting to be too steep for individuals?

The NFL is the most restrictive of all sports leagues in terms of equity/leverage ownership requirements. The primary owner (general partner) must hold at least a 30 percent ownership share and the maximum franchise purchase debt is currently capped at $350 million.

Forbes currently estimates the average NFL franchise value at just under $3 billion, based on 2018 revenues. The actual selling price of a NFL club would probably come in around $3.6 billion.  So in the average case the majority ownership bid would probably require just under $1 billion.

The 20 percent premium reflects the monopoly power of an exclusive League ownership limited to 32 franchises. This systematic bias occurs is because a monopoly auction awards the winning bid to the highest bid, rather the most accurate average bid. (Economists call this bias the “winner’s curse”).

The magnitude of the bias is directly related to the number of potential bidders compared to the rare occurance of available monopoly franchises for sale. As a consequence the NFL owners are now considering relaxing equity ownership requirements to artificially increase the their already considerable monopoly power over potential owners who are otherwise being priced out of the bidding process.

The closed market monopoly power is clearly reflected in the 11.5 percent growth of NFL franchise values compared to the S&P Index (as the most competitive open market rate available) over the last quarter century. For direct comparison, the relative values in the graph are normalized to 1991=1.


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