Determining the value of sport franchises:NCAA FBS programs

Ryan Brewer, M.B.A.Indiana University-Bloomington

Advisor: Paul M. Pedersen, Ph.D.

2009 Scholarly Conference on College Sport

My interest in the study

• Value assessment of sport franchises

• Forbes (Van Riper, 2009)

– NFL (1998)– NBA, NHL, MLB (1999)– NCAA FBS Football Programs (2007)– NCAA D-I Basketball Programs (2008)

– Magazine’s valuation methods include value attributions deriving from four self-defined areas• The sport• The market• The stadium• The brand management

My interest in the study

• Current system of NCAA Division I football championship (“FBS”) is controversial..

• The BCS has been given considerable media attention for its commercial (broadcast & sponsorship) spotlight

Purpose of this study

To value FBS college football programs using theories and practices of classic financial economics

To test for differences between results if this study and the results

generated by Mike Ozanian of Forbes magazine

Determining value in FBS

IssuesCurrent FBS valuations may exclude important

factors in assessing valueCurrent FBS valuations may not have applied

valuation theory in assessing valueA lack of competing alternatives generally exists in

assessing sport franchise valuations

Current Practice

• Considerations included in the algorithm for current valuation of FBS programs:

• 2007 (Forbes’ inaugural valuations):1. Team contribution to athletic department2. Team contribution to university3. Incremental spending in local metro-area during home games

• 2008 (2nd year valuations):1. Team contribution to university2. Team contribution to athletic department3. Team contribution to conference4. Incremental spending in local metro-area during home games

Forbes Valuation Results (2008?)

1. Notre Dame $101 million2. Texas $92 million3. Georgia $90 million4. Michigan $85 million5. Florida $84 million6. LSU $76 million7. Tennessee $74 million8. Auburn $73 million9. Alabama $72 million10. Ohio State $71 million

Current Practice: Valuation Theory• Pricing of [future expected] uncertain income streams is key

to valuation (Rubinstein, 2005)

• The Capital Asset Pricing Model is intrinsic to the modern approach to determining value of anticipated benefits (Treynor, 1961)

• Value drivers are useful in determining the value of assets sold in the open markets (Pratt, 2000)

• A build-up model of the discount rate is an alternative to the CAPM, especially for organizations not traded in the securities markets (Pratt, 2000)

What’s Missing from Current Practice?

Discounted cash flows

Capitalization of cash flows

Assessment of similar franchises sold recently in the open market

Valuation Requirements• Specify the date of value (e.g., Pratt, 2000)

• Specify the relationship between hypothetical buyer and seller, neither of whom are under compulsion, both of whom are reasonably knowledgeable of relevant facts (IRS Revenue Ruling 59-60, 1959)

• Assess the capacity to earn dividends (IRS Revenue Ruling 59-60, 1959)

Financial Analysis (cont.)• Specify the…

– Standard of value (e.g., Pratt, 2000)

– Premise of value (e.g., Uniform Standards of Professional Appraisal Practice, 2008)

– Uses of the valuation (e.g., Trugman, 2004)

• Assess the discount rate (e.g., Brealy & Meyers, 1998)

– WACC

– CAPM

– Build-up method (Pratt, 2000)

Financial Analysis (cont.)

• Forecast cash flows using…

– Historical financial data

– Current economic information

– Adjustments made from the characteristics of marketability • Either to cash flows, risk level, or both, as appropriate

Brewer’s Proposal1. Locate financial data on a sufficient sample of the 119 FBS

programs Revenue data Expense data

2. Assess Cash Flows

3. Using relevant publicly available characteristics inuring to FBS programs, develop a risk model.

4. Using cash flows, quantitative risk assessment, and growth forecast, develop a capitalization model under currently accepted financial economics theory to value FBS programs.

Publicly Available Characteristics• Dividend paying capacity…– Program adjusted cash flow (cf)

• Risk…– Turnstile attendance (a)– Program historical FBS rankings (r) – Proximity to and association with

nearest “major league” town and franchise (t)

– School reputational quality (q)– Power conference affiliation (c)

Most Valuable FBS ProgramsBREWER MODEL

1. Texas $379million2. Georgia $355 million3. Michigan $306 million4. Notre Dame $281 million5. Ohio State $277 million6. LSU $261 million7. Florida $257 million8. Alabama $233 million9. Auburn $206 million10. Texas A&M $185 million

A Contrast of Results Brewer Model

1. Texas $379million2. Georgia $355 million3. Michigan $306 million4. Notre Dame $281 million5. Ohio State $277 million6. LSU $261 million7. Florida $257 million8. Alabama $233 million9. Auburn $206 million10. Texas A&M $185 million

Ozanian Model1. Notre Dame $101 million2. Texas $92 million3. Georgia $90 million4. Michigan $85 million5. Florida $84 million6. LSU $76 million7. Tennessee $74 million8. Auburn $73 million9. Alabama $72 million10. Ohio State $71 million

A Contrast of Results

• Are the values significantly different?– YES (p-value = 0.0000008502)

• Is the first-order linear measure – the slope of value drop descending the ordinal ranking – significantly different?– YES (p-value = 0.0079)

A Contrast of Results

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f(x) = − 3.24848484848485 x + 99.6666666666667R² = 0.926558045331992

Series1Linear (Series1)

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f(x) = − 19.6484848484849 x + 382.066666666667R² = 0.954971034402553

Series1Linear (Series1)

What’s the Difference? ∆Brewer• Uses adjusted cash flow

generated by programs (Value to program owner).

• Incorporates historical performance, turnstile attendance, and other idiosyncratic factors to develop a risk profile for each school (risk to program’s future).

Ozanian• Uses cash flow to academics

and overall (value to university academics).

• Includes analysis of the impact to the community (value to community).

• Includes element of contribution to the conference (value to conference)

Questions…