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Evaluation of an Anchor Tenant for Farmer’s Field
Brent Minner | Sandeep Satish | Evan Fleming | Matt Cohen | Mark Willey
February 8, 2014
UCLA Game Day Sports Case Competition
Agenda
2
Evaluating an Anchor Tenant for Farmer’s Field
1. Overview of the Context
Understanding the business challenge and implications for AEG
2. Assessing the Los Angeles Sports Landscape and the History of the NFL Here
What is the current market like? What is the NFL’s involvement in the city historically?
3. Previous NFL Relocations and Other Relocations in Major Sports
Who has done this in the past? What about other sports?
4. NFL Approval Process
What does it take to get this done?
5. Analysis of Lease Obligations and Local Government Restrictions
Compare and contrast of the Rams and Chargers situations
6. Business and Legal Recommendations
Who should move to Los Angeles?
7. Financial Analysis and Rationale
Why our recommendation is justified
8. Risks and Mitigation Strategies
How to address the shortfalls of such a decision
9. Conclusion and Q&A
Understanding the Context
3
• Demolition of an existing LACC hall and construction of a new hall at
LACC, two parking garages, and a special events center (football stadium)
• To be constructed on city land, but AEG would own and operate Farmer’s
Field and parking garages through a ground lease with the city
• AEG required to enter into a long-term agreement for a NFL franchise to
play their home games at the stadium
Memorandum
of
Understanding
• Majority of the costs for the proposed projects would be paid by AEG or
with expected new revenues
• In exchange for paying for part of the city’s new convention hall, the city
would grant AEG signage rights on and around LACC and extend AEG’s
existing ground lease for the STAPLES Center
• The remaining cost of the new convention hall ($195 million) would be
funded with lease-revenue bonds backed by the city’s general fund
The Situation
• AEG is looking for additional insight into potentially luring a franchise to
Los Angeles
• Evaluate between the Chargers and Rams and make a recommendation
for the most viable anchor tenant for Farmer’s Field (30-year, ~$700
million rights deal)
• Our recommendation is to bring the St. Louis Rams to Los Angeles
The Task
Other Sports / Events
• USC and UCLA both in top 25
of total revenue for college
football5
• Home of 1994 FIFA World Cup
and ’99/’03 Women’s World Cup
• Host of 2015 Special Olympics
Summer Games; potential bid
for 2024 Olympic Games
Los Angeles: Rich History, Fertile Sports Landscape
4
LA Kings and LA Galaxy
• Kings 2012 Stanley Cup
Champs; 100.3% attendance
avg in 2013
• LA Galaxy, winner of 2 of last 3
MLS titles; #2 most valuable
MLS Franchise4
Historic NFL Involvement
• Los Angeles was first city to host a Super
Bowl (LA Coliseum, 1967)
• Rams in Los Angeles/Anaheim for 48
years (1946 – 1995)
• Oakland Raiders won a championship in
LA during stay from 1982 – 1994
What Happened?
• Lack of support from LA and
Orange County to assist with
stadium approval process
• Inadequate financing options for
new stadium for both Rams and
Raiders
Rams & Raiders
both leave LA
after 1994 Season
WHY?
LA Lakers and LA Clippers
• Lakers #2 most valuable franchise in NBA at
$1.3B; Clippers #6 in attendance in 2013
Season1
• TV deals with TWC Sports (Lakers) and FSN
Prime Ticket (Clippers) have top 5 viewership in
NBA (average audience size)2
LA Dodgers and LA Angels of Anaheim
• LA Dodgers and Angels placed 3rd and 7th in
terms of Team Revenue in MLB; Dodgers placed
first in attendance in 2013 w/ $3.7M3
• Combined $200 Million in media revenue for 2013,
2nd most for any market in MLB
Previous Relocations in Sports
5
Recent Relocations in the NFL
Relevant Transactions in Other Sports
Year Team From / To Notes
1997 Houston Oilers Houston to Memphis 17 years since the last relocation
1996 Cleveland Browns Cleveland to Baltimore Contentious / surprising move
1995 Los Angeles Raiders Los Angeles to Oakland First “return” relocation
1995 Los Angeles Rams Los Angeles to St. Louis Lucrative stadium offer from St. Louis
1988 St. Louis Cardinals St. Louis to Phoenix Precedence for St. Louis losing a team
Year Team From / To Notes
2011 Atlanta Thrashers Atlanta to Winnipeg NHL returns to Winnipeg
1984 San Diego Clippers San Diego to Los Angeles LA supports a second team
1960 Minneapolis Lakers Minneapolis to Los Angeles LA inherits first basketball team
• Raiders moved back to Oakland from LA: City of Oakland spent $220 million on stadium
renovations, built a new seating section and training facility, and covered all moving costs
• St. Louis Cardinals move to Phoenix when owner Bill Bidwill was not satisfied with any of the
new stadium proposals (contentious, but anticipated move)
• San Diego Clippers averaged 4,344 fans per game (favorable ruling in prior Raiders case
shifted climate)
• Reborn Winnipeg Jets huge success – Top 10 in per game revenue
• The NFL has returned to every city it has vacated in the modern era (Oakland, Baltimore, St.
Louis, Cleveland and Houston) except Los Angeles
Why were
these
selected?
NFL Approval / Re-location Process
6
• Article 4.3 of the by-laws requires prior approval by vote of three-fourths of
the member clubs before a club may transfer its franchise or playing site to
a different city either within or outside its existing home territory
• No club has an “entitlement” to relocate simply because it perceives an
opportunity for enhanced club revenues in another location
• Unassigned franchise opportunities are owned by the League’s members
as a collective whole
Policy and
Procedure
• Relocation may be available if a club's viability in its home territory is
threatened by circumstances that cannot be remedied by diligent efforts of
the club working, as appropriate, in conjunction with the League Office
• Advancement of the League's collective interests include: TV
rights/opportunity, strong and geographically distributed franchises,
attractive stadium facilities, and financially viable franchises
How does one
move?
• Willingness of stadium authority or community to remedy any deficiencies
in or to replace such facility
• Whether the club proposes to relocate to a community or region in which
no other member club of the league is located
• Whether the proposed relocation from a larger to a smaller television
market, adversely affects current or anticipated league revenue or
expense stream (additional issue: transfer fee)
Member Club
Perspective
Lease Agreements and Gov’t Restrictions
7
St. Louis
Rams
Lease
• Section 16 (E): In the event the Facilities and each Component thereof is not First Tier at
either March 1, 2005 or March 1, 2015, the Rams may by written notice to CVC convert
the term of this Amended Lease
• Arbitration ruling in favor of Rams triggers this clause that enables the team to break out of
lease after the 2014 season
San Diego
Chargers
Lease
• The San Diego Chargers, can announce their intention to leave San Diego between Feb. 1
and May 1 of each year through 2020 if they pay an early termination fee tied to the bonds
used to expand Qualcomm Stadium in 1997
A Los Angeles NFL Franchise is Unlikely to be Taken by the Government
• The City of Oakland could use its eminent domain power to take an intangible asset (i.e. an NFL franchise), provided that (1) the taking is for
a public use, and (2) just compensation is paid. City of Oakland v. Oakland Raiders, 646 P.2d 835, 843 (Cal. 1982).
• Oakland cannot acquire an NFL franchise through the use of the eminent domain power because doing so impermissibly burdens interstate
commerce. City of Oakland v. Oakland Raiders, 220 Cal. Rptr. 153, 157 (Cal. App. 1st Dist. 1985).
The NFL Relocation Policies Must be Judged According to the Rule of Reason
• NFL relocation policies are not illegal per se under Section I of the Sherman Act, but should be evaluated based upon the rule of reason. Los
Angeles Meml. Coliseum Commn. v. Natl. Football League, 726 F.2d 1381, 1387 (9th Cir. 1984).
• The rule of reason requires the factfinder to decide whether the facts of the case demonstrate an unreasonable restraint on trade. Id at 1387.
Courts’ View of Rule 4.3 is Dependent Upon a Fact-Based Inquiry
• In Los Angeles Memorial Coliseum v. N.F.L, the Court of Appeals upheld the jury’s finding that Rule 4.3 was an unreasonable restraint on
trade because it actually harmed the LA Coliseum, because it was not sufficiently procompetitive, and because the rule was not based on a
clear set of factors. Los Angeles Meml. Coliseum Commn. v. Natl. Football League, 726 F.2d 1381, 1394 (9th Cir. 1984).
• In St. Louis Convention v. N.F.L, the Eighth Circuit held that that the St. Louis Convention Center did not demonstrate that there was a
collusive agreement among N.F.L teams, or that the Center was injured as a direct and proximate result of actions taken by the N.F.L in
restraint of trade. St. Louis Conv. & Visitors Commn. v. Natl. Football League, 154 F.3d 851, 861 (8th Cir. 1998).
Business and Legal Recommendations
9
Benefits to St. Louis Rams
• Have been 29th or below in
attendance since 2008; potential
to tap into 2nd largest media
market in the country
• LA Stadium already has
financing and sponsorship deal
in place; opportunity cost
mitigated
• Local TV ratings are 4th lowest
since moving to St. Louis in
1995
Benefits to AEG
• Kroenke is longtime friend and
business partner of Anschutz,
could facilitate/expedite
business transactions
• Exclusivity on signage rights on
and around LACC and
extension of ground lease on
Staples Center
• Significant political and financial
upside if move is a success
Pertinent Lease Opportunities
• Rams have legal exit clause
after 2014 season
• Must have a “top-tier” facility
which has not been approved
(in conjunction with favorable
arbitration ruling)
NFL Relocation Justification – Expanding the Pie
• The degree to which the club has engaged in good faith negotiations with appropriate persons concerning terms and condition
• Effect of the proposed relocation on NFL scheduling patterns, travel requirements, divisional alignments, traditional rivalries, and fan and
public perceptions of the NFL and its member clubs
• Whether there are legislative or referenda proposals pending to address these issues; and the characteristics of the stadium in the
proposed new community
Benefits to Los Angeles
• Local support for Rams still
remains (see adjacent)
• Ability to attract large scale
economic events such as Super
Bowl, collegiate championships,
Olympics
Rank DMA NFL Team NFL Revenue Sharing(1) Market(2) Stadium(3) Brand(4) Total Rank NFL Team NFL Revenue Sharing(1) Market(2) Stadium(3) Brand(4) Total
1 5 Dallas Cowboys 813 657 612 273 2355 1 Dallas Cowboys 813 657 612 273 2355
2 7 New England Patriots 809 414 391 223 1837 2 New England Patriots 809 414 391 223 1837
3 8 Washington Redskins 811 395 365 145 1716 3 Washington Redskins 811 395 365 145 1716
4 1 New York Giants 828 334 281 113 1556 4 New York Giants 828 334 281 113 1556
5 10 Houston Texans 819 278 253 108 1458 5 Houston Texans 819 278 253 108 1458
6 1 New York Jets 775 278 223 98 1374 6 Los Angeles Rams 742 316 325 74 1456
7 4 Philadelphia Eagles 777 241 214 88 1320 7 New York Jets 775 278 223 98 1374
8 3 Chicago Bears 759 255 166 78 1258 8 Philadelphia Eagles 777 241 214 88 1320
9 27 Baltimore Ravens 759 221 171 81 1232 9 Chicago Bears 759 255 166 78 1258
10 6 San Francisco 49ers 865 187 106 69 1227 10 Baltimore Ravens 759 221 171 81 1232
11 26 Indianapolis Colts 785 194 150 75 1204 11 San Francisco 49ers 865 187 106 69 1227
12 70 Green Bay Packers 764 204 144 85 1197 12 Indianapolis Colts 785 194 150 75 1204
13 17 Denver Broncos 741 201 149 76 1167 13 Green Bay Packers 764 204 144 85 1197
14 23 Pittsburgh Steelers 762 170 118 77 1127 14 Denver Broncos 741 201 149 76 1167
15 13 Seattle Seahawks 722 164 140 58 1084 15 Pittsburgh Steelers 762 170 118 77 1127
16 16 Miami Dolphins 722 152 145 58 1077 16 Seattle Seahawks 722 164 140 58 1084
17 14 Tampa Bay Buccaneers 721 152 147 49 1069 17 Miami Dolphins 722 152 145 58 1077
18 25 Carolina Panthers 703 159 146 51 1059 18 Tampa Bay Buccaneers 721 152 147 49 1069
19 29 Tennessee Titans 704 162 137 55 1058 19 Carolina Panthers 703 159 146 51 1059
20 31 Kansas City Chiefs 740 133 101 34 1008 20 Tennessee Titans 704 162 137 55 1058
21 15 Minnesota Vikings 774 120 64 49 1007 21 Kansas City Chiefs 740 133 101 34 1008
22 19 Cleveland Browns 686 159 114 49 1008 22 Minnesota Vikings 774 120 64 49 1007
23 51 New Orleans Saints 659 155 140 55 1009 23 Cleveland Browns 686 159 114 49 1008
24 12 Arizona Cardinals 686 126 98 54 964 24 New Orleans Saints 659 155 140 55 1009
25 28 San Diego Chargers 685 130 95 41 951 25 Arizona Cardinals 686 126 98 54 964
26 9 Atlanta Falcons 666 137 88 43 934 26 San Diego Chargers 685 130 95 41 951
27 35 Cincinnati Bengals 667 126 93 40 926 27 Atlanta Falcons 666 137 88 43 934
28 11 Detroit Lions 693 107 60 42 902 28 Cincinnati Bengals 667 126 93 40 926
29 21 St. Louis Rams 660 106 73 38 877 29 Detroit Lions 693 107 60 42 902
30 52 Buffalo Bills 635 113 91 33 872 30 Buffalo Bills 635 113 91 33 872
31 48 Jacksonville Jaguars 603 117 85 36 841 31 Jacksonville Jaguars 603 117 85 36 841
32 6 Oakland Raiders 650 92 50 35 827 32 Oakland Raiders 650 92 50 35 827
Total 23,443 6,439 5,210 2,409 37,501 Total 23,525 6,649 5,462 2,445 38,080
Growth Rate 0.35% 3.25% 4.84% 1.49% 1.54%
Impact on Franchise Valuation
10
• Moving the team from St. Louis will improve the valuation of the franchise driven by the attractive Los Angeles market
(more lucrative sponsorship opportunities, premium ticket sales, heightened media attention)
• Attractive location will drive Stadium revenue through multi-purpose use opportunities year-round
• Market revenue is indicative of DMA for market (LA #2, St. Louis #21)
• Brand value will increase due to the extended reach of the LA market
Risks and Mitigation Strategies
11
• Operational impact of move on
financials
• Value change of franchise after
move
St. Louis Rams• Higher average ticket cost and travel expense
savings will serve to positively impact op income
• Media, marketing, and television opportunity will
significantly appreciate value of business
• Already has shown a
willingness to spend public
money on stadium
City of St.
Louis
• City still under $150MM in debt from initial
stadium project
• Investment required to fulfill clause in lease not
realistic option with public financing
• Reliant on AEG success
• Most academic studies find
little gain from new stadiums
City of Los
Angeles
• Under MOU, city’s General Fund costs would be
limited
• Strong potential for continued revitalization of
downtown neighborhood (Ex. STAPLES Center)
• Ownership resistance: 9
owners needed to block move
• NFL Relocation/Transfer Fee
NFL
• No breach in current stadium lease allows flexibility
for NFL to make favorable decision for relocation
• Proposed relocation should positively affect
anticipated League revenue
Farmers
Insurance
• Team performance and
overall draw impacts value of
$700M price tag
• Non-Football activities and events at Farmers
Field add tremendous value to deal to hedge
against issue
San Diego
Chargers
• Closer to Los Angeles
• Can pay termination fee to
exit contract, why not them?
• Chargers can terminate lease with payment
anytime until 2020; Rams opportunity is
immediate (potential for both teams later)
• Rams still have loyal fan clubs in LA
Conclusion
12
For AEG to
Succeed
Everyone Needs
to WIN
AEG:- Emblem for revival of football in
Los Angeles
- Generous externalities with
existing real estate portfolio
- Opportunity to control mega
entertainment center
St. Louis Rams:- No termination fee with current
lease / stadium in place
- Previous LA market experience
- Access to unparalleled revenue
sources
City of Los Angeles:- Economic and Political Return on an NFL Team
- AEG responsible for any revenue shortage
- Further growth and expansion of successful Staples/LA Live area
National Football League:- Opportunity to increase the national pie
- Move from low to high potential market
- Take revenue dollars from MLB, NBA, NHL
Kellogg Team
13
• Brent Minner
• 2Y MBA
• Sandeep Satish
• 2Y MBA
• Evan Fleming
• 2Y MBA
• Matt Cohen
• JD-MBA
• Mark Willey
• JD-MBA
Research Sources
15
• Associated Press. “Roger Goodell sends memo”, July 29, 2012.
http://espn.go.com/los-angeles/nfl/story/_/id/8113796/nfl-commissioner-roger-goodell-sends-los-angeles-
relocation-memo.
• “Policy and Procedures for Proposed Franchise Relocations.”
http://www.leg.state.mn.us/webcontent/lrl/issues/FootballStadium/NFLFranchiseRelocationRules.pdf
• Sisney, Jason. “Letter to Hon. Kevin de Leon” August 17, 2011.
http://www.lao.ca.gov/reports/2011/stadm/letters/farmers_field_082611.pdf
• Vincent, Roger. “A return of L.A. Rams? Owner is said to buy possible stadium site” LA Times, January 30,
2014.
http://www.latimes.com/sports/football/nfl/la-sp-nfl-la-rams-20140131,0,3805682.story#ixzz2s0nvWdBq”
August 17, 2011.
Charges & Rams Franchise Value Comparison ($$ in millions)1
Total Value Sport City/Market Stadium Brand
San Diego 951$ 685$ 130$ 95$ 41$
% of Value 100.0% 72.0% 13.7% 10.0% 4.3%
St. Louis 877$ 660$ 106$ 73$ 38$
% of Value 100.0% 75.3% 12.1% 8.3% 4.3%1. Data taken from Forbes.com
Forbes Existing Valuation Comparison
16
Key Observations/Insights:• Both franchises are valued close to the same amount with San Diego extracting higher value from NFL Revenue
shared across teams
• Value of franchise brands nearly identical; given extensive history of Rams in LA, it is safe to say Rams have most
to gain in brand value by making return to Southern California
Notes• St. Louis has more opportunity to increase total revenues as average ticket price will be higher in LA market
• Operating income should also increase for St. Louis as travel expenses within the division (4 out of 16 games per
year) should decline given new location in Los Angeles
• Given current state of St. Louis franchise (declining attendance, below overage income, etc.), there is more to gain
with the Rams in LA than a move of the Chargers to LA.
Operating Metrics at a Glance ($$ in millions)2
Total Value Revenue Op Income Gate Receipts Avg Ticket Price Metro Area Pop
NFL Average 1,165.0$ 286.0$ 44.0$
San Diego 951.0 250.0 30.4 49.0 80.00$ 3.2MM
St. Louis 877.0 239.0 21.1 42.0 69.00$ 2.8MM
Operating Metrics at a Glance ($$ in millions):
Chargers & Rams Franchise Value Comparison ($$ in millions)1: