In life, everything is worth $0 until someone opens up a checkbook or wheels over a barrow of cash.
So today over at Forbes, Mike Ozanian, Executive Editor, ponders over the estimated worth of the Milwaukee Bucks, the NBA professional basketball franchise. Ozanian frets over whether the franchise is worth $450 million or $550 million.
Back in March 2014, Marc Lasry and Wesley Edens paid $550 million to buy the Bucks franchise from previous owner, Herb Kohl. From Herb Kohl's perspective, that Kohl accepted $550 million, the Bucks were worth $550 million to Kohl. It's not hard.
Foolishly, Lasry and Edens overpaid for the Bucks even though the Bucks are worth $550 million to Lasry and Edens. What should have Lasry and Edens paid to get the Bucks franchise?
Well, what is the revenue stream of the Bucks? How does that revenue stream compare to other investments?
The current TV-broadcast contract between the NBA and all TV broadcasters pays the NBA $930 million a year. The Bucks franchise portion is $31 million a year. The 2014 attendance tallied to 552,967. The average ticket price for a game to watch the Bucks came in at $47.7. So, revenue for broadcast rights and ticket sales tallied to $57.4 million.
Now, if we guess and say the franchise earned another $14.72 million from sponsorship and advertising, suite sales, seat premiums, concessions, merchandise, and parking, total revenue tallies to $72.1 million. That guess comes from a premium over actual numbers of another small market NBA franchise.
The average price-to-earnings for the S&P 500 is $31. The estimated percent profit (after-tax income) on 12-month gross revenues 13%. EPS is a good stand-in for market cap to 12-month after-tax profit.Using that as a benchmark for opportunity cost, no shrewd businessman should have paid more than $290.6 million for the Milwaukee Bucks. Said another way, if you could buy every firm of the S&P 500, to get the same profit from the Milwaukee Bucks, if you paid one dollar more than $290.6 million, your return would be less compared to profit earned from owning every firm of the S&P 500.
Let's look at firms associated with the NBA: Disney, Time Warner Cable, Coca-Cola, Nike. To get the same return as buying Coca-Cola outright, if you could, no one should have paid more than $236.4 million for the Milwaukee Bucks. To get the same return as buying the wonderful world of Disney outright, no one should have paid more than $232.3 million to own the Bucks.
Compared to Nike, no one should have paid more than $181.2 million for the Bucks. Compared to Time Warner Cable, no one should have paid more than $133.6 million.
At a reported sale price of $550 million for the Bucks, for every $1 someone should have paid for the Bucks, Lasry and Edens overpaid by $1.89.
Mega-millionaires and billionaires overpay for pro sports franchises for one reason alone — vanity.
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