The Wall Street Journal-20080213-BUSINESS- Is Owning a Sports Team a Losing Bet-

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BUSINESS: Is Owning a Sports Team a Losing Bet?

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Are sports-franchise prices headed for a tumble? Boom-time euphoria has vanished from the stock and real-estate markets. But the cost of acquiring a sports team keeps climbing in the face of a weakening economy, preserving what may be one of the last asset bubbles in North America.

Even Societe Generale, a longtime lender to sports-team buyers, recently decided it was time to pull out. The big French bank says it withdrew from the market last month, believing that such lending isn't central to its mission. A Societe Generale spokesman declined to say whether the decision was influenced by the bank's big losses from trading in European stock-index futures.

For decades, the sports world has been insulated from economic reality because there are plenty of tycoons with millions to burn and not enough teams to go around. So these tycoons have jumped into bidding wars, just for the thrill of owning a one-of-a-kind property. Other businesses keep their fortunes strong. Team ownership becomes a hobby that isn't expected to generate much of a return.

But investment bankers and sports-team appraisers see reasons why that pattern is likely to come under strain. Even some team owners privately voice jitters.

"Nothing keeps going up, no matter what," says Steve Greenberg, an investment banker at Allen & Co. who specializes in the sports business. "If we're headed into a significant economic disruption, where people don't feel comfortable about their net worth, that will affect everything."

Even for plutocrats, the sums involved in owning major-league teams have become big enough that they can't be laughed off. Top franchises in the National Football League are seen as $1 billion properties. Many U.S. baseball and basketball teams are valued at $400 million or more. Even smaller-market teams in the National Hockey League trade hands for $200 million.

Profitable sports franchises may be priced at 20 times annual cash flow, at least double the valuation of a mundane company with similar prospects. Weaker teams can sustain operating losses of $10 million a year or more, before taking into account debt service and noncash charges such as depreciation and amortization.

Sal Galatioto, a former head of Lehman Brothers' sports-business practice who now runs Galatioto Sports Partners, says he has seen successful hedge-fund managers toy with the idea of buying into a sports team only to back off as they absorbed just how problematic the numbers would be. "They will say that normal business yardsticks don't matter to them," Mr. Galatioto says, "but when it comes to pulling the trigger and doing the deal, suddenly those things do matter."

Ticket sales could be immediately sensitive to an economic slowdown. Most broadcast revenue is tied up in longer-term contracts, which wouldn't be hurt right away by a slump in ad spending, but as television contracts come up for renewal, teams could be hit with unpleasant surprises.

It could take a year or two for team prices to soften. Meanwhile, unrealistic asking prices could make it impossible for many deals to close. Donald Erickson, the former head of Ernst & Young's sports- valuation practice who now runs Erickson Partners in Dallas, sees that as a particular risk for second-tier teams in hockey and baseball.

Despite these concerns, teams continue to change hands at unexpectedly high prices. In October, Forbes magazine valued hockey's Edmonton Oilers at $157 million and the Nashville Predators at $143 million. Both recently announced transactions at prices about 30% above those levels.

Canadian drugstore operator Daryl Katz contends he got a good deal with his C$200 million, or nearly US$200 million, agreement to buy the Oilers.

Mr. Katz noted in an interview that his Rexall chain already is a big sponsor of the Oilers. He sees ways to work that relationship even more effectively. Edmonton's booming economy also reassures him; the city is a service hub for Canada's oil-sands industry.

William "Boots" Del Biaggio isn't quite so ebullient. He is a Silicon Valley technology investor who is part of an investor group that bought the Nashville Predators for $193 million in December. The team currently ranks 28th in attendance in the 30-team NHL. It fills an average 14,224 seats at home games, or 83% of capacity.

"Hopefully, attendance will pick up," Mr. Del Biaggio says. "We're going to be really dependent on improving corporate sales. Anyone who is doing this to make money is doing it for the wrong reasons."

There's been speculation Mr. Del Biaggio might want to move the team to Kansas City, something he doesn't rule out. "If expansion or relocation became a possibility in several years, Kansas City would be an awesome location," he says. "But at this point, I'm committed to Nashville."

The Predators haven't been profitable in recent years. Mr. Del Biaggio says he hopes to get to break-even or better on stronger ticket sales and perhaps the NHL's eventual ability to win a national television contract again. Still, he says, "I would never want more than 10% of my net worth to be in sports."