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
Issues
Current FBS valuations may exclude important
factors in assessing value
Current FBS valuations may not have applied
valuation theory in assessing value
A 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.
2.
3.
Team contribution to athletic department
Team contribution to university
Incremental spending in local metro-area during home games
• 2008 (2nd year valuations):
1.
2.
3.
4.
Team contribution to university
Team contribution to athletic department
Team contribution to conference
Incremental spending in local metro-area during home games
Forbes Valuation Results (2008?)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Notre Dame $101 million
Texas
$92 million
Georgia
$90 million
Michigan
$85 million
Florida
$84 million
LSU
$76 million
Tennessee
$74 million
Auburn
$73 million
Alabama
$72 million
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
the modern approach to determining
value of anticipated benefits (Treynor, 1961)
intrinsic to
• 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
– WACC
– CAPM
– Build-up method (Pratt, 2000)
(e.g., Brealy & Meyers, 1998)
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
Proposal
1. Locate financial data on a sufficient sample of the 119 FBS
programs
 Revenue data
 Expense data
1. Assess Cash Flows
2. Using relevant publicly available characteristics inuring to
FBS programs, develop a risk model.
3. 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 Programs
BREWER MODEL
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Texas
Georgia
Michigan
Notre Dame
Ohio State
LSU
Florida
Alabama
Auburn
Texas A&M
$379million
$355 million
$306 million
$281 million
$277 million
$261 million
$257 million
$233 million
$206 million
$185 million
A Contrast of Results
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Brewer Model
Texas
$379million
Georgia
$355 million
Michigan
$306 million
Notre Dame $281 million
Ohio State
$277 million
LSU
$261 million
Florida
$257 million
Alabama
$233 million
Auburn
$206 million
Texas A&M $185 million
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Ozanian Model
Notre Dame $101 million
Texas
$92 million
Georgia
$90 million
Michigan
$85 million
Florida
$84 million
LSU
$76 million
Tennessee
$74 million
Auburn
$73 million
Alabama
$72 million
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
120
400
OZANIAN
100
y = -3.2485x + 99.667
R² = 0.9266
80
BREWER
350
y = -19.648x + 382.07
R² = 0.955
300
250
Series1
60
Series1
200
Linear (Series1)
Linear (Series1)
150
40
100
20
50
0
0
1
2
3
4
5
6
7
8
9
10
1
2
3
4
5
6
7
8
9
10
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…