Brave deeper into the Liberty complex $BATRA - Yet Another ...

Brave deeper into the Liberty
complex $BATRA
I’ve got a few other companies I wanted to write about, but given their
shareholder webcast is early next week, my last post was on LVNTA (which I am
very long), a tweet on them drew a nice response, and I am trying to convince
Greg Maffei to let me race the Freeze at the next shareholder meeting, I
thought now was as good a time as any to talk about Liberty Braves
(BATRA/BATRK; disclosure: long).

The entire Liberty complex is notoriously complex, but one of the nice things
about Liberty is they’ll often just hand you a slide that shows you how to
value a piece of the company (and it's just on you to verify and update).
Sure enough, at their November investor day, Liberty presented the slide
below.

Unfortunately for investors today (and that includes me), BATRA was priced at
~$17/share at the time versus today’s share price of ~$23/share. Fortunately
for investors, that table is not exactly difficult to recreate and update
with different assumptions. Here’s a Gabelli report that does just that and
shows upside to $30.

I’ve spent a lot of time thinking about the Braves SOTP; in fact, I even
recorded a podcast last year walking through its different pieces. And
there’s one piece in the Braves SOTP that I gave the Braves credit for in the
podcast and that Gabelli gives the Braves credit for that I no longer think
is correct: the “hidden asset” of the MLB (technically, I only gave credit

for MLBAM on the podcast, but it’s the same thinking).

Let’s start with the thesis for the hidden asset: each baseball team owns
    th
1/30 of the MLB. The MLB is valued at $12B; therefore, the Braves have a
hidden asset of ~$360m on their balance sheet. In addition, the MLB owns
MLBAM (MLB Advanced Media), which has majority control of BAMTech (whose
technology powers direct-to-consumer streaming services like MLB.TV (duh),
HBO Now, and the WWE network). In late 2016, Disney paid $1B for a 33% stake
in BAMTech. Since the MLB own 66% of BAMTech and the Braves own 3% of the
MLB, the Braves stake in MLBAM is worth another ~$60m ($3B * 66% * 3%). Put
it together and the Braves have a hidden asset through their MLB ownership
worth ~$420m (the Gabelli piece estimates it at $450m and gives it a 50%
haircut to get to $225m).

So why do I think that “hidden asset” story is off? Every team owns the same
stake in the MLB / MLBAM / BAMtech. The MLB owners know that they have this
stake, and I highly doubt they’re just giving it away when they sell their
teams. In other words, when the Marlins sell to Derek Jeter (or whoever) for
$1.2B, that valuation will certainly include the embedded value of BAMTech
and MLB.

If you take the MLB hidden asset out and use the rest of the Gabelli numbers,
BATRA today is worth ~$26/share. Not a huge upside from today’s share price
of $23, so is it really worth buying / looking at?

Obviously, I think the answer is yes   (again, I’m long). There are two reasons
I believe that. The first and most     important reason is that I think every
American sports team in the big        three sports (basketball, baseball,
quidditch) is massively undervalued    by analysts and Forbes. The second and
less important reason is I think the   Braves in particular are undervalued.

Let’s start with my first point: I think every big three sports team
(actually, I’d be willing to extend it to the big five and include football
and hockey) is undervalued by analysts and Forbes right now. Public analysts
generally value sports teams like this: take whatever Forbes has valued the
team in their most recent rankings and add a 30% premium to get to private
market value. To justify that 30% number, they take the past sales prices and
average them out. Here’s a really helpful slide from the most recent Braves
presentation that shows what a typical analyst does.

Notice anything about that chart? A few things jump out to me

1. The Mariners premium was really small.
    2. There was only one professional sports team sold in both 2016 and
       2015
    3. The Clippers premium was so massive that is has to be excluded or
       else you end up with silly high premiums

Here’s my theory: in the old days, team owners weren't as rich as they were
now (often a team was the vast majority of their net worth), and teams were
often a bit of a headache as much lower revenue numbers lead to more
contentious labor fights and teams were often money losers. Today, leagues
are printing money (leading to a relatively benign labor environment), team
owners are often billionaires outside of their team ownership, and teams are,
at a minimum, breakeven and often producing a nice profit. The combo means
that there are much fewer sports teams in general for sale, and I believe
that going forward when teams are up for sale the premiums are going to be
startling. I’ll dive more fully into that theory in a second, but let’s
address the elephant in the room: isn’t that thesis disproved right off the
bat by the small premium for the Mariners?

I don’t think so. Nintendo owned the Mariners, and they made it clear they
wanted a quick and non-contentious sale to their minority partners that would
allow Nintendo to keep a stake in the team. Nintendo was also something of a
forced seller as they “could use the infusion of cash”. A semi-forced seller
who openly admits to not wanting a full auction / shop process and wants to
sell to their minority owners while maintaining a stake themselves is not
exactly an ideal place to find a premium. If a process that poor results in a
19% premium, imagine what a full process could have gotten.

So, Mariners aside, why do I think teams will sell for massive premiums?
There is simply no supply of sports teams and the demand is high, driven by a
decade long bull market and increasing accumulation of wealth by the top 1%.
Again, look at that chart of sales premiums. There was one sale in 2015 (the
Hawks, who were sold after an inflammatory email sparked controversy) and one
in 2016. Given the Mariners weren’t really shopped widely, there was
effectively one team that hit the open market in the past two years, and that
was only because their owners’ hands were forced.

If we drop the Mariners and Clippers both from the average (the Mariners
because they weren’t really shopped and the Clippers because the valuation
was so high), then the average of the four most recent teams sold is ~60%.
Most of those teams were sold under pretty desperate circumstances (the
Clippers had the infamous Sterling scandal, the Hawks had an email scandal of
their own, and the Kings owners had lost a ton of money; see end notes for
more), but obviously a ~60% premium would be nice for any Braves shareholder
today.

This "larger premium" point is further backed up by what’s happening with the
Marlins right now. The Marlins are currently in late stage talks to be sold.
Three groups are circling the team with a ~$1.2B valuation. The Marlins were
valued by Forbes at $940m, so that 27% premium is no big deal, right?

A deeper dive shows the premium to an “unadjusted” number is actually
                                            nd
significantly higher. The Marlins were the 2 least valuable team (according
to Forbes) in 2016 at $675m. Forbes took their valuation way up in 2017
because the Marlins had a handshake deal to sell themselves for $1.6B that
fell through because the soon to be owner was named the ambassador to France.
The average MLB’s team value increased by 19% in 2017 (a figure slightly
raised by the Marlins ~40% jump, but not enough to quibble with), so if we
assume the Marlins would’ve increased by a similar amount absent the $1.6B
deal, the current $1.2B is a ~50% premium to the Marlins “baseline” value of
~$800m (2016 valuation of $675m increased by 19%).

Ok, so hopefully I’ve hammered my point home by now: the Forbes valuations
and “30%” premium analysis lots of analysts like to use massively undervalues
sports franchises in general. Now let’s turn to my second point: the Braves
themselves are undervalued.

Let’s just start with a simple comparison: Marlins to Braves. There’s no
doubt the Braves should be worth significantly more than the Marlins. The
                                                                        th
most recent Forbes valuation had the Braves valued at $1.5B as the 12        most
                                                                      th
valuable team in baseball, while the Marlins at $940m were the 25        most
valuable. The Braves have the largest radio affiliate group in the MLB (147
local radio stations across the southeast) and a deep history with a national
fan base dating back to when they were the only team that was nationally
broadcast consistently when they were on TBS. So if the Marlins are having a
bidding (during an auction described as “a star-studded group of bidders
pushing up the price on a last-place team in a middling market for pro
sports”) war in the ~$1.2B range, I would feel pretty comfy the Braves would
see plenty of demand in the ~$2B range. (Here’s what management had to say on
the Braves versus Marlins debate on the Q4 call “I would posit as a proud
owner that the Atlanta Braves, one of the most storied and longest franchises
in baseball, frankly in professional sports in the U.S. would be far more
valuable than the Marlins, given their fan base, given their opportunity,
given the new stadium, given the potential TV revenue ahead, given the
breadth of the radio coverage, many, many factors that we would be more
valuable than the Marlins, whatever prices they eventually printed if it
is.”)

Moving past a simple comparison, I think the Braves in particular are
undervalued. Forbes values teams on a revenue multiple, and the Braves’
revenue is depressed from a few angles currently.

       New stadium: The Forbes valuation is based on last season’s revenue.
       The Braves moved into a new stadium this season. In their spin off
       presentation, Liberty noted that the average team saw a 19% increase
       in the first year after building a stadium. I would guess the Braves
       are going to see a significantly higher increase, as YTD attendance
       is up 22% (through the All Star Game). That increase in revenue
       should drive a nice boost to next year’s Forbes value, and as the
       Braves get better I’d expect attendance to continue to improve. If
       the old stadium was averaging ~30k+ in attendance when the Braves

were good, I wouldn’t be surprised to see this stadium get to 33-35k
as the Braves start to turn around. In addition, the new stadium has
more premium seating, so the revenue at a constant level of
attendance should be higher, and I would guess the per head for
ancillaries (food, drinks, etc.) are better at the new stadium, which
should further boost revenue given constant attendance.

Farm system / Future is bright: The Braves are currently pretty bad.
They won 41-42% of their games in the 2015 and 2016 seasons, and they
currently sit just below a 50% winning percentage (though their more
advanced statistics suggests they are over performing a bit right
now). The Braves made a purposefully step back over the past few
years to build out one of the best farm teams in baseball (ESPN has
them #1 this year; bleacher report put them as #2 but basically said
they were tied w/ the Yankees). As that farm system matures, their
performance should increase, drawing improved attendance, revenue,
and prestige.
TV deals undervalued: Both the Braves regional TV deal and the MLB
national TV deal are undervalued.
       Regional deal: The Braves signed a 20 year regional TV deal
       in 2007. It’s been recognized for years this was a bad deal
       that was intentionally below market and signed as part of the
       sales process to Liberty. We don’t know exact numbers, but
       it’s rumored the Braves currently get $10-20m/year from their
       deal; for comparison, the Yankees got $85m/year with 5%
       annual increases in 2012 and the Mariners got $2B over 17
       years in 2013 (~$117m/year, though unsure of how that is
       spread out). Sports deals have risen in value significantly
       since the Yankees / Mariners struck their deals in 2012/13
       (and particularly since the Braves deal was struck in 2007).
       If their contract were to end now, I would bet the Braves
       could sign a new deal tomorrow that would get them
       >$100m/year for 10+ years.
               Fox’s (who owns the Braves regional sports network)
               Q1’17 earnings call was on May 8 t h , so we’re not
               talking about a ton of games, but they noted “Atlanta
               Braves ratings are up over 54% this season so far.”
               Maybe FOX was playing games with the numbers (I would
               guess the ratings for the last couple of games of a
               season after a team’s been eliminated from the
               playoffs are dreadful, so maybe we’re talking about a

bit of an apples to oranges comparison), or maybe
                      there was a small spike due to the new stadium
                      opening. Who knows? But a ratings spike that
                      significant further highlights what a steal the Braves
                      current TV deal is.
               National deal: The MLB’s current national deal was struck in
               2012, and the value of sports rights have increased
               significantly since then. Remember, Forbes generally values
               teams on a revenue multiple, and when the last national TV
               deal kicked in it resulted in a 48% jump in the average value
               of an MLB team, so it’s possible the whole of the MLB is
               undervalued right now and that undervaluation will be
               revealed when the next TV deal is signed.

I’ll list the risks in bullet form below and wrap the write up itself here
with a quick note: there aren’t many opportunities in the public markets to
own professional sports teams (I can only think of three), and given the lack
of direct comps and the fact most of the value of a sports team comes from
capital appreciation and not actual operating income, I think a sports team
is exactly the type of asset that can get undervalued in the public markets.
The Braves today are at an inflection point: the team will get better, the
new stadium will boost revenue, and eventually new TV deals will drive
revenue much higher. Today’s share price reflects none of that.

       Risks
               Franchise values decline: Of all the major sports, I think
               football is the worst positioned long term (given the
               concussion issues), but baseball isn’t far behind given the
               snail’s pace of the game. Let’s be frank: baseball was
               designed by people who had literally nothing better to
               entertain them. Today we have smartphones and Netflix; I
               couldn’t see someone starting from scratch and creating a game
               this slow.
                      Esports is interesting to think about here. I do think
                      kids today are less interested in sports than previous
                      generations. Is that just because some marginal fans
                      are sucked away by other avenues for entertainment? Or
                      is the future of competition in things that little
                      kids can relate to much faster like video games /
                      esports?
               Labor issues: There could be a strike, though that would be a
               little bit away as the current MLB player contract runs
               through 2021.
               TV Deal renewal: The TV bundle which has supported regional
               sports networks and the giant national contracts is coming
               unbundled. If ESPN is on the decline, will the next deal be
               smaller than the current one?
                      I doubt it. I actually think there will be more
                      bidders; Twitter, Netflix, Amazon, Apple, Snapchat,
                      and Facebook could all see strategic value in

something that captures this many eyeballs. I’m not
               saying any of those are likely, but I think the value
               of unique content that needs to be consumer live will
               continue to increase significantly.
       Taxes: buying a sports team carries massive tax breaks for the
       buyer currently. If there’s true tax reform, that could
       change.
       “Most of the value of a sports team comes from capital
       appreciation and not actual operating income”: How can someone
       say that? Isn’t the long term value of a business determined
       by its cash flow? Absolutely, but in the case of sports teams,
       there’s a simple trade off: you can turn them into a cash flow
       machine if you want by running a bare-bones operations and
       fielding an awful team. History has proven that’s penny wise
       and pound foolish: if you pour most of the team’s revenue back
       into the team to make the team better, you’re rewarded with
       higher ticket prices, more prestige, more leverage when
       negotiating TV deals / sponsorships, and ultimately a much
       better sales price when you decide to sell the team.

Odds and ends
       Greg, seriously, if you’re reading this: let me race the
       Freeze at the next shareholder meeting. I’m ready to begin
       training tomorrow.
              More seriously on the freeze: a ton of people are
              talking about him. Listen to this interview, “People
              will buy tickets to the Braves to watch the Freeze or
              race the Freeze.” This Sacramento local news network
              spent more time talking about the Freeze then they
              spent on any other sports segment; Sacramento doesn’t
              even have a baseball team! And the MLB had the Freeze
              at the MLB All Star Game in Miami early this week.
              Obviously the Freeze doesn’t drive franchise
              valuation, but I think he does bring incremental fans
              / eyeballs / brand prestige / merchandise movement,
              and just thinking him up / having him / marketing him
              this well is probably indicative of a well-run
              baseball operations team
       I already discussed the Mariners and Hawks getting sold, but
       let’s dive into the other recent sports team sales. The Bucks
       and Clippers were both sold in 2014. The Clippers were
       infamously force sold by the league after racist rants from
       Donald Sterling came out, the Bucks were sold by Senator Herb
       Kohl who demanded that the team remain in Milwaukee and that
       the new owners needed to build an arena. The Kings were sold a
       year earlier because their owners were facing a liquidity
       crunch (and after a sale at a larger valuation that would’ve
       moved the team was blocked by the league).
              My overall takeaway (as mentioned in the article):

team sales are few and far between these days, and for
       a team to genuinely be sold on the owners’ timetable
       (instead of in a forced sale) and through a full
       process (which the Braves will run if and when they
       sell) is incredibly rare. The Marlins were probably
       the first straight sale in the past five years and
       they got a mammoth premium. I’d expect the same to
       happen if and when the Braves are sold.
This is a Liberty entity, so I have no doubt it will be sold
for a full price when the time is right. However, I think that
day is a long way from today for a variety of reasons.
       From a premium standpoint, the Braves probably want to
       wait to sell until their farm system is maturing / the
       team is good again. It also probably makes sense to
       wait for the next national TV deal if you think it’s
       going to increase a good deal, and honestly it
       probably makes sense to wait even longer until the
       awful regional deal is at least on the horizon for
       renewal.
       From the Liberty standpoint, I believe the Braves are
       their only active business right now so for tax
       reasons they can’t be sold in the near future.
       Everything should be worked out in time, but this is
       not a “buy and flip” type investment. I think you
       really need to believe in the long term story to be
       comfortable here. I’m fine doing that in all my
       investments, but it’s a bit strange to say that about
       a Liberty company since they generally have such
       definitive sale catalysts!
Also somewhat different than the typical Liberty story: I
don’t think return of capital is the end game here. As the
Braves improve, I would guess profit / cash flow increases go
into payroll for the team. Maybe after they ramp payroll up
they consider a share buyback, but I wouldn’t be surprised if
they found other investments / more interesting things to do.