Aramark announced an F&B deal with the Las Vegas A’s that includes taking an equity position in the team. Is it a sign of what’s to come?

The SBJ reported that Aramark is making an estimated $100 million equity investment as part of their contract with the Las Vegas A’s. Coming on the heels of the private equity investment involved in the Celtics sale, and the earlier move by the NFL to allow PE investments, it makes sports team equity the stuff of AI start-ups. Some are predicting equity elements will become standard for future deals. 

With each team sale seeming to set a new record, there’s a feeling that valuations will keep rising at their torrid pace. Yet for investors like Aramark to expect this to continue, one of these three scenarios has to be true. 

Sport Teams Are Significantly Undervalued

You certainly could have made this argument 15-20 years ago. Teams were treated more as status symbols than savvy business investments. As television audiences fragmented, sports broadcast rights soared. Teams went from popular institutions to valuable media properties. While media contracts continue to grow in value, investors have had plenty of time to build those trends into future revenue projections. It’s difficult to believe that sports teams are still an overlooked asset class. 

Sports Teams Are a Collectible Asset

Most businesses are valued on their ability to generate cash. Collectibles, however, are based on a combination of scarcity and cultural desirability. In this view, the Dallas Cowboys are valued less like Ford Motors and more like a Van Gogh painting. The upside of this for investors is that team values can continue to rise independently of their business performance. The downside is that the opposite is also true. Collectible investors are just making a bet that there will be other people willing to pay more sometime in the future.

New Investment Can Unlock New Revenue Streams

Perhaps the most compelling argument is that new investment will enable teams to expand or create new revenue streams. This potential is clear in new leagues. Professional volleyball and women’s soccer have the potential to grow their audiences and their businesses significantly if they can attract fans. It’s less clear to see untapped revenue streams in the more established leagues. But there is potential in:

• Expanded ancillary businesses that grab a higher share of wallet from fans (e.g, Atlanta’s Battery Park)

• International expansion that generates even bigger media audiences and new franchises

• Higher gambling revenues from sponsorships, data sharing deals, and other partnerships

It’s easy to imagine sports continuing to grow for decades to come. But it’s difficult to believe that valuations will continue to rise 2-5X faster than the S&P. For more on this topic, check out another piece of ours on valuation math here.