Valuations and active buyers actually willing to pay that much are two different things, as the twists and turns of the Disney sale of the former Fox RSNs have shown. Something similar may happen with the Pac-12, where commissioner Larry Scott (seen above) is currently seeking to sell a 10 percent stake in the conference‘s revenue streams (including “broadcast rights, sponsorship rights, merchandising and all other commercial assets,” the latter of which includes the Pac-12 Networks) for $500 million. The idea there is to gain some upfront cash to distribute amongst the member schools, which could then use that in coaching hires, facility upgrades and the other areas where they’re being left behind by conferences distributing much more money (currently the Big Ten, SEC, and Big 12, with the ACC soon to join that club) to schools. But a problem with this plan is that there might not be many investors interested at the Pac-12’s proposed rate, according to “a former hedge fund manager with more than a decade of experience” who spoke anonymously to CBS Sports’ Dennis Dodd:
Do the math on that $500 million investment for a 10 percent stake, and the Pac-12 is valuing itself as a $5 billion enterprise. Our expert put its actual valuation at around $3.6 billion. That’s still high compared [to] any other conference.
“There’s a big disconnect between what they’re talking and what a fair valuation might be,” he said. “[Scott] might say there’s no other asset available like this on the market. I’d have a hard time [investing] when it’s valued at two-and-a-half what the Big Ten and Big 12 are worth.
“If [Scott] thinks he’s going to get top dollar for the piece of the business that he’s selling, that’s probably not going to happen. They’re going to have to give up more than 10 percent [at a] $500 million valuation.”
Yes, even $3.6 billion sounds a bit high, especially as Dodd’s piece includes another college football executive saying that Big Ten commissioner Jim Delany values that (by most measures, much more successful) conference at $2 billion. (That’s where the two-and-a-half comment comes in.) But this is all about what rights schools are willing to actually assign to the conference, and the Pac-12 has some extra possible upside there thanks to owning and operating their own conference networks (the Big Ten Network and SEC Network are in partnership with Fox and ESPN, respectively).
That’s proven to be arguably more of a liability than an asset so far, as it means the conference is spending a lot of money on network costs and the networks don’t have a powerful partner to help them gain distribution by offering them together with other, more in-demand channels like ESPN or FS1 (leading to some of their current problems), but it means that if Pac-12 Networks revenues dramatically rise from their current low levels, there’s perhaps more potential upside for investors than there would be with a conference that only owns half of its conference network. And the in-house ownership of those networks means that the Pac-12 can do other things if needed with the rights currently assigned there, which would be more challenging if they had a network partner. And it’s worth keeping in mind that this is about much more than the conference networks; it’s also about the other, more valuable television rights (currently split between ESPN and Fox), sponsorship rights and merchandising. So it’s possible to see where a $3.6 billion valuation for the conference could come from.
But even if we presume a $3.6 billion valuation is actually reasonable for the Pac-12 and what they’re including here, that’s still a big problem when it comes to the conference actually pitching 10 percent of itself for $500 million. At a $3.6 billion valuation, they’d only get $360 million for 10 percent equity. Or, if they needed at least $500 million, they’d have to sell off at least a 13.9 percent stake. And a key question there is if the member schools would be open to making either of those moves, which are obviously less appealing than the “10 percent for $500 million” offer. But an even more pivotal question is if anyone really wants to buy in even at that rate.
A challenge with selling investors on the Pac-12 is that there’s a whole lot of uncertainty ahead. The biggest one comes from those primary media rights, the ones currently held by ESPN and Fox. Their deals expire after the 2023-2024 season, and while Scott may be confident that he can get a whole lot more money for those rights going forward, there are good reasons to be skeptical of that claim. The whole TV landscape is changing rapidly, and while live sports are still key for driving viewers, what that means in terms of cable bundles and per-subscriber fees could be very different five years from now.
It’s not certain that rights are just going to go up and up, especially for a conference like the Pac-12 that’s currently less prominent and less in-demand. And we don’t even have a guidepost yet for what the next round of major conference rights negotiations will look like; that won’t come until the Big Ten TV deal comes up after 2022-23. So the conference is asking investors to take a big gamble, and to do so without the apparent potential for just enormous growth that drives investment in startups; there’s a much higher floor here, as the conference comes with existing revenues and actual values, but it’s also hard to see a path where the Pac-12’s valuation absolutely goes through the roof and gives investors a big payoff and an exit.
And on that front, it’s worth talking about the Pac-12’s costs. As discussed last fall in a series by John Canzano of The Oregonian, the conference spends an incredible amount of money compared to its peers. Some of that is on Scott himself, who makes $4.8 million annually (twice as much as the $2.4 million the Big Ten’s Delany gets and 2.5 times the $1.9 million the SEC’s Greg Sankey makes), and some is on the rest of the high-up staff (the whole SEC staff, including Sankey, receives total compensation of $3.7 million, $1.1 million less than Scott alone, and the Pac-12’s five highest-paid employees alone make $8.4 million).
Some of the other costs are on their choice to locate their conference headquarters in a extremely high-rent location like San Francisco ($6.9 million a year) instead of, say, the SEC’s headquarters in Birmingham ($318,000 a year) or the Big Ten headquarters in Rosemount, Illinois (even with a satellite office in New York City, they only spend $1.5 million a year on rent). And the Pac-12’s footprint itself has plenty of other, cheaper cities they could head to.
Even Dodd’s piece misses the point there, saying that the Pac-12 “shares space in the building on Third Street between Folsom and Harrison” with NBC Bay Area, “Comcast Sportsnet” (he presumably means the rebranded NBC Sports Bay Area), and MLB.com, and that they’re “more of a tenant than a palace-dweller in the South of Market district” with “digs” that “are functional but not ostentatious — more utilitarian than opulent.” That’s missing the point that having any sort of office in downtown San Francisco is incredibly opulent at this point, and that’s why they’re paying almost $7 million a year for it. And Scott hasn’t offered a good explanation for why they need to be based there, telling Dodd their conference headquarters are fine because “I don’t think there’s anything different than some of the others.” The difference is where it’s located, Larry.
But setting those criticisms aside for a moment, the idea of an equity play actually makes some sense for the Pac-12 from a strategic perspective. Dodd uses a Shark Tank analogy, and while there are significant differences between inventors appearing there and an established NCAA conference, they are facing a similar issue; they could use money now in return for giving up some money down the road, money that might not come to fruition if they just sit tight. And the conference does seem to be falling behind at the moment, on the fields of play (at least in the high-revenue sports of football and men’s basketball), on the recruiting front, and on the financial side.
The former hedge fund manager told Dodd “For the Pac-12, if there is a board in front of them with a series of knobs involving the fortunes of the league, the biggest of those knobs is winning their games,” and that’s exactly right. If football and basketball teams from the conference start dominating, the next rights deal will look a lot better, more people will demand Pac-12 Networks, and more providers will carry those networks. And maybe an injection of $500 million or so will provide the Pac-12’s schools with the resources needed to win, although that’s far from clear; spending doesn’t always equal winning, especially in a system where you can’t legally pay players. But at the very least, $500 million helps, and it might even change some of the conversation about the Pac-12’s schools falling behind their competition from other conferences, which could wind up helping in recruiting both top coaches and top athletes.
Thus, it seems reasonably logical for the Pac-12 to look to get some money now and invest it in its product so it can actually produce bigger returns down the road. Even though doing so means the investors will get some of those returns, the returns may not come at all (or at least not at the same level) without investment, and the conference’s current revenue distributions have it falling behind. So the base play here has some merit. But the question is if anyone’s going to accept the conference’s valuation, and if anyone’s going to invest at that level (or even a smaller level). We’ll see how it plays out.