Always know where the fire exit is.

This Column closely reflects the sector upon which it opines. It thus needs to move erratically in its commentary each week, from romantic philosophy to callous pragmatism.

In a week when the discord around the “tyranny of the majority” in the English Premier League (EPL) really starts to show all its bad blood, we are today obliged to tend towards the latter.

The Manchester City legal case was never going to end well.

 

We are now, indeed, nearing “the end”.

Perhaps of the EPL itself.

Pessimism may be unattractive, and whilst it is always inspiring to hope for the best, it’s better to prepare for the worst. So, in corporate finance, like sport, over-sentimentality is never recommended. Assets need to be exited when the moment comes. And quickly.

Don’t ever let yourself get attached to anything.

Something you can walk away from in 30secs.

In the best action films, the hero will always know where his/her exits are located, well before it all starts going down. In finance, that same thing is called understanding liquidity.

Can you sell? How quickly? 

For anyone involved in advising people deploying capital in sport assets and sportech, this is the only question to start the conversation today.

 

What do you think your exit will be?

Forget valuation, due diligence, benchmarking. Forget all that for a moment. The focus today needs to be on the eventual exit. And will you be able to get out alive?

Five to one, one to five, nobody here gets out alive.

P.S. Kerr, at minute 4, shows why in 1985 they were in the conversation as biggest band in the world. This Morrison quote is totally improvised, and it’s not in the official lyrics of the song. And he is the personification of “rock star”. 

So today’s Sunday Column asks where, in 2024, one will find the exits for sports investing, and how long it will take to get to the door, if needed. But more basically, if any of us are even getting out of here alive.

For anybody working closely with early-stage companies serving sport, they will know that this is not overly-dramatic. We are in a brutal bear market.

 

Extraction points.

In the world of finance theory, you can get an exit, hopefully with return, in different ways. 

1. Your asset generates a lifetime of reliable dividends (yield) that represent in itself an “exit”.
2. You list on a stock market. That’s called an Inital Public Offering (IPO).
3. You take capital from a Private equity (PE) fund.
4. You get a venture capital (VC) to fund your losses well into a future, before the ultimate exit.
5. You achieve a trade sale, selling your company to a bigger operator.

 

Which of these exits are realistically within our grasp today?
Where is our phone booth?

 

Taking these in turn…

 

1. Dividends are no longer certain, when revenue models are now so volatile.

There is no business in this world of intense disruption that can rely on the stability of future dividend flows. Too much is going to change.

Sport, especially in Europe, doesn’t even make a lot of profits from which to pay dividends; football and rugby being the best examples. Ancillary businesses are not really super-profitable across the board; the content/media model is challenged, and sportech has focussed more on growth than margin. Additionally, suppliers to sport don’t have much pricing power, selling into rights holders. Nothing at all is throwing off cash.

So, best to exclude dividends as your off-ramp.

 

2. IPOs as an exit route, as a means to a liquidity event, are now as scarce as a Marcus Rashford‘s performance. 

Here we see the sad sad situation, and it’s getting more and more absurd. 

IPOs, a public stock market listing, used to be the most well-trodden path, but that world is long gone. The private version of equity, PE, has steamrolled the IPO game in the last decade. For the few sport IPOs that still remain, they all tend to disappoint, especially when investors look beyond the sexy stardust, and realise that it’s a sector really poorly managed, and with bad leadership. Have a look at the share price graph of all categories of listed sports assets, from various SPACs, Genius, Radar.

Hype only goes so far, especially when market sentiment changes, and perfect storms gather. 

 

3. PE can’t continue with its current model if it itself can’t find exits.

The muddled thinking and travails of the PE model, especially in sport, have been a long-standing punchbag for this Column and Goal Own Goal. But that pessimism has been more than prescient. Perhaps, even understated.

In fact, one worries that we haven’t yet seen the worst of the malinvestment fallout, as mark-to-market valuations are being delayed as long as possible, especially with the use of our old friend the Continuation fund.

The facts show that PE funds can’t find an exit, a phone booth, and they will need to hide the reality of their underperforming portfolio assets. But for how long?

 

4. VC and the Silicon Valley Playbook have totally changed. 

One of the very first Columns in 2018 pointed out how little sport was ready to understand the MO, and fickleness, of VC. How the whole game worked. Back in 2018, Vasu Kulkarni from Courtside, explained its reality beautifully, and this exact passage inspired an entire chapter of the book “Sport’s Perfect Storm“. 

For four years of the sportech bull market, understanding how VC really worked, with all its inherent risk in bear markets, didn’t matter. There was always fresh cheap capital.

Then, it changed. Oops!

So, it was very cool this week to see the same Courtside Ventures (one of the first sport VCs) do an honest post-mortem on their own journey in these years. 

This is golden insight, for which they should be commended. If you take your time to analyse well the activity of their three funds, you will see that they seem to have had only two true successful exits out of seventy one investments. The positive return they are claiming on these funds comes from un-exited companies they still hold.

Let’s be very honest, VCs are great in optimistic good times, but too many have confused their own brilliance with the simple good timing of a macro bull market. Exits, successful ones, are rare these days, and valuations will be uncertain. One is tempted to comment…

Let’s speak again Vasu, and do the real sums, once you actually get out of your portfolio companies.

5. That leaves trade sales. Getting out alive by finding someone else to buy you. 

YouTube to Google, WhatsApp to Facebook. Et al. 

The sport industry has a new sexy case study about which to get optimistic. 

Dorna (MotoGP) selling to Liberty F1. What kind of exit was that and what does it tell us?

If trade sale exits are where we need to concentrate, it would be smart to study this deal very well, and this is the public domain document produced for the transaction. It is very informative.

The deal values Dorna at an equity value of €3.5bn. Liberty are buying 86% of the equity (65% in cash, 21% in swapping Liberty F1 listed stock ticker FWONK). So, it’s mainly a cash exit and that’s a big win in these risky markets. For the record, the Liberty shares themself look to me very fully valued at their current share price.

Take the cash. That is real exit liquidity at an excellent valuation. It doesn’t get any better than that these days.

As a “trade-sale” what is this exit telling us about the market in this industry?

Dorna has revenues of €486m of which 43% is media rights and 17% sponsorship. The Liberty PR talks about the merger “benefitting from tailwinds in sports media rights and sponsorship”.

No comment, aside from noting in the margins that the complacency of this entire sector seems to remain strong.

Dorna makes adjusted EBITDA of €179m. Their own document of course shows the usual Charlie Munger “bullshit” EBITDA earnings number.

Dorna actually made a real consolidated LOSS of €38, €8m, €28m in 2021, ’22, ’23, respectively. Closer scrutiny reveals, for example, a very large depreciation figure of £150m. You will want to ask what that is, if you are a pro.

Charlie (Munger that is 😉) is no longer with us, but the best respect you could ever show him would be to look at any future EBITDA number with total scepticism, and find the page in the official accounts that shows the reconciliation between EBITDA and real net profit/(loss). 

Here it is for Dorna.

So, the Dorna equity in the deal is valued at 7.2x revenues, and near to 20x EBITDA profits. Put in the context of more normal markets, a prudent financier could say that they are paying €3.5bn for a business that is breakeven at best, and where they are vastly over-optimistic on future media values.

This Column isn’t going to be in judgement of the quality of deal that Liberty has done.

There is no right or wrong in valuation, especially in times of market turbulence. One could talk synergies and up-selling all day to justify the price. Suffice to say, there is an argument that it is a very chunky valuation for a company with flat revenues, and over-optimism on the idea of growth in media rights. The best argument for MotoGP is geographical expansion. It has always been (since the time Raffaella was sponsoring Max Biaggi at Marlboro), a two-market business. Spain and Italy.

Personally, I would not have done the deal at that price. Conversely, as the seller, I would have “bitten their hand off”, especially as most of it is cash. That’s a gift and a real exit. Assuming there is no lock-in preventing them selling the Liberty F1 stock, the old Dorna shareholders will have “gotten out of here alive”. Big time. 

For some reason, I’m reminded of an unrelated tweet my son sent me this week. 

“Zimbello” would translate well for a finance audience as “Greater Fool”.

The Greater Fool theory argues that prices go up, because people are able to sell overpriced securities to a “greater fool”, Whether or not, they are overvalued. That is, of course, until there are no greater fools left. – Investopedia.

Whatever.

Making money in sport investing is full of opportunities. Reasons to be cheerful everywhere. You just need to ask the right question out the gate…

 

What is the expected exit?

Here it is what we ourselves are seeing as the themes where “getting out” looks positive. Others will disagree and have their own views.

1. AI. For right or wrong, anything with that label can be sold well these days, to both sophisticated and superficial acquirers.

Many companies just need to tick an AI box in their strategy, and are on the hunt for the right asset. Older readers will know how often “trend” dictates where capital gets invested. So many companies put “.com” in their name around the turn of the millenium, and got re-rated. The smartest acquirers, instead, know that their existing value chain is going to be absolutely turned upside down by machine-learning automation. Content creation, document and tender preparation, back-office paperwork grind, market-research. There should be no company in the world not asking itself how it can re-engineer around AI. So if you have decent tech, you should have a material chance of getting an exit with AI. 

2. User Interface (UI) and dashboard management-information-system (MIS) companies.

How many people think the streaming platforms’ UI is smart and intuitive? That includes Amazon and Netflix. In Como, this household thinks they are very poor. Any company that can show true skill in what is automatically put in front of the user, whether in consuming entertainment, or at work, has “game”. 

3. Owned (not rented) sport IP, that can deliver clean governance, athlete commitment, and who can genuinely claim to own a whole sport, will be attractive to broadcasting platforms, who will invest for the eternal IP.

Things like UFC, PTO, MLS, WWE. To make the point, a future exit for Ari Gold and Endeavor could well be to get rid of all the services businesses, which just muddy the waters, to make itself a clean pure play IP asset for Apple/Netflix/Amazon/Sony/EA, uncomplicated by thousands of multi-territory broadcast deals.

Think “what do I need to look like to convince Apple to drop some of their cash wedge on me?” 

4. Roll-up build and buy candidates.

Here is where the smart PE play is now. They want to find a candidate to be the cornerstone of a consolidation play. Sport and sportech are utterly fragmented. That can’t last much longer, and PE knows this, so they are looking to acquire and back the right company and management. Two Circles is that candidate for Charterhouse, and Gareth Balch now knows he can and must think about M&A.

Reflect on what you need to be for a PE firm to see you as that building block, upon which to construct an empire. You’ll need good client traction, and a management team credible in M&A and corporate finance.

If you don’t have that, think about how you can be a target to that same company. Be one of their consolidation buys. That’s an exit.

Being prey can work well as an exit. Get you out alive. 

5. Convergence plays.

This is one of the most elegant investment theses. It is when an asset is re-valued north merely by the fact of being part of a general marco trend that is inevitable.

The government debt/bonds of risky countries like Italy all got a convergence dividend of re-pricing when the Euro and ECB got going. Italy, as a country, wasn’t less risky, but its cost of capital went from 15% to 2% very quickly, raising valuations.

In sport, an obvious convergence play is positioning yourself for the inevitable super-league. Buy major clubs outside of the big five leagues, Celtic, Ajax, Galatasaray, Benfica, at a relatively low cost, and watch them be massively re-rated when the super-league comes and they get invited. Over 6 years this Column has covered the high probability of breakaway closed Hollywood leagues, and makes no further analysis today.  Seek out the Logan Roy piece. 

…

All of these scenario case studies should be able to “get you out alive”, if polished up well. Remember, so much capital is looking for a reason to say yes to deals. You just need to be a good storyteller, hitting their buttons.

So, put a premium on working out how to get an exit. And drop your expectations on valuation. Too many people are still reasoning like 2020. That ship has sailed. Don’t make price an obstacle to the phone booth. 

 

How Charlie Munger valued things. 

A stable company could aspire to 10x (real) profits. 

A growing company could get to 20x with a compelling story and great management. 

A company strategically important could get into an auction and sky’s the limit. So, plan to be seen as “strategic”.

 

If you don’t know well where the fire exits are, where your phone-booth extraction points sit, the world is gonna be a cold place. Very tough times are coming.

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