A New Breed of Sports IPO

Author:
Publish date:

There's not much for an investor in sports franchises to look forward to these days.

You buy the stock -- probably because you like the team -- and then watch it fall. Yes, there is the great brand name, such as the

Cleveland Indians

(CLEV)

and the

Boston Celtics

(BOS) - Get Report

, but the teams are often short on growth prospects and long on out-of-control labor costs. After the initial fan euphoria dissipates, investors often are left with a dormant stock commemorated by a certificate that is more memento than dinero.

Enter

Southwest Sports Group

, a private holding company that is busy cobbling together the assets of hockey's

Dallas Stars

, baseball's

Texas Rangers

, a Dallas-Fort Worth TV station that airs the teams' games and a sports marketing outfit. The overall goal is to form a regional sports network fed in part by programming from the teams. People close to the group say a public offering is in the works and will take place within the next year. Mike Kramer, Southwest Sports' chief operating officer, downplays talk of an IPO. "We have no plan for an IPO until all of our assets are in order," Kramer says.

Yet a peek at who's behind Southwest Sports reinforces the belief that an offering is likely. The group is essentially a holding company for Tom Hicks, owner of the Stars and Rangers, and his investment firm,

Hicks Muse Tate & Furst

. The firm has a controlling interest in such recent initial public offerings as

Capstar Broadcasting

(CRB)

,

International Home Foods

(IHF) - Get Report

and

Chancellor Broadcasting

(CBCA)

.

By packaging sports teams with media properties, Southwest Sports will be following the model set up by "convergence" experts

News Corp.

(NWS) - Get Report

, which have bought the

Los Angeles Dodgers

and the New York

Knicks

and

Rangers

, respectively, to help establish their sports channels in key TV markets.

"For us to become a regional sports network we are going to grow through vertical integration," says Joe Arms, a Southwest Sports attorney. "So we are not going to sell our rights to Fox for X millions of dollars a year."

"It's going to be a huge IPO," says Bill Rhoda, of the Minneapolis-based sports consulting firm

CSL International

, who is consulting with the

Pittsburgh Pirates

about a possible IPO. The publicly traded company will most likely take advantage of Hicks' broadcasting properties in order to make this regional sports network work in the Southwest market.

Of course, Southwest Sports' possible status as a public company doesn't guarantee that it will be a hit with investors.

ESPN

, a unit of

Walt Disney

(DIS) - Get Report

, recently tried to start up a regional sports network, called ESPN West. The idea was to use Disney's

Anaheim Angels

baseball team and

Anaheim Mighty Ducks

hockey team as the network's foundation. But cable operators showed little enthusiasm for yet another channel and Disney sold the teams' broadcast rights to rival

Fox Sports

, a unit of News Corp.

Pro sports IPOs have been spotty at best. The first baseball team -- and the most recent franchise -- to step up to the plate was the Indians, who sold 4 million class A shares to the public at 15 a share on June 3. The stock hit its high at 15 1/4 that day before beginning a slide that has taken it 29% lower, to 10. It seems the only person who received a substantial return on the investment was team owner and CEO Richard Jacobs, who made $54 million on the public offering, according to

Securities and Exchange Commission

documents. Similarly, Celtics stock has dropped 33% since the basketball team's 1986 IPO.

The

Florida Panthers

hockey team, which trades under the name

Florida Panthers Holdings

(PAW)

, has had some stock market success, but that's mainly because it has split into two business segments: the team and its real estate and leisure interests. Since its IPO at 10 a share in November 1996, the stock is up 79%. The lucrative part of the company is not the Panthers, but the real estate holdings and leisure properties, says John Reidy, an analyst with

Salomon Smith Barney

.

Reidy believes that the economics of sports won't permit a publicly traded sports franchise to be a stock-market hit by itself. "Look at the NBA, where labor accounts for 57% of total costs already," says Reidy. "Investors do not make money by owning these sports teams, only the owners do by buying and selling them."

Lance Helgeson, managing editor of the Chicago-based newsletter

IEG Sponsorship Report

, says rising ticket prices -- in part a result of soaring player salaries -- are getting out of hand. "People are getting sick of all this money, and when they see these team owners grubbing for gold, it ticks them off," says Helgeson.

Reidy adds that the Southwest Sports venture looks promising because the group would control not only the team, but the television rights as well. This parallels the current situation at Cablevision, which has seen its stock more than triple over the last 12 months. Cablevision owns 80% of

Madison Square Garden

, which owns the Knicks and the Rangers as well as broadcast rights for both teams.

This may not be what the Minnesota Twins, Pittsburgh Pirates and the Florida Marlins want to hear. All three clubs are in varying stages of their own IPOs, according to the teams. But because none have media properties like Southwest Sports, these deals again hold the potential to leave investors with little more than a piece of paper suitable for framing.

For more info on institutional holders of these stocks, as well as financial statements and earnings estimates, please see the

Thomson Company Reports.