NEW YORK ( TheStreet) -- Watch any owner hoist a trophy at the end of a championship run and they're likely to say it's all about winning. But wins and losses may become secondary to business considerations like profit and loss statements after a plummet in franchise earnings during the recession put a scare into owners, said a gathering of sports M&A minds.
Prior to the recession, owning a sports team was largely the domain of wealthy individuals trying to capture a childhood dream or a trophy to add to a collection of businesses, says Bradley Rangell a managing director of the sports advisory team at Citigroup's ( C) private bank. "It morphed into buying a diversified business," adds Rangell of the change in mentality to owning a sports team. Now buyers need to see a fit with their other investments in real estate and media or a diversification benefit. His comments came at a Tuesday sports M&A luncheon held by the Association for Corporate Growth in New York. For New York Mets or Los Angeles Dodgers fans it's an important distinction to note, as they handicap prospective ownership changes. The crisis changed the notion of what owning a team means, potentially putting some would be buyers on the sidelines, while making a new class of investors likely to play a bigger role in sports in coming years. The crisis was a "wakeup call for a lot of owners. They had to look at teams differently," says Michael Yormark, the chief executive of the National Hockey League's Florida Panthers. "Since the downturn in the economy, it doesn't matter the franchise, these are businesses that truly can lose a lot of money," Yormark adds. It means that buying or owning a sports team now has to tie to an underlying business strategy, instead of playing to the whims of a billionaire. That change may increasingly bring new types of investors like private equity firms, sovereign wealth investors and hedge funds to a team near you. Its partially a result from the wealth and liquidity hit that many high net worth investors felt from the recession. Now, as the value of sports teams heads higher, the number of people who have the money to own a sports team as a pet project is limited.
Meanwhile, there is a high amount of disclosure that a sports buyer has to make to a league like the NFL, NBA or MLB, with leagues even pushing for some recourse to an owners other assets in the event of a team failure, notes Adam Klein the chair of the sports law practice at Katten Muchin Rosenman. Negotiations with leagues tabled big investments that were based on being simply a fan, such as would-be Mets investor David Einhorn of Greenlight Capital With suitors lining up for the Dodgers and others still interested in the Mets, a new model has emerged to replace wealthy individuals looking to own a piece of their childhood team. Investors and owners are now interested in teams with media and real estate assets, in addition to loyal fans who head to the turnstiles whether its win, lose or draw. "The more you can augment it with an ancillary business" the better off you'll be says Rangell of Citi Private Bank. For instance, Rangell helped to negotiate a $420 million sale of the NBA's Detroit Pistons to Tom Gores of private equity firm Platinum Equity in April of last year. In that deal, Gores not only picked up ownership of a team near his hometown Flint, MI - he also gained ownership of the team's real estate assets like The Palace of Auburn Hills arena. It meant the sports deal fit within the firms portfolio of other businesses ranging from real estate to IT, manufacturing and entertainment. The deal worked, "because they saw a terrific buying opportunity and because they saw a strategic fit to their other businesses," says Rangell. Private equity buyers for the L.A. Dodgers like KKR ( KKR), Thomas H. Lee and Providence Equity Partners may even question whether the moves are even a sports push. The Dodgers, after all, own sports programming businesses similar to Madison Square Garden's ( MSG) MSG Networks, the New York Yankee-owned YES Network and the Boston Red Sock-run New England Sports & Entertainment Network. For more on the importance of sports networks, see why the 2012 Jeremy Lin blackout began with Cablevision's ( CVC) spin of MSG. Interestingly, in the negotiations that are likely taking place on sports deals, the valuation methods used on deals may signal the diminished importance of a team's on-field sports play. In deals, sports teams are valued on their revenue instead of earnings, which is the most common practice in corporate merger negotiations. That's because a new owner can come in and make a few trades to dramatically alter the expense structure of a team. -- Written by Antoine Gara in New York