Valuing the Clippers
With that long lead in, we are in position to value a sports franchise, and in keeping with the news story that initiated this article, I will try to value the Los Angeles Clippers. In doing this valuation, I will make a couple of simplifying assumptions, which you are welcome to change. Given the risk discussion in the last section, I will attach a cost of capital of 7.50% for investing in the Clippers, at about 25th percentile of all US firms. I will also assume that once I reassess the numbers for the Clippers, given my expectations of changes (in TV contracts, revenues and costs), the cash flows will grow at roughly 2.5% a year in perpetuity. Finally, I will assume that with the NBA's protection from competition in place, the Clippers will be able to generate a 25% return on capital on their investments (which will allow them to generate the 2.5% growth with a 10% reinvestment rate).
In this table, I value the Clippers, first using their 2012 numbers (which I know are too low), next using the median revenues and EBITDA margin for an NBA team, then giving the the revenues and margins of their more lucrative neighbor in the city (Los Angeles Lakers), and finally with a combination (best-best) of the league's highest revenues (which belong to the Lakers), the best pre-player expense margins in the business (Knicks) and the lowest payroll of any team in the sport (the Utah Jazz). Even with this improbable mix, the value that I estimate for the Clippers is $1.61 billion, well below the $2 billion paid by Mr. Ballmer. You are welcome to download the spreadsheet, which has in it the key numbers, by team, for all NBA teams and do your own assessment.
Expensive toy. It makes him part of a small group of people in the world that own a pro franchise.
Pro teams only come up for sale every so often, especially ones in big markets. Ballmer isn't getting any younger and he is worth $20 BILLION.
Relatively speaking, buying the Clippers was not a super expensive purchase for the guy. He can hold on to it forever and the prices of sports franchises (goodwill predominantly) will continue to grow well after he dies.
In short, he has the money so why not? He needed to spend at least ~1.7BN to outbid the next closest guy and a few extra hundred million made sure he secured it.