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Taking a deeper look at the Atlanta Hawks franchise valuation

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Forbes weighs in and we dive deep.

Detroit Pistons v Atlanta Hawks Photo by Kevin C. Cox/Getty Images

Forbes released their 2018 NBA Franchise Valuations in early February of this year, which provides the best publicly available data on the financial performance of NBA teams. The Atlanta Hawks are listed as the 23rd-most valuable franchise at $1.15 billion -- a 30% increase over last year’s $885 million valuation, which was also 23rd-highest.

The league-wide trend for the Forbes’ NBA valuations was upward and by a lot. Every franchise is now valued at $1 billion or above, with New Orleans in last place for the third consecutive year but now valued at $1 billion -- up from $750 million last year. The average franchise value last year was $1.36 billion but this year the average franchise value has climbed up to $1.65 billion.

Forbes provides estimates of financial data for NBA franchises other than their valuation. So, let’s take a stroll down these various financial variables with an Atlanta focus.

Current Data Release

One caveat about the data released from Forbes is that the valuations are intended to be for right now but all of the financial variables that go into this valuation are from the 2016-17 NBA Season. This recent massive jump in franchise valuations should come as no surprise because the 2016-17 NBA Season was the first year of the NBA National TV contract with ESPN and Turner. We’ve detailed this contract previously and noted that the revenue from TV would go from $1.03 billion in 2015-16 to $2.1 billion in 2016-17.

Of the current valuation of Atlanta at $1.15 billion, Forbes further breaks down the components as $611 million due to sport (partly NBA revenue sharing), $262 million due to the Atlanta market, $181 million from operating Philips Arena, and $96 million in brand. League average for these categories are $671 million, $509 million, $299 million, and $176 million, respectively.

Atlanta’s current standing in the NBA for valuations is about what one should expect and about what we have seen historically. The Hawks have consistently lagged the average franchise valuation over the years as seen below.

At the same time, most of the NBA has lagged behind the average valuation which is another way to say that certain teams (New York, LA, San Francisco) are in the $3+ billion valuation range. A few highly valued teams can drag the average up, although it’s not a completely unequal distribution as 11 teams are above the average as seen below.

Each dot on the figure represents a team’s valuation, the solid red line is Atlanta’s specifically, the dashed blue line is the average and the grey shaded area represents a 95% confidence interval of the average:

Listed within the figure are sales (or failed sales, shoutout pizza mogul Alex Meruelo) of the Atlanta Hawks over the years. Tony Ressler purchased the Atlanta Hawks at a valuation of $730 million for the franchise in 2015, according to Forbes.

I wouldn’t say that his investment has steadily climbed, but it did take a substantial jump this past year to give him a hefty increase of $420 million in 3 years of owning a majority of the team. While it’s a nice increase, he hasn’t improved the relative standing for Atlanta at all. Most NBA experience at least this much of an increase during this time. A rising tide lifting all the boats, so to speak.

Revenues

Breaking down the Forbes financial values further we come to the revenues of NBA teams. Atlanta saw an estimated $209 million in revenues for the 2016-17 season, up from $169 million the year before and $142 million before that. There’s been a steady increase for the franchise, but that’s to be expected especially with the $1.1 billion increase in revenues due to the TV contract -- which works out to roughly $37 million per franchise.

Aside from the National TV contract, the entire NBA has been trending upward in revenues for many years:

In completely unsurprising news, NBA team revenues are dominated by New York and Los Angeles as it has been ever since Forbes began tracking this data in 1999 (Financial World previously tracked this data beginning in 1990). What might be surprising to some is that the Golden State Warriors did not lead the NBA in revenues last year.

Even though we heard outlandish stories of the Warriors single handedly increasing the NBA’s salary cap due to their playoff revenue, they still did not top the Lakers or Knicks in revenues per Forbes. Maybe it is true that Golden State was raising the salary cap with their home playoff games (put me in the doubtful camp), but just imagine what would happen if LA or New York had a championship level team if they still had higher revenues than Golden State.

Back to Atlanta’s $209 million in revenues: $27 million in revenues comes from the gate for Atlanta, which ranks 23rd in the NBA. Another component of revenues for the team is their local TV contract, which is with Fox Sports Southeast. It is hard to come across publicly available data on NBA team’s local TV contracts, but Forbes previously estimated that the local TV deal for Atlanta averages more than $30 million in revenues. Good thing Atlanta signed this deal before they saw massive decreases in viewership.

And another source of revenues for Atlanta that we have some data on is their naming rights from the arena: Philips Arena at around $9.3 million per year. This has always been one of the most lucrative naming rights deals in the not only the NBA but the entire sporting world in the US. This has been true since it was signed and has only been eclipsed by the Brooklyn Nets’ Barclays Center in average annual value.

With the naming rights deal set to expire in 2019, one has to wonder if the Hawks will be able to replicate a high revenue generating naming rights. Coincidentally, the new Atlanta Braves stadium was able to garner an agreement worth $10 million a year from SunTrust, so it’s possible.

Naming Rights

Stadium Team Sponsor ($mil) (years) AAV ($mil/year)
Stadium Team Sponsor ($mil) (years) AAV ($mil/year)
MetLife Stadium New York Jets/Giants MetLife $450 25 $18
AT&T Stadium Dallas Cowboys AT&T 400 20 20
Citi Field New York Mets Citigroup 400 20 20
Mercedes-Benz Stadium Atlanta Falcons Mercedes-Benz 310 27 11.5
Reliant Stadium Houston Texans NRG Energy 300 30 10
SunTrust Park Atlanta Braves SunTrust Banks 250 25 10
Gillette Stadium New England Patriots Gillette 240 30 8
Levi's Stadium San Francisco 49ers Levi Strauss 220 20 11
FedEx Field Washington Redskins FedEx 205 27 7.6
Barclays Center Brooklyn Nets Barclays 200 20 10
U.S. Bank Stadium Minnesota Vikings U.S. Bancorp 200 20 10
Philips Arena Atlanta Hawks Philips 185 20 9.3

Costs

Another important aspect to track in franchise valuation is the costs of operation. Within the NBA, this largely means the player expense although coaches, management, sales, legal, analytics, and administration are also areas which the Atlanta Hawks need to expense each year.

The player expense for teams are largely regulated through the Salary Cap as defined within the Collective Bargaining Agreement (CBA) — a cap is set based upon a percentage of collective league-wide revenues that is called Basketball Related Income (BRI) and a team can only exceed this cap if they have an available exception.

While league-wide revenues have steadily increased over time, it is not actually the case that this trend has continued in player expenses even though the Salary Cap is tied to revenues. We can see this from the Forbes estimates on player expense:

There are two pronounced dips in 1999 and 2011 for player expenses. These are related to work stoppages that reduced the number of regular season games to 50 and 66 respectively. But these dips from work stoppages — and 2005 — are important because they marked changes in the CBA and a major change that occurred with each of these is the defined percentage of BRI that sets the Salary Cap changed. And you can take a good guess at which direction they went: prior to 2005 it was 48.04%, then 49.50% for the 2005-06 Season, then 51% from 2006-07 through 2010-11, and finally 44.74% ever since 2011-12.

An important distinction to note here about the costs is that the CBA negotiations and associated percentage declines in costs directly results in increased franchise valuations. Lower costs — and at a certain level for the foreseeable future — will cause the present value of an operation to rise. If the percentage of BRI which defines the Salary Cap was left unchanged but revenues continued their trend, then you can be certain that the values of NBA franchises would not have risen by as much.

You can be certain that the NBPA will bring up franchise valuation increases in their next set of CBA negotiations, which will then set up a careful dance where percentage points on BRI may be tossed back and forth which in turn may increase or decrease the valuations again. That’s just how these negotiations work out.

But back to Atlanta. While the organization has consistently lagged behind the rest of the NBA in revenues, the same cannot be said for their costs.

The team is generally below average or towards the bottom, but the team has shown instances of spending above average in certain years. Now don’t get me wrong, the team has never been in the top five for expenses and cannot be called a team that will attempt to win “at all costs” but there simply aren’t teams that are like that. These are businesses after all and it would sound foolish for Apple to want to increase their costs to simply sell the most number of tablets in a given year. They generally care about profits.

Operating Income

And here we’ll close out with a historical look at the operating incomes for teams over the years with a particular emphasis on Atlanta:

To the surprise of no one, Atlanta has consistently trailed the rest of the NBA in terms of yearly operating income. Forbes estimates that only a few years did the team have an operating income above league average — and those were during the years that owners were suing each other and payroll was at the league minimum.

Atlanta has seen positive operating income in each year since the 2012-13 season which marked the end of a four-year stretch of negative operating income. This is largely a symptom of the 2011 CBA which resulted in a nice bump in revenues for Atlanta due to a friendlier revenue-sharing agreement for them.

But what does the future hold for Atlanta’s financials? Well, given that the team is in line to have limited payroll committed to the future, one would expect their costs to be around the league minimum next year. The team’s revenues are likely to continue increasing because 1) their local TV deal has already been locked in, 2) the national TV deal will continue disbursing funds at a higher rate, and 3) the team will open a newly renovated Philips Arena which will cost in excess of $190+ million (although it appears to have cost the team roughly $50 million with the rest picked up by taxpayers).

All of these point in the direction of increased operating income for the team and should contribute towards a higher franchise valuation. As one then speculates on potential redevelopment of the “Gulch” (with a main firm headed by Tony Ressler’s brother), which has been estimated at around $1 billion, this could only put more upward pressure on the franchise value.