Did the NFL just let in a Trojan Horse?

The American NFL season officially kicks off this week starting with defending Super Bowl champions the Kansas City Chiefs playing the Baltimore Ravens. The start of the season also coincided with a recent NFL owners meeting in Minnesota in which team owners voted 31-1 in favour of allowing private equity firms to buy ownership stakes in teams. ABSI this week will take a deep dive into the business of the world’s most lucrative sport. 

The National Football League (NFL) is the most lucrative sporting league in the world in terms of revenue. In 2023, the NFL generated ~US$18 billion in revenue and it forecasts that this could reach US$25 billion in 2027. The sources of revenue are wide-ranging, as the league cashes in from its ~410 million fans globally, but its TV rights are the primary earner at ~US$10 billion per year through agreements with CBS, NBC, Fox, ESPN, and Amazon.

Given these facts, it is unsurprising that all 32 NFL teams are profitable entities as they cash in on these TV rights alongside match ticket sales, other stadium revenues, sponsorships, and merchandising, and while player salaries are significant, the league has a salary cap which ensures costs are somewhat contained. However, profitability can vary significantly depending on the size of the city or “market” that the team is located in and the performance of the team in the league. 

Valuation History of Dallas Cowboys

While the financials of NFL teams are private business, it is widely reported that the Dallas Cowboys are the highest-valued NFL team, with an estimated value of ~US$10 billion. The Cowboys have consistently held the top spot for years, thanks to their strong brand, large fan base, and highly lucrative stadium, AT&T Stadium, which generates significant revenue from hosting events beyond football games. On the other end of the spectrum, the lowest-valued NFL team is typically the Cincinnati Bengals, with an estimated value of around $4 billion.

Green Bay Packers Inc Financial Statements

The most unique ownership structure in the NFL today is the Green Bay Packers Inc. which is a publicly held nonprofit corporation that values the team at US$5.6 billion. In its most recent annual report, the organisation reported revenues of ~US$610.3 million and net income of ~US$35.6 million which was down from ~US$61.6 million in 2022. In terms of expenses, player costs were the largest line item at ~US$294.2 million. Given these results, the Packers technically trade on a trailing price-to-earnings (P/E) ratio of 157x. For context, everyone’s favourite stock NVIDIA trades at ~56x LTM P/E. 

Despite the sky-high valuations NFL team value appreciation has been historically very strong. The average value of a team in 2014 was ~US$1.43 billion and in 2024 this has ballooned to ~US$5.1 billion, a CAGR of ~14.2%. With the approval of private equity ownership rules, it is expected that this growth trajectory to continue.

It is important to appreciate that approval by NFL owners for PE firms to invest in a team comes with a number of caveats including:

1. The NFL has to approve a fund to invest - 8 funds across 4 groups are approved;
2. 3% minimum and 10% maximum ownership of any one team;
3. A maximum of 6 clubs a single fund can invest;
4. 7.5% cap on a single investor within the PE fund;
5. A minimum holding period of 6 years.

Given the high valuations of NFL teams, what is the incentive for PE firms to invest given that their business model is traditionally to take large controlling stakes in underperforming businesses to turn around and flip in a relatively short period? 

The answer: allocation of billions in capital in an ultra-safe and uncorrelated alternative asset that will attract a nice annual management fee without fears of redemptions. There is also a vanity and hospitality side to the equation as part-ownership of a team affords special perks to impress clients.

For current owners, the deal will see continued appreciation in their teams while also allowing them to realise some liquidity in an asset class that is highly illiquid and regulated by the governing body. The funds from PE can be reinvested into the team to promote growth or it can be put in the pocket of the selling owner. It is also expected that PE will bring innovation and thought leadership to teams which could result in better content and experiences for fans. In contrast, though, PE firms do need to make a profit and their ownership may come with pressure on teams to raise prices and pursue further advertising revenue streams in order to justify the valuations being paid which could alienate fans. 

The PE policy implemented by the NFL is a double-edged sword but does follow similar policy to other American sports leagues including the NBA, MLB, NHL and MLS who have relaxed their ownership rules. While overall it hasn’t impacted the leagues there are some examples of negative externalities such as increased ticket prices and reduced community engagement, along with attempts to move franchises to larger markets. The NFL seems to be addressing this issue by limiting ownership to 10% but opening the door is a slippery slope. 

Written by Jack Colreavy, Associate Director at Barclay Pearce Capital.