Lebron did not only tantalize the public and his suitors by withholding his “Decision” for a TV special last Thursday night. Wall Street was in for the ride as well, in particular shareholders of publicly traded MSG, owner of the Knicks, one of the finalists in the sweepstakes. The unusual trading activity and price fluctuations the stock underwent the second half of the week, purely on Lebron speculation and the eventual decision, show one of the reasons why most sports teams are not publicly traded.
For those unfamiliar, Cablevision spun-off MSG to shareholders in Q1 this year, and after its initial trading days in February presumably marked with some institutional buying, traded at an average volume of 342k shares/day prior to last Wednesday. Volume spiked 4-fold on Wednesday when rumors that Lebron would hold the TV special in Greenwich, CT, near the Knicks practice facility. As the soap opera played out the rest of the week MSG recorded 3 of its top 9 volume days since trading started in February, and 3 of the top 4 since the initial February trading period.
Along with the unusual volume, shares jumped 6.41% as the Knicks hopes surged Wednesday, then dropped 5.52% as the Heat rumors intensified Thursday, and dropped another 4.61% on Friday following the announcement. Those are 3 of the 5 biggest price changes since trading started. Average option volume is around 400 contracts, but one trade involving 2000 contracts executed on Wednesday, and the July 22.50 calls has over 20,000 open contracts – a short-term bet on Lebron signing – which have zero trade value this week.
This is all well and good, stocks move all the time on announcements, the better question is if Lebron would actually have that much impact on the intrinsic value. The answer is likely no. The teams (Knicks and Rangers) currently break even or operate a small loss. Lebron would have his biggest impact if he helps the team reach the playoffs, which could add up to $2.5m per home playoff game, according to CNBC. However, during the regular season the Knicks already operate near a sell-out (though clearly many of them go unoccupied) and it’s a little late to raise prices at this point, so his addition would add a minimal amount to tickets. Similarly, most sponsorships are category exclusives locked in on multi-year contracts. MSG would certainly gain some new sponsors, possibly benefit from some escalator clauses with current sponsors by signing the star (assuming they negotiated that in advance), but estimates place the benefit at only $5-10m per year in the near term. The CNBC and Forbes estimates, which are reasonable given these assumptions, estimate a roughly $35m windfall for MSG had they signed Lebron.
Most followers caught by the glitz of the teams don’t realize the biggest asset to MSG’s bottom line is the network, specifically the subscriber fees it charges cable providers. In the near-term Lebron would not likely impact these fees because they are typically locked in on long-term contracts, but when those contracts did come up for renewal, having that chip to leverage would certainly help garner a nice increase (though not as much as having baseball coverage would, but that’s a different story). The other revenue generators for the network are TV and online advertising. Local cable advertising is not a big market in the scope of things, and local online advertising is still not a significant revenue generator. He would probably add less than $10m total in advertising. In the longer run, if he is worth a 10-20 cent per subscriber fee hike, MSG could add 10-20m in profit per year as the contracts come up, but again, that depends on when the contracts are due.
Clearly, he would have had an impact, but do the numbers justify the 97.5m in market cap the stock gained Wednesday, or the close to $160m it gave back the next two days? By time, the stock started trading the Knicks season was already in the tank. If they improve though, fast forward to March and April when each win or loss could determine a playoff berth, and that extra revenue, or even to the trading deadline as acquisitions could impact ticket sales, playoff chances, and cost structure. Though most of the value sits in the network, sports illicit lots of emotion, and it appears that emotion would impact stock volatility, especially given the teams play in Wall Streets backyard.
In the end, if free agency elicits this type of volatility, its likely that wins and losses for a contending team would, and even more so that playoff performance would. If that turns out to be the case, is buying this stock any different then sports gambling? You can make a case that stock picking in general is not much more than gambling, based on some efficient market theories and studies on behavioral finance that show the impact of sentiment. But putting sports teams in the market would likely take that to a new level and dampen other financial benefits of public listing, such as access to credit and cost of capital. Thankfully, the Cavs are privately owned.