Purpose of MLS's $40 Million Expansion Fee

[Tuscan]

With all the focus on MLS's questionably pricey $40 million expansion price tag, I have yet to actually see what the massive fee would actually be going towards. Obviously there are operating costs associated with media contracts, administration and management salaries, web networking, and other costs associated with FIFA membership etc... Somehow I don't see those costs coming anywhere near $80 million (assuming 2 new franchises), so where is the rest going?

[Bill Ault]

to the original investors to recover some of their losses no doubt... as in any expansion leagues do it for one primary reason the influx of cash (see NHL and NBA examples in early 90s) it's a sure fire way to improve the bottom line in the short term - often short sighted (see CFL and NASL) it certainly can fend off the creditors in bad times...

[Tuscan]

Is MLS in debt?

[finchster]

quote:Originally posted by Tuscan

Is MLS in debt?

No [}]

Yeah, only three teams make money, LA, Toronto, Dallas. The rest are all in the red

[Johnnie Monster]

Look, MLS club finances are a shell game, and it's no different than any other business. Most companies write off self-recovered business expenses for tax purposes, essentially giving the appearance of "losing" money. Otherwise, their actual profit margin is taxed. The problem for LA, TFC and Dallas is that they are too successful to convincingly mask all of their revenues.

That said, the big question mark that needs to be answered is this:

How much revenue is generated by Soccer United Marketing?

All MLS owners share ownership of SUM. While the publicly stated mandate for SUM is supposedly soccer marketing, I have little doubt that there are numerous other projects under the radar which yield very strong revenues for them. I would be willing to bet that the lion's share of expansion fees go into SUM's coffers for reinvestment, whether it be stocks, bonds, property development, etc.

[Richard]

Like so many topics we have been down this road of MLS team profitability before. It is simplistic in the extreme to look at individual team operating budgets and extrapolating this information to judge profitability or otherwise of the whole MLS enterprise.

MLS has existed for longer than any other north American pro soccer league. The fact that so many groups are willing to invest in stadia and pony up $40 million for the right to enter a team despite the current economic climate in itself suggests that despite all the percieved negatives, MLS is doing something right.

[Tuscan]

So is MLS as an entity, not looking at the teams comprising it, in any form of debt? I should have phrased that question better.

It would be interesting to get a proper breakdown of where the expansion fee funds are going to go, and how much of it is actually going to go towards investment in the league itself (through media contracts, general league promotion, anything else MLS itself needs to put money towards). I hadn't considered SUM in the equation, so thanks for bringing that to light. How exactly does SUM function in relation to MLS? I know that they are separate entities, but is SUM not owned fully by MLS?

[Richard]

As far as I am aware MLS is a privately held corporation and thus is not obliged to publish financial statements.

Without financial statements at the very least we are all just guessing in an information vacuum.

[Bill Ault]

Not that they can be entirely believed but in their court case with the players in 2001 the league pegged their losses up to that point at 250 million.... as has already been said finances at this level are a shell game at best....

Good Soccer America article at the time

www.la84foundation.org/SportsLibrary/SoccerAmerica/2001/sa1494o.pdf

[Canuck Oranje]

Not to be nitpicky but NASL existed from 1968 - 1984. MLS from 1996-2008 so far. That means MLS needs to exist another four years to match NASL and NASL looked a lot more promising in 1980 than it did two years later.

Also, I suspect that the franchise fees are based as much on potential than actual financial return. Quite frankly, I think the league is still very much speculative.

And as far as Saputo, I would say that Joey is unwilling to take the big risk from a business perspective. The Saputo family is not known for being lousy at business. For all the stuff on the surface, Gillett's financial position can't be that good at the moment and I suspect that has got more to do with it.

From a Montreal fan perspective, it is still disappointing no doubt.

quote:Originally posted by Richard

MLS has existed for longer than any other north American pro soccer league. The fact that so many groups are willing to invest in stadia and pony up $40 million for the right to enter a team despite the current economic climate in itself suggests that despite all the percieved negatives, MLS is doing something right.

[Richard]

^ Saputo was very clear in his public statement that he did not believe an MLS team business in Montreal would be viable if the league charged $40 million for the rights on top of the investment in stadium improvements that were demanded. He may be right in the short to medium term, depends on what your motive is to get involved with MLS. I don't believe the Saputos really needed Gillett's money, they needed his name and associations more than anything else.

[Canuck Oranje]

I agree that Saputo really didn't need Gillett's money if they wanted to foot the full bill. But there is something to be said for spreading the risk. I don't think it is coincidence that we have Melnyk, Claure, and Kerfoot as the moneymen behind three of the bids. Melnyk made his money in pharmaceutical drug development, Claure in cell phone distribution in emerging markets, and Kerfoot in software. The three businesses share the fact that they are high risk and high return. That's kind of where MLS is today too.

Another point, I suspect that any bid that will depend on taxpayer dollars to get a stadium built will be in for a rude awakening. Especially in the USA where many for these funding arrangements flow through municipal governments. With that in mind, it would put Miami and Vancouver at the top of the heap because viable stadiums are possible with the least amount of cost.

quote:Originally posted by Richard

^ Saputo was very clear in his public statement that he did not believe an MLS team business in Montreal would be viable if the league charged $40 million for the rights on top of the investment in stadium improvements that were demanded. He may be right in the short to medium term, depends on what your motive is to get involved with MLS. I don't believe the Saputos really needed Gillett's money, they needed his name and associations more than anything else.

[Free kick]

quote:Originally posted by Tuscan

With all the focus on MLS's questionably pricey $40 million expansion price tag, I have yet to actually see what the massive fee would actually be going towards. Obviously there are operating costs associated with media contracts, administration and management salaries, web networking, and other costs associated with FIFA membership etc... Somehow I don't see those costs coming anywhere near $80 million (assuming 2 new franchises), so where is the rest going?

MLS is a business and its franshises have values. The 40 Mill is an investment in the league and not an expenditure. No different, in many ways than buying a stock on the stock market, buying an antique from somebody or a stamp at a collectors show. or a better example, buying a condominum.

The cost of a franchise doesn't have to be justified by the league or anybody else. The money doesn't have to go toward anything or anywhere other than in the pockets of the owners. So you might ask why 40 $Mill versus say $50 Mill that the ottawa senators paid in 1993 or the 100 million or so that NHL teams paid in the last expansion. Al,l thats is based on revenue potention, rights, etc.

You want to own a sports business property much less so for its profits but more so because its values tend to appreciate. The initial owners Tampa bay lightning of the NHL paid 50$ Mill to get into the league in 1993 and yet they sold this summer ( 15 years later ) for $180 Million. Yet relatively speaking the TB Lightning would not be considered as good an investment as TFc because it took them 15 years to triple in value whereas it only took TFC 3 years to triple in value. MLSEL, they bought into the league for 10 Mill ( which was easily recooped through stadium naming rights etc), but barely two years later they could sell their franchise for $40 million. ( I dont have a pressent value caluclator at my finger tips now the rate of return).

[Tuscan]

So if I understand correctly, theoretically the expansion fee could be looked at as nothing more than an admission to a movie type of deal, but obviously in this case it is getting into a growing league with oodles of potential growth. I assume then that the $40 million fee must be based off an estimate of what MLS believes the clubs will be worth right from the get-go? Interesting that TFC is now worth $40 mil, and that the expansion fee is set at $40 mil.

If this is the case, then Joey is crazy for not having ponied up the dough for the fee, assuming that the league will continue to grow and franchises will either begin or continue to prosper.

As a side question, what was/were the downfall(s) of the NASL, and does MLS have the potential of falling victim to the same crisis/crises?

[Vancouversoccerman]

The downfall of the NASL was a combination of over-expanding to any market who wanted a team and overpaying older foreign players. They also vastly overestimated the growth of soccer in North America. That's the short version, anyway.

MLS has done well so far of learning from the NASL's mistakes, and the salary cap is also there to protect the league from maverick owners who want to go over the top on players. The DP rule gives it some protection as well.

In the end, a league is only as good as their owners.

[Free kick]

quote:Originally posted by Tuscan

So if I understand correctly, theoretically the expansion fee could be looked at as nothing more than an admission to a movie type of deal, but obviously in this case it is getting into a growing league with oodles of potential growth. I assume then that the $40 million fee must be based off an estimate of what MLS believes the clubs will be worth right from the get-go? Interesting that TFC is now worth $40 mil, and that the expansion fee is set at $40 mil.

If this is the case, then Joey is crazy for not having ponied up the dough for the fee, assuming that the league will continue to grow and franchises will either begin or continue to prosper.

As a side question, what was/were the downfall(s) of the NASL, and does MLS have the potential of falling victim to the same crisis/crises?

Just to be clear. I conservatively used 40 Million as TFC valuation based on the expansion fee that is being requested from new entrants and the fact that Seattle and Philly are being asked to pony up $20 Mill and $30 Mill respectively. Its a conservative estimate based also on the Forbes Magazine valuations etc. The trademarks and MLS brands are not very strong compared to clubs in the NFL, MLB, NBA and NHL. Thats because the clubs are new and dont have much of presences on TV.

But $40 Million is based on an estimate that takes into account all the teams in the MLS. You can be quite certain that TFC would fetch quite a bit more. You only need to base it on the fact that they maxxed out on season ticket sales and have a lengthy waiting list.

Forebe, who is known to be conservative in their estimates pegs TFC at 44 mill. but they are known to be very conservative in their valuations because they dont take into account a lot of altenate revenue streams.

Lastly, despite what Saputo ( and some of his apologists in Montreal) will say, if you go by Forbes I dont see how $40

Million for entry in 2011 could be off base if you look on the list below and consider that it was compiled in 2008. $40 Mill looked like the mid point of this list in 2011 based on normal growth.

LA Galaxy - $100 Mill

TFC - $44 Mill

Chicago Fire - $41 Mill

Dallas - $39 Mill

NYRed Bull - $36 Mill

DC United - $35 Mill

Houston Dynamo - $33 Mill. ( Houston Dynamo was sold this spring to Golden Boy Promotions and Brenner International in a transaction that valued the team at $45 million.)

Colorado Rapids - $31 Mill

Real Salt lake- $30 Mill

NE Revolution - $27 Mill

Chivas USA - $24 Mill

Columbus - $23 Mill

KC Wizards - $22 Mill

_-----------------------

Mean Average = $37.3 Mill based on 2008

median = $33 Mill based on 2008

http://www.forbes.com/business/2008/09/09/mls-soccer-beckham-biz-sports-cz_kb_0909mlsvalues.html

http://www.forbes.com/2008/09/09/mls-soccer-beckham-biz-sports-cz_kb_0909mlsvalues_slide_3.html?thisSpeed=15000

[Richard]

Something is only worth what somebody else is willing to pay for it, and it seems people are quite happy now to pay $40 million to join MLS.

[Trillium]

quote:Originally posted by Richard

Something is only worth what somebody else is willing to pay for it, and it seems people are quite happy now to pay $40 million to join MLS.

Lets assume you pay 40 million to MLS and you draw 20,000 people per game... it costs you $2,000 dollars to buy a MLS fan.

Now lets assume you want to recoup your money over five years, each fan cost you 400 per season.

Now lets assume you have 20 home games .. each fan costs $20.00 per game day seat... so your ticket price are going to be $35.00 bucks.

Now in Montreal you dont have a Market that can charge a Parent and son or daughter up to $100.00 to go to game .... or at least that is what Saputo believes about his Market after 15 years of runnng a team there.

The Capitol expense of 40 million would have not enhanced the Saputo buisness... especially when he knows he can expend $2.00 per seat or roughly 800,000 more a year in player salarys and purchase better players then MLS can with the right to sell those players on and reap the profits.

The purchase of better players will allow him to win the Voyageurs cup and play in the Champions league, if he manages it well and brings in enough young players to sell on, he will get the agents wanting place a player on the Impact rather then MLS cause the salary will be equal or better, and the movement on to a Euro league will be easier as the player develops.

Champions League at the Concacaf level has changed the game for clubs with ambition. Imagine a Liverpool game in Montreal in the big O in the summer 40k people at $50.00 each a two million gate, the revenue streams possible drawf MLS. Add in a game against someone like Gremio of Brasil and you can see Saputo and the Impact being cash cow year after year ...

Folks .. Joey has it right now he needs to implement.

[Richard]

Then perhaps Joey Saputo made the right decision to stay away from MLS, we wish him well in USL-1. Other ownership groups are counting on long term appreciation of their capital investment as well and are willing to take what short term pain there may be for the long term gain.

[Bill Ault]

quote:Originally posted by Trillium

Folks .. Joey has it right now he needs to implement.

As long as his league doesn't disappear around him. While I agree with your argument and the Saputo's justifications I suspect in the long run his decision will end up costing him dearly in the long run...

[Trident]

See, thats all well and good, but the USL is shaky right now, who knows if it'll be there in 10 years.

[Trillium]

quote:Originally posted by Trident

See, thats all well and good, but the USL is shaky right now, who knows if it'll be there in 10 years.

The same risk factor exists for MLS will it blow its budget post Beckham ? You cant make real determination about the durability of leagues in North America .. you can look to the way Marcos has built the USL versus the MLS and ask if the Bear Market last long term will it be USL franchises who can last longer by cost reductions not highly mortgaged MSL franchises.

Red Bull only exists as long as Red Bull makes money as a product, I am not sure about all the funding sources for other MLS franchises but if you are dropping five million a year or more its not going take long unless your a football person .. to lose interest.

Its going be interesting few years ... as it all shakes out.

But I am hoping Ottawa to make the MLS grade and for the Impact to do well in USL .. untill both leagues realize, hey lets just merge and do promotion relegation.

[jasonm]

quote:Originally posted by Trillium

Champions League at the Concacaf level has changed the game for clubs with ambition. Imagine a Liverpool game in Montreal in the big O in the summer 40k people at $50.00 each a two million gate, the revenue streams possible drawf MLS. Add in a game against someone like Gremio of Brasil and you can see Saputo and the Impact being cash cow year after year ...

Folks .. Joey has it right now he needs to implement.

One problem is that I think Liverpool would charge an appearance fee of 5 million.

Also if it was that easy to schedule games and have nice revenue gates, the CSA would be all over that and schedule friendlies for CNMT.

[ag futbol]

quote:Originally posted by Trillium

The same risk factor exists for MLS will it blow its budget post Beckham ? You cant make real determination about the durability of leagues in North America .. you can look to the way Marcos has built the USL versus the MLS and ask if the Bear Market last long term will it be USL franchises who can last longer by cost reductions not highly mortgaged MSL franchises.

Red Bull only exists as long as Red Bull makes money as a product, I am not sure about all the funding sources for other MLS franchises but if you are dropping five million a year or more its not going take long unless your a football person .. to lose interest.

Its going be interesting few years ... as it all shakes out.

But I am hoping Ottawa to make the MLS grade and for the Impact to do well in USL .. untill both leagues realize, hey lets just merge and do promotion relegation.

I think that's ignoring right now that the most stable teams in the USL (less montreal at this point) all want out of the USL and the Silverbacks are basically one step away from folding since they are not playing this year.

MLS might have more expenses, but it also has more revenues. They signed long terms deals with companies like Adidas, VW, and ESPN. None of those are in question for the immediate future.

I don't quite get your point on leverage. We have no way of knowing these MLS teams capital struture, so we can't tell if they are financed by debt or not. An upfront investment can either be funded by debt or equity (which the vast majority of owners in MLS have plenty of) so there's nothing to say they are going to be more affected than their USL counterparts just because of a larger capital disbursement.

[Tuscan]

quote:One problem is that I think Liverpool would charge an appearance fee of 5 million.

I believe he meant that in the way of the Club World Cup. Somehow I doubt the Impact could ever lure a club of the stature of Liverpool to play in Montreal, even at the Big O, if not for a competition like the CWC. If anything, I could see Montreal possibly bringing over a Serie A side since they have done a tour of Italy in the past.

Quite frankly, USL's years are numbered at this point. Unless league management can pull a rabbit out of their hat and somehow find a way to properly compete with MLS (not counting an economic crisis), I really don't see how it could remain as anything more than a feeder league to MLS or simply be absorbed.