FROST: The Sports Industry Remains Healthy

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Tim Frost

WILMETTE, Ill. — Investment in the sports industry continued during the pandemic and this month we will examine the rationale behind that spending and forecast what’s ahead.

Every industry was deeply impacted by the pandemic, but sports and entertainment were among the hardest hit. Sporting events, concerts and other gatherings were postponed or — in many cases — canceled.

As in any downturn, there will be an adjustment that occurs until the recovery takes hold. Many sports are under financial duress, causing sellers to enter the marketplace at discounted prices.

However, the underlying business fundamentals of well-capitalized leagues remain sound, supported by long-term broadcast deals and sponsorship contracts. There are some teams and related businesses that are suffering from cash flow issues where revenue is dependent on the consumer spend.

Opportunities arise for those with capital and others needing liquidity.

There has been a change in mindset in attending large events. Attendance at sporting events has been in decline. There are empty seats at races and tracks have reduced overcapacity by removing seats.

Promoters have worked with health officials to develop plans. Along with restrictions on crowd size, attendance will grow but not to the levels previously seen.

Creating value for fans with flexible ticket and concession packages will help the bottom line.

The pent-up demand for live sports was front and center at the start of the shutdown. Sports are fortunate they have an engaged community with strong loyalty and brand awareness.

The intellectual property of sports is content. Transferring this to consumer interaction on a digital platform is key. Motorsports did this with iRacing and other simulations. In-race data, realistic track and car graphics and professional drivers kept the enthusiasm high and the money flowing.

Sports is a scarce commodity. There are a limited number of leagues and teams available.

The pool of potential owners and buyers is driven by wealthy individuals looking to participate in the motorsports industry. They are usually successful in other businesses and have capital to invest. This has continued to be the underlying premise of increased valuation levels.

The sports infrastructure is well developed. State-of-the-art stadiums, established team operations, solid sponsors and loyal fan base, along with fantasy leagues and sports betting, point the way to a bright future.

Complete ownership is beyond the reach of most new investors. League requirements along with legal issues complicate the equation. Minority positions are typical and manageable from an investment standpoint.

Motorsports investment is following these trends.  The charter system in NASCAR and the Concorde Agreement in Formula One have attracted new groups to motorsports.

The 23XI Racing NASCAR Cup Series team, backed by Michael Jordan and Denny Hamlin, is one example. Jordan’s ownership of the Charlotte Hornets and Hamlin’s NASCAR career with Joe Gibbs Racing is a formidable combination.

Along with the shared commitment of founding sponsors and Bubba Wallace in the driver’s seat, they will be in the limelight.

McLaren Racing received an investment led by MSP Sports Capital. The deal is for $245 million over two years for up to 33 percent ownership stake in the Formula One operation, which values the team at $740 million. MSP Sports Capital is led by Jeff Moorad, who was part owner of Hall of Fame Racing that competed in the NASCAR Cup Series during the mid-2000s.

The long-term future of investing in sports is secure. The economic fundamentals and deep pool of investors support this positive trend. Fans will be able to enjoy motorsports from green flag to checkered flag for years to come.