For the first 103 years of the Pac-12’s existence, its valuation was inconsequential.
For the past six months, that has been one of the hottest topics in a conference that generates an outsized share of hot topics.
Commissioner Larry Scott and his strategists calculated a $5 billion valuation for the conference media rights as part of a plan to attract an equity partner.
That partner would acquire 10 percent of the media rights holding company in exchange for as much as $750 million in cash that would be sent to the schools.
Some called the plan creative. Other termed it desperate. In reality, it’s both:
The schools need the cash, they need it now, and the conference created a means to generate a windfall that would allow it to retain control of the content.
Then Scott and his team assigned a $5 billion valuation on the holding company — a whopper of a number, for sure, but was it accurate?
Two pieces of information were required for an assessment of the valuation:
Private Pac-12 financial data, and an open-market point of comparison.
Fortunately, we have both.
Thanks to Hotline sources, we have the Pac-12 conference and Pac-12 Networks financial data.
And thanks to Disney’s sale of 21 Fox Regional Sports Networks (RSNs) to Sinclair broadcasting, we have a reasonable market benchmark.
(The approach is good enough for Mark Cuban, who drew the comparison in an email to the Oregonian’s John Canzano.)
The Fox RSNs were valued at $10.6 billion in the sale, which is approximately 6X their projected EBITDA, or earnings before interest, taxes, depreciation and amortization.
That 6X multiple for the Fox RSNs gives us a benchmark to value the Pac-12’s media-rights holding company.
Of course, the Pac-12 doesn’t have earnings in the traditional sense. Instead, we’ll use the total revenue (revenue less operating expenses) as our starting point.
We know the Pac-12 Networks were projected to generate $35 million in FY19.
And we know the conference was projected to generate $349 million in FY19, with the networks adding another $35 million (the profit that gets distributed to the campuses).
That’s $384 million in what we’ll call net revenue.
If we then apply the same 6X multiple the Fox RSNs received, that would place an open market valuation of $2.3 billion on the Pac-12 media assets — far less than the figure Scott and his investment advisors (The Raine Group) have projected.
However, it’s not quite so simple.
The 6X multiple assigned to the Fox RSNs could be viewed as too high for the Pac-12 Networks, because the 21 RSNs have enormous collective reach (74 million homes) in addition to a national sales force and Tier 1 media partners — all of which act as a force multiplier for the valuation.
The Pac-12 Networks have none of that: small footprint, small staff, small revenue … small everything.
However, the networks also account for just nine percent of the net revenue figure ($384 million) we’re using.
The remainder comes from conference-side revenue streams, the largest of which is the Tier 1 deal with Fox and ESPN for premium football and men’s basketball games.
But even there, the situation is nuanced.
Approximately one-third of the conference revenue comes from the college football postseason and NCAA Tournament units. Should those streams be included in an open-market valuation of the Pac-12 media rights?
For the purposes of this exercise, we’ll include both: the March Madness cash comes from CBS/Turner and flows through the NCAA to the conferences, while the football postseason revenue is courtesy of ESPN, which owns the rights to the Rose Bowl and the College Football Playoff.
Both revenue streams, therefore, originate with third party media deals.
One could argue that the conference buckets (premium football content, March Madness and the CFP/Rose Bowl) would command a multiple greater than 6X.
Should we adjust? And if so, by how much?
If we randomly doubled the multiple, to 12X the Pac-12 operating revenue, that would produce a valuation of $4.6 billion on the conference’s media assets — still less than the self-assigned number.
But 12X is probably high, and here’s why:
Before 21 of the 22 Fox RSNs were sold to Sinclair, the most valuable of them all — the crown jewel — was sold separately: The YES Network.
For those unfamiliar, that’s the Yankee Entertainment and Sports Network. And it went for 8.4X earnings.
(Also worth noting: The Pac-12 is counting on digital media giants to bid for the conference’s media rights in 2024, thereby driving up the price, but none of them made a serious play for the Fox RSNs. While plenty could change in the next few years, that’s hardly an encouraging sign for the Pac-12. Or any other sports property.)
Even if we were to apply the same Yankee-esque multiple of 8.4X to the Pac-12’s media rights holding company, the result would be a $3.2 billion valuation.
That’s substantially less than the conference’s internal estimate.
And if we’re in the correct range with $3.2 billion, then an investor (or group of investors) willing to hand over the $750 million sought by the conference would receive, in return, almost 25 percent ownership of the company.
That would leave the schools with far too little for far too long.
So unless the Pac-12 manages to convince equity partners that the value of its media rights is substantially greater than the market seems to indicate …
The Pac-12 will hand over a larger slice of ownership than it initially planned or receive less cash than it originally hoped.
Or it could assess the options and do nothing.
Doing nothing just might be the smart play.
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