Sports / Football

Q&A: Sports economics expert analyzes Toronto-based bid for Bills

John Vrooman believes Toronto is attractive to the NFL, but the Tanenbaum-Rogers-Bon Jovi group had better be prepared to play with the financial big boys.

Buffalo running back C.J. Spiller  makes a fingertip catch at teh Bills' training camp in Pittsford, N.Y. The Bills are for sale and a Toronto-based group is interested in bringing the team north of the border.

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  • John Vrooman is a professor of economics at Vanderbiilt University specializing in professional sports.

Sports fans might think the NFL is all about football. Really, though, it’s about dollars. Billions and billions of them.

And there aren’t many people who’ve studied the economics of the NFL more than John Vrooman, an economics professor at Vanderbilt University in Nashville, Tenn., specializing in the study of professional sports.

With a Toronto-based bid for the Buffalo Bills hanging in the balance, Vrooman answered some questions from the Star about why billionaire investors are trying so hard to get into the NFL ownership club, what a team in Toronto might be worth, and whether the NFL wants to have a team in Toronto at all.

In standard business terms, the Bills (and many other NFL teams) have valuations rather out of whack with their earnings, to put it bluntly. The Bills, for example, would be in a price-to-earnings ballpark of around 30 to 35. Why, then, are they so sought after?

(Note: Price-to-earnings ratio is a company’s market value divided by its annual profits, and is often used as a rough guide of whether a company’s stock is over- or underpriced. In comparison to the Bills, RBC has a price-to-earnings ratio of around 13-1. Apple’s is around 15-1).

I have often said that the NFL is the perfect portfolio investment. Two-thirds of the revenues are shared equally and the remaining one-third is perfectly diversified because a team shares with other clubs whose fortunes have a perfectly negative correlation. The revenue streams are almost risk-free pure money. An NFL franchise has monopoly power over fans and monopsony power over players. The NFL has the same collective power as a group. NFL franchises are a natural-born sure thing. The Dallas Cowboys are the most valuable club at $2.5 billion (U.S.) or more and they have been a mediocre .500 since the Bills last appeared above water in mid-1990s

What would you value the Bills at now, and what would they be worth if they moved to the Toronto area?

Where they sit in the newly renovated Ralph (Wilson Stadium) in the 55th TV market, the Bills are worth just below $1 billion. In a new publicly subsidized venue by 2020 they could support $1.3 billion in Western New York. If moved to a new privately funded venue in Toronto by 2020, the Bills would be valued at $1.6 billion. Including relocation costs, the Bills could justify a bid of $1.5 billion by (MLSE chairman Larry) Tanenbaum and Rogers.

So (Buffalo Sabres owner) Terry Pegula is expected to close at $1.3 billion or higher and Tanenbaum-Rogers-Bon Jovi at $1.5 billion or lower depending on stadium cost estimates.

The weakness in Toronto could be game day attendance vs. Buffalo but the gate is declining in importance (home gate is only about 15 per cent of total revenue) and Toronto’s strength is TV market size, new media and a strong corporate base, which are all increasing in importance.

(Real estate mogul Donald) Trump is probably blowing smoke and his bid will not be treated seriously. As previous owner of the New Jersey Generals, Trump won an antitrust suit in USFL v. NFL and was awarded $1 in damages. This league has a long memory.

It’s widely perceived that the NFL looks unfavourably on the Toronto-based bid. Why is this the case, since the increased value of the franchise would also (presumably) have a positive impact on the value of other NFL franchises?

This is not true overall among NFL owners. This is a made-for-TV league. TV monopoly money in the new deals has risen from $120 million per club to over $190 million. Meanwhile, the monopony (one buyer) 48 per cent salary cap has locked team payrolls at $133 million next season. (That’s) $60 million quick and fast, risk-free easy money.

Aren’t three rich guys, one of who’s a major shareholder and senior executive with a telecoms company, just the type of people the NFL would want as owners? (If not, why not)?

Of all the pro sports leagues, the NFL is the most particular about club owners. They abhor highly leveraged deals: Dan Snyder was approved after a year of due-diligence search when he tried to buy the Washington club for $750 million and $500 million debt. Cross-league ownership is not allowed unless teams are in the same markets and the league has minimum general partnership shares. With all of these restrictions, NFL ownership has become real big-boy football, and owners need to have the financial pop to assume a major equity share and pony up the ante for this sure bet.

Operating in a bigger, richer market is also more expensive (whether we’re looking at real estate costs, wages or many other things). Are those higher expenses enough to offset the potential gains of being in a market like Toronto?

No, the cost side outside stadium costs are about the same. Venue costs are directly related to market size and public subsidies are inversely related. So a new venue in Toronto would cost more than one in Buffalo and almost certainly be paid for by the club. (Canada and the U.S. are vastly different on public subsidies for sports venues). This is why the net venue cash flow is a critical factor for the club to be moved to Toronto. Another major piece of the relocation scenario is that the other NFL owners will charge a hefty relocation fee if the Bills are moved, and we are not talking chump change. The other owners will want a piece of the action gained from the difference in value in Toronto and Buffalo. This would be at least triple the $29 million relocation fees in the scramble surrounding the 1995 expansion.

Do you think the NFL would like to be in Toronto (if not with an existing franchise, perhaps by expansion)?

Yes, but expansion is unlikely. Relocation is the way and the Bills are the best shot. L.A. is the competition but there are several competing and self-defeating groups in L.A. Houston blew right past L.A. because ownership was united and tenacious, offering $700 million when the other L.A. bids were less than $600 million. There will be a significant wow factor in the winning bid for the Bills. And the amount of the bid will internalize all of the possible futures.

Some reports have suggested that there are only three groups which submitted bids for the Bills this week. Would this surprise you if it’s actually the case, given how infrequently NFL teams come onto the market? (Also, do you think it’s actually the case?)

No, the number of players will be limited for the reasons mentioned above. This is big-boy financial football and bidders had better bring all of their chips.

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