Description

Take me out to the ball game

Take my BATR series C shares out with Malone and Maffei

We'll take the prospective acquirers shares to minimize the tax, but please throw in an extra face mask

For Liberty’s confident they’ll all soon be back

They knew Root, Root Sports, when it was in their domain

If they re-attribute again they’ll be shamed

For simplicity they created one, two, three tracking stocks

But the team doesn’t come with Liberty’s plane

Overview:

Liberty Braves Group (“Liberty Braves,” “BATRK,” or “the Company”) is a tracking stock that represents Liberty Media’s ownership of the Atlanta Braves MLB franchise as well as a related mixed-use real estate development project, known as The Battery Atlanta, that surrounds the team’s ballpark (now known as Truist Park). The Braves, which are the oldest continuously operating professional sports franchise in America, are the epitome of a “trophy asset,” offering ownership in a professional sports franchise that cannot be replicated. The finite supply of MLB teams (just 30), coupled with the growing ranks of U.S. billionaires with 607 in 2019 (pre-coronavirus) vs. just  404 in 2010, bodes well for investors when/if Liberty decides to sell the team.

The uncertainty surrounding the pandemic created significant share price volatility in the Liberty Braves Group earlier this year. At the pandemic lows in March 2020, shares of BATRK were down roughly 45% from the recent December 2019 all-time highs of ~$30 a share though shares of BATRK have retraced a portion of those losses over the past couple of months. As a result of the share price pressure, BATRK shares are currently trading at a meaningful discount to their private market value. The status of the current season could be in jeopardy based on press reports of current negotiations between the owners and players. Although the prospect of a canceled 2020 would be less than ideal, we do not believe it would permanently impair the team’s valuation. MLB has undergone several meaningful labor disputes over the past ~40 years though the sport/MLB brand has demonstrated an uncanny ability to recover in the wake of the temporary damage it inflicted to its image and reputation. Nevertheless, we believe that the teams will likely work hard to come to agreement given the challenges the sport faced in the wake of the last major strike (cancellation of 1994 world series).  

Key Investment Considerations:

Improved Team Performance with Favorable Outlook:

During 2019, the Braves won the NL East division title for the second consecutive year, helping the team to its best attendance in 12 years, including a record 17 sellouts, by attracting 2.7 million fans, up ~4% from 2018. The strong attendance helped drive an ~8% increase in baseball revenues in 2019  thanks to increases in all major revenue sources (tickets, premium seating, concessions and merchandising, etc.). The Braves garnered many postseason awards last year, including three Silver Slugger Award winners, the most of any other team—the first time any club had multiple winners under 23 years old in a season. In our view, this is a testament to Braves’ farm system, which has been among the top-rated farm systems in MLB over the past ~5 years, including #2 in 2019 (by Bleacher Report)—especially impressive in light of several player graduations to the big leagues in recent years. The Braves’ strong nucleus of young players, coupled with several key offseason free agent signings, should help sustain team, and financial performance when the season/play resumes. 

Discount to Private Market Value:

Forbes annual rankings of professional sports team values are closely monitored by investors in publicly traded sports franchises. Although these valuations have a bit of a black box component to them, the values Forbes place on teams are typically used as a starting point if and when a team owner decides to sell. According to data compiled by Evercore ISI, the past 50 transactions of professional sports franchises have occurred at an ~30% premium to the prevailing Forbes value. We have observed that the the premium commanded by MLB teams in recent deals has been even higher (~64%).  In April 2020, Forbes released its annual publication of MLB team values, which valued the Braves at $1.8 billion, up 6% over the prior year. 

Applying a 25% premium to the recent Forbes value for the Braves, we note that shares are trading at a roughly 25% discount to their private market value based on the reported enterprise value for BATRK. However, the reported EV does not reflect any value for the Company’s real estate which could add $5 a share in additional value. Accounting for the Braves’ real estate holdings, we estimate that BATRK is trading at a nearly 40% discount to its private market value at current levels.

Underpriced Local Media Rights:

The Braves’ current local TV deal (2027 expiration) was signed well before the escalation in sports media rights that has occurred over the past ~10 years and is significantly below market. Although the Braves renegotiated a portion of the deal in ~2014, Liberty noted in 2019 that the Braves are generating ~$83 million/year from its contract with the two regional sports networks (RSNs) that broadcast Braves games (Fox Sports South/Southeast), with this amount increasing to ~$113 million at the contract’s maturity in 2027. It should be noted that his amount remains well below the level that peer teams generate (Cubs pull in ~$160mm annually) and is just a fraction of what the top teams pull in, such as the Dodgers (~$300 million). Sinclair’s 2019 purchase of 21 RSNs, including the two RSNs that broadcast Braves games, could provide the impetus for a renegotiation of the current contract. The Sinclair entity that purchased the RSNs is heavily levered (>5x), so we believe that it may have a strong interest in extending its Braves rights beyond the current term. What’s more, it is believed that Braves programming represents ~80% of the economics of these networks and the Braves have discussed the possibility of starting their own network when the agreement ends in 2027. Liberty is no stranger to RSNs, having owned a number of these networks in the past while Charter, in which Liberty holds a large stake, also currently operates a number of these networks. Although Sinclair would likely have to compromise near term free cash flow in a renegotiation, it could provide it with longer-term visibility, which would increase its financial flexibility. Absent a renegotiation, the Braves stand to benefit meaningfully when the current contract ends given the increasingly valuable nature of sports rights due to the ongoing adoption of sports wagering (increased fan engagement, etc.), the scarcity value of live sports (commands premium advertising rates), and potential distribution with tech companies (Amazon, Twitter, etc.), which are becoming increasingly active in sports programming. 

National Media Rights Renewal:

The Forbes value for the Braves has increased at an ~9% CAGR over the past 20 years. A significant driver of this increase has been the national broadcast revenue secured by MLB, which is split equally among the 30 teams. Although the league may have difficulty matching the 100% increase it garnered during its last media deal, which began in 2014 and runs through the 2021 season, we note that Fox negotiated an extension for its portion of the contract in 2018 at an ~35-50% increase relative to its prior deal. Although there are many factors that contributed to the increase, we believe that sports programming continues to be increasingly attractive from a broadcaster’s perspective as it remains one of the few genres that continues to be viewed live. Furthermore, big tech companies (Google, Twitter, Facebook, Amazon, etc.) have shown increasing interest in sports rights and will likely be major participants in the next round of bidding for professional sports team media rights. It should be noted that Amazon was part of a consortium that helped the Yankees regain majority control of their network in 2019 as that company has ostensibly recognized the value of live sports programming. 

Online Wagering:

The 2018 supreme court ruling that paved the way for broader sports gambling coupled with the ongoing legalization by states of online wagering bode extremely well for the value of sports franchises. These factors have several important considerations for the Atlanta Braves. The national media contract that MLB struck with its broadcast partners was signed well before the broader sports gambling legalization. However, we would expect the next contract (current contract runs through 2021 season) to garner a significant increase. Indeed, and as noted above, the MLB renewed a portion of its media contract with Fox at a meaningful increase. In our view, sports wagering likely factored into a portion of the increase given the opportunities that it provides (increased fan engagement, new advertisers, etc.). Should the MLB garner a similar increase for the remaining portion of its contract it could portend a meaningful step up in team valuations as measured by Forbes. A 2018 Nielsen study suggested that MLB could generate $1.1 billion in additional revenues due to legalized sports gambling. 

Although the adoption of online wagering in the Southeast portion of the U.S. has been virtually non-existent, that could change as a result of the current pandemic. In our view state budget deficits, which have become larger as a result of the pandemic, could prompt the acceleration of online wagering more broadly in the U.S. (at present, just 22 states have passed laws that legalize online wagering). Should online sports gambling become legal in Georgia and in other states in the Braves’ multi-state Southeast footprint, many of the near term benefits will likely accrue to the Braves RSN. During a recent investor conference, Sinclair CFO Lucy Rutishauser stated, “We have proposals from many companies that are looking to partner with us and when you think about the sports betting opportunities, the benefits could take the form of adding a new advertising category, gamification, interactivity, new programming around sports betting, targeted opportunities, sponsorships, and these are just a few that I named. So, these are some of things that we're looking forward to, and reasons we're very excited about the RSNs.” Nevertheless, there could be in-stadium initiatives surrounding online legalization that the team could benefit from in the near term. Longer-term, The increased opportunities that the Braves’ RSN partner will likely benefit from going forward associated with online wagering should give the Braves significant leverage when its local media rights contract comes up for renewal or during a potential renegotiation. 

Attractive Real Estate Holdings Offers Upside:

In our view, The Battery Atlanta is an underappreciated component of the BATRK story and should generate attractive returns with approximately ~$25 million in stabilized NOI expected for the real estate assets currently held with the completion of Phase 1 of the development. As a testament to The Battery’s success, the Braves in 2018 sold the residential component within the Phase 1 development at an ~22% IRR that generated proceeds of ~$60 million (net of debt and JV distributions). The retail component of the project boasts 3 of the top-grossing restaurants in Atlanta. It should be noted that while Truist Park is a big draw for the Battery it is not the only factor that brings in consumers as the Battery attracts ~3 million consumers annually in addition to game attendees. Phase 2 of the Braves’ real estate project is underway, which will include the North American headquarters for Thyssenkrupp elevator business (in February 2020, Thyssenkrupp reached an agreement to sell its elevator business to a private equity consortium). As Phase 2 nears completion, we believe that it could set the stage for buybacks at Liberty Braves Group. In our view, with a finite amount of developable land around the Battery coupled with the shares lingering discount to private market value, we believe that Liberty would strongly consider buybacks as a way to narrow the discount. 

Favorable Financial Position and Liquidity:

At March 31, 2020, Liberty Braves Group boasted a strong liquidity profile with $343  million in cash on its balance sheet. The Braves were in compliance with all of their debt covenants at the end of the first quarter and Liberty noted that it was monitoring its ability to comply with debt covenants in future periods and are in discussions with their respective lenders. Liberty had $698 million in total debt at the end of 1Q 2020 with ~70% associated with its ballpark ($299 million) or its real estate development initiatives ($189 million), both of which are non-recourse to the Braves. Although the Braves have offered refunds for April and May games to its season ticket holders, Liberty noted that many of its fans have not elected to receive a refund, preferring to keep their place if a season resumes. The Braves have also offered an incentive if fans rollover their funds until next year, which could help minimize the required refunds.

Potential Acquisition Candidate:

Past comments by Liberty management suggest that it would be amenable to parting ways with the Braves. Although an acquisition may prove difficult in the near term due to the uncertainty surrounding the pandemic, it’s definitely not out of the realm of possibilities. Recent press reports speculated that a group led by Alex Rodriguez/Jennifer Lopez were considering purchasing the NY Mets provide a strong indication of demand for professional sports franchises regardless of the economic environment.  It should be noted that in 2018 the NFL lifted its long-standing cross ownership rules that prevented ownership of professional sports teams  in markets also containing an NFL team. In our view, this should increase the universe of prospective acquirers when Liberty decides to sell the team.The rising ranks of the number of U.S. billionaires should also bolster the number of potential acquirers. 

2020 Season Status?:

The prospect for the 2020 MLB season to resume is tenuous at this point. Although the logistics of hosting games during the current pandemic presents challenges, the biggest point of contention for an MLB resumption at this point is the economics, which the other major professional sports leagues have overcome. To date MLB players have been reluctant to agree to salary caps and revenue sharing agreements that have been proposed by the owners. Should the owners and players not be able to come to an agreement about beginning the season there could be negative implications for the Braves including turning off fans from the sport. Although MLB has recovered from past labor conflicts, the league has not been immune from the fallout occuring immediately proceeding the resolution of past labor strikes. 

Catalyst

• Beginning of the 2020 MLB season

• Announcement of MLB’s next national media rights agreement

• A potential renegotiation of the Braves' current below market local media rights agreement

• State budget shortfalls could accelerate online wagering in the Braves’ media footprint

• Completion of phase II of the Braves’ real estate development initiatives could portend shareholder friendly initiatives

• The Braves elect to bring Chief Noc-A-Homa out of retirement