Thursday, December 4, 2008

Canadians Are Cheap Bastards

On the heels of Montreal's MLS bid getting the kibosh put on it over a desire to pay less than the posted $40M franchise fee, Vancouver's bidders are getting similarly cold in the feet about ponying up that kind of dough.

Or are they?

This article here first writes, "Should we pay or should we go? That's the question facing the Vancouver Whitecaps and five other ownership groups bidding for two Major League Soccer franchises as a global recession forces them to reconsider the $40-million US franchise fee."

Then the same article goes on to report, "[Vancouver bid applicant Jeff Mallet] said his group still expects to pay a $40-million fee if it is selected to join the league. 'We know the league is looking for $40 million and we respect that,' Mallett said in an interview. 'All our financial modelling has been done around the $40 million.'"

According to the same article, St. Louis is apparently getting a little anxious about the size of the fee and Barcelona Miami has said it will pay the full 40 as long as nobody else pays less. Maybe the article is simply saying that global economic conditions aren't what they were a couple of months ago? Gee, crack journalism there boys.

Anyway, probably no coincidence that the Canadians are particularly nervous. When this process was going on, the Canadian dollar was close to parity with the US dollar. Now it's about .8 to the USD, so that $40M fee becomes $50M.

But does it even matter? Mallet is a former Yahoo! executive. Were his options and compensation packages paid in Canadian dollars (doubt it)? Also part of the Vancouver bid are Steve Nash and Steve Luzco, minority owner of the Boston Celtics. Nash, while Canadian, plays in Phoenix and is probably paid in US Dollars and Luczo, like Mallet, also has a background from US-based tech companies. So I would imagine any personal wealth they commit to this or any financing they secure would be in USD (unless there are some rules here I'm completely ignorant of... and even if there are, I'm hoping they were smart enough to buy some futures to reduce this kind of forex risk).

All of that said, the cost of the franchise fee relative to the salary cap is a pretty significant multiple. Cap in MLS is $2.3M, so that makes the fee about 17.4 times that of the cap. Compare that to the NFL. The cap in the NFL is about $117M so relative to the most valuable franchise the Dallas Cowboys that's a multiple of about 13.7. Relative to the least valuable franchise the Minnesota Vikings that ratio drops to a mere 7.2.

The cap-to-cost ratio is a bit of an arbitrary measurement—and comparing any sport to the NFL is a bit like comparing mini Red Delicious apples to super jumbo Honeycrisp apples—but it does show how low the compensation in the MLS is (versus what the value of the franchise is). As another measure look at the revenue to cap for the NFL teams v. the MSL teams. Average revenue for the top half of the NFL teams averages about $220M (eyeballing from the same Forbes lists linked above). So the revenue is a little less than a 2x multiple of salaries. In the MLS the top half of the teams are somewhere between $10 to $14M in revenue (this excludes the LA Beckhams). So they have revenues in excess of about 5x or 6x that of player salary costs.

Now, if you are looking at buying a franchise, in the NFL you're probably paying somewhere in the $1.3 to $1.5 billion range, so you're about 5x the revenue of a top team. In the MLS you're paying $40M and are down around 3x to 4x of revenue of a successful team. So, new entrants in MLS aren't necessarily getting raked over the coals. But as a long terms strategy for the league, keeping player salaries so low while expanding and collecting large franchise fees probably isn't very sustainable. You're already not able to attract world class talent (one or two designated players aside) given salary restrictions, and now in a couple of years' time, you are going to dilute the talent pool that much more by adding four teams. Probably doesn't take much more expansion before potential owners get shy about paying tens of millions for s team that's at least half stocked with borderline marginally talented players.

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