Wow, what a cool story, and one that I never knew anything about: in 1976, the owners of the American Basketball Association team the Spirits of St. Louis made a deal with the rest of the ABA to forego merging with the NBA, and instead, to collect one-seventh of the annual television revenues of the other ABA teams — forever. They’ve made over $100 million from the NBA to date; with the new NBA television contract, they stand to make that much again in just over four years. Stunning, and awesome. [found at MetaFilter]


That story’s pretty cool, but the deal isn’t as good as it appears. It’s not like they got the $100 million up front, it was strung out over 20 years. And, many of the early payments are much less than the later ones. Thus, we introduce the concept of present value.

If you took a pile of money and just invested it into the S&P 500 starting in 1980, you’d make an average return of 17.75%. If you discount back each of the payments to 1980 dollars (I did a quick and dirty back assumption that the payments specified in the article were divided equally over the time period.), it only makes the deal worth $8.83 million.

If you add in the future payments — let’s assume it’s 25 million from 2003-2006; 30 mil from 2007-2010; 35 from 2011-2014; and 40 from 2015-2018 — those extra $520 million only adds less than $4 million to the deal.

So, I see the deal worth about $13 million dollars. Now, this assumes the S&P 500 and the NBA are equally risky deals, and that future returns will mirror past, but I’d argue that in the late 1970s, the NBA was a far more risky gamble than the market. So, if anything, that reduces the price to below $13.

BTW, let’s assume he didn’t do the deal, but kept the team. Assuming the team broke even from 1980-2002 (i.e. no profits, but no losses either), then if the team has a value of $150 million in 2002, then it was worth $3.5 million when he made the deal. So, the $3 million buy out wasn’t totally crazy. In fact, if you assume only an additional 0.75% of risk, lets say from the fact that it’s much harder to sell NBA teams than shares of the S&P 500, the value works out to $3 exactly. (Well, 3.02.) Also, the deal’s value drops from 13 to 11.5 million.

• Posted by: Adam Trachtenberg on Jan 25, 2002, 12:55 AM

From my perspective, though, the hindsight of the deal is that they have had a guaranteed income stream for the past 25 years for which they had to do nothing.

I agree that there’s no way, in 1976, that they could have known that to be true; in an alternate universe, the NBA could have folded (or the ABA teams could have flopped), and then what they did could have been known as one of the dumber business deals of all times.

To me, this is like buying Manhattan for a few bucks — at the time, it seemed pretty risky, and the downside given failure was not insubstantial, but in the end, it worked out pretty damn well.

• Posted by: Jason Levine on Jan 25, 2002, 9:29 AM

Well, the risker the deal, the higher the possible returns necessary to make it worth the chance.

But, from one point of view, this deal isn’t any different from buying some sort of financial instrument where you invest a bunch of money up front and it throws off payments at annual intervals. It just happens to be that instead of buying, for example, the coupon payments of a bond, they bought a share of the television royalities of the NBA.

It’s certainly way cool, but remember the other guy got $3 million from the sale of his team. If you took the $3 million in 1980 and immediately turned around and invested it in the market (say the S&P 500) and never touched it again until today, you’d have a lot of money (about $110 million) and still have done absolutely no work in the past 25 years either except for opening envelopes from your broker with your statements.

Maybe it’s just that everyone else in the NBA is just trying so hard to make money by building stadiums and drafting players…

• Posted by: Adam Trachtenberg on Jan 25, 2002, 11:18 AM
Please note that comments automatically close after 60 days; the comment spammers love to use the older, rarely-viewed pages to work their magic. If comments are closed and you want to let me know something, feel free to use the contact page!