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Chris Russo | Will merger and acquisitions deal-making return this year?

Chris Russo, chief executive of Fifth Generation Sports LLC, looks at the US market for sports-related M&A deals and their future prospects amid the Covid-19 pandemic

2020 began with the completion of a number of high-profile sports transactions, including Endeavor’s acquisition of On Location Experiences, Spotify’s acquisition of The Ringer, and Penn National’s purchase of a stake in Barstool Sports. However, as a result of the COVID-19 pandemic and the ensuing economic challenges, sports merger and acquisition activity has declined dramatically. While it is unlikely that a large volume of new transactions will be completed over the next several weeks, there is a possibility that robust M&A activity could resume in the third and fourth quarters this year. Key sectors to watch include:

US Pro Sports Teams (NFL, NBA, NHL, NBA): Several industry observers have suggested that liquidity concerns may drive some owners to sell their professional sports teams. The current crisis could be particularly difficult for owners whose core business interests include hospitality and travel. Although this hypothesis is plausible, control transactions may nevertheless be rare. Team ownership represents the fulfillment of a dream for many owners. Given that the long-term prospects of Major League Baseball, the National Football League, National Basketball Association, and National Hockey League, remain bright, owners will be loath to relinquish a good investment and a scarce trophy asset, unless all other alternatives are exhausted.

On the other hand, team minority stake and limited partner transactions may increase in Q3/Q4. A key driver for this enhanced activity is the launch of new investment funds dedicated to acquiring team LP stakes, such as Arctos Sports Partners. Also, certain major leagues such as MLB are beginning to modify ownership rules, enabling institutional funds to invest in multiple minority stakes with the potential effect of increasing deal volume.

eSports: M&A activity in the eSports sector could rise in Q3/Q4 as buyers seek to capitalize on the robust growth and attractive demographics of the gaming sector. During the pandemic, streaming on Twitch reached an all-time high, and average concurrent viewers were 76% higher in April, 2020 versus February 2020, according to data from TwitchTracker.com. Also, with traditional sports suspended, eSports creatively filled the void, including Nascar iRacing on Fox Sports and NBA 2K programming on ESPN. While the resilience of gaming is attractive to buyers, some of the challenges facing eSports may also result in increased transaction volume in Q3/Q4. For example, a number of eSports teams have faced difficulty in achieving monetization. Event cancellations in 2020 have further reduced revenue opportunities for certain franchise properties. Some teams may need to raise additional capital, and existing owners could decide to sell these businesses rather than contribute more funding.

Sports Betting: As professional sports return, the betting space is poised to gain strong momentum, and these industry dynamics could spur M&A transactions. Over the past several months, additional states have legalized sports betting, and robust wagering activity can be achieved, regardless of whether fans are able to physically attend games. Sports betting operators will need to make significant marketing expenditures to: i) reactivate existing customers, ii) secure new customers, and iii) establish operations in new states. Given these high costs and the intense competition (e.g. New Jersey has more than 10 online sports betting providers), some operators may seek to consolidate, thus driving M&A. In addition, M&A activity may occur in the sports betting start-up sector. Over the past two years, a number of innovative companies have been launched that focus on sports betting software, content, analytics, and related areas. A number of these start-ups may find it difficult to secure fresh capital in 2020, forcing them to sell to larger, more established players.

Digital Media: Ad-supported digital media companies have faced challenges in recent years, due in part to competition from Facebook and Google and the dominance of programmatic ad buying. Sports media companies have generally fared better than other categories because of the associative value of sports and the windfall of ad money that is emerging from sports betting. Also, there are a number of digital sports businesses that have achieved success based primarily on subscription models, such as The Athletic and FloSports. However, the current advertising slowdown may lead to distress situations in the marketplace, prompting consolidation in digital sports media. Companies with subscription models and/or multiple revenue streams may have an opportunity to acquire struggling sports media brands that are solely dependent on advertising. Whether this happens in Q3/Q4 may depend upon whether there is consensus between Buyers and Sellers on new valuation metrics.

While it is helpful to analyze sports industry sectors in developing a Q3/Q4 M&A outlook, the most important determinants of deal activity may ultimately relate to the availability of capital and Buyer confidence. With respect to capital, many private equity funds have significant dry powder, and family offices/high net worth parties have benefited from the stock market rebound over the past several weeks. Moreover, a number of sports specific funds have been launched in recent years, such as Bruin Sports Capital which announced $600M in new capital from CVC Capital Partners and The Jordan Company in November 2019. As to the issue of confidence, it is difficult to predict the Buyer mindset for Q3/Q4. Confidence may relate to sports specific conditions (e.g. the degree to which pro sports has resumed) or macro-conditions (e.g. potential treatments for COVID-19, the stock market performance etc.). Regardless of timeline, sports M&A transactions will eventually return, and those parties that are creative, well capitalized, and able to adapt to new paradigms and opportunities, will be best positioned.

Fifth Generation Sports is a sports consulting firm focused on the intersection of sports, technology, and digital media.

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