In a unique bit of sports business news, the Pac-12 is interested in selling a 10 percent stake in the conference to private equity investors, The Oregonian reported over the weekend.
The Pac-12 would put all of its commercial assets — from media rights to merchandising to distribution agreements — into a new entity called Pac-12 NewCo. An investor would then buy a 10 percent stake $500 million, which the Pac-12 would distribute to its schools. Assuming an equal division of money, every Pac-12 school would get $41.5 million.
This idea raises lots of questions for everyone involved.
1. Why would Pac-12 schools be interested in this kind of move?
This is the easiest of all these questions to answer. The Pac-12’s most recent annual payout to its universities was $31 million. That’s well behind the Pac-12’s power-conference peers. The Big Ten’s payouts are now over $50 million and likely to climb further.
The Pac-12 Network has been underwhelming commercially. Some schools have made facility and other investments, hoping the Pac-12 would come along with higher payouts, and now schools like Oregon State, Washington State, and Cal face significant athletic department debt. Getting $41.5 million, even just once, would be nice, either to help shore up the books, or make other investments, like improved facilities.
2. Why would an investor be interested in the Pac-12?
It’s trickier to think of the appeal for an investor. The idea of buying a percentage of future earnings in sports isn’t totally new. There’s a similar experiment going on with minor league baseball player earnings now. But nothing similar to this arrangement has been done before in college. It’s not clear if investors would see this as a high-upside or silly idea, given how different this would be from so many other investment vehicles.
3. The Pac-12 values itself at between $5-8 billion. Is that right?
This valuation, as the Oregonian and documents described it, assumes ESPN and Fox continue to shell out massive checks for TV rights once the current Pac-12 contract expires in 2024. That seems impossible to predict with certainty.
Plus, how would the risk of ongoing and looming player-pay lawsuits impact a valuation? There’s a reasonable chance costs increase over the next decade. Is there enough certainty in the trajectory of this story to produce an accurate valuation?
4. Let’s say the valuation is right and the Pac-12 gets $500 million. Would a bunch of cash one time really change the conference landscape?
The Pac-12 had a horrible 2017 football season and 2018 NCAA men’s basketball tournament. This year, it missed the Playoff for the third time (more than any other Power 5 league) and needed until December 28 to win a bowl game. Nobody shows up to its championship game in an NFL stadium that covers seats because no one’s coming. The ongoing men’s basketball season could be even worse than the last one.
But it’s not like the league is poor, exactly. Distributions were still high enough for UCLA to hire Chip Kelly, for Washington to hire Chris Petersen, for Utah to keep Kyle Whittingham around, and for the league’s best schools to recruit at least pretty well. Steve Alford and Clay Helton aren’t underachieving because their schools are poor, after all.
Does an extra $41.5 million all at once really change the landscape, especially when the Big Ten and SEC are still going to be richer going forward and when the investor would presumably get a piece of future distributions? If the Playoff expands and the Pac-12 gets in more regularly, will people be talking so much about the financial gap in the first place?
And what if this plan works? Could other leagues take the same path and realize they’re worth way more? If you’re exploring this move to try for financial parity, what happens when you find out the other conferences are worth even more? The Pac-12 might be better served just making better hiring decisions, both at the school and conference level.
5. What happens when the needs of a Pac-12 investor clash with the values of the Pac-12 — like caring about water polo, for instance?
The Pac-12’s presentation says the league will “hold super voting shares to ensure ongoing operational controls,” but that seems to infer that an investor would get some voting rights. If somebody buys 10 percent of the league and gets 10 percent of the votes, they’ll have more voting power than any individual Pac-12 school. Would USC be okay with, say, Goldman Sachs technically being more in charge of the Pac-12 than they are?
The Pac-12 will almost certainly still lag in cash compared to the Big Ten and SEC. College athletic interest is generally lower in the West than in the South or Midwest. Travel expenses are higher, and being in the Pacific and Mountain time zones limits TV audience size. Even a big chunk of upfront cash won’t change those long-term realities.
At some point, an investor wants its money back. What’s the plan there, given the Pac-12’s current big deficit and those demographic realities? How will the Pac-12’s schools respond if an investor wants the league to stop sponsoring a sport that doesn’t make money, or to do something else that clashes with their values?
6. Oh, who’s actually going to be able to bid on the Pac-12?
Will the Pac-12 be willing to sell those shares to anybody? Are they willing to let the buyers sell their shares to whoever they want? It’s one thing to let some Salesforce investor buy a share, but what if they want to sell it to, oh, a gambling company? Or a shady investment bank? A mega-rich bagman type? Would schools be OK not knowing who owns their stuff? If the schools want restrictions, can they still get the big money they want?
If the Pac-12 is going to put restrictions on who could buy into the share, limiting the size of their market, are they going to be get as much money as they’re hoping for? If hypothetical shares of the Pac-12 are highly illiquid, is anybody going to want to buy them?
7. Should Stanford just reach into its huge endowment, buy the whole Pac-12, and decide all this for itself?