BATRB - Atlanta Braves: This Yankees Fan Is A Buyer

2024-01-05 01:26:32 ET

Summary

• The Atlanta Braves, recently split off from Liberty Media, is an attractive acquisition target for potential buyers.
• Sports teams often trade on a multiple of revenue, and the Braves has consistently been profitable with control over their television rights and a significant real estate development.
• The valuation of the Braves, considering both the baseball revenue and the real estate, suggests a potential stock price increase from the current market cap.

Basic Thesis:

Investing requires setting aside biases and prejudices to objectively examine investments. As a lifelong Yankee fan (proud owner of World Series rings with my last name on them), I am shunting my loyalties and coming out in favor of the Atlanta Braves ( BATRK ) ( BATRA ), which was recently split off from Liberty Media in July of last year. A former tracking stock, the two share classes now represent a C-corp. Economically they are the same. BATRA has one vote per share (~10 million shares outstanding) and BATRK is non-voting (~50 million shares outstanding). There is also BATRB, with fewer than 1 million shares that is quoted in the OTC market. For liquidity purposes, BATRK is the main subject of this pitch.

There are very few publicly traded sports teams. MSG Sports ( MSGS ) and Manchester United ( MANU ) are some of the few. Most teams are privately owned by wealthy individuals or families. Given this dynamic and the attractiveness of the asset, I believe that post-spin out, the Braves is an acquisition target for a number of potential buyers.

When the teams trade, the prices usually don't reflect underlying current economics. For example, the New York Mets were bought by Steve Cohen in 2020 for $2.42 billion. Notably, the sale did not include the team's television rights, the stadium, or any land around the stadium. It was just the team. Covid caused severe losses and Cohen incurred major losses ramped up payroll after the purchase. However, even previous years, one can see below, were not cash flow gushers to justify a price of $2.42 billion.

For this reason, sport teams often trade on a multiple of revenue. The Mets were sold for over 6x revenue (again without the high margin television rights). MANU trades at 5x, but traded over 6x revenue when it looked like the whole team would be sold earlier last year. MSGS goes for about 6x revenue, reflective of what some people call the "Jimmy Dolan discount".

The Braves, like anything John Malone controls, have been consistently profitable and control their television rights as well as The Battery, a significant mixed-used real estate development around their stadium, Trust Park (they lease the stadium). The Battery throws off meaningful NOI in addition to the team's historical profitability.

Below is an OIBDA (operating income before D&A) profile from 2022 and 2021. There was a slight dip in '22 thanks to some increased player salaries and the bump from the team's 2021 World Series win.

2023 is higher than 2022 through the end of September thanks to higher revenues. Notably, the company's broadcasting revenues were higher year over year despite the bankruptcy of its carrier, Diamond Sport. In bankruptcy, Diamond Sport rejected the contracts covering several teams but kept the Braves.

I believe Diamond Sport keeping the contract speaks to the Braves' strength as a team and the Atlanta market's attractiveness. Atlanta is one of the largest and fastest growing markets in the country. There are 14 to 15 million people in the Southeast who identify as Atlanta Braves fans. The team appears set for success for the next few years with a number of their most talented players young and tied up in contracts.

Valuation:

As stated above, sports teams usually trade for multiple of revenue. However, with the Braves, one has to split the business between the real estate and the team/broadcasting. If one applied a 6x multiple to the baseball revenue (assuming 2024 finishes 10% above 2022 versus ytd trends of 15% higher), you get a $3.5 billion valuation. This valuation is supported by the Forbes valuation below. Notably, most teams have traded for 20-25% above where Forbes has pinned valuation in March of '23. The valuation trend keeps going higher, which should make up the difference in March '24.

The real estate is a matter of cap rate applied to NOI. I think an 8% rate is not aggressive given the uniqueness and quality of the Battery, which as you can see above, throws off about $60 million of stabilized NOI. Applying that cap rate to $60 million gives a $750 million value.

Putting that together, you get a value of $4.25 billion versus a current market cap of $2.42 billion and net debt of $560 million, giving an EV of $2.98 billion. The difference would accrete to the equity resulting in a stock price ~$60/share versus $38.50 currently.

Why Now?

Fair question. In my opinion, John Malone is the most talented and experienced navigator of the tax in corporate history. Splitting off the Braves allows for a clean tax transaction in the event of a sale. Some people argue that two years between separation and a sale is required to avoid negative tax consequences to shareholders. However, that provision applies only to someone that you have been in talks with previously. If you have not been in talks to sell an asset to someone, you can sell it whenever. Bioverativ and Baxalta were sold within 6 months of being spun off.

That means some rich dude (or woman) could come along and buy the whole thing now without violating the safe harbor. I don't think Malone or Maffei have any sentimental attachment to the team. In my opinion, they've set this thing up for a sale and could do so any day without negative tax consequences, which they're allergic to.

Risks:

The main risks in my mind are a downturn in the fortunes of the Braves, a league strike, another pandemic, or some material change to the broadcasting contract. Anything that materially dents the revenues and profits of the team will hamper value. I think real estate has corrected nationally but anything that dented Atlanta real estate would hurt as well.

Conclusion:

I think the Braves are a unique asset. The team is well run and costs are set via long contracts for the foreseeable future. There are not many class A sports franchises available for sale, let alone those attached to high quality real estate. I think the owners are willing sellers and the situation is cleaned up for a transaction to occur. I think one can own the stock here. If one wanted a little more juice, as of this writing, the May $40 calls are not too expensive (~$2.50/contract, ~29 vol).

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