Has the value of the Red Sox diminished?
It’s hardly been a storied New England winter this year, but now with baseball players in Florida, spring is definitely in the air.Yet while the advent of spring training usually puts a bounce in the step of almost all New Englanders, they’re sporting less-than-sunny dispositions this year, and not because of the lackluster play of the other two currently active sports teams.They’re trepidatious – with memories of a 7-20 September record for the Boston Red Sox lingering in the shadows of the Florida sun, and scents of fried chicken and beer still wafting in the media wind.But fans aren’t the only ones who have reason to be concerned.For Red Sox ownership, another season or two like the last two could diminish the overall financial value of the team that they have steadily built up since 2002.Last year was the second disappointing season in a row for the team that, before 2010, hadn’t missed the playoffs since 2006. In addition, the Red Sox were one of only three teams in all of Major League Baseball with a negative operating income (-$1.1 million, according to Forbes.com), but had still been one of the top six biggest spenders, having reportedly committed a combined $296 million on Adrian Gonzalez and Carl Crawford.And although management will only talk about the move as being made to ensure that baseball would be played well into October, they were no doubt also moved to act based on the drop in television ratings experienced by Red Sox-owned NESN, the revenue from which they depend on, in part, to offset any financial losses.For most of the 2011 season, their efforts seemed to pay off — until September hit, and the team’s nine-game lead vanished.Cash flows keyBut will the 2011 tanking of the Sox depreciate the team’s overall value?On its own, no. The Boston Red Sox as a franchise is a long-standing institution that has had many ups and downs but has overall been experiencing a positive trend.Its one-year value change improved 5 percent from last year, which is lower compared to the annual value change of 10 percent since John Henry and Tom Werner bought the team in 2002. But it is still substantial, given they paid $380 million for the team then, and its value has since risen to $912 million (again, according to Forbes.com).The Red Sox owners, like most successful business owners, surely realize that the value of their business is directly related to the cash flows it’s currently generating, as well as the ones it could generate in the future. In the case of the Red Sox, all of its cash flows are known, with long-term revenue contracts, television rights, naming rights and licensing rights, just to name a few.But it will be important to see what happens between now and the renewals of these contracts. If the Sox were to land in third place again this year and miss the playoffs once more, the franchise’s value could definitely take a hit, most likely in the form of lower television ratings (and thus lower advertising revenue for NESN), lower sales in Sox paraphernalia and possibly some smaller sponsorship deals.Still, the fact that the New England region is such a fanatical sports area will help to reduce the financial impact of a disappointing season, unlike a Minnesota or Kansas City team.Perhaps the biggest losers in last year’s collapse and behind-the-scenes carryings-on are the players. Most fans didn’t appreciate the fact that millionaire pitchers were sitting in the clubhouse eating fried chicken and drinking beer on their off days. As a result, some of these players may experience personal diminished value, as fewer companies will want to sign them for endorsements.That said, the players involved are starting off the spring with acts of contrition and promises to rededicate their efforts toward the team’s success.And the Red Sox brass has once again exercised its business acumen – and its checkbook – to deflect the poor performance, this time by focusing on management and hiring a hard-nosed guy in Bobby Valentine to restore order and instill leadership, something the club was definitely lacking by the fall.If they can all work to translate their sentiments and words to results on the diamond, then the players can improve their individual value, and help to sustain, and grow, their team’s overall value.John M. O’Brien, managing director of Amherst-based The BVC Group, a professional services firm providing independent business valuation opinions to clients, is also a member of the Business Valuation Committee of the New Hampshire Society of CPAs. For more information, visit thebvcgroup.com.