The Pittsburgh Post Gazette reported yesterday that the Penguins ownership is “moving slowly” toward a sale of the franchise. While little else is known at this time about the parties involved, assets contemplated (the sale might involve land adjacent to the Consol Energy Center), deal structure, or valuation, the Forbes list of NHL franchise values may provide a hint on what the tally may eventually bring for the team itself (independent of any land transacted). The value of the Penguins can be derived in several ways, but we will trim this down to two; as a multiple of total enterprise value (TEV) versus revenues, and a multiple of earnings before interest, taxes, depreciation and amortization (i.e., cash flow). We do not have enough data to opine on the Penguins value as a function of their net assets (balance sheet), so we will keep this discussion as simple as possible.

However, before we get further, some qualifying distinctions are in order. The manner in which Forbes calculates value is somewhat uncertain. This is because some of the financing of a franchise often times involves debt. As such, the value Forbes assigns is really the total enterprise (TEV). TEV encompasses both the equity portion AND the debt portion for an overall team value (I am assuming). This will become important when we assess what the Penguins might fetch in a proposed transaction. To restate, the math therefore is equity + debt = TEV = Forbes team value with debt as a percentage of TEV.

A second point should be made. Before we get into the analysis of the Penguins in particular, it can be instructive to examine prior recent sales of other NHL franchises to obtain a glimpse of what the Penguins are worth today. Two examples of private ownership transfers occurred in Buffalo and New Jersey in the past few years. (Of note, we will forego a public market comparable of the New York Rangers contribution to the media and entertainment conglomerate Madison Square Garden Company).

In the case of Buffalo, in 2011, Terry Pegula bought the Sabres for $189mm (of which, according to Forbes, was 48% debt or about $90mm and $99mm equity). In 2011-12, the Sabres had revenues of $87mm and cash flow of $-5.6mm. So the revenue multiple of TEV of Sabres commanded at the time was about 2.2x revenues and infinite multiple of cash flow. Interestingly, by 2013-14, the Sabres had revenues of $103mm and cash flow of positive $4.4mm. Forbes valued the team last year at $288mm or 2.8 times revenues and a hefty 65x cash flow. Said another way, it would take Pegula 65 years to earn enough cash to justify the current value of the Sabres, but “only” 43 years to regain his original purchase price. Although this represents a mere yield of 2.3%, the additional $16mm incremental revenues have resulted in a $99mm increase in overall value. Not too shabby. Also of note, as the NHL itself has grown revenues, the values of almost all franchises has been augmented because often times investors will pay a higher multiple for an enterprise or market that is increasing.

As for New Jersey, an investor group bought the team in 2013 for $320mm. The debt component of the TEV was almost 80% or $256mm at the time of the deal (we aren’t sure if the group has since recapitalized the Devils or not). Normally, a team with this much leverage would command a lower multiple of revenues and cash flow. For New Jersey, in 2013-14, they had $111mm revenues and lost $2.2mm cash flow. This results in a TEV/revenue multiple of 2.88x (with no calculable multiple of cash flow possible).

Back to the Penguins.

If both New Jersey and Buffalo, whose teams are modestly on both sides of breakeven from a cash flow standpoint are each worth roughly 2.8 times TEV/revenues, what are the Penguins worth?

According to Forbes, the Pens generated revenues of $141mm in 2013 (actually our numbers suggest that PIT had a top line of $120mm, but we’ll use $141mm). This is where the science of valuation mathematics becomes more of an art form. To add color to our Buffalo and New Jersey discussion, we note the Forbes list provides a TEV/revenue multiple which is either higher or lower than the mean based on the perceived value of the logos, brand recognition, and size of the metropolitan statistical area (possibly as a function of age and/or prior success of the team, however distant). Basically, the revenue multiple is therefore proportional to how much support a fan-base supports a franchise on a perpetual basis, how much cash flow it is expected throws off, and whether this number can be grown.

For PIT, Forbes ranks the Pens as the 10th most valuable team in the NHL at $565mm (roughly the same position they have had for a number of years). This equates to 4x TEV/revenues of $141mm and 26 times cash flow of $22mm. Healthy margins for a healthy team (i.e., one that produces positive cash flow, which is only about half of the NHL). Despite its decent present financial standing, is a 4x multiple the price that will eventually be paid? Possibly, possibly not. Here’s why.

It seems that PIT is possibly a victim of its own success. Since their arena runs at full capacity, the only obvious lynchpins an investor group would have to increase value are raising average ticket prices (and associated hockey related revenue goods and services), hoping that multiples league wide continue to expand (will another Rogers style TV deal emerge in the US?), or gaining access to additional real estate that could be developed to capitalize on opportunities to generate revenue outside the arena (like overflow game viewings akin to what PIT has done during past playoffs). If each of these is possible, a 4x multiple could be justified.

What could make the Penguins worth less than what Forbes is opining would be factors representing the opposite of those listed above as well as an enormity of outside conditions related to the economy and market factors independent of anything hockey related. If there is no ability to expand the revenues for whatever reason, and the team reverts back to break even on a cash flow basis the way it was in 2011-12, the multiple might contract to 3x or less (it was 2.4x in 2012). At 2.8x TEV/revenues, the Pens would fetch about $400mm at baseline to be in line with both NJ and BUF while allowing an additional 0.25-0.5x or so for the Penguins brand and potential continued leverage of star players like Crosby, Malkin and Kessel (except these stars are aged relative to others in the league. Is this why the Pens want to sell now?). The no growth and/or contraction scenario would maybe bring roughly $450-$475mm to current ownership if past is prologue.

In short, without knowing if additional real estate and/or non-traditional growth opportunities exist for new owners it is difficult to assign a value from the outside to a private entity with limited public financial statements. Note – it appears as if the Penguins have two additional assets available as part of the potential sales package.

Therefore, it appears as if $450-$565mm is likely the range that covers hockey related and external outcomes while the real estate provides additional value to the team and represents the growth angle would-be buyers are seeking. This is an interesting story which we will be watching with interest as it unfolds.

UPDATE – it appears as if Philly fans have put a valuation on the Penguins.……$790 dollars! Claude Giroux statue? Isn’t there already one in Ottawa?