This week, Jason Colodne, Managing Partner at Colbeck, sat down with Andrew Kline, former offensive lineman for the St. Louis Rams and founder of Los Angeles-based investment bank Park Lane, to discuss the future of live sports post COVID-19.
Following his retirement from the St. Louis Rams in 2003, Kline turned his focus to sports finance and founded Park Lane, a boutique investment bank that specializes in providing M&A advice, corporate finance, and other services to leagues, franchises, sports businesses, and independent investors.
Park Lane has worked on some of the top sports M&A mandates in recent years and served as an advisor for dozens of leading sports franchises, including the Miami Heat, Los Angeles Dodgers, and Cincinnati Reds.
The Marriage of Sports and Finance
Colodne: Not many former NFL players can say they went on to found their own sports investment business. Could you tell us a little about your professional journey and what first drew you to investing? Kline: My dad owned a small business in LA. He was an insurance broker. He worked really hard six days a week. I knew I wanted to go into business because of him. He knew I was destined to play in the NFL, which was saying something because I’m not a conventional body type for the NFL. I was on the team [St. Louis Rams] for two years, but I also got to start my career then. I had a lot of significant injuries, so I started investing in a sports marketing company and working for a real estate developer. I had the jock job where they didn’t expect anything out of me. Then we started working on a deal in St. Louis to buy a professional hockey team. After nine months, we won the deal. I’ll never forget the day we signed the LOI and one of the investors did a press release. It bashed one of the principal investors in the deal, and the thing was history. But I had so much fun pursuing that team. I learned from the bankers’ models and saw the buy-side of it. They were more sophisticated than real estate models. More numbers, more moving parts. Eventually, we hired some of those bankers away when I founded Park Lane. Together, we learned how to build the right business model for a sports focused investment bank. Since then we’ve diversified and done a lot of early stage non-team deals. We’ve traded a lot of secondaries. Now, we’re in the people business as far as our team goes. This is an obvious statement, but if I could open one other division right now, it’d be a team of restructuring guys. We’ve been thinking about that for some time.
Sports Face International Challenges
Colodne: What cracks has the pandemic exposed in leagues’ underlying financial structures?
Kline: It’s not a league issue. It’s not even regional. This is an international issue. In some cases, leagues and teams lost more than 90% of their revenue. That’s significant. Not even Colbeck in their deepest diligence would ever underwrite a pandemic that would destroy 90% of revenues. As a result, the teams that have really wealthy owners that can flip the bill are fine. The ones that are absolutely dependent on revenue are in trouble. Not even the best commissioner in this would have underwritten a total stoppage of play. It’s more a function of the wealth of the owner or the balance sheet of the team. We could see a significant restructuring within the industry from everything including media rights to players’ salaries.
Can Fans’ Goodwill Save Players’ Salaries?
Colodne: Baseball has served as the backdrop for one of the longest and most colorful labor movements in the US. Now, we see players’ victories being challenged by owners as they propose a revenue-sharing agreement for the 2020 season. How do you think COVID-19 will impact the balance of power between the players’ association and the league?
Kline: I’ll give you two answers: the fan’s answer and the investor’s answer. Fan’s answer: I was in Dallas the day before the NBA shut down and COVID-19 seemed like a distant thing. Nobody wanted to believe it was happening. I was watching the Mavericks game when it got cancelled right before they started. COVID became really real when the players were sent back to the locker room. Fans are desperately craving sports content. Goodwill will be profound when players retake the field. I think back to Big Papi’s Boston Strong speech following the Boston marathon and what a unifying connection ran between the city. When players retake the field or court — assuming teams start playing again — producers will figure out how to film games the right way so playing without fans isn’t an issue. The goodwill and benefit from that for players will be huge. Investor’s Answer: The financial effect will be massive as well. Teams won’t get any of those days back from unplayed games. It’s not like they’re sitting on a physical inventory and can unleash the winter season sale. They can’t make up the revenue again. And on the government side, teams have been so shamed for taking PPP money that many of them have given it back. Everything will get repriced.
What Is the Fate of Minor League Baseball?
Colodne: Minor league baseball teams are in a pretty tough position this year. While the MLB gets a significant chunk of its revenues from media rights deals (50%), minor-league teams rely almost exclusively on ticket sales and the in-stadium experience for their income. Compounding this is the scheduled disaffiliation of 42 minor-league teams from the MLB’s financial protection in September. Is there any hope for minor league teams’ survival? Kline: The number of Minor League teams will shrink, which has been accelerated by COVID-19. Teams without MLB ownership, strong balance sheets, or well-heeled owners — even top franchises who haven’t had to manage cash well — could be in trouble.
If you look at recent developments, Major League Baseball is taking on a more direct leadership role. There may be a shift from some teams to new independent leagues to keep the operations in current markets as much as possible, but MLB is addressing what they view as a surplus of teams and players needed to build their rosters.
Will Bankrupt Teams Find Buyers?
Colodne: Historically, baseball has a very low failure rate for teams. However, right now there are a number of highly leveraged owners, including those of the Marlins and the Mets. How many bankruptcies could the league handle? Would they step in if there weren’t enough interested buyers in this climate? Kline: There’s this clause called “in the best interests of baseball” that basically allows the MLB to do whatever the commissioner says. He can be the final word. They wouldn’t let a bunch of bankruptcies happen. Or maybe they would, but they’d make sure they were favorable. Even if a number did occur, they’d always find willing buyers. Even though there are companies suffering through this, there will always be a greater demand for teams. There’s just too limited an amount of supply. The harder problem will be finding the right buyer. Hundreds of people don’t pass the background checks. There might be plenty of willing buyers, but that doesn’t mean the deal will get consummated.
How Do We Stand Internationally?
Colodne: Have you seen any international leagues implement solutions that US leagues could learn from? How do US franchises fare from an international perspective? Kline: It depends on the market. The German Bundesliga has an incredibly strong balance sheet. Every ticket is sold out for season ticket holders. While they don’t have the revenue of some other brands, they’re incredibly stable from a financial standpoint. Just having a strong brand name isn’t enough to ensure financial stability. Every market is so different depending on the region.
Entertainment Product vs. Tribal Allegiance Kline: For example, early in my career as a banker, I noticed that on a typical American sports team there are about 150 people running a sports business. Compare that to 10–15 coaches and trainers. Sports teams were ultimately businesses, and that’s where the manpower went. But for the first European soccer deal we did, there were 7–8 people running the entire business. Meanwhile, they had over a hundred coaches and trainers. The teams had stuff at their disposal that was just unreal from a player’s perspective. The difference is they get paid for winning games. If you lose, you get relegated. The emphasize there is on winning. One of the things that’s been really interesting to see is how international leagues have learned from each other. The US still has 150–200 employees running the team, but now they have access to the best sports nutritionists, physical therapists, and specialists in the nation. The US picked up a lot of things from China and Russia on how to develop athletic talent. Meanwhile, the UK has learned a few things from the US. In the US, sports are very much about putting on a great entertainment product that can be monetized. If someone comes to visit you in LA, you can say, “Let’s go to a Lakers’ game,” and that’d be totally normal. It’s just part of entertaining. But if you were a Manchester United fan in England and tried that with someone who wasn’t, they’d be like, “Why would you want to do that? That’s not my team.” It’s tribal there. A very different practice.
New Avenues for Investment
Colodne: Are there any overlooked investment opportunities you think potential investors should take a closer look at?
Kline: I think back to after 9/11, where, from a tactical level, we were thoroughly at war with the Middle East. Concerns one, two, and three for sporting venues were the safety of the fans and protecting them from terrorist attacks. Stadium security was a top priority, but from a perspective of preventing violence. Now, we’re going to see increased stadium security, but from a public health perspective. If you look at the future of live sporting events, people will want to feel safe going into these venues. How does that happen? How do you ensure the guest goes in feeling like they’re not going to leave carrying the virus? Franchises will have to adapt their business models to ensure this. Changing landscape of media Kline: Another huge shift will be the changing landscape of media and how people view what sports look like in the future. We will see increasing overlap between e-sports and traditional sports. Franchises will have to ensure that the fan is super digitally connected. We’ve seen this in Disney World with the MagicBand, which controls the entire experience for each visitor. Carnival Cruise has done something similar with a wearable wristband. This will become the new normal in future stadiums.
Colodne: In 2021, will we all be watching the Yankees play behind a mask and face shield? Kline: People have short memories. Most people will get over it. There’s a bell curve for how long people will be sensitive to these things. Ultimately, whatever happens culturally will also happen in the sports venue. But I hope there’s a day where we’re not wearing masks and dousing ourselves in hand sanitizer. That has its own set of side effects.
Each month, Colbeck will sit down with an industry specialist or thought leadership expert to discuss new investment opportunities and niche industry developments that are of interest to our audience.