Making money usually isn't one of the main motivations for investing in a sports team. Big corporations can make terrible team owners. And the Tampa Bay Devil Rays are a team on the rise.
Those were just some of the plain-spoken opinions shared Thursday by Lehman Brothers managing director Sal Galatioto.
If you're ever hoping to buy a sports team, you probably want Sal in your Rolodex. The 51-year-old Galatioto heads Lehman's sports advisory and finance group and has served as a financial adviser on the sales of numerous pro sports teams, including the Washington Redskins and the Anaheim Mighty Ducks.
During an interview and an investment seminar sponsored by Lehman subsidiary Neuberger Berman at the Tampa Club, the avuncular Silician-born, Brooklyn-raised Galatioto shared his insights on sports investing.
"People who buy sports franchises didn't become extremely wealthy by owning sports franchises," Galatioto said. "They became extremely wealthy doing something else, then they buy a franchise."
That may explain why making lots of money typically isn't at the top of the list of reasons why people buy stakes in teams. What is? A few big ones are name recognition, raising the visibility of the business you own and a simple love of the game, Galatioto said.
"People read about you all the time because, guess what _ it's the only business with its own section in the newspaper," he said.
So you have tens of millions of dollars to spend (or a vivid imagination). Which big league sport is the best investment bet? The National Football League is the hands-down first choice, Galatioto said. That's because most of a team's revenues are contractually obligated. All teams are subject to a salary cap, the proceeds from the NFL's national media contracts are evenly shared, more than a third of the gate receipts are shared with the visiting team and player contracts aren't guaranteed, allowing owners to drop players virtually any time they choose, Galatioto said.
But he pointed out one major hurdle for investors eager to buy an NFL franchise: few people ever want to sell them.
"NFL teams generally trade when someone has an estate problem or the owner dies," he said, adding, "They're like Rembrandts; they come on the market very rarely."
Compare football's profit potential to that of Major League Baseball, which has no salary cap, far weaker revenue sharing and guaranteed contracts, which means "if you make a mistake on a guy and he blows out his arm, you're stuck with him for the next five years," he said.
The National Basketball Association can offer less risk than baseball but that varies greatly from market to market, Galatioto said, noting that teams such as the New York Knicks and the Philadelphia 76ers draw large crowds regardless of how well they are playing. Moreover, he adds, "you're talking about filling 18,000 seats for 41 games, rather than 60,000 seats for 81 games" as in baseball.
National Hockey League teams are also heavily dependent on gate receipts because the NHL's media revenues aren't nearly as lucrative as those of other sports, Galatioto said.
Another major consideration in sports investing is the demographics of the home market, including whether it has a growing population of young families and is home to a large business community, Galatioto said. Unlike team performance, which can be improved with smart trades, draft picks and coaching, there's little you can do about a shrinking population and a moribund local economy, he said.
Galatioto also pointed out that team owners have unusual control over their own financial fortunes because they have ultimate control over payroll, which is by far their largest expense.
"When you buy the team, you say, "Well, I'm going to keep my payroll down and I'm going to make money,' " he said. "Then you own it, and then every day you read the newspaper in city X, you're getting killed because you're not spending money. The team stinks, you're an idiot, and so what do you start doing? You start spending money."
Just about the only way to buy a stake in a team is as a controlling general partner or as one of the limited partners associated with a general partner, he said. While it's possible to buy shares in a handful of publicly traded companies that own sports teams, such as Atlanta Braves owner Time Warner Inc., those companies are generally so large that their sports ownerships are insignificant.
Besides, big companies have not been good owners, he said.
"Teams need a leader, they need somebody with a love for the sport," he said. "Corporations don't love or hate anything. They just act as corporations."
And what about the Devil Rays?
They're young, talented, have a committed and passionate manager in Lou Piniella and are located in a market with attractive demographics, he said.
While Galatioto has previously spoken out in favor of reducing the number of Major League Baseball teams, he said he's now "on the fence," and added that the Rays should not be among the teams considered for "contraction."
"If you fix the performance of the team and then nobody goes (to the games), then you can start talking about contraction," he said. "I don't think the Devil Rays have ever reached that level of performance where you can say, "Okay, now we have a very competitive team and nobody comes.' Then you have a problem."
_ Louis Hau can be reached at hausptimes.com or (813) 226-3404.