Liberty Braves Group (BATRA), a tracking stock comprised of a premier baseball team and an expanding real estate development, is selling at a huge discount to intrinsic value.
The Liberty Braves Group is a division of Liberty Media, the media company run by John Malone. The Braves Group is one of three businesses within the larger parent, the others being Formula 1 and SiriusXM. Each business has its own tracking stock that's meant to track the value of just that business.
The tracking stock of the Braves Group is composed of two different businesses. The first is the Atlanta Braves, a Major League Baseball franchise. The other, tangential part of the business is a mixed-use development called the Battery Atlanta. The Battery Atlanta is a real estate development project that is located right next to SunTrust Park, the Atlanta Braves' home stadium.
SunTrust park opened to begin the 2017 season. In 2014, Braves Holdings purchased 82 acres of land, 16 of which was used for the Park and the rest of which was used for the Battery. The total cost of the stadium was $722 million, $392 million of which was publicly funded by Cobb County and $330 million of which was funded by Braves Holdings through cash and debt.
SunTrust park is 1.1 million square feet with 41,200 seats, including 30 suites, 4,200 premium seats, multiple hospitality clubs and retail merchandise venues.
The Battery Atlanta is a real estate development that features retail, residential, office, hotel, and entertainment properties. Right now, the Battery includes 328 thousand square feet of class A office space, 219 thousand square feet of retail space, 53 thousand square feet of entertainment space, and the 264 key Omni Hotel. Eventually, the Battery will feature 968 thousand square feet of class A office space, 239 thousand square feet of retail space, 114 thousand square feet of entertainment space, and an additional 140 key hotel. Braves Holdings also has 100% ownership of all space other than the hotels, where it has 50% ownership. This expansion will increase the value of the Battery and increase its lease revenues.
Sources of Revenue
Revenue for the baseball team is derived from both local and national sources, with ticket sales and broadcasting rights as the team's primary revenue drivers. Team revenues include ticket sales, broadcasting rights that are sold to TV stations, shared revenue distributed to all teams by the MLB, merchandise sales, revenue from minor league teams, and other revenue sharing arrangements with the MLB.
SunTrust Park also generates revenue in ways other than through tickets. Corporate sales and naming rights generate revenue for the team, and concessions, advertising, suites and premium seat fees, parking, and publications also generate revenue.
The Braves also have one of the league's best broadcasting deals. Each MLB club is allowed to sell rights in its home territory and the Braves have long-term local agreements with Sportsouth Network II. Each club also gets its share of national broadcasting rights that are sold by the MLB. Each club can also sell radio rights and the Braves have the second largest radio network in the MLB, with 122 local radio station affiliates broadcasting games across the Southeast.
The Battery generates lease revenue for the Braves group through its various leases. Of course, the Braves group can also periodically liquidate a portion of the Battery and generate revenue that way as well.
Team position also matters a great deal in sports. The more a team wins, the more valuable it is. The two most dominant teams in American sports right now, the Golden State Warriors and the New England Patriots, exemplify this. Both teams have risen to be one of the most valuable in their respective leagues because of their dominance. Winning means it's easier to convince cities to buy teams new stadiums, to charge more for tickets, to charge more for broadcasting rights, and it also means that franchises are worth more as brands.
The Atlanta Braves seems to be in a good position right now. The team won the NL East division title for the first time since 2013 and is ranked atop Bleacher Report's Future Power Rankings, a good sign for the future. This increase in performance is also reflected in ticket sales, with game day revenues up 9.5% through the first three quarters of 2018. All this gives the Atlanta Braves a good moat going forward.
The two parts of the business - the MLB franchise and the mixed-use development - ought to be valued separately.
Atlanta Braves MLB Franchise
First, let's consider the MLB franchise. Sports franchises are complicated to value because much of their financial information is private and also because sports team valuations seem to be out of sync with other industries. P/E ratios for sports teams are quite high, likely kept high by the scarcity of sports franchises and the fact that they are trophy assets. This fact is further complicated in the case of the Braves because the Braves Group's financial results aren't as straightforward as one would expect from a public company because the Group is a subsidiary of a larger business.
Nevertheless, a straightforward way to value MLB franchises seems to be through a revenue multiple. Forbes' list of MLB franchise values includes revenue data. According to this list, the Atlanta Braves ought to be valued at a revenue multiple of 4.8, understandably lower than the 6.5 multiple enjoyed by the league's marquee franchise, the New York Yankees. And, according to FiveThirtyEight, the Atlanta Braves have a larger-than-average TV market. They're also based in a large, important city which is a great situation for any sports team to be in. According to Statista, the average revenue multiple for an MLB franchise in 2018 is 5.22, so a revenue multiple of 4.8 for the Atlanta Braves seems reasonable and even conservative.
It's also important to note that the value of the team at this time should include the value-added of the stadium. SunTrust Park is the newest stadium in the MLB, with the last stadium being built in 2012. Only five stadiums have been opened in the past 10 years. Any potential acquirer would place a great deal of value on the stadium. Not only do they not have to go to the trouble of building a new stadium, they also know that they have a state-of-the-art stadium that they can use for years to come. In light of this news, a revenue multiple closer to the MLB average of roughly 5 seems more reasonable.
Now, let's determine revenues. Baseball revenues through the first three quarters of 2018 were $382 million. The bulk of baseball revenues are generated during the second and third quarters of the year, but some revenue - including shared revenue, merchandise sales, and other revenue-generating uses for the stadium - is generated in the fourth quarter. So, a yearly revenue estimate of $400 million seems reasonable. And, if the team continues to improve and perform well, this number is likely to increase.
With yearly revenues of $400 million and a multiple of 5, the Atlanta Braves can be valued at roughly $2 billion.
The mixed-use development is even harder to value because its revenues are just starting to come to fruition, with the development generating just $28 million in lease revenue through the first three quarters of 2018.
A conservative way to calculate the value of the mixed-used development is to value it at cost. Obviously, the actual market value of the development is likely to be much higher than the cost. The total cost of the development was roughly $558 million. The company was expected to fund $470 million of this cost, $270 million of which came through debt.
So, overall, the total value of the Group's stake in the mixed-use development is $470 million.
The total ballpark debt attributed to the business is $319 million according to the company's third quarter investor day presentation. The mixed-use development debt attributable to the business is $159 million, which includes a deduction of $77 million after the company sold the residential portion of the Battery Atlanta, paid back its residential debt, and paid off its partner in the residential construction. After all these transactions, the company received $61 million. Thee company also has $71 million in operating debt. So, total debt is $549 million.
The total asset value of the two parts of the business is roughly $2.5 billion. With total debt of roughly $549 million, the net valuation of the business would be roughly $1.95 billion.
There are three classes of tracking stocks in Braves Group. Some have voting rights and some do not. According to the company's third quarter 2018 filing, there are roughly 51 million total shares outstanding in the company. There are 10 million class A shares, roughly 1 million class B shares, and roughly 40 million class C shares.
Right now, Braves Group shares trade at roughly $28 a share. This means that the business as a whole has a market capitalization of roughly $1.428 billion.
With a valuation of $1.95 billion, this would mean the company's selling for 73% of its intrinsic value, meaning there's a 36% upside in the stock right now.
Overall, Braves Group is a smartly positioned baseball team with much larger revenues in the pipeline and an adjacent real estate development that's also growing. Even using a conservative valuation, the group seems to be quite drastically undervalued.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.