Endeavor to Buy Nine Minor League Teams by Ben Clemens December 10, 2021 Major league baseball remains in a holding pattern. There’s a lockout, the two sides are intermittently negotiating, and nothing can happen until they reach an agreement. That’s major league baseball, though, not all of baseball, and some interesting economic shenanigans are afoot across the minors. As Baseball America’s J.J. Cooper reported last week, Endeavor Group Holdings is purchasing nine minor league baseball teams: the Gwinnett Stripers, Mississippi Braves, Rome Braves, Augusta GreenJackets, Iowa Cubs, Scranton/Wilkes-Barre RailRiders, Memphis Redbirds, Hudson Valley Renegades, and San Jose Giants; The Athletic’s Daniel Kaplan and Evan Drellich first reported the possibility in October. These transactions aren’t yet final, but they’re very likely to be approved, which will make Endeavor (via new subsidiary Diamond Baseball Holdings) the largest MiLB owner. Endeavor, a publicly traded company partially owned by private equity group Silver Lake Partners, is already in the business of sports, though not specifically minor league baseball. They own a little bit of everything, from agencies to sports organizations. Their marquee holding is the UFC, but seriously, the list is endless: Professional Bull Riding, Euroleague Basketball, the IMG Academy that turns out baseball prospects, the Madrid Open, the William Morris Endeavor agency. It’s a broad portfolio, much of which is made up of directly-sports-related operations; an arm of the company also sells media rights for the Olympics. What would a diversified sports holding company like that want with minor league baseball teams? In a word: money. I don’t want to be overly reductive here, but that’s mostly why companies buy things. In the past, plenty of minor league team sales have been driven by non-monetary reasoning. In 2017, for instance, the Brewers bought the Carolina Mudcats, an A-Ball team in the Carolina league. It wasn’t because they saw untapped profit potential in Zebulon, North Carolina. Rather, they wanted to avoid the affiliate shuffle that frequently saw minor league teams switch major league parents; the Braves owned three of the four Atlanta affiliates Endeavor is purchasing for similar reasons. That’s no longer an issue after 2020’s minor league restructuring, and Endeavor isn’t a major league team anyway. This purchase is all about dollars. Given that, what should we expect from it? From an on-field perspective, almost nothing will change, and that’s by design. The Professional Development League system, in addition to contracting more than 40 teams, standardized the relationship between minor and major league teams, putting guidelines around facilities and leaving the on-field personnel and player development operation in the hands of the parent clubs. But let’s be honest, that’s the boring part of a minor league team. Endeavor bought the fun parts: the crazy promotions, the wacky marketing, and the lucrative merchandise. In the 8-K form Endeavor submitted in support of its purchases, it listed a wide range of value-adding propositions: “(Diamond Baseball Holdings) will support its clubs with ticket sales, partnerships, naming rights, food & beverage, merchandise, content strategy, collectibles/authentics/NFTs and media rights, tapping into the broader Endeavor network… for expertise across the various disciplines.” That’s a heaping helping of corporate euphemisms, but the general idea is that Endeavor is going to run the business side of its minor league portfolio. The game on the field won’t change, and given the new license, the players will have uniform playing conditions. Endeavor will try to come up with new window dressing to monetize the games. There’s a ghoulish part to all of it, naturally. Private equity firms love to acquire and pick apart companies. It’s more efficient to spend $20 dollars and make $50 than it is to spend $100 and make $120, so slashing away huge parts of a going concern is a popular way to increase profits. I don’t think that will be the central story here, though. That might be a bonus for Endeavor, but it’s not a key feature of the company’s existing holdings. You don’t buy the UFC and look to reduce its scope, but that doesn’t mean there won’t be cuts. Endeavor got rid of roughly 15% of the UFC workforce when it first acquired the brand, though it has continued to grow in the years since. I’m not saying these are benevolent corporate overlords, but neither do they appear to be the cartoonish type of PE villain that buys a company and literally sells the factory for spare parts. What kind of money is involved here? It’s hard to say, because minor league sale prices are rarely disclosed. We can approximate, though. First, Forbes occasionally creates a list of minor league franchise values. The last one, which was released in 2016, valued the Sacramento River Cats first among all minor league franchises, at $49 million. As an added bonus, Forbes collected some 2016 sale data. The bands were wide, but franchises sold for anywhere between $10 million (A-ball) and $40 million (also A-ball, but the Dayton Dragons are a prized franchise). Double- and Triple-A teams tipped the scales at anywhere from $20 million to $35 million. Baseball America reported that Endeavor’s purchases were expected to be above pre-existing market rates, while some other minor league sales this offseason have been reported as roughly flat compared to pre-pandemic levels. That’s a good sign for the health of the minors as a whole, or at least, for the teams that secured PDL licenses in the 2020 reshuffle. All told, I estimate that Endeavor is spending something on the order of $200 million to acquire these franchises. This will likely mean taking on some debt. Endeavor currently carries roughly $5 billion in long-term debt, a significant portion of their balance sheet. They’re built to expand quickly by taking on debt; their revenue was growing by roughly 20% per year before 2020 threw a wrench in the works, fueled by acquisitions. The pandemic dealt their business a huge blow — live sporting events weren’t exactly in vogue in 2020 — but they weathered the storm and used the proceeds of a 2021 IPO to consolidate their control of UFC. Their recent earnings suggest a return to their earlier rapid growth might be imminent. That likely means there will be more purchases to come, and indeed, sources told Baseball America that Endeavor might eventually purchase 35-40 affiliated minor league teams. That rapid growth isn’t without pitfalls. It’s all well and good when you’re buying new things and making the pie bigger, but at some point, the acquisition-fueled growth part stops, and the revenue increase you’re aiming for has to come from increasing the efficiency of existing businesses – or perhaps spinning them off if they aren’t working out for you. Throwing the typically sleepy world of minor league baseball into the world of acquisition-driven financial growth doesn’t sound like a happy marriage. But perhaps they’ll find the hoped-for revenue increase by improving existing operations. There are real efficiency gains to be had here. It might sound bland, but just combining minor league ticket sales departments would be a meaningful gain. Some of it is a personnel issue – one person to answer the phones costs less than two – but that’s small potatoes. Sharing a ticketing website and software? Replicating promotions across different teams? That will all strip down costs without hurting revenue. I reached out to J.C. Bradbury, an economics professor at Kennesaw State University who researches the economics of sports. Bradbury sees these economies of scale as key to the deal. “You could develop a good website and share it across all your franchises like MLB does,” he told me. “You could hire one general manager to run five teams.” In addition to pure numerical advantages of scale, Bradbury noted that owning so many teams would make developing new promotions more efficient, as good ideas could be replicated across teams, while bad ideas are quickly discarded. Broadcasting rights don’t make up a huge part of the minor league pie, but Endeavor listed them as part of what they’re hoping to make money on. Merchandise might be a bigger part of the plan. In 2019, minor league teams combined to make $85.7 million in merchandise sales. None of the nine teams Endeavor is acquiring were among the top 25 clubs in sales (individual revenues aren’t reported, but the top 25 is). Bradbury suggested that a group of teams might be able to secure a combined merchandise and uniform deal with better terms than individual teams achieve. If they’re able to both expand the pie and increase their share of it, that could be a meaningful source of income, though again, given murky data, it’s hard to say just how much it would move the needle. Using the venues to host events when the teams aren’t playing is a natural fit given Endeavor’s other holdings. NFTs, which they mentioned in their 8-K, are less so. There’s an air of “just name some things that could make money” to that filing, which makes sense: it’s more of an aspirational statement than a marching plan. How likely is this all to work out? It’s far too soon to say. Predicting how a basket of minor league teams will do when it comes to off-field revenue generation is beyond the scope of this article, never mind how they’ll mesh with a multi-billion-dollar corporation. Given Endeavor’s plans, the success of this venture will say a lot about how the minor league game experience looks for years to come. In a perfect world, that doesn’t have to mean a dull corporate makeover of the wacky minor league landscape. The Savannah Bananas, an independent team, have become wildly successful – and no doubt profitable – by leaning into the silliness, both on the field and off. PDL teams can’t copy Banana Ball, but the promotions and entertainment that come with the game are open for innovation. The highest-earning Triple-A franchises were clearing more than $5 million in annual profit before the pandemic, and if Endeavor thinks it can match or exceed that number, their franchises might be able to combine good business with affordable entertainment. Bradbury thinks that this potential for increased profit drove Endeavor to buy in bulk. “If they show that minor league franchises are undervalued, the price of a team might go up,” he noted. By buying as many teams upfront as possible, there’s less chance that Endeavor will need to chase higher valuations as they expand their minor league empire to its fully-planned scope. Regardless of what happens, there will be some individual upheaval. For now, Endeavor reportedly plans to keep most of the staff of the teams they’re purchasing, but in the long run, that’s unlikely to be the case. That doesn’t mean every departure will be due to new management, but let’s be honest: one way to boost profit is by having fewer people do the same amount of work, and that will almost certainly happen here. Centralizing ticket sales might save money, but it also means laying off the now-extraneous ticket salespeople. Even beyond that, minor league teams and their local communities don’t always live in harmony, and centralizing ownership is unlikely to change that dynamic. Bradbury noted that the Gwinnett Stripers have the ability to opt out of their lease after the 2023 season. That sets up a potential conflict between team and city, assuming that the conditions for the opt out are met. Endeavor, insulated somewhat from local community backlash by the scope of their operations, might be more willing to drive a hard bargain than the Atlanta Braves, the previous owners, would have been. In the broad scope of baseball, this move isn’t seismic. If you don’t go to minor league games in person, you might never notice the difference in ownership. It’s still a meaningful shift in the economics of the sport though, and in this winter of economic discontent, every change in the future financial landscape of baseball is worth examining.