Selling The Astros: Pretty Good, Akshully
If you follow the business side of baseball or wear a 10-gallon cowboy hat all day, you may well know the Houston Astros’s owner, Drayton McLane Jr., is preparing to sell the franchise. Reports have diverged on what the final selling cost might be — anywhere from a paltry $650 million to a respectable $680 million.
Now that McLane begins to close the baseball chapter of his life, my knowledge of the wealthy elite informs me he will now spend the remainder of his days getting in shape whilst swimming laps in his massive vault of gold coins. While he readies his swimming top hat and alligator-skin booties, let’s take this time to reflect on McLane’s investment.
The outgoing Astros owner originally purchased the team in 1993 for $103 million (according to Forbes). The honorable Texan made his fortunes from Wal-Mart and — like most wealthy Americans — from his parents. Let us then play Investment Pretend! — the game little, aspiring investors play with their Paddington Bears in their expansive mansion bedrooms.
What if McLane, instead of purchasing the Astros, had just left his moolah in the ol’ company? Or, what if he decided to put it in a (generally considered) safer investment, General Electric? Or what about IBM, a long-standing powerhouse, who in 1993 was facing serious financial difficulties (i.e. a risky, high-upside investment)?
The Do Nothing approach (leaving the cash in Wal-Mart shares) would have earned McLane a real return of 7% (real meaning after inflation). His gamble on the Astros purchase earned a staggering 17-18% annually (again, after inflation)! Of course, this is just in capital gains; McLane may very well have been drawing revenue (or, likewise, seeing losses) on a yearly basis. Unfortunately, we may never know exactly how his accounts looked during that period.
Had McLane put his money in GE, he would have earned a modest 5% after inflation (had he sold his Pretend GE Stock before the the 2008 financial crisis, he would have made much more of a killing). IBM, on the other hand, came back strong and made millionaires out of gamblers. Had McLane put the heft of his financial powers into a near-failed IBM, he would have (a) been incredibly stupid and (b) amassed enough wealth to eat Platinum Flakes for breakfast and resurrect the dinosaurs just to hunt them back into extinction.
Granted, this is far from a complete survey of his financial options — just a fun-sized sampling. He could have easily done a million different things with his millions — but we can still say this pretty easily: Investing the Houston Astros was a wise financial decision. An 11% real return (the return he made after considering he could’ve made 7% via Wal-Mart) on any investment is straight robbery.
Of course, there’s a variety of reasons McLane can get such an absurd return:
It doesn’t work like that — the MLB brings with it lucrative TV, radio, and advertising contracts, as well as long and profitable relationship with communities and the cultural history of America, Canada, and many other countries.
I imagine finance nerds will shortly come from the woodwork, tossing pitchforks and financial calculators my way, claiming I’ve done it all wrong. That may be true, but we can all agree on this fact, no matter the final sale price: McLure made bank.
“amassed enough wealth to eat Platinum Flakes for breakfast and resurrect the dinosaurs just to hunt them back into extinction.”
Outstanding Bravo. Great line.
Thanks Dave!
“Now that McLane begins to close the baseball chapter of his life, my knowledge of the wealthy elite informs me he will now spend the remainder of his days getting in shape whilst swimming laps in his massive vault of gold coins.”
I’m glad I’m not the only one who got his knowledge of the wealthy elite from Scrooge McDuck.
That’s all they taught me in grad school.
Just out of curiosity, what would have happened if he’d put his money in, say, a broad index fund? What did the rest of the market do during the period?
Over the same period of time, the S&P 500 index has roughly tripled in price per share, from $435 to $1,357.
http://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=3&c=1993&d=04&e=11&f=2011&g=m&z=66&y=0
I’m too lazy to work out the math of the ROI.
11%ish? Astros still looking good.
Geez! Thanks fellas for doing all the legwork!
Well, you forgot dividends in your financial option calculations…
Definitely agree that capital gains have been the big source of wealth for team owners, though.
Yeah, I left out the dividends, but I also ignored possible “dividends” from team ownership. Other than real income, some owners may even choose to draw salaries or entertain business associates at games and whatnot. Perks like that have value beyond the capital gains.
You also forgot stock splits, which for Wal Mart has happened twice since January 1993.
That sounds to me like it could be a killer for the Wal-Mart comparison. Still though, if my bank offered me a 17% annual ROI, I don’t think I’d throw them out of the office.
No, if you look at a history of a stock the splits are already factored.
Say if a stock splits 2:1, the historical stock price will be cut in half.
Hmm… I didn’t even think about splits or anything. I’m not sure how they may have affected my calculations.
One split being factored in that took place between 1993 and 2011 would mean that his ROI should have doubled. He would be holding twice as many shares as he originally bought and would get the price per share for that many shares, so double the money. If there were even more stock splits, his ROI could have been even higher.
There has been 2 stock splits since 1993 The first one, which took place in February 1993, and the 2nd in March 1999.
So his intial investment was $103 million at 16.28/share. That means he had 6,326,781+ shares. Split them twice and you get 25,307,125+ shares. Take that number by the stock price in April 2011, $54.98, and you get a total of $1,391,385,749.
That is just a dollar total without inflation, dividends, etc. It is definitely a higher number than he is going to get with the Astros, meaning a higher ROI(so didn’t actually calculate the number). If we called the dividends from Walmart stock or the Astros income depending on which route he chose a wash, then he was not smart to get rid of Walmart.
@Dustin: Call me crazy, but that makes a 774.8% return. That seems a little big.
Joe is correct when he says that historical prices are adjusted to account for stock splits. If you use the charts on Google Finance, it will even show when they happened and how many shares you got. Otherwise there would be random spots on the chart where the stock price tumbles 50% in one day, which is not the case.
Had you picked up a WSJ in 1993, it would have shown Wal-Mart’s price as $65.12 per share, not $16.28.
Bradley’s math stands!
Hooray!
McLure made bank? I remember him such some shows as Planet of the Apes, the Musical.
I hate every ape I see, from Chimpan-A to Chimpan-Z!
Oh you’ll never make a monkey out of me!
If only people would quote the better show set 1000 years in the future.
Good news everyone! It’s a sepository!
Discreet AND discrete! Now with more discretion!
I love you, Dr. Zaius!
Troy is exactly the sort of millionaire that MLB is committed to excluding from the owner’s club. Especially after those embarrassing personal issues. Maybe he can rebuild his reputation if he takes care to be seen associating with more human women.
Due, what about dividends? Wallmart, IBM, and GE are significant dividend paying companies.
GE’s annual dividend yield was roughly 6% (less in the 2000s, more in the 90s) for that time frame which, in dollars terms was roughly $1/share/year. if he started with 13.7 million shares, over eighteen years, that’s another ~250 MM in dividends. that’s if he chose not to do dividend reinvestment and instead filled his mcduck tower with gold coins. had he reinvested it in ge stock, it would obviously be more than 250 MM.
Excellent points. I figured the dividends would have been minimal, which may have been a miscalculation in my part. I should have at least looked at them.
Either way, though, outside of the possibility of leaving his cash in WalMart, I think it’s very unlikely he’d have invested all in a single company.
Baseball Nerds are not Allowed to Call Finance Nerds “Nerds”.
Also I am assuming the overlap between the groups is significant. You are also ignoring the fact that Mclane probably had some operating profits in most years, Borrowed a portion of the 100M he paid from the bank to buy the Astros and unlike an investment in a Stock he was able to Depreciate the investment in the club which has value.
“Mclane probably had some operating profits in most years”
As an Astros fan I can tell you that Mclane had operating profits in some years but not most. My dad (who is a CPA in Houston) and I were talking about this exact topic last week and he was working under the assumption that Mclane probably sunk another $100M in operating costs into the Astros (or exactly one Carlos Lee). Still a nice return on investment but not near as gaudy a number.
Thanks for the insight! I don’t follow the ‘Stro’s particularly close, so this was the kind of stuff I had no idea about.
“amassed enough wealth to eat Platinum Flakes for breakfast and resurrect the dinosaurs just to hunt them back into extinction”
Great line. Second the comment from Dave.
Can we basically surmise that owning a sports franchise is pretty much one of the best investments you can make?
a) you will always have a market to sell into
b) Barriers to entry are high, as you stated
S&P would have given something close to 7.5/annual return if you factored in the dividends etc.
Yeah. I think we can agree: If you’ve got the spare change and the political capital, then go ahead! Buy that franchise you always wanted!
Then again, who know’s what teams will be selling for 10 years? If the present attendance issues turn into a severe decline in the sport, then I imagine there will be a number of teams looking to sell for a loss.
So can the taxpayers now stop paying the lions share of stadium constructing costs?
I’m not a Giants fan but am more than happy to see a team win that paid their own way for stadium financing. How the Yankees were able to dig into the taxpayer coffers I’ll never understand (oh yeah…the threat they’d relocated to Portland).
@Terry: That’ll never happen. As long as there are politicians willing to performs the PR stunt of bringing a sports team to town, there will always be a race to the bottom as local governments clamor to hand fistfuls of cash to wealthy owners.
I think your calculation contains a typo. IBM has been hovering around $170, not $117, and the 52-week low is $120.
Hmm… I’ll have to look into that.
http://www.google.com//finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1305230400000&chddm=8211&chls=IntervalBasedLine&q=NYSE:IBM&ntsp=0
I may have look at a price earlier in 2011… Note sure exactly what happened. Good catch!
Not to be a dick, but really, “as seen by they’re decent-to-good attendance”?
They’re = they are. Their = belonging to them. It’s really not that hard.
I agree, champ! What is hard is writing over 3000 words every day, and then copy editing every line of those 3000 words, and then finding time to hang out with my wife.
Sometimes a few typos slip through in the mean-by, so I apologize if this ruins your viewing experience.
Woe is you, I guess. If it is that much of a hassle, maybe you should get a new hobby?
Occupation, you mean?
Yeah, I realize I sound kind of pricky in my response, but I’m just trying to have a little fun. (See: the edit I made)
Calling someone champ is more than a little pricky.
I used the term hobby because I assumed a professional would have more pride in getting their grammar correct, rather than getting overly defensive about errors. Maybe try: “Thanks for the help. I put a lot of work into my writing, but no one is perfect!”
I always try to do a simple search for terms I know I can mix up (which and that, there and their, Ect). I even keep a checklist.
Fair enough, David. Perhaps I reacted poorly. I think I was fine until “It’s really not that hard” crossed my screen.
I do take my writing very seriously and take pride in my spelling as well as my grammar. Also, I was told on a previous post that calling people “Champ” and “Shooter” was apparently awesome. I was trying to be awesome.
Spiderman is a well-known grammar d!ck. Always has been since he got too flabby to fight crime and Mary Jane left him…
Imagine if he had bought Apple stock!!! he’d be a billionaire now for sure.
As an Astros fan, I am obliged to observe that this is the only possible thing the franchise could do to merit good reviews right now. What a mess! Here’s hoping new ownership brings new and improved management.
Yeah, It’s kind of funny how much the franchise is worth given their poor performance of late. Kind of implies:
success =/= financial success
Fantastic article, I love the business side of things. 🙂
Thanks Zach! I do my best.
I always appreciate an article on my (rightfully) forgotten ‘stros, but this article is wildly inaccurate on the return analysis side. Conservative rough estimate of dividend (non-compounding, non-inflation adjusted) and split adjusted returns are closer to:
WMT: %500 ROI, including $100M in dividends paid
GE: %3,100 ROI, including $1.5B in dividends paid
IBM: %3,800 ROI, including $560M in dividends paid
If you start assuming re-investment of cash as XIRR and other return calcs do, you are looking at enough scrill to buy the entire AL East (as in the actual franchises, although clearly that’d be a pretty poor investment move).
As you mentioned, we’ll never know what sort of revenue Drayton was taking/hemorrhaging from the club, but if the Marlins’ books we got to see last year are anything to go by, i think its safe to say he wasn’t hurting for liquidity during his tenure as owner.
Moral of the story, its always nice to start with $159,000,000…
“Moral of the story, its always nice to start with $159,000,000…”
Ha! That’s the truth! Yeah, as I mentioned in a comment above, I didn’t even check the dividend payouts because I figured they’d be insignificant or non-existant, but boy was I wrong.
Nonetheless, it’s hard to imagine what McLure’s cash flow look like anyway. I think we can say, given the recent cases of the Mets and Dodgers, that the MLB doesn’t oversee the financial operations of these clubs — like, at all. Also, each club apparently does it in wildly different manners. Therefore, I think we have to conclude the leaked docs don’t really tell us too much outside of the specific leaked-from organizations.
If you want to see something really insane look at how much Steinbrenner made off the Yankees.
I’d rather not. I don’t think I could handle it.
“11% real return…on any investment is straight robbery.”
Indeed it is. Professional sports grow ever more sickeningly profitable and exclusionary by the year. And it’s clearly not just driven by the players — it’s the whole package.
There really was no skill involved in me making this hefty profit.
I touched me number one dime and it brought me good luck.
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I do love the manner in which you have presented this problem plus it really does provide us some fodder for consideration. On the other hand, coming from what precisely I have observed, I just wish as the actual remarks stack on that men and women continue to be on point and don’t start upon a tirade regarding some other news of the day. Still, thank you for this fantastic point and even though I do not really agree with this in totality, I respect your perspective.