Crowdsourcing the Philadelphia Union Financials

The MLS tends to be opaque on financial matters and it's hard to blame them. Most private companies don't release more financial information than required. And the MLS is a league that is trying to weave itself into the mainstream of American sports. The last thing the league needs is overly intense scrutiny on how it is choosing to invest in that growth or control expenses. Whatever they are doing appears to be working as MLS franchise fees have reportedly more than tripled since the Union ownership paid $30M just 4 years ago.

But none of this means that fans still don't want to know how successful their team is financially. Financial success leads to signing better players which leads to more wins on the pitch. And a healthy financial franchise is a franchise that fans will continue to invest their entertainment dollar in.

For the first time since the Union became a franchise, Forbes released MLS team valuations. They do this religiously for every major sport including the biggest global club soccer teams. But it's been since the 2007 season that the MLS valuations were published. In addition to new insights from Forbes, two BrotherlyGame.com fanpost writers have scoured the web for every financial nugget available on the Union (links below). The goal is to compile all of this information into one coherent view. If financial documents are a work of art, then this won't be a Monet. Think something more like what's on the wall of your local coffee shop.

Starting with the revenues, here are the line items and brief details about the assumptions made to arrive at the figures. Special thanks to the work by scottymac that provides much of the insight throughout.

Revenues: Forbes reported the Union revenues were $21.4M in 2012. That will be the gut check figure for the assumptions once the totals are tallied.

Ticket Revenue - Attendance figure of 17,867 is well documented. So too is the $26.15 average ticket price for the MLS in 2012. Not sure if the Union ticket prices are higher or lower than average so I use the average; assuming 18 home games including a preseason game but not the BPL friendly. Those are apparently negotiated by the league and actual revenues may not go to the team.

Concessions - A source of many of the assumptions below is the deadspin release of '07-'09 financial statements of 6 Major League Baseball teams. These provide great insight into how sports franchises operating and the level of expense needed to perform certain functions. Net concessions in these reports for the Pirates, Rays and Angels average exactly $5.

Parking - Parking is difficult to assess because so much depends upon the location of the stadium and how much parking is owned by the team. The number works out to about $5 per attendee if you assume 2.2 attendees per car for $15 to park with a 75% net margin. All of those numbers seem reasonable.

Jersey Naming Rights - $3M via a scottymac sourced page.

PPL Park Naming Rights - $2M via a scottymac sourced page.

TV Revenue - Nearly $2M in revenue via my comparison of local and national TV deals for MLB. The National TV deal detail was from here. It's worth pointing out that local TV deals may actually lose money for the Union. The production costs may exceed the revenues generated. But investment in the local TV market is key to future growth.

Other Sponsorship & Ads - There are plenty of sponsors outside of the jersey and park naming rights but there is no financial information publicly available on how much they are worth. MLB teams on average claimed sponsorship and ad revenue of 30% of ticket sales. However, MLB teams don't have jersey sponsors. 30% of the estimated Union ticket revenue is $2.5M. Subtracting out the park naming revenue that leaves $500K, which seems like a reasonable assumption.

Merchandise & Other - MLB teams claim other revenue at 38% of ticket sales. That includes extra suite revenue as well. I can't imagine that the Union sell merchandise or draw suite income at the same rate as MLB. I cut the revenue rate in half or 19% of Union ticket revenue. That puts merchandise, suite income and other revenues at $1.6M.

Costs - If there is little information available on revenues then there is basically zero information on costs. The MLS players association does release salary figures for each player twice per year. And while that is very generous, it doesn't begin to tell us what the costs are of running a sports franchise. However, operating a professional sports organization is probably similar across sports. I looked at the average costs as a percent of ticket sales over 5 MLB teams and 10 seasons to estimate the Union expenses.

Team Operations - These are the costs of running the team; transportation to away games, uniforms, facility maintenance, etc. Not only do they pay the players, they have to provide suitable facilities and travel accommodations and that's not cheap. Average MLB data showed this expense at 56% of ticket sales.

Park Operations - This one is pretty obvious; security staff, utility bills, etc. The costs of opening up the park for a game and providing that great experience. MLB average is 28% of ticket sales.

Player Development - Here is where MLB and Soccer may be different. MLB have expenses related to minor leagues and scouting. The MLS doesn't have a minor league necessarily. However, MLS teams need to scout around the globe to be effective. And they also manage various levels of U-teams within the Union Academy. The MLB teams spend 42% of ticket sales on player development. I'm going to assume the same, especially in a year where the Union launched the YSC Academy.

Administration - This is for the administrative staff, sales, marketing, etc.. MLB spends 46% of tickets sales in this area. My bet would be the administration for an MLS team would be leaner than for MLB but I keep the rate the same.

Salaries - If you are willing to crunch all of the data provided here, then you'll see that the Union had guaranteed salaries of $3.6M. The issue with guaranteed compensation is that it's an accounting metric. It includes the amortized amount of any signing bonuses or upfront payments. While it's a good number from a financial perspective it may not be reflective of the true cost taken by the team. That said it's the best number we have and at least it's public. What is unknown is what did the Union pay to players who were not on the roster? In a recent article by David Zeitlin, Hackworth cited "serious financial constraints" which were presumably payments to past players. The 2012 guaranteed compensation was $4.2M. I'm going to assume the same total costs for 2013 because I can see a $600K hole as being significant in Hackworth's eyes. It also potentially reflects what the Union and the MLS might be willing to budget annually for this team.

There is also the question of coaching salaries. And while Hackworth's salary has not been made public I would place it in the $250-$300K range. Recent rumors about the Whitecaps desire to hire Bob Bradley place his expected salary close to $1M. I'm using that to assess Hackworth's current market value along with some published 2007 head coaching salaries. Each of the assistant coaches are likely in the $100K range. I am not 100% sure where that money sits in the expenses. It's likely in the administration line or the team operations line. The MLB documents are not clear where the coaching costs reside. But I do believe it is accounted for in the assumptions made already.

Interest Expense - How much of the owners' building expense (reportedly $49M) and franchise fee (reportedly $30M) were borrowed from creditors is anyone's guess. Later I will run debt as a % of investment scenarios at 25%, 50% and 75% with the remainder coming as owner equity. In the income statement below I assumed 50% and a 4% interest rate.

MLS Revenue Sharing - Is the franchise fee enough for the MLS or do they take money back from the teams? They likely do. No clue how much. I'm going to leave this blank and assume whatever these costs might be would be paid for by lowering costs in other areas of the business.

Here is what the Income Statement looks like for 2013 when you accumulate all of the above.

Depending on how much borrowing was done to build the stadium and pay the franchise fee, the Union range from a slight negative operating income to a positive of $1.2M. Forbes does not calculate the interest in their operating income estimate which they note is EBITDA (Earnings before interest, taxes, depreciation, and amortization). This income statement without the interest expense shows an EBITDA of $2M, higher than the $1.1M Forbes estimate was for the 2012 season. The difference could roughly be any revenue sharing that the MLS takes. But that is just a guess.

The bottom of the table attempts to calculate the Owners' return on investment so far (Cumulative Annual ROOE). That is going to depend upon how much of their own money they invested. It's also going to depend on what the Union is worth. Given the rumors of unsatisfied creditors that surrounded the building of PPL Park, I am going to assume that no principal has been paid back on any loans. The thin operating margins also suggest it would be difficult to be making a significant dent in the debt. If we take the Forbes valuation of $90M and look at debt ratios of 25%, 50% and 75% we see a wide range of potential returns. If the owners borrowed 25% of the up front investment then their annual return is a modest 4.3%. But if they borrowed 75% of the money then their annual return is a reasonable 11.7%. Just for completeness that return is over 4 years and assumes the Forbes valuation is unchanged in 2013. As a point of comparison, the S&P 500 has delivered an annual return of 10.8% between 2009 and 2012 and 14.3% if you include 2013 . But not many investments have been matching the stock market these last few years. The Forbes valuation of all the NFL franchises has only appreciated 2.8% annually over the same 4 year period. By that comparison the Union are doing quite well.

But all this rate of return talk is muddled by the fact that the MLS is a single entity league and the Union owners are not really owners in the classic sports franchise sense. They are investors/operators. So what their return might look like could differ depending on how that arrangement with the MLS is structured. But at least this view gives us a classic financial point of view on the financial health of the franchise.

What does all this mean? It definitely appears the Union are headed in right direction financially. Their operating income is positive. Although after interest expenses and other accounting charges they are likely still losing money. With a $90M valuation a year ago after an initial investment of $79M their returns could be worse, but they are not stellar. They should have invested in the stock market, but now they have the fun of owning a sports franchise. If I were they, I would be bullish on the Philadelphia market and the growth potential of the MLS and would continue to invest in players and the long term. This year's formation of the YSC Academy is a great sign that they are thinking exactly that way.