Sports Finance Report: Rising Cap, CBA Clauses Change NFL Team-Building Strategy

GREEN BAY, WI - SEPTEMBER 10: The name of the late Reggie White of the Green Bay Packers, inducted into the NFL Hall of Fame this summer, is unveiled before a game between the Packers and the Chicago Bears on September 10, 2006 at Lambeau Field in Green Bay, Wisconsin. (Photo by Jonathan Daniel/Getty Images)

Editor’s Note: Welcome to a daily column we run here at BroBible breaking down the day’s biggest stories in sports finance with commentary from the equities analyst and sports fanatic perspectives. It comes to us via our friends at JohnWallStreet, publisher of a free e-mail newsletter focused on sports related public equities and their subsidiaries. You can sign up here.

Rising Cap, CBA Clauses Change NFL Team-Building Strategy

The NFL salary cap has risen from $120 million in 2012 to $167 million in 2017, escalating $10 million annually over the last 4 years; while the value of rookie contracts has simultaneously declined after the players negotiated to increase cap allocation for veterans, within the 2011 collective bargaining agreement. The current CBA also allows for teams to roll over available cap space to the next season, creating a situation where teams can stockpile money (see: Browns, 49ers and Jets all have over $100 million to spend this offseason). Those large sums of available cap space have changed the perception that free agency is a collection of desperate teams overpaying to acquire talent on the decline, to a viable roster-building strategy with empirical data to support those beliefs; 6 of the top 10 spenders during the 2016 offseason made the 2017 playoffs, with the Jaguars (spent $20 million more than anyone else last offseason) turning it around from 3-13 to 10-6.

Howie Long-Short: NFL players are underpaid relative to athletes in other professional sports. Their careers are shorter, their contracts are rarely guaranteed in full and there are simply far more players divvying up the revenue allocated. NFL teams also don’t tie contracts to a percentage of the salary cap, so as the cap rises, star player contracts become relative bargains. Only once a player receives a franchise tender (a tactic used to retain valuable free-agents) is the contract tied to a percentage of the salary cap, and even then, it’s an average of the Top 5 players at the position or a 120% increase from the year prior; far less than a player could earn on the open market.

Fan Marino: The Jets gave up a 1st and 3rd round pick to acquire restricted free-agent (and current HOF) Curtis Martin in March of 1998. There was another 1998 free-agent signing that receives far less acclaim, but deserves to be recognized among the all-time great free-agent acquisitions. In February of 1998, the Jets made Center Kevin Mawae the highest paid player at the position with a 5-year $17 million contract. Mawae, who went on to play 8 seasons with the Jets, including 7 times as a First Team All-Pro, is a 2018 HOF finalist., compares Mawae’s career to those of Mike Webster, Gene Upshaw, Jim Otto, Larry Allen, John Hannah, Gary Zimmerman, Will Shields, Walter Jones and Jonathan Ogden. What do all those guys have in common? Their busts reside in Canton, Ohio.

Kering to Spin Off Puma SE, Focus on High-Margin Luxury Brands

Kering (OTC: PPRUY) has announced plans to spin off a majority stake in Puma SE (PMMAF), enabling the company to focus on its high-margin luxury brands Gucci, Yves Saint Laurent and Balenciaga. CFO Jean-Marc Duplaix indicated the group would also look to rid itself of the boardsports label Volcom. The company will distribute 70% of Puma shares to its investors, reducing its own stake to 16%. The transaction price will be determined at April’s shareholder meeting. PPRUY shareholder Groupe Artemis (see: Francois Pinault), will become PMMAF’s largest shareholder; controlling 29% of the company.

Howie Long-Short: Kering paid $6.4 billion for Puma in 2007, slightly above the current market cap ($6.1 billion); despite the stock price climbing 45% over the last 12 months. Despite not yet having capitalized on the turnaround (profits fell from $324 million in ’07 to $6.3 million in ’13, before rising to $161.5 million over the first 9 months of ‘17), it makes sense for Kering to sell their sportswear (and lifestyle) brands; as Duplaix explained, the company has found itself in “a sort of imbalance, linked to the outperformance of the luxury sector.” In other words, their sportswear businesses were dragging down the overall performance of the company; particularly Gucci, among the hottest names in fashion.

Fan Marino: PMMAF, the German footwear and sports apparel manufacturer, will report full year earnings on February 12th; after having increasing profit guidance 3x in 2017. The company turnaround can be attributed to a refocusing on the world’s most popular sports (soccer, running, motorsports) and a boost in women’s sportswear sales. Puma publicly stated it welcomes the transaction, but shares closed -4.4% on Thursday amid concerns the company lost a powerful backer.

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Fox Sports Announces WC Content Partnerships with Twitter, Snapchat

Twenty First Century Fox Inc.’s (FOXA) Fox Sports, which holds the exclusive English broadcast rights to the 2018 World Cup, has announced several content partnerships that will expand their coverage beyond the television screen. FOXA announced plans to stream exclusive digital content on Twitter, Inc. (TWTR), including 27 live shows (30 minutes per) and near real-time highlights of every goal scored. On Snapchat (SNAP), the broadcast network will create “Publisher Stories” using video, text, artwork and motion graphics to comprehensively document every day of the tournament. SNAP will also produce FIFA World Cup “Our Stories”, featuring highlights and exclusive fan reactions. The 2018 World Cup, hosted by Russia, runs from June 14th through July 15th.

Howie Long-Short: To boost advertiser interest, Snapchat commissioned a recent study (using internal data and insight from Nielsen) on the company’s “unique audience”; users more active on SNAP than they are on other social platforms. The study focused on a subset of users interested in sports and sports-related content. It found SNAP users are more likely to be sports fans (i.e. watch, attend, stream games) than non-users, are more active on their smartphones at sporting events (important to activate and connect with fans) and “feel a stronger connection to sports” (i.e. spend more on officially licensed products). That sounds like a platform all sports leagues might want to explore.

Fan Marino: Twitter is reportedly exploring the concept of implementing micro-payments that would enable sports fans to watch the endings of close games; think iTunes for sporting events. I don’t see it. Fanatics (or gamblers) who would care about the ending of a close game, already have access to the out-of-market packages. The casual fan will simply continue to catch the highlights as soon as the game ends, for free. Proponents of this idea point to video games and the success in-game micro-payments, but gamers are engaged. I don’t believe that’s a valid case study.

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What is JohnWallStreet?

JohnWallStreet is not a person or location, but a destination for the educated sports fan.

While we won’t be publishing “hot takes” on LeBron’s relative greatness to Jordan, we will be offering up the most relevant sports related finance news, in easily digestible bites, with commentary from both the equities analyst and sports fanatic perspectives.

We’ll cover publicly traded professional teams & stadiums, television networks, apparel & footwear companies, equipment companies, ticketing companies, content and facilities providers. If it trades on Wall Street, and has a sports angle, it’s in our wheel house.

Howie Long-Short and Fan Marino will be providing their expert opinions on each story. They have slightly different areas of expertise. Fan Marino is a firm believer that the SEC is the premier football conference. Howie Long-Short knows it as the Securities & Exchange Commission. Fan Marino lives and dies with the college selection of 5 star, blue chip recruits. Howie Long-Short spends his days analyzing blue chip stocks. Howie Long-Short knows that Black Monday occurred on October 19th, 1987. Fan Marino swears it happens every January after Week 17. You get the point.

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