Study thesis: Stadium naming rights do not align with best interests of shareholders. A company that purchases stadium naming rights may lack prudence and care in allocating capital, which negatively affects shareholder returns over the long-term.
Study background
Thus far in 2016, several high-profile bankruptcies have been witnessed, especially in the retail and energy industries. The financial health and long-term viability of many other businesses have been called into question.
This has especially been the case in retail, where internet sales growth compounded in the double digits for a decade now, has put pressure on many traditional retailers. In the oil and gas industry, the steep fall of energy prices that began in 2014 has whittled away at the strength of the world’s largest producers and hastened the decline of smaller ones, especially those producers in shale in the United States.
The observation was made that several public companies that have gone bankrupt this year or that have been under increased scrutiny are or were spending millions of dollars a year on the stadiums for professional athletic events. Two such companies were Sports Authority, which had purchased the naming rights for the stadium of the Denver Broncos in the NFL; and Chesapeake Energy, owner of the Oklahoma City Thunder of the NBA stadium name.
Sports Authority declared bankruptcy in March of 2016 and will completely cease to exist by the end of the year, leading to near-total loss for investors. Chesapeake Energy is still a viable business, but laden with debt, dealing with cash flow shortfalls going on two years, and a business model that does not rely on end consumer awareness, the wisdom of holding naming rights seems dubious at best.
Due to these observations, the thesis was formed that stadium naming rights generally do not align with investor best interests. The practice may also be indicative of a lack of prudence and care on the part of management in allocating capital and making the best use of business cash flows.
Research description
The sales of stadium naming rights gained popularity in the early 1990’s as a way for stadium owners to raise funds needed for construction and to increase event revenue. Large corporations started to see the large venues as an effective way to mass-market and raise awareness of the business.
Our observations were limited to the four most popular professional athletics leagues in the United States and Canada: the National Football League (NFL), Major League Baseball (MLB), the National Basketball Association (NBA), and the National Hockey League (NHL).
The study spanned the history of the sale of naming rights in these leagues, the first of record being in 1973 between the Buffalo Bills of the NFL and private food company Rich Products.
The primary study was to first compile a historical list of all company purchasers of stadium naming rights, both private and public, and identify the duration of the right, and whether a bankruptcy occurred during or shortly after termination of the naming rights contract.
The secondary study was to compare publicly traded companies stock performance during the duration of the naming rights contract against an index, either an industry specific index or a broad stock market index like the S&P 500.
Summary of observations
There were an observed 134 companies that purchased naming rights for professional sports teams since 1973. Of those, 25 were privately held and another 11 were acquired by another company during their sponsorship. Of the remaining 98 publicly traded companies, nine of them declared bankruptcy during or shortly after their naming rights contract with the respective stadium.
This left 87 companies with publicly traded stock that we could compare against an index. The average total return across the 87 companies was 150%, and total return outperformance against respective indexes of 71%.
However, there were 56 companies that underperformed their index during their ownership of stadium naming rights, and only 31 that outperformed. We found a handful of outliers that outperformed their index skewed results. Those outliers were Qualcomm (own the rights for the San Diego Chargers stadium from 1997 – present with stock performance of 3,100%), Target (own the rights for the Minnesota Timberwolves arena from 1990 – present with stock performance of 1,860%), and Molson Coors Brewing (own the rights for the Colorado Rockies field from 1995 – present with stock performance of 1,880%).
When removing those outliers, total return of the remaining 84 companies dropped to 74%, and the average company underperformed its index by 8%.
We found that companies that have owned naming rights for longer periods of time (10 years or more) performed much better and rarely underperformed their stock index. Short-term deals, of which the majority of naming rights deals were, usually underperformed their stock index or ended when the company declared bankruptcy.
Of note was company performance by industry. Most companies observed operated in the banking, oil and energy, technology, or consumer discretionary industries. Companies operating in the consumer discretionary spending industry (retail, food and beverage, and consumer-slanted technology) usually outperformed their index during their naming rights deal. Companies operating in banking, oil and energy, and technology (enterprise or business-to-business slanted technology) usually underperformed their index.
It was observed that bankruptcies occurred during bubbles or periods of rapid change. Most bankruptcies occurred during or around the technology bubble of the late 1990’s or the financial crisis of 2008.
Conclusions
We conclude that the purchase of stadium naming rights by publicly traded companies generally does not align with the best interest of shareholders. An overwhelming number of companies stocks underperform broad-based stock indexes during the deals, and a high percentage declare bankruptcy during periods of severe or prolonged economic downturn. This would indicate that many of these companies are not exercising prudence and care when allocating capital and making the best use of business cash flows. Many companies that were observed, especially those that declared bankruptcy or held the naming rights for a short period of time, displayed a lack of diligence in controlling business expenses and overhead costs.
However, it could be argued that a few select companies seemed to benefit from the deals. Those operating in industries where consumer awareness and advertising benefits business and influences consumer choice (like food, beverage, and consumer-slanted technology) outperformed while sponsoring a stadium. Other companies have a vested interest in the stadium or team itself, like Rogers Communications with its ownership interest in several professional sports teams. Factors such as this also must be considered before taking a critical look at naming rights.
Excluding a few exceptions, though, it can be concluded that shareholders who own stock of a company that purchases naming rights to a venue should weigh the cost of the deal against benefits expected to be received. It is also important to consider the company’s management team, how they manage overall business operations, and their stewardship on company funds and assets.