Major League Soccer: Billion Dollar Franchises Are Coming

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Friends,

Seattle Sounders FC announced yesterday that MLB Hall of Famer Ken Griffey Jr. and his wife have purchased a minority stake in the Major League Soccer Club’s ownership group.

The group now includes:

• Ken Griffey Jr.

• Ciara

• Russell Wilson

• Mackelmore

Financial details haven’t been made public but the Seattle-based club was valued at $405M in 2019, which was a 30% increase from their $310M valuation in 2018.

(📸 / Seattle Sounders FC)

For those of you that still don’t take MLS seriously—despite the continued rise in team valuations—check out this mind-blowing stat:

Seattle Sounders FC averaged over 40,000 fans per game last year, which was slightly less than you would’ve found at a Cincinnati Bengals game, but almost double what you would’ve seen at a sold-out NHL game.

Yes, I know the Bengals weren’t good — but you get the point.

(📸 / The Seattle Times)

Even more interesting, the most valuable teams in MLS are now valued closer to $1 billion than $500 million, rivaling the top teams in the NHL — a league that is more than 100 years old.

How is that possible?

Today, we’ll check it out — digging through why the value of an MLS team has grown so much, what future valuations might look like, and potential speed bumps along the way.

(📸 / MLS)

First — let’s set the stage.

Major League Soccer, or MLS, was founded in 1993 as a a men’s professional soccer league intended to represent the sport’s highest level in the United States and Canada.

Here are the facts:

• The first MLS season was in 1996

• There are currently 26 teams — 23 in the U.S. and 3 in Canada — with plans to expand to 30 teams by 2023.

• MLS averages over 21,000 fans per game, which ranks behind the NFL & NBA but ahead of the NHL.

• Rather than operating as an association of independently owned clubs, MLS is a single entity — meaning each team is owned by the league and individually operated by the league’s investors.

Furthermore—to get a lay of the land—here is a map of where each MLS team is currently located geographically.

Future expansion teams not listed:

• Austin FC - Coming in 2021

• Charlotte FC - Coming in 2022

• Sacramento Republic FC - Coming in 2023

• St. Louis City SC - Coming in 2023

From a valuation perspective, the average MLS team was valued at $313 million in 2019 — a 30% increase from 2018 and up more than 100% from 2015. For context, the average NHL franchise was valued at $667 million in 2019.

Top 5 most valuable MLS teams:

1. Atlanta United: $500M

2. LA Galaxy: $480M

3. Los Angeles FC: $475M

4. Seattle Sounders $405M

5. Toronto FC: $395M

To be fair—similar to projected valuations for other major professional sports leagues—these need to be taken with a grain of salt. For instance, Vincent Tan sold his 20% stake in LAFC last year which valued the team at more than $700M.

The interesting part?

MLS teams don’t make any money.

According to Forbes, the 23 teams that played in MLS during 2018 combined for $100 million in losses. Even worse, only seven of those teams turned a profit, and of those seven, only three were by $1 million or more (Source).

That’s not the only problem.

Major League Soccer has been somewhat artificially inflating franchise valuations through expansion.

What do I mean?

Over the last 5 years, there has been a flurry of MLS expansion teams announced — with Cincinnati and Nashville each paying $150M, St. Louis and Sacramento paying $200M each, and Charlotte paying an MLS record $350M in expansion fees.

With expansion fees being distributed throughout the league, both league-wide and team revenue has become artificially inflated.

Don’t believe me?

Get this — In 2018, MLS clubs reported total revenue just shy of $800M, but in 2019, they made almost half of that from expansion fees alone.

Even worse, MLS can’t expand forever. They already have 4 teams on the docket for future expansion—bringing the total to 30—but most believe they won’t go much further that that. Sure, as the talent pool starts to dilute through expansion, MLS could theoretically just pay more for players given the global nature of soccer — but that’s clearly not sustainable forever. Point being — expansion is going to stop soon.

So given they won’t be able to use expansion fees to prop up the valuation of sub-standard teams for much longer, what is Major League Soccers plan to turn these valuations into a sustainable long-term investment?

Broadcasting rights, of course.

Over the last decade, MLS has seen the average annual value of their broadcasting rights increase from ~$8 million to $75 million — a massive increase, but still minuscule when you remember the NBA & NFL bring in over $2.6 billion and $8 billion annually from their TV deals.

Different leagues, but again, you get the point.

To make MLS profitable long-term—assuming expenses stay the same and the league stops expanding—Forbes projects they’ll need to land a broadcasting deal in the range of $525M annually, or 7x what they currently get (Source).

With negotiations starting now, is that even possible on their next deal?

It’s unclear — but as TV rights continue to expand at an astronomical rate for virtually every single professional sports league, why shouldn’t we expect the same for one of the fastest growing professional leagues in the world?

Spoiler alert: we should.

After all, there’s a reason why major celebrity investors like David Beckham, Magic Johnson, Robert Kraft, Kevin Durant and Lamar Hunt are getting involved.

In the end, don’t be surprised a decade from now when the average MLS franchise is more valuable than their NHL counterpart.

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