DealLawyers.com Blog

Last year, I blogged about the NFL’s decision to allow its franchises to seek investments from a group of approved PE sponsors.  Since then, teams like the Patriots, Giants, and 49ers have obtained significant investments from private equity and other investors. When you add in the record-breaking sales of pro sports franchises like the Boston Celtics, the LA Lakers, and the Washington Commanders, it’s become clear that pro sports teams are becoming an important asset class for M&A transactions.

In recognition of this development, this recent Cooley memo addresses some of the key challenges that buyers face in structuring investments in and acquisitions of professional sports franchises. Some of these challenges include:

– Debt and security limits. League rules often limit the amount of debt that a team can use to finance the acquisition of a team, and generally do not permit team assets to serve as security for such acquisition financing. Typically, these debt limits are in the hundreds of millions of dollars and are far short of the amount needed to meaningfully finance the acquisition of a team valued in the billions of dollars.

– Limits on number of owners and minimum size of investment. League rules often limit the number of individuals (e.g., 25) who can be an owner in a sports team and further require that each owner must own at least a minimum percentage (e.g., 1%) of a team to qualify as an owner.

– Limits on institutional ownership. While participation by institutional investors is generally permitted across the major American sports leagues, most leagues limit the amount of equity that institutional investors and sovereign wealth funds can hold in a team (generally between 15% and 30%, depending on the league).

– Fitness for ownership. Further limiting the sources of capital available for a potential buyer are league rules concerning the suitability of a prospective investor as an owner. The leagues tend to require extensive background checks, obligate owners to provide capital to the franchise as and when required to cause the relevant teams to be operated in a first-class manner, and to indemnify the sports league and its affiliates, often on a joint and several basis.

The memo addresses some of the unique transaction structures that have evolved in order to address these challenges, most notably multistep structures allowing the transfer of franchise ownership to be completed over time.  It also addresses the protections for both buyers and sellers that are often included in these deals to respond to the default and other risks presented by transactions with deferred closings.

– John Jenkins