Indiana Pacers Transaction
Breaking down the recent minority interest sale of the Indiana Pacers
Overview
Last week, as I was working on the write-up breaking down Mark Cuban’s recent sale of the Dallas Mavericks (Dallas Mavericks Transaction), I received a notification from Bleacher Report that the owner of the Indiana Pacers also announced a sale of 15% of the team. As I mentioned at the end of the previous piece, with valuations at all-time highs and more institutional investors entering the mix offering liquidity options for ownership groups, I expect this acceleration of transaction activity in the NBA to be the new norm rather than the exception.
Transaction Details
On November 30th, 2023, Herb Simon, owner of the Indiana Pacers since 1983, announced that he sold a 15% stake in the team to 72-year-old billionaire businessman and film producer Steven Rales ($7.5B Net Worth). Rales already owned 5% of the team, bringing his total ownership stake to 20%. Although the team did not discuss a specific valuation for the deal, valuation estimates ranged from $2.9B (Forbes) to $3.47B (Sportico), which would imply a $435M - $520.5M investment from Rales.
There weren’t many other specific details about the transaction but reports state that it may have included a right of first refusal for Rales to purchase a majority stake in the team eventually. The NBA will go through its normal review and approval process before the deal is finalized.
Sports as an Investment
89-year-old Herb Simon bought the team in 1983 for approximately $11 million. Using the top-end Sportico estimate of $3.47B this would imply a 31,545% Return on Investment for the 15% stake or a 15.47% CAGR over the 40-year holding period. It’s important to note that this is a bit of a simplification of actual return because it doesn’t consider cash inflows or outflows during the holding period, simply appreciation. The Simon family may have been taking cash distributions on this 15% stake during the holding period, which would have increased the total return. Additionally, they may have injected additional capital into the team during this time, which would bring down the total return figure.
Chart 1 below shows the growth of both revenue and corresponding valuation for the Pacers since 2000.
Although a sports franchise is a unique asset that makes comparison to other traditional financial instruments difficult, it can still be an interesting thought exercise to look at returns compared to the S&P 500. Chart 2 below shows a hypothetical $1 invested into the Pacers in 2000 compared to the S&P 500.
The difference in growth seen above can be attributed to absolute returns as well as variability in those returns. The table below shows the 5-year average returns of the two assets, the standard deviation of those returns, and the corresponding Sharpe ratio, which is a measure of risk-adjusted returns. It’s important to note once again that these figures can be skewed because they don’t consider the lack of frequent pricing of an NBA franchise or the cash flows during a holding period.
Deal Rationale
For the Simon family, keeping the Pacers in Indiana has been a top priority, and selling an interest to Rales, who has numerous ties to the state, can help fulfill this mission. When announcing the deal, Simon stated, ” My good friend, Steven Rales, who has strong Hoosier ties and is a graduate of DePauw University and co-founder of Danaher Corporation, which is the owner of Indiana-based life sciences company Beckman Coulter, expressed an interest in acquiring a minority investment in the franchise. After considerable discussion, Steven is going to become a minority owner of 20% of the franchise pending league approval. Management of the franchise remains under Simon family control. The Simon family is as committed to Indiana today as we have been since we moved here from New York in the 1960s.” (IndyStar).
Herb’s son Steve is slated to succeed Herb as the controlling owner of the team, but partnering with Rales and including a right of first refusal for future equity stakes as part of the deal creates a succession option in the family while maintaining the team’s legacy in Indiana.
From Steven Rales's perspective, the Pacers present an opportunity to ride the wave of general NBA franchise appreciation while buying an asset that has underperformed both on and off the court. The enterprise value of the Pacers is small relative to other NBA franchises, ranking 27th out of the 30 NBA teams. Chart 3 below shows the valuation of the Pacers compared to NBA league averages over time.
Despite being in the basketball-obsessed Hoosier state, the team has had the lowest average attendance in the NBA this year, averaging 15,381 fans per game. They have had very little playoff success and haven’t won a championship since 1973 when they competed in the ABA.
With this being said, the team signed a new 25-year lease extension to continue playing at Gainbridge Fieldhouse in 2019, and they will be hosting the 2024 NBA All-Star game. They have an exciting young core of players, led by all-star Tyrese Halliburton, and recently competed in the inaugural NBA in-season tournament championship. Rales will be buying into a franchise that has upside potential.
Conclusion
The Pacers are not as high-profile of a team as others that we have seen change hands recently, but they still highlight how the rising tide of growth in the NBA is lifting all ships. With a new media deal coming in 2025, I expect to see the trend of increasing valuations continue. The deal will be larger than the last regardless, but the success of the first in-season tournament has created a strong bargaining chip for the NBA as they approach broadcast and streaming partners. The league had more engaged fans in November and December compared to years past despite competing directly with the NFL. This engaged audience for live content is at the core of the value of the NBA and all sports franchises.
I haven’t received any updates since starting this piece about another pending transaction, but it will only be a matter of time before we see more legacy owners taking some chips off the table and more institutional investors and ultra-high-net-worth individuals enter the space to see if they can create additional value for an NBA franchise.