Billionaire bails on Sacramento MLS team, league may need a new sucker to pay $200m expansion fee

Way back in 2017, University of Michigan economist and Soccernomics co-author Stefan Szymanski said to me of MLS’s ever-increasing expansion fees, “Why would you buy something for $150 million which is basically giving you a share of losing $100 million a year?” Since then, the fee per team has gone up to $200 million, which does not make the math any better, but still lots of rich people have been lining up to pay the price without balking at the cost.

Until now, that is:

Sacramento’s roller coaster journey to join Major League Soccer has taken a dramatic downward arc, with Mayor Darrell Steinberg announcing Friday that billionaire and lead investor Ron Burkle is no longer part of the bid…

Major League Soccer issued a statement after Steinberg’s confirming Burkle’s withdrawal, stating Burkle said issues with Covid-19 and the project prompted him to withdraw. Several media reports suggested costs involved with expansion, including the price tag for the stadium of $252 million and an expansion fee to MLS of $200 million, were factors in Burkle’s decision.

That always did sound like a terrible deal for Burkle, and apparently uncertainty about how he was going to earn back his money in a post-Covid world was enough to make him bail on the expansion plan, even if the team wasn’t set to take the pitch until 2022, by which time we should actually be back to full stadiums. (Or at least, as full as they get in MLS.) And apparently Burkle is free to do that despite Sacramento Republic F.C. having been formally awarded an expansion slot in November 2019, because Burkle never actually signed a final expansion agreement, whoopsie.

Anyway, with Burkle back to just co-owning the Pittsburgh Penguins and whatever else billionaire investors own, MLS is now going to have to figure out whether to find another moneybags eager to plunk down close to half a billion dollars for a Sacramento team and stadium, or to find a replacement expansion franchise. At last count, there were roughly 10,000 owners in other cities looking to get in on the totally-not-a-Ponzi-scheme, so MLS presumably has options, though you have to wonder if there’s something that spooked Burkle — maybe those 2022 league TV contract renewals weren’t going to be as lucrative as had been hoped? — that could give other owners pause as well.

For now, it’s officially still full speed ahead in Sacramento, but clearly this situation bears watching: Among other things, will the collapse of Burkle’s ownership group lead to fewer big-money stadiums being planned, or just to more demands that the money come from someone other than the new owners saddled with expansion fee expenses? (Three guesses.) If nothing else, it’s likely that whatever strange things the clip-art entourage were going to get up to at a new Sacramento stadium will have to put off for a while.

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16 comments on “Billionaire bails on Sacramento MLS team, league may need a new sucker to pay $200m expansion fee

  1. I mean, if they just want someone to step in and replace Burkle and who can refuse to sign any binding agreements and not put any money in, I’m available.

    I might need some sort of total liability waiver (or at least a get out of jail free card, which, not being a billionaire, I don’t have at present) or something, but um….

    I am always surprised by how little hard background work sports leagues do before announcing new owners. MLS is still not in NHL territory, but wow. Just wow.

    1. It boggles the mind that this guy spent years trying to convince MLS that he was excited to spend $450 million on a stadium and expansion fee on a team in a league where a mid-market team could expect to generate between $30-$40 million in revenue (which is nothing short of crazy). He had his bid accepted, but then drew the line when he got an updated estimate for the cost of electricity and plumbing.

  2. I think you should clarify something about that Szymanski quote. He is not say that each team loses $100 million a year. He is saying that each team loses an average of around $4 million a year. (100 divided by 26 teams.) But that’s just an average. There are some teams in MLS that make money. Sacramento has shown great support for soccer. Their minor league team draws very well. If a team in Sacramento packed a 20,000 seat stadium each game they would not lose $4 million a year. A team like that would probably make a small profit.

    1. Right, that’s what he means by “a share of.”

      I cannot see a Sacramento team making enough of a profit to come close to paying off $450 million in expansion fee and stadium costs.

      1. This begs a larger question, Neil… I’ve looked at a copy of the MLS’ LLC agreement and, even presuming that SUM somehow generates $10 million a year per team operator (to me a ridiculous notion, but possible I suppose), between MLS and SUM those investing in this still aren’t capable of recouping their investments. Not over 5 years, not over 25.

        It’s a misnomer, but is “franchise appreciation” (i.e., the value of their ownership interests in the LLC and SUM) what these guys are envisioning when they plunk down this much money?

        I see MLS 2021 in the same light as NASL 1978 or the Arena Football League circa 2000 – a venture with a public perception of growth, but one that’s fueled through ongoing capital injection rather than actual growth. And one that, ultimately, will collapse under its own weight once they run out of suckers to buy in.

        1. That’s pretty much the definition of a Ponzi scheme, yes.

          And yeah, I think “You’re not just getting a share of a money-losing league, but also a money-generating soccer marketing arm!” is the sales pitch. It’s nonsense to me, in part just because the numbers are so low compared to the price tag for buying in, but it only needs to be enough to give new owners cover to buy a new toy.

  3. And now the President of Sac Republic and left the building:

  4. The valuation of MLS teams is steadily moving upward, with the top MLS teams being valued at more than the entire bottom third of the NHL, and with more than half of MLS’s teams valued at more than the NHL’s bottom team. When the pandemic is over, we should only expect this trend to continue.

    The point is that a turning point has been reached; MLS is a major league that is here to stay. If a particular MLS owner tires of owning his or her team (technically, of owning his or her share in MLS/SUM), that owner will always be able to find someone who is eager to take that team off his or her hands.

    What’s more, MLS should not be grouped with leagues such as the NASL and the USFL, which were dependent on a never-ending influx of expansion money, and so accepted bids from every two-bit lemonade-stand operator, without bothering to check into the stability or solvency of the ownership groups. By contrast, MLS vets its applicants thoroughly, and rejects more of them than it accepts.

      1. A 20% share of the Galaxy recently sold at a price that establishes the value of that team at a level that would rank the team just outside the top ten in the NHL.

        But I don’t think that an entire team has changed hands recently — which is not really that surprising, as very few owners seem to think that now is the time to get out, probably on account of the ongoing upward trend in value which can be expected to continue.

        The league averted a lockout or strike that had at one time seemed likely for this season; and just around the corner is the 2026 World Cup that will take place in the U.S., Canada, and Mexico, an event which is sure to boost the interest in soccer even further.

        So the outlook for MLS is good. The expansion fees are soaring, and not because everyone is stupid. These fees are soaring because a lot of people want to get in on the league before it hits 32 teams, where it will probably remain.

  5. Seems about right.

    Pon·​zi ​scheme | ˈpän-zē-
    Collegiate Definition
    : an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks

  6. For either the charter clubs or the early wave of expansion clubs (who paid $10-25m for their franchises), the current model of MLS has worked really well. As several people have mentioned above, this is not growth in the standard sense. Early investors are very much still being paid off (or having their operating losses covered) by vastly inflated expansion fees. For those who bought in at $100m or more, the $3-5m they might see for each expansion franchise granted later is less than manna from heaven.

    For the Hunt and Anschutz families (who were rumoured to have invested some $360m into the league during the first decade of operation), it may not have been all that great an investment (I am sure they are now fully whole on the investment – possibly even better than that. However, tying up a third of a Billion for two decades is not good business). That said, both Mr. Hunt and Mr. Anschutz were very clear up front that this was investment in the game in America, not something they expected to generate quarterly returns on.

    It is likely that Mr. Burkle just doesn’t see a bigger fool coming to take a prospective Sacramento franchise off his hands in a decade for $1bn or more. If that is his position, I suspect he is right.

    Could it be more than that, though? Could it be that not only is the bigger idiot theory out the window, but that some current teams might be available for vastly less than expansion franchise asking price given the current state of professional sports?

    If so, what effect will this have on the franchises that aren’t among the ten who regularly turn a profit or come close?

  7. Ahhh, the life of a politician.

    One moment you’re riding high as a 6-year California State Senate President pro Tempore, the next you’re riding low as a two-term City of Sacramento Mayor with two strikes against you in you’re quest to be California governor.

    First, that pesky homelessness problem. Over 6,000 homeless on the streets of Sacramento, a 100% – 200% increase since taking office, with one homeless death every 3 days. Despite expenditures of over $60 ($180) million to combat the problem.

    Now this! Your billionaire buddy bolts for Southern California, specifically his Sycamore Valley Ranch, leaving you high and dry on MLS island. And no way now to pay for your trip there.

    Guess things could be worse. You could’ve built Ron Burkle’s $300 sports shopping mall for him on your dime, only to have him bolt. (KCRA: Where the news comes first! And investigative journalism is optional)

  8. “Over 6,000 homeless on the streets of Sacramento, a 100% – 200% increase since taking office, with one homeless death every 3 days.”

    Sac really needs to up that death rate or they are never solving that homeless problem.

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