Successful sports properties are now fetching high prices. Matthew Doherty has helped crystallise the value of a successful Nascar franchise

The value of a Nascar property

George Gillett Jr. has bought one of Nascar’s prime properties, the Evernham Racing team, for around US$150 million. According to merchant banker, Matthew Doherty, it is an investment that makes perfect sense for both.

In August last year long-time Nascar team owner Ray Evernham sold 80 per cent of his eponymous Nascar race team to George Gillett Jr., for a sum believed to be in the region of US$120 million. It valued the whole team at US$150 million, for something most people didn’t think was worth much at all, being barely five years old and going through a rough patch on the track. But for Gillett, already the owner of the Montreal Canadiens NHL ice hockey franchise and co-owner of English Premier League club Liverpool, it was a triumph and he considered it a cheap buy.

Gillett believed Evernham to be a prize to be plucked in Nascar and that he was getting in on the ground floor as far as Nascar team valuations were concerned. And it was a bigger bonus for him that Ray Evernham wanted to stay and run the renamed Gillett Evernham Motorsports.

The banker that made the deal happen is Matthew Doherty of Los Angeles-based boutique adviser, McLaren Capital Partners. Doherty has given Gillett financial advice for more than 20 years and called on years of experience in Nascar and Formula One to bring the two parties together.

Doherty founded McLaren Capital Partners in 1991 to offer mergers and acquisitions advice. Rather than trying to compete with the established forces in investment banking such as the Goldman Sachs and the Morgan Stanleys, he decided to find niche industries that required specific expertise. He found three: oil, defence and motorsport. He says: “We’ve done well at it. In the oil and gas sector and the defence sector we’ve made some fairly major impacts where we’ve restructured entire industries.” The move into motorsport came from clients involved in those industries. Doherty explains: “Because a number of our clients had got involved in motorsport we had a natural proclivity to it.”

Surprisingly, despite his company’s name, Doherty has no relation with the McLaren Formula One team, but he has worked with Sir Frank Williams, Ross Brawn, Jean Todt and Adrian Reynard, as well as the likes of Warburg Pincus when it owned the Jordan team.

Doherty hopes if Sir Frank ever sells his team he will do it through his firm, despite the obvious peculiarity of doing a deal involving a firm called McLaren. Doherty can’t disguise the fact that he would love to sell Sir Frank’s team for him.

But he had no knowledge of Ray Evernham until he picked up a copy of the trade magazine BusinessF1 in Sir Frank Williams’ office in May 2004. The magazine featured a report on the financial success of the Nascar series. Sir Frank let him take the magazine away and he eagerly devoured every word of the in-depth report into Naasar’s finances on the plane journey home. He remembers: “I read the article on Ray and then asked a mutual friend, Derrick Walker, to make the introductions.”

The two men clicked, as Doherty recalls: “We built up a relationship with Ray as an individual and looked at a number of things, how to build his brand over time. About a year ago he called us and said it was the right time to do something. One of the things we had mentioned to Ray over the years was that, internationally, there are a number of entrepreneurs who own a number of sports franchises – soccer teams, baseball, a cricket team, etc. None of them as far as we knew had really got involved in motorsport, but we didn’t see any reason why they wouldn’t or why they shouldn’t. We spoke to a number of people who owned numerous sports platforms and George Gillett not only knew motorsport, had been in motorsports, but was a perfect fit for what Ray wanted to do. So we put that deal together and closed in July or August this year.”

Putting the nuts and bolts of the deal together took around six or seven months as he explains:“It was maybe a little bit on the expedited side. We’ve had a relationship with George for over 20 years so we knew him and we knew a number of other people, some European but primarily Americans who knew motorsport in general.”

Doherty is well placed to consider the motivation of each man. For Gillett, he says, there was a solid business theory behind his expansion into the world of Nascar. “The investment thesis was that in motorsports you have teams that generally get 80 per cent of the revenue through sponsorship. In other forms of sport the number is primarily television-based, but the advertising base is growing. If you could go to an international consumer brands company, be it a Proctor & Gamble or whoever, American-based, European-based, Asian-based or whoever, and sit down with them and offer to them more than just putting their name on a quarter-panel or a sidepod or naming rights on a stadium, but offer them a more comprehensive marketing solution then you would have a competitive advantage over someone who was just asking them to put their name to a sidepod. That was the theory behind the investment. We spoke to George about it. He not only has Liverpool and the Montreal Canadiens, he also owns half a dozen golf courses and ski resorts and a number of auto dealerships. When someone like George picks up the phone and talks to Anheuser-Busch or whoever, he can offer anything from a decal on the side of a car to preferred rights on his golf courses. He can offer B2B and B2C returns.”

Doherty says Gillett is always looking for the right opportunity to “expand his business empire”. But it is all about primarily getting a return and sentiment for the sport takes second place. He explains: “He wants to build a bigger sports business. He’ll tell you that he considers himself to be a steward of the team, Liverpool, or whoever it is. But if George needed to write a cheque for US$20 or US$30 million to meet payroll or fund losses, he’d reconsider his stewardship. I think at a certain point in time, as with anyone in the sports business, people will be willing to take a lower rate of return or be willing to make a profit in other ways but at the end of the day, and it doesn’t matter how wealthy you are, you don’t like to lose money.”

Despite that Doherty believed Gillett and Evernham were compatible people. What Gillett could bring to the table was exactly what Evernham required. He wanted to cash out but keep running the team and keep an interest. Gillett had investment funds burning a hole in his pocket and wanted a stake in Nascar and more importantly an honest partner. There were plenty of people running Nascar teams he wouldn’t have trusted to hold his wallet.

From an early stage Doherty was convinced that the pair were a perfect match. “At any point in time, no matter what business you’re in, industries change and they go from entrepreneurial companies to more professionally run companies. In motorsports you had two different kinds of owners: those where motorsport was 95 per cent of the network and those for whom motorsport was five per cent of the network. It’s very similar to Formula One. For someone like Frank Williams it is maybe 95 per cent of his network, but if you look at Mercedes-Benz it might be 0.1 per cent. It’s hard to compete on that level, with someone who can go out and spend however many millions on the latest piece of technology. It’s very hard. Ray basically said ‘I’ve built this company from zero’ and its turnover is substantially above US$100 million a year.

“From Ray’s perspective, his mandate to us was very simple. He said, ‘I’m a mechanic and crew chief, I can figure out suspension geometries and all the rest of it, but my skill set is not running a US$150 million or US$200 million business’ – which is where they will be in a short period of time – ‘I need someone to do that for me’. His quote was ‘you need to find me a partner so I never need to play another round of golf with a CEO ever again’. His mandate was to find somebody who could take on that position.

“I think it’s probably true in Formula One as well as motorsports in general; if you’re sitting back and waiting for an agency to phone you and say they want to get into motorsport, all you’re really doing is competing on rate; which one is the cheapest? That’s a very tough way of making a living. If you don’t have the ability to go directly through the board, to that level, then you are going to have a really hard time to be successful commercially. The agency will take 15 or 20 per cent of the revenue as well, so that is a disadvantage. Someone like George or Tom Hicks, who owns Clear Channel, or a number of other people, is picking up the phone and talking to these people at the decision-making level.”

Gillett has also been able to demonstrate the ability of a well-connected entrepreneur to attract major sponsorship. During his five months at the team he has given the sport something of a commercial masterclass, snaring three prestigious sponsors. As Doherty explains, the secret behind his success is the ability to get to a decision-maker quickly. “Right out of the box Anheuser-Busch decided they were going to move their Budweiser sponsorship and George had a relationship with Tony Ponturo at Budweiser but also with the Busch family. Even though Evernham Motorsports had a horrendous year in Nascar last year, they were able to secure what is undoubtedly, at least in the US, one of the premier sponsorships. That was nice from our perspective.

“To take it one step further, a very prestigious retail outlet called Best Buy, selling electronics, had their sponsorship come up and the team was able to secure it – all within 120 days of closing the deal. Valvoline, an oil company, had previously announced they were pulling out of Nascar but because George owned all the auto dealerships he was able to secure them. Literally within less than six months of closing the deal, all of Evernham’s old primary sponsors essentially have gone and new ones have come in.

“Just from a marketing standpoint, these guys like George who are coming into the sport already have a relationship with sponsors. It’s very easy for them to make a phone call and say ‘we won the World Series last year, we won the Stanley Cup, come and join us and this is what we can do for you’. That’s the key. You have to have established relationships with sponsors to expand that relationship.”

Just as internationally-renowned single-seater drivers such as Juan Pablo Montoya, Dario Franchitti and Jacques Villeneuve have been attracted to Nascar so too, in Doherty’s view, are the multimillionaire owners. Dietrich Mateschitz from Red Bull has already made his entrance in a predictably glitzy way, while in the near future Gillett’s Liverpool football club co-owner Tom Hicks is likely to conclude a deal to buy Richard Childress Racing. Doherty is convinced others will follow, sooner rather than later. “The economics have changed although that’s not to say someone like George wouldn’t have looked at it five or 10 years ago. Five years ago you could have bought a premier Nascar team for US$15 million to US$20 million. Today that same team is worth US$100 million to US$250 million.“

Undoubtedly Evernham and Gillett were influenced by the decision of Jack Roush to sell 50 per cent of his eponymous team to John Henry, owner of the Boston Red Sox last February. Roush is believed to have netted US$150 million from the sale, valuing his team at US$300 million,  and that set a lot of Nascar team owners thinking. But Evernham was the first to do anything about it.

And for Doherty, the business model of a Nascar team makes it ideally compatible for sports entreprenuers such as Gillett. “In Formula One someone like Ferrari can spend millions developing a new suspension, the numbers are astronomical – US$10 million, US$20 million. You really couldn’t spend that kind of money in Nascar because everything is very regulated, much more regulated – you don’t have the carbon fibre. You can spend millions but you can’t spend tens of millions, so the model is a little bit different. What Nascar as the sanctioning body has done is grown its model so much that all the boats are affected by the rising tide. You have guys like Ray and Richard Childress and others 10 years ago who were making US$200,000 a year and they were as happy as you can be. Now all of a sudden the rate card for these teams – six or seven years ago if you could get US$10 million for a primary sponsorship that was a big deal; today US$20 million is the base case. Some of the primary sponsorship deals, like Dale Earnhardt Jr., are close to US$30 million.

“On a car like Jr’s, he may have US$40 million of sponsorship on there. He’s probably making US$11 or US$12 million as a salary – some of that comes from the winnings. You can see that someone like Hendrick Motorsports is a very profitable company. One other things that the teams can do in Nascar but can’t in Formula One is leasing deals. If you’re a good team with a powerful engine, you can lease those engines to competing teams. A good lease programme today in Nascar is probably US$4.5 million to US$5 million per year. What does it cost to build an engine? Certainly not US$4.5 million. Five or six teams are leasing engines at US$5 million apiece – that’s really profitable.”

Whereas Doherty considers Formula One teams to be more “outsourced marketing departments for the manufacturers” he believes the model implemented by the France family for Nascar does give owners a realistic shot at running a team profitably. “The France family put together a pretty powerful model and they are smart. They essentially said there is 25 per cent of the TV money for the teams and we’ll keep the rest; and they own the tracks so they can allocate how much goes to the track owner. They’ve done a phenomenal job at making the pie bigger. I don’t get the impression that Bernie is out there pounding the pavement to bring in sponsors. That’s what Nascar has done. The France family is out there all the time and it’s sort of a self-fulflling prophecy now because a UPS can come in and say ‘we like Nascar’. There are the junior leagues, if you will, where someone can dip their toes in with the trucks or ARCA. As a sponsor, if you want to spend US$3 million or US$4 million and have a meaningful experience in Nascar you can do it. If you do that in Formula One, you can’t get anywhere.”