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Corporate Finance Final Final Term Paper


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GGU MBA Corporate Finance Final Project Term Paper

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Corporate Finance Final Final Term Paper

  2. 2. Table of ContentsTable of Contents ....................................................................................................................................... 1I. Overview and Proposal Hypothesis: .................................................................................................... 2 1.1 Historical Facts and Figures of the National Football League............................................. 2 Snapshot of Statistical Facts and Figures in the NFL (through 2011) ....................................... 5 2.1 Report Objective and Hypothesis ............................................................................................ 6 3.1 Minnesota Vikings Franchise Historical Background and Current Position ...................... 8II. Geographical Observation and Comparison: Facts and Statistical Information ..................... 11 1.1 Minneapolis Metropolitan Region versus Los Angeles Region: ........................................ 11II. Feasibility Analysis: Metrics, Formulas, and Measurements ........................................................ 14III. Stadium Comparative Analysis:........................................................................................................ 20 1.1 City of Minneapolis New Stadium Proposal ......................................................................... 20 Restating the Position in Favor of Minneapolis ........................................................................... 20 2.1 City of Los Angeles New Stadium Proposal ........................................................................ 25 Restating the Position in Favor of Los Angeles:.......................................................................... 25IV. Closing Argument and Final Recommendation: ...................................................................... 29Citations: .................................................................................................................................................... 31Appendages: ............................................................................................................................................. 32
  3. 3. I. Overview and Proposal Hypothesis: 1.1 Historical Facts and Figures of the National Football League It is fourth and goal and a football length from scoring and winning the National Football League’s (NFL) Super Bowl, the ultimate prize in all of professional sports in America in the first half of the 21st Century. Only a few seconds remain to determine whether weeks and months of preparation leading up to this moment was worth the investment in time and money. Unfortunately, time is an adversary and each tick of the clock before the final decision is made and the play is called and engaged only exacerbate the insatiable anticipation of finally achieving monumental success and thus solidifying the team’s efforts and Photo 1: Courtesy of the National Football League its final output as distinguishable and legitimate. If you score, you will be the toast and talk of the town, positioned nicely to sustain longevity and potentially long-run profitability as a viable entity in the industry and the marketplace. For one of the League’s most storied and venerable franchises, it is fourth and goal and the moment of truth, a decisive point in a crucial time, to determine whether they will be able to maximize profit on an annual basis in their current market while remaining viable in the local community or if a fresh start in a new environment is in store to provide the franchise with a better financial and economic opportunity is at its doorstep. The crux of this issue is at the center of debate for
  4. 4. many of the League’s teams who are close to or on the verge of losing money and,more importantly, their fan base. This dilemma is confusing to most insiders withinthe League and its entertainment industry and to those who are rabid admirers of thesport because the NFL, since the inception of its revenue sharing system in 1961under former League Commissioner Pete Rozelle, has experienced exponentialgrowth and popularity more than any other professional sports’ league throughoutthe period. The NFL was founded in 1922 and comprised of eight teams. By 1960,following its merger with the American Football League (AFL), the NFL grow to 13teams. Today, the League has expanded to32 teams, represented in every region in thecontiguous United States, with a slightexception to the Mountain West regioncomposed of Montana, Wyoming, Utah, andthe Dakotas and the plains of the Midwest, Image 1: Courtesy of the National Football Leaguenotably in states such as Nebraska, Iowa, and Oklahoma. League attendance has remained on average at a steady clip over the past25 years at roughly 61,000 fans per game, with games played on a 16-gameschedule for a majority for those years. (The previous seasons were designedaround 14-game schedule.) In a short-run cycle, this estimates to an averageequivalent to 90% capacity. Currently, the spirited popularity of the League isrunning at 94% capacity and in order to maintain this attendance capacity rate,marginal increases from stadium-generated revenue in ticket, concession, parking,
  5. 5. and club paraphernalia and memorabilia prices must be sustain on year-to-yearbasis. At the end of fiscal year 2010, the NFL generate over $8 billion in revenuefrom gate receipts, luxury boxes and suites, concessions, merchandise and apparellicense fees, stadium naming rights, trademark licensing, multi-year network, cable,and satellite television and online media contracts, offseason appearance fees andspecial programming, and advertising and special promotions. The crown jewel that is at the heart of the enormous success of the Leagueand serves as the catalyst behind its phenomenal growth is the franchise stadium.During a span of 14 years from 1990 to 2004, 19 new stadiums were built forcombined total of $6.2 billion. Prior to 1990,many League stadiums were financedproportionately with approximately 80% in publicfunding and 20 % in private funding. Yet, since1990, a dramatic shift occurred in stadium Photo 2: Courtesy of Jet (2003-financing that saw 2011) a significant increase in privatebacking that literally split this bifurcated funding matrix in half: public funding at 54%versus private funding at 46%. However, it should also be noted that there are a number of newer fan-friendly, corporate-centric arenas within last five years that are driven by privatecontributions almost exclusively with 100% private financing in some cases. Publicfunding is derived from various sources in the form of state and local bond initiatives,state, county, and city sales and use taxes, excise and liquor taxes, tolls, rental, and
  6. 6. parking fee premiums, and other less intrusive forms of tax codes and initiatives. Incontrast, private funding for NFL stadiums is obtained through partnership alliancesfrom individual contributors who provide financing by direct cash, market securitiesand other investment instruments such as short- and long-term bonds, or the sale ofcapital assets in real estate and property. Snapshot of Statistical Facts and Figures in the NFL (through 2011) NFL Financials (selected listing):  Total Annual Revenue – 2010 $8,742,998,000  Average Ticket Price (up 4% from 2009) $75  NFL Profit to Average Total Costs 7%  Industry Profit to Average Total Costs 8.5%  Broadcasting Fees through 2011 $8 Billion  Satellite Fees $4 Billion  Super Bowl Total Ad Revenue Over $400 Million  Super Bowl 30 Sec Ad Average Fee $3 Million  Average Fan Costs (FCI) per Year: Account for 4 average-priced tickets, 2 small draft beers, 4 small soft drinks, 4 regular-size hotdogs, parking for 1 $420 per Family of Four vehicle, 2 game programs, and 2 of the least- expensive adult-size adjustable caps  Player Average Salary < $2.0 Million  Player Wages as a Percentage of Total Revenue 52.5%  Stadium Rent Costs as a Percentage of Total 4% Revenue  Average Depreciation Costs of Franchise Assets as a Total Percentage of Revenue (%): excluding 6% player’s contracts  Utility Costs for Stadium Use as a Percentage of 5% Total Revenue (%)  Percentage of Franchise Total Revenue 12.5% Generated from Endorsements  2009 Advertising Spending: NFL, NFL.Com Shop $139,486,000 Website, NFL.Com Fantasy Association, NFL.Com NFL Statistical Facts (selected listing):  2010 NFL Regular Season Attendance Total 16,570,000  2010 Average Attendance per Game 64,978  US Viewership of 2010 Super Bowl 100 Million  Average Percentage of All US Households to 42% Watch Super Bowl since 2000  Sports Industry Expected Annual Growth Rate 3.5%  Average NFL Viewer Earnings per Year (highest $62,200 of all four major sports)  Gender Viewership Ratio: Male to Female 4 to 1  Ethnic Viewership Percentage Breakdown: 75%; 70%; 65% Whites, Blacks, and Latinos
  7. 7. 2.1 Report Objective and Hypothesis The National Football League (NFL) is classified as a private organizationcomposed of 32 independently privately-owned and operated franchises. The headof the League is run by a League’s commissioner who is elected by majority votefrom the League’s owners. These owners are not only responsible for daily business operations of theirrespective franchises (teams) but are also the main drivers and facilitators behindthe construction of the stadium facilities their teams perform. Depending largely onthe initial capital structure of stadium funding at its inception, many of the League’sstadiums are funded solely by private or public finance or either by a mixedcombination of the two. The sourcecomponents that generate the fundingneeded for building a stadium is derivedfrom various financial and investmentsstreams in the form of state and localtaxes, public or private bond initiatives, Photo 3: Courtesy of New (2011)and a percentage of sales revenueobtained through merchandise, gate receipts, concessions, parking and rental fees,advertisement, national and local media, and other minor avenues. Although the popularity of the sport has grown rapidly, becoming the nation’snumber one sports league out of four professional sports’ leagues – the others beingMLB, NBA, and NHL, a few of the League’s legacy franchises in smaller marketshave struggled to compete with other more profitable franchises in the League
  8. 8. primarily due to economic stagnation and antiquated stadiums that failed to stimulatethe local economy’s existing fan base and create new growth opportunities in fanattendance. When a macro-economic crisis occurs, the sports and entertainmentindustry become greatly affected, because revenue is mostly generated by individualand corporate discretionary income. Therefore, if a venerable franchise isestablished in a metropolitan area where low growth rates in population, business,and personal income along with unfavorable rankings in lifestyle and quality of lifebecome the norm, it could find financial sustainability difficult to maintain. One of theLeague’s highly celebrated and respected franchises has recently found itself at thecrux of this dilemma and currently is considering ways to increase revenue andprofitability of their organization and is the subject of this feasibility report: TheMinnesota Vikings. The purpose of this report analysis is to assess and evaluate the currentfinancial and economic health of theMinnesota Vikings franchise in the City ofMinnesota by using a preferred set offinancial concepts and principles, models,formulas, metrics, and equations used incorporate finance to determine whether aproposal to build a new stadium in the Image 2: Courtesy of the Minnesota Vikings and theMinneapolis region National Football League will create long-rungrowth for the organization and its surrounding community or whether a motion torelocate to another national market with substantially better expected growth
  9. 9. potential within a newly constructed stadium: For the purpose of this report, thepreferred competing market that will be the basis of this argument is the City of LosAngeles. Thus, the report hypothesis is confirmed and stated as follows: Should theCity of Los Angeles build a new football-exclusive stadium to accommodate therelocation efforts of the NFL’s Minnesota Vikings franchise from the City ofMinneapolis?3.1 Minnesota Vikings Franchise Historical Background and Current Position Known around the League as the “Purple People Eaters,” the MinnesotaVikings began as an expansion franchise – the League’s 14th - which was foundedby an ownership team of businessmen lead by Bill Boyer, H.P. Skoglund, MaxWinters, Ole Haugsrud, and Bernie Ridder in 1960 but yet started its first full seasona year later in the Fall of 1961 as a part of the NFL’s National Football Conference(NFC). Due to the strong Scandinavian influence in the metropolitan area ofMinnesota, the team was officiallyawarded the name of the Vikingsby the League. Fomented by anaggressive marketing campaignduring the team’s inaugural Photo 4: Courtesy of (2007)season, the franchise sold onaverage nearly 26,000 tickets with an average capacity peaking at 85% for its homegames at a stadium named the Metropolitan stadium, a stadium with a maximum
  10. 10. capacity of 40,800 seats. A few years later, seating capacity at Met Stadium - aname commonly referred to by the locals – was expanded to 47,900. For several years leading up to the mid ‘80s, the Minnesota franchise hadbeen one of the League’s most storied and successful franchises, the first team inLeague history to make an unprecedented four Super Bowl appearances in fourstraight years. Since many of the games were being broadcast nationally, theseearly achievements attracted fans across the country and created a fan base thatstill remains one of the League’s largest. What soon precipitated from the growingpopularity of the franchise in 1979 was a new stadium initiative to capitalize onincreased demand. Two years following a much-anticipated ground-breakingceremony, the Hubert H, Humphrey Metrodome was finally constructed and becamethe team’s new home to the present. For the purpose of this report, we will not cover in in depth detail the history ofthe franchise and its days under the roof of this uniquely inflatable geodesic domedesign, but will focus on the main point of addressing the feasibility study todetermine the viability of the organization’s continued presence in the city ofMinneapolis. The primary argument does not solely rests on a new stadium initiativebut rather the inclusion of other direct and indirect factors – social, economic, andenvironmental - that support new finance projects such as the existence of a stadiumand the professional organization (s) it serves.
  11. 11. For in the case of the proposal to retain the franchise in its current host’s city,it should be noted that one of the critical factors – environmental - that is part of theentire evaluation process had recently made its negative impact on the decision-making process for franchise, the League, and many of external investors who arefans but, more importantly, equity partners in the overall financial success and healthof the organization. Additional capital expenditures were required for structuralimprovements to the indoor, air-supported roof of the Hubert H.Humphrey Metrodome,caused by heavy accumulation ofsnowfall that was slightly abnormal Photo 5: Courtesy of Deadspin.comfor a short period but was notatypical of average seasonal winter conditions for the region throughout the courseof any given year. Therefore, it is reasonable to surmise that this among the other factorsoffered in this report will leverage the decision-making process in one direction orthe other. We hope to prove our argument and succinctly and precisely make thecase for the relevance of those factors in the assessment process. And based onfinal analyzes we will offer our recommendation that is substantiated on thosepremises. We will first provide a breakdown of preferred factors that are used asassumptions in many of the statistical and data analyzes, to establish the premisefor the basis of our assessment, evaluation, and final analysis and
  12. 12. recommendations. These assumptions have been carefully identified, investigated, and selected for relevance purity, a typical methodological strategy employed by financial analysts in the marketplace is to calculate the present value and evaluate financial position of a company, or entity, for comparative analysis purposes. This procedure and financial tactic used by decision makers and their team of analysts worldwide is in line with a similar standardized financial assessment and analytical toolkit used in this report. The first series of items to discuss in our breakdown analysis are facts and statistical matters concerning geography, demographics, climate, transportation, and cost of living between the two proposed regions: Minneapolis and Los Angeles. The following section gives you a statistical breakdown of these component factors.II. Geographical Observation and Comparison: Facts and Statistical Information 1.1 Minneapolis Metropolitan Region versus Los Angeles Region: Demographic, Economic, Climate, Transportation, Cost of Living Statistics % of or % of or Above/Below Los Above/Below Minneapolis, National Angeles National Economic Impact Component Variables MN Benchmark , CA Benchmark Demographics: *Population 385,058 0.13% 3,958,25 1.29% 1 *Pop. Change 0.63% -1383% 7.17% -30% *Median Age 35.7 -2.52% 35.1 -4.27% *Household Size 2.24 -15.18% 2.88 10.42%
  13. 13. Demographic, Economic, Climate, Transportation, Cost of Living Statistics Male Population 50.91% 3.14% 50.02% 1.42% Female Population 49.09% -3.26% 49.98% -1.42% Married Population 28.84% -63.49% 35.54% -32.67% Single Population 71.16% 25.73% 64.46% 18.01%Economic Unemployment Rate 6.10% -49% 13.40% 32% Recent Job Growth 0.61% 120% -0.59% 80% Future Job Growth 35.12% 11% 25.42% -23% Sales Taxes 7.15% 5% 8.25% 18% Income Taxes 7.85% 20% 9.30% 33% Income per Cap. $28,016 3% $25,274 -7% Household Income $47,043 -13% $47,387 -12% POPULATION BY OCCUPATION Management, Business, and 14.62% 6% 11.58% -19% Financial Professional 31.18% 27% 20.60% -10% Service 16.93% 14% 15.84% 8% Sales and Office 24.17% -4% 23.36% -8% Farming, Fishing, and Forestry 0.15% -353% 0.18% -278% Construction, Extraction, and 4.39% -113% 7.75% -21% Maintenance Production, Transportation, 13.03% -22% 14.49% -9% and Material MovingClimate *Rainfall (in.) 34.2 -7% 18.1 -102% *Snowfall (in.) 54.5 54% 0 0% *Precipitation Days 101 1% 26 -285% *Sunny Days 198 -4% 284 28% *Avg. July High 87 1% 77 -12% *Avg. Jan. Low 6.3 -225% 49.8 59%
  14. 14. Demographic, Economic, Climate, Transportation, Cost of Living StatisticsTransportation Commute Time 23.6 -17% 32.2 14% COMMUTE MODE *Auto (alone) 59.94% -27% 66.53% -14% *Carpool 9.92% -8% 11.27% 5% *Mass Transit 13.99% 65% 11.30% 57% Work at Home 4.19% 3% 5.07% 20% COMMUTE TIME TO WORK Commute Less Than 15 min. 26.96% -6% 18.55% -54% Commute 15 to 29 min. 49.55% 27% 34.47% -5% Commute 30 to 44 min. 16.47% -20% 26.42% 25% Commute 45 to 59 min. 3.36% -123% 8.95% 16% Commute greater than 60 min. 3.66% -121% 11.61% 30%Cost of Living Overall 108 7% 147 32% Food 109 8% 108 7% Utilities 97 -3% 109 8% Miscellaneous 114 12% 106 6%Favorable Index: <100Unfavorable Index: >100*The asterisk indicates key assumptions factored into thereport.2.1 Minneapolis Region vs. Los Angeles: Other qualifying variables not included:  Ethnicity and Racial Composite: The City of Minneapolis racial groups are 60.34% of people are white, 19.04% are black, 6.47% are Asian, 2.17% are Native American, and 11.99% claim Other. 12.70% of the people in Minneapolis, MN, claim Hispanic ethnicity (meaning 87.30% are non-Hispanic). In contrast, Los Angeles racial groups are 45.67% of people are white, 9.48% are black, 10.48% are Asian, 0.80% are Native American, and 33.57% claim Other. 50.74% of the people in Los Angeles, CA, claim Hispanic ethnicity (meaning 49.26% are non-Hispanic).
  15. 15.  Average Viewers by Ethnic Groups: Figure 40: Professional sports viewership, by race/Hispanic origin, February 2011 Total White Black Asian Hispanic Base: Adults aged 18+ with access to 2000 1495 300 100 300 the internet % % % % % Any viewership 85 85 88 84 83 Football 70 70 75 51 65 Baseball 53 55 49 46 52 Basketball 43 38 71 41 44 Hockey 26 28 21 16 20 Average # of sports followed 3.2 3.1 4 2.8 3.1 Source: Mintel  Education Comparison: Education Minneapolis, MN Los Angeles 2 yr. College Grad. 6.22% 5.86% 4 yr. College Grad. 25.73% 18.78% Graduate Degrees 15.67% 10.00% High School Grads. 87.06% 72.06% The information indicated above represents many of the assumptions that factorinto the feasibility study report and sets the foundation for interpreting our variousmathematical analyzes to help formulate and arrive to our final argument andconclusion, and recommendation, which we elaborate in detail in the ensuing section.II. Feasibility Analysis: Metrics, Formulas, and Measurements Before executing the feasibility analysis, it is important to gain insight on thegeneral success of the League and its financial performance record during a specificperiod of 5-10 years. By analyzing KPIs (key performance indicators) such as League’s
  16. 16. revenue streams, attendances, player salaries - which makes up a substantial portion ofall costs (51%) on average per squad - and other variable costs notably associated withconcessions, parking, stadium and corporate facilities maintenance, and fixed costssuch as stadium and corporate utility, leasing, some corporate administrative salariesthat are unlevered by multiple bonus package incentives as one would find in playersmulti-year contracts, developing a credible feasibility analysis report for the MinnesotaVikings franchise to determine which market is more conducive to long-run profitabilityand sustainability will be achieved. The table below on the following page is a scaled-down sample version of someKPIs generated by the League that function both as an exploratory and comprehensivefeasibility study analysis. With all things being relatively equal, since the primary sourceof revenue generated is predicated on gate receipts and various forms of PSLs andluxury boxes, etc., the most crucial key performance indicator must be “city population”because of the obvious implications involved in creating a sufficient fan base anddemand for the product on the field, the main catalyst behind revenue sales.. Immediately following this chart is a regression analysis report. As mentioned inthe previous paragraph, the KPI that this report will focus its research between the twoproposal regional sites regards variables urban areas where populations tend to be adriving force behind mounting a fan base large enough to provide an annual ROI and asteady marginally steady growth rate that is inflation adjusted. However, for the integrityof this report, it must be noted that there is only one outlier in the League for whichurban population size does not impact the success of the franchise and that isdemonstrated in the League’s reigning Super Bowl champions, the Green bay Packers,
  17. 17. a team in which the population of its metropolitan area is roughly 300,000 inhabitants,as compared to an average of approximately 1.5 million. You will discover in this report that the population size is a clear determinant andthe independent variable designated when feasibility analysis is conducted byengineering design firms who are usually the facilitators behind new stadium proposalsand possible relocation agendas. The old adage states that success on the field puts“butts in the seats.”A Sampling of NFL Stadiums and Selected Variables used In Regression Analysis Total Annual Revenue Metropolitan Average (weighted) for Team and Stadium Area Team Value ($ in Stadium Total Ticket Home Games:Stadium Name Owner Population billions) Costs Price 2006-2010DallasCowboys:Cowboys City ofStadium Arlington 6,300,000 $1,850,000,000 $1,200,000,000 $110 $403,692,300WashingtonRedskins:FedEx Field Team 5,358,100 $1,555,000,000 $251,000,000 $79 $341,509,890New EnglandPatriots:GilletteStadium Team 4,522,900 $1,401,000,000 $325,000,000 $118 $405,660,400New York NewGiants: MetLife MeadowlandsStadium Stadium Co. 19,006,800 $1,300,000,000 $1,400,000,000 $112 $441,428,960Green BayPackers: City of GreenLambeau Field Bay 307,000 $1,089,000,000 $259,000,000 $72 $254,669,760DenverBroncos: MetropolitanSports FootballAuthority Field Stadiumat Mile High District 2,506,600 $1,046,000,000 $401,000,000 $77 $291,438,070San Francisco49ers:Candlestick City of SanPark Francisco 4,274,500 $991,000,000 $25,000,000 $76 $260,797,040Minnesota MetropolitanVikings: Hubert SportsH. Humphrey AuthorityMetrodome Commission 3,229,900 $796,000,000 $55,000,000 $76 $236,213,320
  18. 18. Sample Linear Regression Chart:Y Variable = Population Total for NFL Metro Regions: Variables of significance aretotal Team Value and total Stadium Costs/Price, which was expected.SUMMARYOUTPUT Regression StatisticsMultiple R 0.839169968R Square 0.704206235Adjusted R 0.660384936SquareStandard 2497472.346ErrorObservations 32ANOVA Df SS MS F Significance FRegression 4 4.00937E+14 1.00234E+14 16.06995 7.58E-07Residual 27 1.68409E+14 6.23737E+12Total 31 5.69346E+14 Standard Upper Lower Upper Coefficients Error t Stat P-value Lower 95% 95% 95.0% 95.0% -Intercept 877917.9484 3075741.855 0.28543291 0.777491 -5432983 7188819 5432983 7188819Team Value - -($ in billions) 0.007394966 0.003179404 2.325896978 0.027778 -0.01392 -0.00087 -0.01392 -0.00087StadiumTotal Costs 0.007414349 0.001909151 3.883583436 0.000602 0.003497 0.011332 0.003497 0.011332Average - -Ticket Price 14311.31906 88075.78212 0.162488697 0.872131 -195028 166405.3 -195028 166405.3Total AnnualRevenue(weighted)for HomeGames:2006-2010 0.036169336 0.023633726 1.530411895 0.137548 -0.01232 0.084662 -0.01232 0.084662 The independent variable (population) in the regression analysis chart shows thatboth multiple regression and regression squared is comfortably 70 percent or higher,meaning that there is a strong relationship, or correlation, between the independentvariable and dependent variables. If we test our hypothesis, our null hypothesis, basedon this scenario, that states that any marginal increase or decrease in population doesnot have any effect on the selected dependent variable in the above short-formexample, then we can test the validity of this hypothesis in one way by evaluating theregression charts p-value results. Since the level of significance is set at 5 percent, if
  19. 19. the p-value is lower than the LOC (level of confidence) at 5 percent, then the nullhypothesis must not be accepted. The chart above indicates that of the four dependent variables, only one has a p-value less than the level of significance and that is reflected in the relationship betweentotal stadium cost and population, which is understandable because of the one-time fee,fixed-charge effect and the inflationary pricing of stadiums not reflected in the constantyear-to-year growth rate and variations incurred from annual increases in prices. The data plot below illustrates the relational trends between the independentvariable, metropolitan population, and the dependent variables. As mentioned beforethere are few outliers indicated in the regression analysis because of the disparity ofspread from two of the US largest cities, New York and Chicago. NFL Franchise Regression Analysis 25000000 20000000 per Franchise 15000000 Population 10000000 y = 111162x - 1E+06 Series1 R² = 0.5782 5000000 Linear (Series1) 0 0 20 40 60 80 100 120 -5000000 Axis Title The standard coefficient at Y-intercept stands at 877,917 rounded. The slopebelow (111,162) serves as a very important statistic because it pertains to the valueplace on population size being the key non-exclusive factor that affects revenue,attendance, and the team’s overall fan base, the lifeblood and most sustainable
  20. 20. component in the entire feasibility analysis. For each unit increase of 111,162 inpopulation growth, three of the four dependent variables are positively affected. Now that the form and outline of the feasibility report purviews from bothhistorical context and technical description, the heart of the report analysis is primedand ready for full disclosure. In reiteration, the primary objective, due to the nature ofthis course assignment and degree program, is to demonstrate in this term paper acomprehensive understanding of corporate finance concepts and applications bydeploying them in a practical and useful manner that illustrates sufficient competency ofmaterials discussed in the course. (Please refer the appendage section at the endfor a detailed description of various corporate finance methodologies andanalytical tools used in our analysis.) Again, it must be restated that National Football League, also known as the“League,” and its membered body of 32 independent franchises (referred to as “teams”)are by law called “private entities” and as a result are not subject to federal mandatesset by the US Securities & Exchange Commission, a federal institution responsible forall US businesses who have filed an initial public offering and are categorize as a“public’ company. So, the gathering of important financial data and information that iseasily obtained for public companies ‘s 10-Q and 10-K quarterly and annual reports ismuch more difficult but not impossible. Where the lack of sufficient information and data that could be used in thisfeasibility study is evident, this problem and other such-similar problems were rectifiedadequately by paralleled analysis against a closely-related industry. Statisticalinformation used from these industries involved general growth rates in revenue from
  21. 21. sales generated by ticket and concessions operations, merchandise and memorabilia,stadium leasing and other capital asset revenue enhancers and capital assetinvestments, advertising, special licensing fees, radio and television contract fees,expected rate of return on debt instruments for stadium funding and several others thatadded to the total value for the franchise. These and other minor and less accessiblefactors formulated a portfolio of basic assumptions that were used in the report. We begin our analysis in the following two sections, first for the City ofMinneapolis followed by the City of Los Angeles. Immediately following ourcomparative analysis will be a section describing our final conclusion andrecommendation.III. Stadium Comparative Analysis: 1.1 City of Minneapolis New Stadium Proposal Restating the Position in Favor of Minneapolis Since it has already been well-established in previous paragraphs the history and current economic and social positions of the Minnesota Vikings franchise in the city of Minneapolis, it is important now to take a closer look at the team’s current new Ramsey County at Arlen Hills stadium proposal and some of the key economic indicators that will shed light on the City’s probability to retain its team for the foreseeable future. As in the case of LA’s stadium proposal, the Minneapolis Sports Facilities Commission for the City requested the services of two local firms to conduct two separate independent studies on the overall economic impact by RSM McGladney, Inc. and the Convention Sports and Leisure Company.
  22. 22. Although these studies are complete, some of the basic assumptions, asoften the case with impact study report, are subjective for the most part. Therefore,existing forecast data and information were slightly adjusted on a conservative basisto reflect current market conditions, as noted earlier. There are three areas that willbe analyzed in this section to how those adjustments differ from studies generatedby the firms mentioned and how those newer outcomes might be subjugated tonegative and recessive influences in the marketplace. For instance, the CSL study reports the NPV of annual ongoing operations(under a 30-yr stadium lease agreement) and jobs for the local economy projectsmarginally lower inflation rates, which will affect long-term forecasting. Now, let’stake a look at the NPV of four specific economic drivers outlined in the report andadjusted to an annual inflation rate of 3.5 percent which will contribute to the localeconomy long-run. The nominal discount rate of 8.675% was used, a rate that isreasonable and should remain in the adjustment. The formula used for the NPV(inflation adjusted) is NPV = [Cash Flow x (Inflation Rate)] ÷ Nominal Discount Rate= [CF x (1+ri)t] ÷ [(1+rreal) x (1+Inflation Rate) – 1]t. Now, let’s analyze and comparethe figures in the table below.Table 1 Sampling: Direct Spending - Adjusted NPV (30-Year Lease Horizon) Interest rate 5% Real Inflation rate 0.035 $150,178,500.00 Nominal Inflation rate 0.08675 Year 0 1 2 3 CFs $145,100,000 $150,178,500 $155,434,748 $160,874,964 FV of CFs $0.00 $138,190,476.19 $131,609,977.32 $125,342,835.55 NFV $2,375,642,644
  23. 23. Table 2: Annual Economic and Jobs - Adjusted NPV (30-Year Lease Horizon)Estimated Annual Economic and Jobs Impact Generated in Minnesota by On-Going Operations NPV @ 5% Discount Rate Adjusted 30-Year NPV (@ 8.675% Year 1 30-Year NPV nominal discount rate)Direct Spending $145,100,000 $3,664,000,000 $2,407,969,349Total Output $274,500,000 $6,933,000,000 $4,494,237,807Personal Earnings $105,700,000 $2,687,000,000 $1,730,568,074Employment 3,400 n/a Before offering a comparative analysis on tax revenue generated by a multitudeof on-going operations activities at the Hubert H. Humphrey Metrodome, reviewing thecurrent tax bracket will help to understand which areas taxes are levied against. Table3 below shows tax rates for both the State of Minnesota local municipalities.Table 3: State and Local TaxState Taxes: City Taxes:• 6.875 percent sales tax • 0.5 percent sales tax (Mpls. and St. Paul)• 2.5 percent liquor tax • 3.0 percent liquor tax (Minneapolis)• Personal income tax • 3.0 percent entertainment tax (Minneapolis)• 10.0 percent admissions tax • 3.0 percent restaurant tax (Minneapolis) • 3.0 percent hotel tax (Minneapolis) • 6.0 percent hotel tax (St. Paul)Hennepin County Taxes: Other Taxes:• 0.15 percent sales tax • 0.25 percent five-county transit sales tax As noted previously, today’s stadium funding is often comprised of a mixture ofcapital investments from long-term bonds, investment securities, private investments,to, as in a majority of the cases, state and local tax revenue. The new proposedMetrodome stadium at Arlen Hills is estimated to cost $1.057 billion. Unlike the averageresidential home or commercial building, yet similar to players’ contracts, NFL stadiumsare considered depreciable assets and thus all depreciable assumptions must beincluded in the analysis where the combination of leasing payments along with all taxrevenue and operating expense will attribute to NPV. Below is an estimated NPV 30-
  24. 24. Year comparison of all tax revenue collected for the Arlen Hills’ stadium between CSL’simpact study and the adjustable NPV proposed in this report.Estimated Fiscal Impacts Tax Type Year 1 30-Year NPV Adjustable 30- Year NPVState TaxesSales $10,067,000 $254,300,000 $164,821,464Personal Income 12,380,000 327,700,000 $202,690,944Liquor 253,000 6,100,000 $4,142,230Total State Tax Revenues $22,700,000 $588,100,000 $371,654,6385-County Transit Sales Tax $325,000 $8,200,000 $5,321,047Hennepin County Sales Tax $165,000 $4,200,000 $2,701,454City TaxesSales $531,000 $13,400,000 $8,693,771Restaurant 375,000 9,200,000 $6,139,669Hotel 321,000 7,900,000 $5,255,557Entertainment 1,716,000 44,000,000 $28,095,126Liquor 255,000 6,200,000 $4,174,975Total City Tax Revenues $3,198,000 $80,700,000 $52,359,098Total Tax Revenues $26,388,000 $681,200,000 $432,036,238Admissions Tax $5,813,000 $149,300,000 $95,173,058Total Including Admissions $32,201,000 $830,500,000 $527,209,296TaxTax Assumptions: NPV of estimated tax revenues over the first 30 years of stadium operations assuming a 5 percent discount rate. Represents a combination of taxes assessed by cities in which stadium-related spending is assumed to take place. Includes the 0.375 percent sale tax increase effective July 1, 2009 due to the passage of the Clean Water, Wildlife, Cultural Heritage and Natural Areas Amendment. The initial cash contribution from the Minnesota Vikings applied to the newstadium cost is $407 million (37% of all project costs). The Team is also expected tocontribute $14 million annually towards operating expenditure at our adjustable NPV of$229,214,314. With all things being equal, thus far the adjustable NPV amount that will
  25. 25. be attributed to annual team-generated activities plus initial cash contribution equals$1,163,423,610. Other revenue-generating activities such as interest payment frombonds and other securities and miscellaneous items in the form of tax increases willmarginally or substantially add to this total. Under these aforementioned assumptions,the current adjustable NPV gross profit totals $106,423,610. Even though original cash flow figures have been adjusted with a higher inflationrate, because of the immense popularity of the National Football League, you can seefrom our proposed results that the League, in general, and the Minnesota Vikings’franchise specifically, in spite recessive downturns, are capable of making a handsomeprofit. Yet, as this paper referenced earlier regarding KPIs, the most crucial componentin driving revenue for an NFL franchise is largely attributed to regional population sizeand population growth, the primary impetus behind sustaining an existing fan base andobtaining newly acquired fanatics for the Team worldwide. So, how does the City of Minneapolis new stadium initiative compare andcompete with the City of Los Angeles proposal to persuade this venerable franchise touproot and relocate nearly 3,000 miles away to a region that is diametrically opposite inseveral ways from one to another? What are some of the benefits offered byMinneapolis’ competitor that is convincing enough to support a franchise when the cityfailed miserably on two separate occasions in recent memory? Are there logisticalattractions – some newly established – in the LA region that can assure the Franchise ifit elects to relocate that things are different this time around? To address these andother questions, we now turn to the City of Los Angeles’ new stadium proposal at theGrand Crossing location to better answer these and other questions.
  26. 26. 2.1 City of Los Angeles New Stadium ProposalRestating the Position in Favor of Los Angeles: NFL fans regularly arrive at games wearing apparel purchased prior to theevent, pay entrance fees, and freely order food and memorabilia for three hours inan attempt to capture the atmosphere forever. The issue, however, is that the mostrecently built NFL stadium, Cowboys Stadium, cost $1.15 billion, which would resultin a tax increase that Governor Mark Dayton of Minnesota ruled out as an option tohelp pay for a new stadium thus pushing a vote out to possibly as late as November2012. This delay is too long to wait for a decision partly because most peoplebelieve voters will reject the new tax anyway. Instead, Minnesota politicians areconsidering building a new casino with the intent to apply partial state revenues fromthe casino to help fund a new stadium. “If you build it, they will come.” If the Vikings are considering using otherentertainment tax revenue as a source of financial support, the ownership shouldalso consider the Los Angeles (LA) Stadium at Grand Crossing complex, which isdesigned by the team that built the Staples Center, home of the LA Lakes, Clippersand Kings professional teams. Because the Grand Crossing complex is the size of600 acres, some marketing plans include non-football entertainment daily rangingfrom restaurants, shopping, a theater and even a hospital, which would make this asmall community where people may want to visit regardless whether a football gameis being played and investors wouldn’t have to worry about people being forced tostay at home due to brutal winter weather. The complex’s proximity to more than 15million people within an hour has resulted in a fully private financing option, no new
  27. 27. tax payer dollars. Also supportive are the local governments that stand to create18,000 new jobs and earn new tax revenue, particularly if a team from outsideCalifornia moves into the state. The economic synergies appear to favor LA as well from a marketabilityperspective. While Minneapolis is home to several Fortune 500 companies, it is the13th largest metropolitan area compared to LA being the 2nd, so prior to committingto relocate, the Vikings should be able to secure new marketing contracts of greatervalue. Comparisons between team merchandise sales are often difficult to predictwhen relocating. Initially, LA Vikings merchandise would be a highly demandedcommodity for many reasons. Southern California fans appreciate the most recentfads and they would certainly get that with the news of a new NFL team, especiallygiven that the mascot symbolizes toughness often thought of as a modern daypirate. Additionally, the team would immediately compete for the NFC West divisionlead in part because some of the weaker teams in the entire League are in thatdivision and also because the Vikings are just one full season removed from theNFC Championship game and led by young stars including NFL’s best running backarguably. But what stands out the most is the potential collaboration of two storiedfranchises that showed life in Minneapolis, but relocated during difficult financialtimes only to be rejuvenated in sunny LA. At the time the Vikings were joining theNFL, the Minneapolis Lakers professional basketball team was declining. Asfortunate as the team was to survive a plane crash during a winter storm, the NBAplaced the franchise on financial probation$ in 1960, ultimately leading to the
  28. 28. decision to relocate to LA to achieve economic prosperity. Coincidently, a year aftera winter storm caused havoc resulting in the collapsed Metrodome roof, anotherMinneapolis’ professional sports teams finds itself facing financial questions as wellas being courted by opportunities in LA. People say that history repeats itself. If theVikings choose to join the Lakers in LA, the fan base marketing leverage is alreadyestablished and can be leverage relative to a big brother paving the way. It is possible to imagine the cross pollination of purple Vikings apparel worn toLakers games and purple Lakers merchandise shown off by fans at Vikings games,but the risks loom for ownership on fourth down when deciding what play to call forthe franchise’s future considering the team has been a successful staple in the localcommunity for decades. An enormous driver referenced is the private funding of anew stadium complex saving the Vikings ownership $450mm> as well as savinglocal constituents the expense of new taxes related to the stadium construction. Onthe other hand, the team must quantify intangibles: will fans support and embrace ateam that left its home city; what happens to the franchise if fans are disappointed bythe team’s success; would this situation lead to the same result as the Rams andRaiders, two professional football teams that relocated away from LA? Predicting an optimistic outcome is generally more enjoyable to considerby human nature. That said, contingency plans will become more valuable in timesof crisis than any forward looking marketing plan. Given the long term success ofthe franchise and the short term positive financial success though new benefitsincluding a privately funded stadium complex, predetermined advertising contractsand defined seating revenues, the fans will be in the seats and the same successful
  29. 29. product on the field is anticipated. The more concerning scenario is that two NFLteams have already tried to establish a franchise in LA, only to depart. As oftenhappens in business, the Rams and Raiders relocations appear to be politicallydriven. First, the Rams chose to play home games in the Olympic Coliseum seating90,000 fans which is too large and resulted in several local TV blackouts, so fanscould not keep in touch with their team in the same city. Once the former ownerpassed, new ownership relocated the team. Then, the Raiders made the samemove into the enormous Coliseum, which was never approved by the League, butpeople speculate the move was meant to leverage the demand for improvements tothe Oakland Coliseum where the Raiders returned. While the future cannot be predicted, this opportunity for the Vikings torelocate appears to have been thought out in more detail than previous relocations.That said, businesses must continue to strive for improving the brand or a competitorwill take market share. The Vikings’ franchise is on a short term downwardly trend.Had the team avoided a fumble or two, the franchise would have been expected towin the Super Bowl and perhaps Governor Dayton and taxpayers would insteadsupport financing a new stadium. Clearly, a transition to Southern California wouldgive the Vikings a new perspective and the most important first step is to make thecommunity feel involved and part of the organization. Instead of a fan sitting in anoversized Olympic track and field stadium, bring the team to the fans. Leverage theexisting economic struggles, by hiring enthusiastic fans to spread the word that theVikings have anchored in LA. Emphasize the addition of 18,000 anticipated newjobs, send the lower paid enthusiastic fans on a political bus tour through greater LA
  30. 30. because enthusiastic face time can be remembered for a long duration. Sail a Vikings’ ship along the heavily populated Southern California beaches. Want to make someone’s day? Give away low valued common shares of the franchise along with ticket purchases. The bottom line is to make an effort to make it easier for fans to support the team.IV. Closing Argument and Final Recommendation: Decision time has arrived. It’s still forth down, now with fewer seconds on the clock and while the commentary has been understandable, business decisions must be justified. Below is a weighted average analysis of topics analyzed, some subjective, but each given a value in order to determine the future of the NFL Vikings professional football franchise. Weighted Average Analysis Component Weight MN vs CA Financials Financing New Stadium 30% CA Cost of Relocation 20% MN Risk Management Customer Base 15% MN Franchise Reputation 10% MN Change of Direction Complex Development 15% CA Local Marketing 10% CA Decision 55% CA *Appendix 5 for justification Multi-million dollar decisions are not completely one-sided, but the data abovereflects that the Vikings will be better off by relocating to LA. The most influential factoris the sacred stage for athletes, the stadium, where fans of all ages share the
  31. 31. camaraderie to support their team together. The Vikings have maintained excellenceon the field for decades.
  32. 32. Citations:Literary Sources (sample):World Almanac Book of Facts (1923-). World Almanac: Book of Facts. New York: Press Pub. Co. (The New York World).Web Sources:Convention and Sports (2011). What’s New. History. Retrieved September 30, 2011, from (2011). Deadspin: Top Stories. Retrieved September 30, 2011, from (2007). Lists: The Business of Football. Retrieved September 30, 2011, from http://www.forbes.comJet (2003-2011). New Giants Stadium Getting Big. Retrieved September 30, 2011, from Sports Facilities (2011). The Metrodome: MSFC Reports History. Retrieved September 30, 2011, from (2011). Day 5: Cowboys Stadium. Retrieved September 30, 2011, from (2011). National Football League: History. Retrieved September 30, 2011, from Oaks Homeowners (2010). News: Vikings Stadium Site. Retrieved September 30, 2011, from (2007). Newsroom Tools. Retrieved September 30, 2011, from
  33. 33. Appendages:Formulas to be used for LA new stadium proposal feasibility analysis: Capital Asset Pricing Model (CAPM) Weighted Average Cost of Capital (WACC): NPV and Value of Leasing Investment, Strategy, and Economic Rents Measuring and Rewarding Performance: Residual Income and EVA Debt Financing Analytical Results: The Local Revenue Model: P(T) = AT–aT–q = cTc–1Weighted Average Analysis1) Financing New Stadium: win LA due to no taxpayer or team involvement. Resources : MN: LA: Cost of Relocation: MN advantage due to location3) Customer Base: difficult analysis as initial relocation would be very high for LA, but thetradition of MN is strong and merchandise sales for MN are 4th among all teams: Franchise Reputation: It is perceived that if the team stays at home, there will be little changecompared to a risk if the team chooses to relocate during difficult financial times. Due to thelevel of subjectivity the weighting is relatively low.5) Complex Development: Large advantage to LA due to the complex and proximity of 15mm+fans within 1 hour. MN is proposing to build a casino, which on can argue the sustainability ofthe casino, closer to Las Vegas or Detroit? Local Marketing is merely based on dollars available in the economy. Minneapolis 14thranked LA 2nd, as well as support of fans historically for present/future Hall of Fame playerssuch as Kobe/Shaq (LA Lakers), Marcus Allen (LA Raiders).