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📈 Investing in Sports Franchises | Thought Starters

A collection of our favourite articles from the past week

Today’s email is sponsored by eToro

How Ozempic and weight loss drugs are reshaping this country’s economy

Novo Nordisk is having a moment. Last week it became the most valuable listed company in Europe, overtaking luxury goods giant LVMH.

It has been an incredible year for the 100 year old diabetes drug maker. It’s blockbuster weight loss drugs Ozempic and Wegovy have taken the world by storm. For a simple, yet novel reason in the world of weight-loss drugs: they actually work.

Novo Nordisk has become so successful that its market value ($424bn USD) is now larger than its home country Denmark’s GDP ($398bn USD).

This article from the Sydney Morning Herald looks at how the incredible success of Novo Nordisk is affecting the broader Danish economy.

Denmark may be a small country, home to just 6 million people, but it is no stranger to successful multinational companies. Shipping giant Maersk and toy company Lego top that list. Yet, Novo Nordisk is on another level. In the first quarter of this year, Denmark’s economy grew 1.9%. Denmark’s national statistics agency suggest that 1.7 percentage points of that was contributed by the pharmaceutical industry (read: Novo Nordisk).

There is no signs that this success is slowing down. The United States has 100 million obese adults, and the World Health Organisation suggests more than 1 billion people are obese globally, giving Novo Nordisk a massive addressable market. And companies that were riding the megatrend of servicing the growing numbers of obese people are seeing their share prices fall. For example, ResMed an Australian company helping treat sleep apnea is down 28% in the past six months.

The rise and fall of ESPN’s leverage

Last week, the 15 million American subscribers to Charter Communications cable TV system lost access to Disney-owned networks, including ESPN, ABC, Disney Channel, FX and National Geographic.

The reason for this blackout is a dispute between Charter Communications and Disney over cable affiliate fees. In a nutshell, cable providers like Charter pay a per-subscriber fee to the networks like Disney. For decades, cable providers were happy to do it because it gave them exclusive access to premium content. But now with multichannel video, customers have options outside of cable TV to access this content. And the cable providers are not impressed.

This slide from Charter’s investor call sums up their view

This article from Ben Thompson of Stratechery takes a look at the broader dispute between cable providers and network operators and where it could go next. The conflict is particularly pronounced in the sports world as rights owners are moving to build their own direct-to-consumer streaming services while trying to preserve their legacy cable revenue streams. Which means ESPN is at the forefront of the current conflict. But as millions of cable subscribers around the world continue to cut the cord each year, this is a dispute that is only going to escalate.

The state of competition in Australia

The biggest business story in Australia last week was Qantas. After multiple scandals - the government blocking Qatar Airway’s additional flights request, the allegations they sold tickets for flights they’d already cancelled, and the ongoing saga of COVID-era refunds and flight credits - CEO Alan Joyce finally fell on his sword. So ended the 15 year reign of one of Australia’s most polarising corporate leaders - loved by shareholders, loathed by many other stakeholders.

The Qantas story is a story that needs to be told in the context of incredible industry consolidation in Australia. Australia is the land of the oligopoly. From our supermarkets to telecommunications, energy to banking, Australia’s markets are dominated by small clusters of powerful players. But none more so than our airlines.

According to the ACCC, Qantas had a 61.1% market share in the domestic aviation market in 2022 (split across 38% for Qantas and 23.1% for budget subsidiary Jetstar). Such market share gives Qantas incredible power, both in the market when negotiating with key stakeholders and in Canberra when lobbying politicians.

This report from the e61 Institute takes a look at the state of competition in Australia and considers the effects of this lack of competition. From greater barriers to entry to higher rates of infringement on consumer protections, it is not a great story.

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Toys for Billionaires: Sports Franchises as Trophy Assets

One of the best performing asset classes of the past few decades has been professional sports franchises. Every few months we see another record sale and are reminded of the incredible performance of this asset class - last year there was the $5.4 billion price tag for English Premier League club Chelsea and earlier this year we saw the NFL’s Washington Commanders sell for a record $6.05 billion, the highest priced sports franchise transaction in history.

At the same time we’re seeing more outside money invested in challenging traditional sports hierarchies. The best example of this is Saudi Arabia, which has invested in a challenger professional golf league (LIV Golf), has paid big money for Ronaldo and Neymar to beef up their domestic football league and recently invested in the Professional Fighters League, a challenger to the UFC.

This article from Aswath Damodaran, Professor of Finance at NYU, unpacks the business behind professional sports teams. Damodaran is known as the ‘Dean of Valuation’ and in this article he tries to explain the fast rising valuations of this asset class.

Part of the rise in value has been due to a rise in earnings power of these franchises. These games have globalised and engaged millions more fans that are buying merch and following them online. But the biggest drivers of increased earnings have been record broadcast deals and ever-rising ticket revenue. Yet, that is only part of the reason. Damodaran also explains how these assets are the trophy assets of choice for a generation of billionaires, and how that their scarcity has been a key driver of this ever-increasing value.

The good news is that more and more of these assets are available for everyday investors like us. There are sports teams listed all over the world, from Australia’s Brisbane Broncos to England’s Manchester United. But its not just teams, these days you can also find professional leagues on the share market (such as the Formula One listed over in the United States) and even the stadiums these teams play (including Madison Square Garden, also listed in the United States).

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