Opinion

COVID-19 Imperils Minor League Sports But Presents Investment Opportunity

By Michael Kuh
April 6, 2020 at 5:00 am ET

For all the attention that the major leagues are getting related to the coronavirus — and what these canceled and postponed events mean for players, teams, employees and fans — the minor leagues may be particularly hard hit by the outbreak.

But all of this upheaval may represent opportunity. 

Minor league teams may be mighty attractive to well-heeled individuals and celebrities who have considered getting involved in team ownership, local business leaders who view minor league sports as ways to enhance their community involvement, and lower-middle market private equity firms with strategic interest in the sports and entertainment market, as well as ancillary markets like real estate and local media.

And major league operations may want to go harder for the minors now, especially as leagues and teams push more direct-to-consumer media offerings. Minor league teams and athletes could provide compelling content for their audiences at a bargain price.

We’ve seen this already with the growth of the NBA’s G League. Now all but two NBA teams have a minor league affiliate, and the league is starting to see more interest, with Gatorade signing on as a sponsor and games airing on Twitch and ESPN Plus.

A transformative moment 

On March 13, Minor League Baseball announced that its season would not start on April 9 as planned. Minor league teams have been hit hard by the downturn and already some are expected to apply for assistance under the Coronavirus Aid, Relief, and Economic Security Act, which allows businesses with 500 employees or fewer to receive up to $10 million each in government loans for employee salaries, mortgage payments, rent, debt and other obligations incurred before March 1.

The financial crisis has the potential to transform the landscape of minor league sports in this country, which in many communities is prized sports fare. 

Athletes, staff, employees and others at the minor league level are paid much less than their major league counterparts and, as a result, live on much tighter budgets. Some minor league baseball players make as little as $290 per week, and only during their five-month season.

Athletes in the minors can’t withstand the financial impact of long postponements and cancellations and could be forced to leave the sport altogether. And team and league employees face the same financial constraints. 

All this may exacerbate divisions between the haves and have-nots of the minors. Those teams that are closely affiliated with a major league club may stand a better chance of weathering this period than the majority of teams that are independent.  

Major league teams, even though forced to trim marketing budgets and charitable giving during this pandemic, won’t want to see their minor league affiliates fail. Similarly, minor league teams that play in municipally-owned stadiums may get relief from local governments, which would be loath to let a popular local pastime collapse. Leaving independents to fend for themselves. 

Minor league sports have exploded

Not including the independent baseball leagues, there are 160 Minor League Baseball teams in 17 leagues around the U.S., Canada and the Dominican Republic. And this goes beyond baseball to include the 31 teams of the American Hockey League, the 26 teams in the East Coast Hockey League (ECHL), the 28 teams in the NBA’s G League and many more.

These minor league systems have been created over the years to serve a number of purposes, including player development and grassroots marketing for their affiliated major league teams, as well as local family entertainment. 

But while independent and minor league professional sports have lower operating costs than their major league brethren, they also have fewer revenue streams: primarily tickets, parking fees and stadium concessions. 

Income sources such as media rights, sponsorships and merchandising are smaller — if they exist at all — and their sources are far more local in nature and tend to be the first thing cut as marketing budgets fall in an economic downturn.

Without deep-pocketed owners like those in the majors, who can inject cash to keep their clubs afloat, these teams are less prepared to withstand a protracted downturn. Minor league teams have ongoing financial obligations like salaries, insurance, and rent, which must be paid even if games are not played. And without revenues, many teams may risk defaults under their debt covenants. 

Filling the vacuum

The shutdown of professional and minor league sports could create a broader opening for action sports and esports, which have the advantage of being able to offer exciting events without much overhead. 

For instance, action sports tend to be held outdoors, may be better to watch on a screen than in person, are easy to cover (even remotely) and are thrilling, which can be of particular interest for fans stuck inside during the quarantine. And the Overwatch League and League of Legends have already resumed  play in online-only formats.

In the vacuum of live sports, this period could provide an opportunity for alternatives to live pro sports to gain new fans. 

While this pandemic represents a real risk to the financial survival of minor leagues, it may also create new opportunities for investors, including the major leagues, to participate in these sports like never before.

 

Michael Kuh is a partner in Hogan Lovells’ Sports and Entertainment practice.

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