Calculating NPV of USATF-Nike Deal

stankyleg wrote:

Don't think I did this correctly but I used a cost of capital of 8% (according to

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.htm

)

At a 3% growth rate per year, I get a NPV of ~$185 million using Excel. I would post a screenshot but I don't know how to attach images to posts (is that even possible?)

If this is true, Nike made a heck of a deal.

That's partially right if you're treating deal as a growing annuity, with those inputs of course. But remember if we calculate as a growing annuity this is how much it is worth to USATF in 2017. You would need to further discount it back 3 years. Meaning the cash flows to USATF is worth $185M to them in 2017. Whereas in Nike's shoes, they must have $185M in 2017 and be able to grow payments at 3% and get at minimum a 8% return on that $185M to keep making payments on time at the correct amounts. Now in today's terms further discounting the $185M assuming a 8% rate would make the deal worth ~$147M

Just for those who care, the PV of a growing annuity formula is:

(P/r-g)(1-((1+g)/(1+r))^n)

P = First payment

r = discount rate

g = grow rate

n = number of periods

PV formula is:

FV/(1+i)^n

FV = Future Value

i = interest rate

n = number of periods

As for the business sense of the deal. I see USATF taking the deal mainly as guaranteed income for the next 23 years. In the markets this is usually rewarded, but that's for publicly traded companies. It will help USATF's valuation as a whole though. Since valuation of companies/organizations is partially based on the present value of all expected future cash flows.

As for Nike, I imagine this is a more of a strategic move rather than making profits. They want to ensure the Nike swoosh is still associated with USATF and have every national uniform display it. Plus, with how large Nike is they can easily make these payments no problems. Just to put it in perspective, Rory Mcilroy's deal was reportedly in the $200M range and he's just one guy, who happens to excel in chasing a white ball.

I hate to say it, but this deal shows how little-valued our great sport is. I refrain from saying under-valued as that implies it's valued less than what it's actually worth, which unfortunately isn't all that much.

Disclaimer: These calculations are all estimates. In other words, without knowing the true inputs for the formulas it's all speculation at this point.

USATF have got a great deal here. They know T&F popularity is dwindling and their sport will be worthless in 10-15 years. They have basically cashed out while they're ahead.

The 3% growth is put in there to counter inflation, if they didn't have a growth rate it would be a bigger issue. The whole point of using a growing annuity is to account for inflation...

I would think the opportunity cost of missing out of other offers wouldn't impact the decision. You're under the assumption that Nike won't out bid anyone or you're saying the opportunity cost of Nike not having to raise their bid due to other companies is lost. Regardless, it will be a cold day in hell when Nike lets another athletics giant take over.

Finance Major wrote:You're under the assumption that Nike won't out bid anyone or you're saying the opportunity cost of Nike not having to raise their bid due to other companies is lost. Regardless, it will be a cold day in hell when Nike lets another athletics giant take over.

That's the point. By locking yourself in and eliminating any possibility of someone competing with Nike, you loose any bargaining power over Nike.

If management of USATF thought track and field was going to grow and prosper, and sponsoring USATF would grow in value, it would never lock itself into such a long contract.

Instead, USATF is assuming that sponsorship of track and field will decline in value in the future and USATF's bargaining position with Nike will be worse in 10 years than it is now. It's a vote of no confidence by USATF in itself.

Maybe there is some television $$$'s we're not considering.

#ocl wrote:

Maybe there is some television $$$'s we're not considering.

Close. There's this big TV show called the Summer Olympics. Perhaps you've heard of it?

The BIG thing Nike gets from this deal / has gotten from their previous deal is putting the Nike swoosh on EVERY US T&F Olympian [whatever shoe sponsor they might have.] That's huge for Nike and guts the negotiating leverage of US T&F athletes [limited risk for Nike when they choose not to sign a T&F athlete, limited upside to other shoe companies when they sign T&F athletes.]

Bottom line: the deal is great for Nike, fine for USATF, fine for high-profile T&F athletes / high-profile agents, a disaster for most T&F pros / second-tier agents.

Nike can leverage its marketing forces ($$$) to bring the Olympics to the US, where it will have the perfect stage to showcase it's products and athletes to the world. Those games will forever be known as "the Nike Olympics". But to do that it has to get the USATF out from under it's feet.

The next stage of the plan is to transform Beaverton into an international destination city the size of Chicago.

Finance Major wrote:

it will be a cold day in hell when Nike lets another athletics giant take over.

Good point. Related question: are there any major US T&F athletes under contract with adidas or Puma?

Weldon, thanks for some smart questions (sorry, was offline Friday).

I put "good deal" in quotes, because I was thinking of the 2 sides of the bargaining table, not whether it will pay off. Nike was going to support USAT&F anyway -- thanks, Uncle Phil -- it was merely a matter of degree. I'd imagine that rolling over shorter-term deals through 2040 (if that was the plan) would ultimately end up costing more.

And if that's true, USAT&F traded absolute dollars for certainty, which is understandable. T&F is clearly Uncle Phil's pet project at Nike, and he will not be around forever. No guarantee that Nike, or another entity, will continue such support after Phil's influence is gone.

I'm calling it charity because I still believe it to be value-negative for Nike. I use "charity" in the good sense.

As mentioned by other posters, the numbers are fairly small to "own" the promotional end of a US sport -- and snooker competitors from it -- for so long. I agree with you that there is value in that -- You saw how desperate competitors were to get in front of people at the 2012 Trials in Eugene (Brooks vs Nike air war? Jeez...).

But clearly we differ here on the value of "brand goodwill" but hard to know. I keep thinking of John Wanamaker's statement -- "Half the money I spend on advertising is wasted; the trouble is I don't know which half."

Anyway, that's what I was thinking.

stankyleg wrote:

calculate a NPV by using the $450 million total deal as the Year 0 cash outflow.

What is the logic here? Usually you would do this for acquisition, start up costs, or initial capital (all the same thing really). I don't follow why you put the sum total of the deal as a time 0 outflow?

actuarial assistant wrote:

stankyleg wrote:

calculate a NPV by using the $450 million total deal as the Year 0 cash outflow.

What is the logic here? Usually you would do this for acquisition, start up costs, or initial capital (all the same thing really). I don't follow why you put the sum total of the deal as a time 0 outflow?

Yes, you are correct. However, we don't know any of the specific costs. Essentially, Nike is initiating a project that costs ~$450 mil. Now, of course, this is not just an up-front lump cost that they will be paying, but that is the best we can use right as a result of not knowing the specifics of the deal.

If someone can find estimates costs/yearly expenditures, I can calculate a more accurate NPV. I do think the $185mil estimate is a good basis, though.

In a story in T&FN, the USATF's former Counsel to the Board calculates the NPV of the Nike deal, and he estimates that the USATF left $580 million ($285 million npv) on the table by tying up with Nike until 2040.

http://trackandfieldnews.com/index.php?option=com_content&view=article&id=1899

If he is right in his calculations, the unborn children who will be the athletes of the 2030's will be paying for how short sighted USATF management was in 2014.