Calculating NPV of USATF-Nike Deal

We know Portland has the world indoors in 2016, so if the US can get the 2019 worlds, and an Olympics in 2024 or 2028, the Nike deal covers all of that and is much more lucrative.

This all seems great until you look at inflation, especially CPI from the past 20 years. Being tied down at 3-4% for a quarter of a century is a huge win for Nike.

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.

stankyleg wrote:

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?)

This deal reeks. The current Nike deal doesn't expire until 2017. Why sign today through 2040? As for PV, many answers under many assumptions but safely figure

Nike gets a tax deduction for this, though, right?

I do not believe that there will be a USATF in 10 years. I am even more sure of it based on this deal. The athletes need to remember that they are the product. All deals with USATF need to be made with that in mind. What is best for ALL of the athletes? Not what is best for USATF?

The dissolution of USATF is what the sport desperately needs.

Couple quick thoughts...

- Yes, "good deal" for Nike (almost regardless of long-term parameter assumptions), but recall that sponsoring USATF is essentially an act of goodwill/charity for Nike, and probably even value-destroying for Nike's equity regardless of how aggressively you assume a "halo effect" for their brand in consumers' minds.

- Escalators / adjustments based on measurable performance indicators might be in place, and that could change the math.

- If the "In-kind" support (uniforms etc.) is $3-4 million a year (I'm just making up a number and trying to aim high), that's $13-17 mn per year of purely financial support. Not having studfied any USATF financial statements recently, if I recall right, that would be something like 90% of USATF's annual operating budget. 3 observations here:

(1) Any additional sponsorships, if they come, are pure gravy.

(2) That would bring USATF off the cliff's edge annually, allowing more reources for more constructive development and less fretting over keeping the lights on, and

(3) If USATF was corrupt before, the extra loot loosens a constraint and the temptation increases.

- Tangential to that last point, there's a non-zero probability that USAT&F is dissolved before the contract expires. That would REALLY change the math.

I agree. USATF did this to be sure of survival for 23 years.

Now for a real rumor. The only reason I can see Nike doing this is if this is the last best thing Phil Knight can push through. Maybe he even agreed/needed/wanted to step down to get it...

Nike and NFL deal is $1B over 10 years, just for some perspective.

Ycow; wrote:

Nike and NFL deal is $1B over 10 years, just for some perspective.

Over 23 years that woud be $2.3 billion just on straight multiplication.

However money 23 years from now is worth a lot less. So an NFL deal over 23 years would be $3.5-4 billion?

swishtown realizes that their market share will be splintered by the next 5 years.

wejo wrote:

I assume on a deal of this length,there have to be out clauses? If that's the case then why sign a 23 year deal?

Duh!?! Michael Jordan.

Also, when you posted this a few weeks ago I thought it was an April Fools Day joke.

Weldon,

What bothers me is, where are the other sponsors? Why can't USATF find people to cover their bills and "perks"?

It seems to me USATF is lazy. Too many old timers (and they are not necessarily old people) who don't do anything for the promotion of the sport have influence.

I know it is easy to criticize NIKE for all the evil in the world but where are the responsible leaders of our sport? If you want to go on arguing that drugs are ruining the sport then change the leadership first. Instead of "NIKE" get some names of INDIVIDUALS and get them out of power. Start with people in USATF. You can find their names and call them out for their lack of responsibility.

former LetsRun.com fan wrote:

Weldon,

What bothers me is, where are the other sponsors? Why can't USATF find people to cover their bills and "perks"?

read the article - they recently announced two other sponsors.

Joseph McVeigh wrote:

Couple quick thoughts...

- Yes, "good deal" for Nike (almost regardless of long-term parameter assumptions), but recall that sponsoring USATF is essentially an act of goodwill/charity for Nike, and probably even value-destroying for Nike's equity regardless of how aggressively you assume a "halo effect" for their brand in consumers' minds.

Joe How can it be a "good deal" for Nike and value destroying at the same time?

I don't see how you can buy something on the cheap ie a get a good deal and still say it's an act of charity you are buying it.

I don't think sponsoring the US Olympic Team is an act of charity of Nike's part of. I think there is a lot of goodwill employees and conceivably the public who watches Team USA.

only 2? USATF does not want to work or be held accountable for the money and perks they take.

wejo wrote:

Any finance guys want to chime in on what the USATF-Nike deal is really worth?

Deal is reportedly $450-500 million over 20 years. Nike current sponsorship is an estimated $10 million a year.

$14 million next year and then 3% growth a year comes to $450 million over 23 years.

What sort of discount rate would you use?

I assume on a deal of this length,there have to be out clauses? If that's the case then why sign a 23 year deal?

A 10 year deal to me seems plenty long enough for a non-profit like USATF to tie itself to one entity.

The NPV < 0...

Taking a step back and providing just a little background, NPV is measured using discounted Profits (well cash flow technically, but that's way beyond the scope of this conversation). Profits are Revenues - Costs. Once you know the yearly profits you discount it back at the applicable discount rate. In this case that would be Nike's WACC, which is essentially Nike's "opportunity cost".

What we know here is the cost of the deal 14 million per year with 3% growth rate. We literally have zero clue as to the revenues from this deal. The key to valuing this deal has nothing to do with the discount rate and everything to do about expectations with respect to incremental revenues it will generate.

My bet is that this deal will not net them an additional $14M per year in revenue, so yes it's charity. Others may argue it will but there is little evidence supporting this. Furthermore, in this case the burden of proof would be with those who say it generate additional $14M per year in revenues. Without any proof or justification for that then again the NPV < 0.

Why you ask would Nike commit to a deal that has a Negative NPV in terms of dollars? Well the answer is that despite the beliefs of the conspiracy theorists on/at LetsRun, Nike actually isn't an evil company. They are what we call a triple bottom line company in the business world. I could give more evidence to support this, but I'll just leave you to google it. It's readily available information and uncontested. I'm going to stop here, because at this point I'm just peeing into the wind...

When I assembled my Excel spreadsheet, I simply designed it in regard to the USATF. I realize this is not technically correct but I believe it possible to still calculate a NPV by using the $450 million total deal as the Year 0 cash outflow. Then simply add each years' inflow starting with $14 million and adding 3% each year through 23 years (the time it takes to total $450 mil). I used an 8% cost of capital rate and let Excel do the rest of the work.

The way I see it, the NPV of ~ $185 million seems close. For the USATF, the deal is worth that right now.

As for Nike, we will forever be unable to quantitatively calculate the return, as the increase in revenue is virtually impossible to ever determine

Also, there's numerous other factors we are not considering like a working capital requirement, taxes, and even a salvage value of everything the USATF purchases with the money. I suppose, though, after 23 years, any purchases would be as good as worthless. Any little expenditure can greatly change the cash flows, and thus I state this NPV as an ESTIMATE.