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.