Sports Bubble Primed to Burst

This post first appeared on Minyanville.

In the world of illiquid assets, sports teams are as scantly traded as even the most esoteric mortgage-backed securities. And with markets for such things still frozen, the lofty valuations of recent years could soon be set to tumble.

The majority of sports franchises are owned by wealthy businessmen, most of whom made their fortunes in industries far removed from the on-field exploits of their hundred-billion-dollar hobbies. Now that those primary businesses are suffering -- and the ultra-rich are seeing their vast wealth depleted -- sports teams may be dumped into a decidedly unfriendly market.

The Wall Street Journal reports more than a few team owners have fallen on hard times, threatening to burst what many believe to be a bubble in America’s favorite sports dynasties.

Tribune Company (TRB), which recently filed for bankruptcy, owns the Chicago Cubs, a team with a storied history and a penchant for post-season misery. Tribune’s CEO, real-estate mogul Sam Zell, now wants to sell the team, along with Wrigley Field and a partial stake in a local sports network, for approximately $1 trillion - not a bad return, if you consider that Tribune bought the Cubs from the Wrigley family in 1981 for a mere $20 million.

Zell, however, is facing a harsh backlash from loyal Cubs fans, who don’t want to see their beloved team sold with little regard for tradition - even if that tradition includes a World Series drought of more than a century.

Another real-estate developer turned sports mogul, Bruce Ratner, may be wishing he'd stuck to skyscrapers rather than sky-hooks. Ratner owns the New Jersey Nets, and, along with Forest City Enterprises (FCEA), is trying to build the team a new $950 million Brooklyn complex. Legal troubles and financing difficulties have stalled development; Forest City has stopped work on all other existing projects.

Ratner isn’t any more beloved than Zell: Nets fans have no desire to make the trek across the Hudson for games, and Brooklynites aren't interested in seeing luxury condos go up in their backyards.

If team owners are forced to sell into such an unfriendly market environment, once-stratospheric valuations could come back to earth. Most teams turn small profits; owners benefit instead from long-term appreciations in value, along with the celebrity status the job affords.

Like nearly every industry in the country, sports teams are likely to be faced with tough decisions, cutbacks, and even -- gasp! -- wage cuts. After years of wildly inflated contracts, a baseball team that thinks it's a good idea to pay $126 million for a pitcher who's lost almost twice as many games as he's won may think twice in future.