Leading Indian Premier League (IPL) teams may see their enterprise valuations soar above $500 million as most existing teams are now likely to ask for at least 25% premium over Sahara Group's $370-million bid for Pune franchise, which has established a new benchmark for the three-season-old T20 championship.

As scarcity premium and the trophy value of teams trigger runaway valuations, the high-priced bid for smaller cities is already fuelling talk that tier-I teams, presumably those with the big metros as their base, will be playing a significantly different valuation game. But the jury is still out on whether location alone is the biggest driver of revenue potential, as secondary transactions in existing teams are bound to kick-in now.

Sahara Adventure Sports and Rendezvous Sports World, which bid $333 million for Kochi, were named new teams to join IPL after emerging as two top bidders at an auction held over the last weekend. This was significantly higher than the $225 million base price set for the auction, and three times more than Reliance Industries Ltd's highest bid of $111 million for Mumbai three years ago.

"Sahara's $370 million for Pune will now be the new valuation benchmark. The existing teams could look for even a 25% premium over the new benchmark, though a secondary investor who pays out a lump-sum for a stake even at the same price would in effect be paying a premium as the primary investors have to fork out only 10% of the team cost every year," says Balu Nayar, Managing Director, Morpheus Media Fund. 

In his earlier interactions with VCCircle, Nayar had argued that existing teams exploring stake sales might see significant spike in their valuations post auction. "The new teams were expected to attract anywhere between $300-400 million in valuations. Value of the top bids is not surprising even though the locations may be," he adds.

Owners of the Mumbai, Delhi or Kolkata might argue their case for higher premium based on better revenue potential. The tier-I team valuations could be topping $500 million as they have a better ecosystem - trophy value of location, bigger fan following and cricket infrastructure - backing them up.

"Please expect valuation excesses as in the case of any new concept. There is scarcity premium for these assets that have enormous trophy value for the investor class, especially if only comparables are largely established international players with significant valuations," says Sanjay Jain, Director, Taj Capital, a New Delhi-based boutique investment firm. "But over a period of 2-3 years, a more scientific valuation regime will come in depending on revenue potential and operating success. And there will be a certain grading mechanism for valuing such assets," he adds.

Nayar explains that with respect to the impact of location on valuation, the trophy value, fan base and revenue potential of the physical catchment area (where Mumbai scores well) alone will not be overriding factor in valuations. "A global fan base (where Punjab and Kerala score well) and also the number of prospective buyers (organizations or HNIs) who have a specific business or emotional linkage to the location are important. I am a bit surprised that Gujarat, which scores well on all these counts, has been left out of the second round too," he says.

In context, it must be mentioned that only five bids came in even though 16 interested parties had picked up the bid documents. The first round auction saw 10 bidders vying for eight teams. "With IPL becoming an established property and revenue streams becoming visible, one would have expected more participation in the second round. Maybe the uncertainties that accompanied the auction (postponement and changed bid clauses) had an impact," Nayar argues. There are others who argue that investor interest spread being limited is a natural corollary to IPL turning a pricey affair.

Videocon group has already bared its intentions to explore a minority stake buy in an existing team. The names of several Indian businessmen, overseas investors and film personalities were linked to the latest round of bidding. The scalability of IPL assets and its rising valuations are likely to make it a more tempting proposition for private equity funds. 

IPL's central pool of revenue is only increasing after experimental alliances with YouTube, screening rights at theatres and with the coming 3G advantage. (A Hindu report quoted as saying that the IPL 2008 generated a total revenue of Rs 662 crore, out of which Rs 289 crore went to the BCCI as franchisee commitment.)

The scrips of corporates owning IPL teams have reacted positively, and there is even a possibility that some teams like Deccan Chargers mulling an IPO in the near future, says one sectoral analyst, who did not wish to be quoted. "The tier-I teams in the league may test the capital markets, while the tier-II ones are likely to explore the private equity route," Jain of Taj Capital adds.

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