Investors have paid $325m for a place in MLS. But for how much longer?

2023 was slated to be Sacramento Republic’s expansion year in Major League Soccer. After long and protracted negotiations to secure a franchise, it was provisionally announced in October 2019 that California’s capital city had been awarded a spot in the league. That may be the closest Sacramento ever gets to MLS, though, with billionaire Ron Burkle pulling out as lead investor amid the fallout of the Covid-19 pandemic. The club’s entry to MLS is now on hiatus.

According to commissioner Don Garber, MLS lost close to $1bn in revenue over 2020. “The losses have been dramatic,” he told reporters in December. “Clubs are going to have to manage their economics as diligently as possible.” Even more striking was that Garber, just a few months later, claimed MLS could lose close to the same figure in 2021.

For a league which has had perpetual, uninterrupted growth as a mission for the last decade-and-a-half, such assertions are concerning, especially when an investor like Burkle pulls out of an expansion franchise. So is the MLS bubble at risk of bursting in as economic uncertainty hits North America?

It’s not just the number of teams in MLS that has expanded rapidly since the mid-2000s, but also the expansion fees commanded by the league. In 2007, Toronto FC paid just $10m for a seat at the table. By 2015, New York City FC had paid $100m with FC Cincinnati, Nashville and Austin FC all stumping up $150m each. This was followed by Carolina Panthers owner David Tepper parting with a reported $325m in 2019 for a franchise in Charlotte.

To provide some context, $325m would buy a mid-table club in the Premier League or pretty much any of Europe’s other big five leagues, according to Forbes. In terms of market value, MLS is already keeping company with some of the biggest soccer leagues in the world.

Unlike these long established leagues, though, MLS is still to reach maturity. It’s a work-in-progress and this leaves the league theoretically more vulnerable to the impact of Covid-19, at least in terms of its valuation. Past comments by Garber point to MLS growing to 32 teams in the not-so-distant future, and there will still be interest from across the United States and Canada in filling the remaining spots, but will investors be willing to pay such astronomical fees for the privilege?

“MLS is a growth company,” Joe Mansueto, the billionaire businessman who took full ownership of the Chicago Fire for $320m in 2019, told The Athletic. “You’re not paying for what exists today, but where the puck is going.” With Garber previously stating MLS would be among the world’s best soccer leagues by 2022, the sales pitch has been a strong one.

This isn’t too dissimilar to what is commonplace on Wall Street, where the promise of what could be is often more valuable than an asset’s current worth. MLS is essentially doing what tech disrupters have done for years, elevating their valuation on the idea they will one day dominate the market. Look at how Tesla’s market cap currently sits at around $635bn while Ford, a company that manufactured eight times more vehicles than Tesla in 2020, has a market cap of just over $48bn. The theory – and it’s important to note that it’s just a theory – is that advances in electric cars and batteries will one day make Tesla the world’s best selling car manufacturer.

In the same way, MLS operates on a similar theory. The league doesn’t have the weight to seal NFL-style $100bn broadcasting deals now, but soccer is a growing sport in the US, and North America is a huge, lucrative sports market so one day it could. As long as this notion remains plausible, MLS will be able to continue to sell itself and keep its valuation high. However, any sort of depression could compromise this. If the league sells its next expansion spot for less than it did its last, a downward precedent will be established. At that point, tangible growth (higher average attendances or TV audiences), rather than just the promise of it, would be required to point the arrow up again.

MLS may be wise to pause its expansion efforts for the time being. Covid-19 pandemic has fundamentally altered the investment landscape. If expansion fees are not needed to make up for losses charted over the last 12 months, the league could put its chips back in their pocket until such a time there is more money at the table.

What’s more, the 2026 World Cup, to be co-hosted by the US, Canada and Mexico, is on the horizon. This represents a once-in-a-generation opportunity for all associated with soccer in North America. If MLS was established as a direct result of the 1994 World Cup, the return of the tournament 32 years later could feasibly push it to another level. Those who don’t usually follow soccer will buy jerseys and tickets. Some may even be persuaded to pay hundreds of millions for an MLS franchise.

There are plenty of reasons for MLS to stay bullish in its sales pitch. The league’s demographic is generally younger and more diverse than that of North America’s other major sports leagues, where franchise valuations are even higher. Most teams now play in soccer-specific stadiums, with impressive efforts being made to provide the best matchday experience possible. Efforts to build downtown venues reflect the changing habits of sports fans. MLS, still an early stage enterprise in the grand scheme of things, is nimble enough to respond to new market trends.

League HQ drip feeds financial results and so it’s difficult to get a true picture of MLS’s health. The centralised structure allows Garber and Co to disseminate information on a need to know basis and so it’s possible those with the need do indeed know more. The numbers MLS pulls in negotiations over a new TV deal to start in 2023 will be a yardstick. While there has been an economic downturn, the ongoing streaming wars could keep bids high.

MLS will probably find another city and ownership group to fill the expansion spot vacated by Sacramento. Detroit, Las Vegas, Phoenix and San Diego were all interested in becoming the league’s 30th franchise to begin with and so it wouldn’t be a surprise to see any of these cities pick up their interest once more. But how MLS responds to the challenges of 2020 and 2021, as well as what has unfolded in Sacramento, will reveal a lot.