What’s in a [Corporate Stadium] Name?
posted by Lawrence Cunningham
Citigroup and other banks face populist rebuke for executive compensation and lavishness amid a financial crisis the banks may have fomented and resulting undercapitalization that puts them and the financial system on the brink of collapse.
The demotic backlash reaches particularly to Citi’s deal with The New York Mets concerning branding rights associated with the team’s new stadium, Citi Field, scheduled to open this baseball season. Citi has a 20-year contract with the Mets for various marketing programs, including naming the stadium, in exchange for $20 million in annual payments.
Other banks have similar sports-branding deals with other teams. Barclays, the British bank, signed a contract in 2007 on terms substantially similar to the Citi-Mets deal. It agreed to pay $20 million annually for 20 years in connection with promoting the New York Nets basketball team and naming their new arena.
Bank of America has a contract with the Carolina Panthers football team, under which it pays $7 million annually for marketing rights at that team’s stadium, including naming it. Notably, on a per-game basis, that figure is 4 times higher than Citi’s Mets deal and twice as a high as the Barclays deal.
Pressure on Citi heated up in late January when some in Congress demanded that Citi terminate its contract. Citi reportedly gave some thought to terminating the agreement, but promptly quashed speculation that it would do so. Others in Congress support that decision, emphasizing that the contract and marketing arrangements involve business decisions that it is not the job of Congress to second guess or micromanage.
Nevertheless, pressure remains, with a New York Times reporter suggesting the money would be better spent retaining workers, while others defend the deals on the grounds that they help the banks’ economic positions, both through improved branding and associated merchandising transactions.
How should informed people think about the Citi-Mets arrangement, and others, and assess the competing political, business and economic issues implicated?
To begin, people should appreciate that there is a large market for sports branding rights in the US, of relatively recent vintage. It was a small market when it began in 1971 through the mid-1990s, when it rocketed. In the old days, stadiums were named after civic leaders; since 1997, the vast majority have been named for corporations. This phenomenon reflected sizable new stadium construction in the period, which corporate finance supported, in exchange for corporate investment in brand name and associated merchandising avenues.
The stakes rose accordingly, with the average annual contract price for deals rising from $1 in 1995 million to $5 million in 2002, and terms extending up to 20 or more years. Some reach higher annual prices, like Fed Ex – Washington Redskins $8 million annual price and Reliant Energy – Houston Texans $10 million annual payment. The Citi-Mets and Barclays-Nets seem to hold the current record at $20 million annually apiece.
The exponential price growth reflects intense interest by corporations in the opportunity—especially for companies whose products are otherwise difficult to brand, like banks. Indeed, when the Mets first went looking for corporate partners, it was asking $10 million annually.
Smaller deals also exist, such as for collegiate stadiums and urban cultural institutions. For example, Bank of America named University of Washington’s basketball arena for a half million annually (in a deal that reportedly was to expire in 2008) and Wells Fargo named Arizona State’s for a lump fee of $5 million for an indefinite time. Washington Mutual named the Theater at New York’s Madison Square Garden on undisclosed financial terms, though undoubtedly much lower than big-time sports team terms.
The Citi-Mets deal is much more than mere stadium naming in exchange for cash. The Citi brand is to be streamed throughout the stadium, in video programming, on Mets television, print, radio and Web sites, and in all Mets publicity materials. The two are to develop extensive joint marketing, advertising and promotional programs, like special offers for fans/customers, discounts, merchandising and so on.
The two also agree to joint community outreach through their respective charitable foundations. One example: a statue at the field’s main entrance will recognize Jackie Robinson, the African-American Brooklyn Dodgers baseball player who broke through baseball’s old “color barrier” in 1947. The two also plan jointly to promote the Jackie Robinson Foundation Museum and Education Center in Manhattan to educate children about Mr. Robinson’s role in forging social change.
Congressional opponents of the Citi-Mets deal call for its termination, raising a question of the termination provisions of these contracts. I have not been able to find a copy of the contract, despite extensive research (and calls to the offices of the Members of Congress prescribing termination, who acknowledged that they have not seen the contract either). It is likely that it contains some provisions addressing termination (and naming rights contracts are terminated from time to time).
Termination clauses in naming rights contracts may give either side the right to terminate for stated reasons and on stated terms. Bankruptcy of the corporate partner is a common reason, and one cited for the termination of naming rights contracts amid the recession of 2000-2002 (ending several big deals, including: Enron-Houston Astros; Adelphia-Tennessee Titans; and WorldCom (MCI)-Washington Capitals & Wizards).
Those terminations sparked interest among teams in adding clauses allowing them to terminate on grounds akin to so-called morals clauses appearing in sports endorsement contracts. Teams can terminate if continued association could expose the team’s brand name to embarrassment. This can occur when a company, like Enron say, turns out to be plagued by fraud, hurting the team whose stadium is named for it.
But termination may not be cost-free. Consider the Enron-Astros deal, made in 1999, for 30-years and total payments of $100 million. The Astros sought to terminate but apparently lacked a termination provision akin to morals clauses. As a result, Enron refused to terminate. The Astros persuaded it to do so only after agreeing to pay a $2.1 million termination fee.
Some companies in the current environment have signaled interest in trying to terminate their naming rights contracts, although not in any very large deals. For example, DHL Express, subsidiary of the German company, Deutsche Post AG, reported in late November an interest in terminating a number of sponsorship contracts with several US baseball teams and with Major League Baseball as a group.
For companies, termination may nevertheless require paying a stipulated amount of liquidated damages. So long as the amount is reasonable in relation to the team’s probable losses and actual damages are difficult to estimate, the clauses are likely to be upheld. What would be a reasonable amount for the Citi-Mets contract is obviously unclear. But certainly a reasonable amount could be a significant amount and Citi would get nothing in exchange for it.
The Barclays-New York Nets contract gave Barclays the right to terminate its commitment if the team, and its developer-owner, had not assembled the rest of the financing for construction of the arena and surrounding area by November 2008. That condition was not met and Barclays had the right to walk. It elected not to do so, waiving the condition and extending the developer’s deadline for financing.
Barclay’s decision lends support to the reasonableness of Citi’s decision not to seek termination of its Mets contract. It is a business decision for Citi’s board, and officers under its direction, to make. It involves weighing a number of contending factors.
For at least a decade, corporate naming rights contracts have been a common form of business transaction, designed to promote products that may be difficult to brand. They often involve much more than merely naming a field. Benefits accrue in many directions, including in charitable directions. Termination may not be as easy as some in Congress suggest and may even result in a net cost to the corporate sponsor.
Hat Tips: Stephanie Cuba & Chris Davis
Additional References:
John Crompton & Dennis Howard, The American Experience with Facility Naming Rights. Here
Dennis R. Howard & John L. Crompton, Financing Sport, 273-75 (2d ed. 2004)).
Marc Edelman, A Primer on Property-Rights Theory in Professional Sports, 18 Fordham Intell. Prop. Media & Ent. L.J. 891,914 (2008).
Daniel Auerbach, Morals Clauses as Corporate Protection in Athlete Endorsement Contracts, 3 DePaul J. Sports L. & Contemp. Probs. 1 (2005).
February 23, 2009 at 9:31 pm
Posted in: Contract Law & Beyond
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Responses (5)
eric - February 24, 2009 at 7:39 am
Another timely example: AIG, whose logo has for some time appeared on Manchester United jerseys, will not be renewing its $78.0 million sponsorship deal with the team (roughly the NY Yankees of English football, for the non-soccer fans in the audience). Which is a shame, because it would have been amusing to have the jerseys emblazoned with the logo of the U.S. Treasury Department.
Lawrence Cunningham - February 24, 2009 at 8:33 am
Eric,
Thanks for the add. Two notes on it:
(a) AIG reportedly says it does not plan to renew its contract with Manchester United, which expires by its own terms at year end 2010 without obligation, but is not seeking early termination before then; and
(b) my understanding is that the Federal Reserve, not the Treasury, funded the US capital investment in AIG.
–LC
A.W. - February 24, 2009 at 10:20 am
I strongly suspect the real purpose of naming something the Staples center, or whatever, is more for the satisfaction of financiers and investors, assuming it serves any rational role at all (a big assumption). Its their way of saying, “we are the big dogs. invest in us.”
For the rest of the public, it increases awareness, but that is about it. i will never catch myself going, “oh, where should i go for office supplies. oh, right, the people who named a stadium after themselves.”
Lawrence Cunningham - February 24, 2009 at 11:18 am
A.W.,
Personal satisfaction may be part of it but assessing rational role requires data, not assumptions.
True, calculating the relation of the costs of a contract right to its benefits is not always easy, particularly in marketing and merchandising.
Even so, in these deals, especially Citi-Mets, the payoff from awareness is only part of the gain, and that is especially hard to measure. The merchandising results are more susceptible to empirical calculation.
Subject to those admitted difficulties, it does not seem unreasonable to accept an estimate, by a Bank of America officer, “that every dollar spent on the company’s sports-related deals generates $10 in revenue and $3 in income.”*
But ultimately the question is who is best equipped to make the required judgments. Candidates are the corporation’s board or its shareholders, and corporation law always resolves that choice in favor of the board.
Should the rules change if government is a shareholder? At present, government has made loans and provided guarantees to Citi, but has not acquired its common stock.
In the current talk, one hears of the government “nationalizing” Citi, which presumably means it becomes its sole shareholder. In that case, government would have the power to elect Citi’s board and, in effect, direct business decisions like this one.
It is not clear which governmental authorities would choose the directors of a nationalized bank, but candidates include Congress, the executive (President and/or Treasury) or the Federal Reserve or some combination.
However directors are chosen, it seems plausible to believe that they could reach the same business judgment that the net benefits of the contract are favorable compared to breaching it.
* See Madlen Read, Stadium naming rights: Frivolous? Or good marketing? (Associated press Feb. 8, 2009).
bobby b - March 1, 2009 at 2:55 pm
“How should informed people think about the Citi-Mets arrangement, and others, and assess the competing political, business and economic issues implicated?”
Informed people should be thinking about the quickest, most efficient means to reverse our current slide into public “ownership” of private business, recognizing that the blurring of roles must logically lead to governmental regulation imposed only to sustain a mediocre status quo and ending evolutionary growth and improvement.
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