WHAT IS AMERICAN PHAROAH WORTH?

The value of a breeding stallion is simple to model but difficult to calculate in practice because current and future cash flows derived from stud fees and selling his offspring, discounted to account for the time value of money, depend on how successful the stallion turns out as a sire and how long he lives and remains fertile.  A stallion may start out with a high stud fee based on his prowess on the racetrack only to have the stud fee drop some when his first crop does not impress visually or plunge after his initial crops are not impressive as racehorses.

In that I don’t know the sales arrangement between American Pharoah’s owner, Ahmed Zayat, and Coolmore Stud (Ashford Stud is its American subsidiary), I have made the following assumptions for some very rough calculations of the colt’s worth.

American Pharoah’s stud fee is likely to be in the range of $75,000 – $125,000.  Assume that the initial stud fee is $100,000.  Further, also assume that he will be bred to 150 mares and get 90% in foal.  The contractual terms will be that the stud fee is due if a foal stands and nurses.  Finally, suppose that Mr. Zayat retains 10% ownership, or 15 shares, and that Coolmore breeds 15 of its own mares to American Pharoah.  Therefore, owners of about 108 mares (120 x .90) would pay the $100,000 stud fee to Coolmore.

The cash flow from stud fees from this scenario for two years would be $21.6 million plus what Coolmore received for selling progeny from the Coolmore mares it bred to American Pharoah.  Say that seven of the Coolmore-owned progeny were sold as weanlings in year 2 for an average price of $200,000.  This would be an additional (to stud fees) $1.4 million.  Coolmore’s total take would come to $23 million in American Pharoah’s first two years at stud (not accounting for expenses and the time value of money).

If American Pharoah proves to be less than a stellar sire his stud fee will drop dramatically.  On the other hand, if he is a sire of distinction, his cash flow could be astronomical over his lifetime.  These are the great unknowns:  how he will pan out as a sire and how long he will live and be fertile.

The correct multiplier on potentially $23 million in cash flow over two years and considering the associated risks is certainly arguable.  Since the cash flows for a stallion at stud in the out years are problematic, to say the least, a low multiple is warranted.  At a very low (conservative) multiple of, say, 2 to 1, American Pharoah would be worth in the neighborhood of $46 million.

If American Pharoah succeeds fantastically at stud and remains fertile for 10-15 years, a sales price of $46 million would in retrospect be a bargain.  By contrast, if he flops as a sire of racehorses, half the purchase price can be recouped within two years (his first crop won’t be yearlings until 2017–if he is retired at the end of 2015–and won’t race until 2018).  The worst-case scenario is, of course, that he is sterile, as with Triple Crown champion Assault and the great Cigar.

That 90% of a 3-year-old racehorse may prove to be a bargain purchase at $46 million.  Amazing!

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