Monday, May 3, 2010
The business of owning an NBA team in 2010
By Henry Abbott
For most of my life, the general consensus has been that owning an NBA team was one of the sweetest deals out there. Almost no matter what you did, you would make money. Even the Clippers were in the dough! Even if you had to dig in your pockets now and again for a free agent, you'd make all that up and more -- the story went -- whenever you decided to sell.
Things change, though.
The economy tanked. Teams have gone to amazing lengths -- including profound price cuts -- to sell tickets. The Bobcats were sold by an owner under real financial duress, for a price that indicated he had not only incurred operating losses, but also an erosion of team value over the years he owned it. Greg Miller, CEO of the Jazz's parent company, whose family has invested in the team for more than three decades, told TrueHoop few weeks ago that "almost anything we did with our money would get a better return on investment."
When David Stern said in February that the league was positioned to lose more than a billion dollars over the next few years, I couldn't shake the notion that some of that may have been posturing for the players union. The league and the union are, at the moment, haggling over how to carve up the NBA's revenue pie. At a time like that, it would make perfect sense for the owners to claim poverty, and to demand major concessions from the players.
But there's evidence that the financial pain among NBA owners is real. Consider that the Bobcats sale could be seen as a sign that, for the first time in decades, this really might not be a great time to make money selling your NBA team. And yet, despite a bad market, more than a quarter of the league is for sale in some manner. Reports have had the Wizards, Warriors, Pistons, Hornets, Hawks, Nets, and Grizzlies all in various states of play, not to mention that Michael Jordan has said he's amenable to additional investors in the Bobcats. Word on the street is that there may be even more teams on the market than that.
If an NBA team is, as many secretly suspect, the goose that laid the golden egg, why in the heck would you sell when the market's down, an owner-friendly collective bargaining agreement is on the way, the game is gaining ground overseas and the economy is recovering?
It's enough to make you think all that talk about NBA teams losing money might not be just rhetoric.
It's also a sign of changing times. The new thinking is that in this day and age, the profits will generally go not to all owners, but instead to the owners of well-managed teams.
At the Board of Governor's meeting, I asked Commissioner Stern about this. Our exchange:
There seem to be a number of NBA teams in play at the moment, despite the fact that it's a bad economy, and the Bobcats sold at a number that didn't wow a lot of people. Is this a sign that owning an NBA team isn't a surefire good investment, or is it different now than it used to be?
You know, I guess I would say that we'll have to wait and see. Clearly the Bobcats reflected a series of decisions that had been made over the years that resulted in there not being a good TV deal out of the box, there not being a naming rights out of the box, and there not having a pricing structure that was encouraging of the community, taken together with the basketball decisions. They were operating out of a relatively deep hole, and in some ways, I think there should be some relationship between performance and value, and I think that's what happened in Charlotte.
That said, I'm pleased to report that our competitive colleague, Mr. Jordan, is working that market as only he can, and I expect the financial performance of Charlotte to improve along with his basketball performance, which finds them in the playoffs this year; and there will be a huge turnaround financially in that franchise.
The others, I think we just have to wait. It's true that Washington, as you said, is in play. There are negotiations going on and we expect that to trade at a very robust enterprise value. It's likely and that's because of an estate, a sale by the estate.
Detroit will be under scrutiny for a sale, I think, because of the settlement of the estate. It's been announced that Golden State is for sale, and there are always ongoing issues for other teams, as well. I've read that I've more than read; I've read, but I've also been intentionally involved, that New Orleans is having some discussions. And that was well reported on to the owners, and I think that the valuations will be solid.
And then you can draw your own conclusions about where that sits, but it's going to take a few months for all of this to settle out. I'm optimistic.
You've told us that this is a difficult time; you said those words today, and at the All Star Game, you told us that the league was expecting to lose money.
We will still lose money. There's no question about that. Nothing's changed. The fact that we lost 300 some odd million dollars last year and we are down in revenue this year, will, as Adam Silver reported to the board, continue to reflect that we'll lose money.
But I think there are, you know, buying opportunities in our franchises, and what we heard was the capital markets are loosening up. We'll be renewing certain aspects of our league credit facility. Credit is getting looser. And there is a generally more optimistic view of the world by high net worth individuals, which defines a group that would consider buying NBA franchises.
I don't think we are going off the charts any time soon on the high end, but I think we'll see some solid pricing. But, you know, when you consider some of the losses that go with it, that, of course, has to be a drag of types on franchise values. But despite that, I think we'll see solid pricing in those franchise transactions that are coming.
To better understand the changing landscape of NBA ownership, I called George Postolos. You may know him as the guy who recently tried to buy the Bobcats. But his NBA experience is far deeper than that. (He jokes that he literally carried David Stern's bags.)
After Harvard Law School, he worked at the highly regarded Wachtell, Lipton, Rosen & Katz (a firm that, ironically, advised Michael Jordan in getting the team Postolos wanted). Postolos then became a special assistant to Stern, dealing with, according to his official resume, "collective bargaining, efficient operation of league offices, national television, international expansion, and retail brand extensions." He then became president and CEO of the Houston Rockets, where -- thanks to some clever negotiating of TV deals and stadium development -- he says he more than tripled the franchise's value. Since leaving the Rockets, Postolos has started his own business that does two things: Invests in sports teams, and advises others who would like to do the same. He is connected around the NBA, and keeps a close eye on ownership situations around the League. He is also a serious basketball fan. We spoke by phone a few days ago:
Can you clear something up for me? You’ve been discussed in the media as someone who wanted to buy the Bobcats. Yet on your company website, you’re described essentially as a consultant to people who want to invest in teams. Can you clarify?
I remain committed to becoming an NBA owner. By that I mean becoming part of a group that acquires a team. That’s a goal that I’ve had for some time.
In addition to that, I also consult with people who are interested in buying teams, even if I don’t have a relationship with them were I would become part of a group. I similarly have worked with investors who are interested in baseball teams, and football teams, but most of the action has been in Major League Baseball and in the NBA in the time that I have been doing this.
Is 2010 a good time to buy?
I’m not a fan of any deal, just a good deal. 2010 could be a year when you could strike a good deal. There aren’t as many buyers as there used to be. You might say buyers are scarce.
That just has to do with the state of business in general, the financial markets in general, and how that’s impacting sports and many other businesses.
It’s unique, or it’s unusual to have multiple teams that have been for sale for a period of time. If you’re someone who has been interested in investing in a team, you’ve had an opportunity to look at a number of them over a short period of time.
The high net-worth businessmen in these deals have had a lot of success -- most of the people who’ve invested in sports fit into that category -- so they’re also prominent in some other industry. So when your core business has issues, then you’re going to look at all of your assets and you’re going to say OK, I want to make some adjustments here. I want to concentrate on fewer businesses.
One of the things you’re going to take a look at is your sports franchise, particularly if it’s requiring liquidity, because there has been a liquidity crisis. By liquidity, I mean free cash that you have available for investment purposes. If you have a business that is losing money, and the NBA has talked about how last year and this year too have been money-losing years, those losses have to be funded. And those have to be funded by ownership, and in significant part by equity contributions. That means they’re using up liquidity.
With private equity investments in general, and many other businesses, they have more needs for cash now, which means they’re going to look harder at these things.
Every situation is different. You have a couple of estate sales where a longtime owner has passed and the next generation has to make decisions about whether they want to be involved or not. It’s lots of different circumstances, but they’re affected by what’s going on in the economy, and where the NBA is in its collective bargaining agreement negotiating cycle. But you’re seeing similar things in other leagues. Multiple franchises are looking at their strategic alternatives, because there’s some duress.
Owning an NBA team used to be seen as a can’t-miss investment. And if that were still the case, it’s hard to see how a death in the family could make you want to sell. With a great long-term return, wouldn’t you hold on no matter what?
So far most people have held on. I think that’s important to keep in mind. Just because a franchise is for sale doesn’t mean it’s going to sell. You see a wide difference between what the current owner wants to sell for and what a buyer wants to pay. Then a transaction doesn’t happen. Someone might solicit proposals over a period of months or years. But the fact that you have a large number for sale doesn’t mean you have a large number that will sell.
If I’m understanding correctly, it’s like a street with a lot of “For Sale” signs on front lawns. And one house down the street may have just sold cheaply. But if the owners of those houses aren’t desperate, they may eventually take it off the market again.
It’s a good analogy. Most every owner will have that option. There are very wealthy families, these are very wealthy individuals, these are very wealthy groups. Most of them will have the option of continuing to hold the franchise.
In some rare circumstances, there will be somebody more motivated to sell, maybe because they’ve got significant pressure from somewhere else, or maybe because of the capital structure. Obviously, in the NHL with the Coyotes, that was a forced sale, and the owner decided to seek bankruptcy protection, and you have a long process from that.
You have the same situation with the Stars, potentially. The situation Tom Hicks is in with the creditors of his sports franchise there that’s affecting both of his franchises. And I think [former Bobcats owner] Bob Johnson was in a situation, not saying anything specifically about his situation, he was very motivated to make a change. He made that very clear, and so you knew he was going to do something. I don’t think any of the other teams have gone that far.
In the New Jersey situation, you’ve got a big need. They’ve got to finance a new building, and they need new money coming in to meet that objective. The existing owners wanted a new party to come in and they needed a big infusion of capital to complete the stadium project. That’s why that transaction happened.
Not sure if you saw a little while ago that Greg Miller defended his family’s investment in the Utah Jazz, but at the same time said almost anything else they did with their money would get a bigger return.
I think that they have done a good job over the years. They’ve had good people in management positions. They’ve made good decisions off the court. On the court, they’ve been competitive. I don’t know exactly how they finance their operation. They have spent aggressively to get their new team in place, after the Stockton and Malone era came to an end. Maybe that’s put some stress on their investment, or maybe that’s dampened their returns. I would think that they’d be in the position, because they’ve been active for so long that they have done reasonably well.
They certainly have a well-run franchise that’s been competitive. There are certainly other families that owned franchises during that period that have done quite well.
Maybe it has to do with market size, or the wealth of the market. But other owners in similar situations have done very well. But they have spent aggressively, and maybe it has something to do with having interests that trumped running it as a good business. And that’s certainly the case in sports sometimes. I think anyone would say that they’ve been a well-run franchise over an extended period of time.
That’s a good point. The role of owner is about money, but it’s also a role with a lot of other things, including passion for the game, an attachment to a city and other perks.
No question, but today in 2010, buyers are not looking for that as much. There’s a narrower set of considerations. But generally speaking, they’re looking for a good business with an opportunity to make money, in addition to those other considerations. That may not have been the case in a frothier environment, or when teams were less expensive. I mean, a lot of these families, the Millers in particular, when they acquired their teams the franchises didn’t trade for hundreds and hundreds of millions of dollars.
As the numbers have gotten bigger, a smaller set of investors are able to meet those requirements, particularly after what our economy has gone through over the last few years. Those people can be more discriminating, and they’ve become more discriminating, and they’re looking for a legitimate business with a legitimate chance of a return on their equity.
There’s still an upside case for sports franchises, but it depends on the particular situation, and it depends on skilled ownership and management. They’re more important than they’ve ever been.
I would say skilled ownership has always been a big help. But in between say 1980 and 2000 or 2005 or 2007 or whenever you want to define that period, you had such substantial appreciation in franchise value. A rising tide lifted everybody’s boat.
It had to do with new stadiums coming online. Several broadcast networks that needed sports programming grew to be hundreds of cable channels. The development of all-sports networks, the development of suites, expansion of corporate sponsorship, companies using athletes to promote their products, and the economy in general was strong during that period … lots of thing were happening to increase values. The equity markets were growing almost as quickly as franchise values.
So the value of all companies was growing.
We may be in a different era now. Certainly in the last several years, or even over the last decade, asset values have behaved differently than they did in the preceding period. So that’s going to affect things.
You have to ask yourself the question -- are we going to continue to have the kinds of changes that I just described, that made a big difference in the business model of the leagues and the teams? We know that people want sports content on their handheld devices. We know sports content is becoming more important as an internet property. We know that sports are becoming more global. We know that leagues are developing their assets outside the United States. But is all that going to add up to the kind of growth that we’ve had in the past? I think a case can be made for that, but I don’t think it’s a strong enough of a case, today, based on what we’ve been going through the last couple of years, to say that any team investment is a good investment.
I think now you’re saying OK, let me take a look at the situation that I’m stepping into. Am I paying a fair price? Do I have a plan? Is there something I can do to radically improve the value of the franchise, either by restructuring it, re-branding it, opening a new venue, a new television strategy or otherwise making the product better?
You could say we’re entering the era of great sports franchise management, where there’s going to be a lot of attention paid to how things are run. Sports analytics, the way they’ve affected baseball and basketball and to some degree football now, that’s just a different version of the kind of attention now on how these businesses are managed.
Generally you’re talking about situations where the businesses are very well managed over an extended period of time. That’s where you see sustained success off the court and on the court.
What are some of the best managed franchises?
I think that the Spurs are very well managed. I think that what I would highlight there they had a decade there where they were one of the most successful on the court, they’ve always managed their television rights very well and over-performed for their market. They have basically taken advantage of the way other nearby teams were pursuing their own television strategy. They got a good stadium built that was accretive. Not all stadium deals are created equal. Just because somebody got a new building does not mean the team is more valuable. But that was one where they cut a very fair deal with the public, and then were successful in marketing the building.
A series of championship runs helps a lot, and they had good fortune to get Tim Duncan in the lottery. But obviously, by drafting extremely well they’ve had great continuity on the personnel side. I think Peter Holt has done a brilliant job with the way he has developed a relationship with the community in San Antonio.
You wouldn’t say in advance that San Antonio is a great market for sports in this country, but they’ve just played their hand very very well. And I’m familiar with that case, ‘cause I’m from San Antonio, so I probably know more about that case than some others.
You’d have to mention the Lakers, just because Jerry Buss has been very very successful over a long period of time and built a great brand there that’s unique in sports. Showtime! The way he’s been able to attract stars in different eras, and do something that uniquely speaks to L.A. If you live in Los Angeles, you identify with the Lakers. He’s done that very well. Part of is that he has been successful, but it’s also that he has made great decisions in terms of the way he organizes the business.
[Houston Rockets owner] Leslie Alexander has had success. He has won championships. He has done those things that I mentioned. He also did a new building very well, and the same thing with the television rights, bundling them with the baseball team.
Same thing for Jerry Reinsdorf in Chicago. That’s another situation where somebody has done it over a long period of time. And in that case, with multiple franchises.
You definitely have some very well-run organizations. They all benefitted also from owning their franchises during a stretch of time when all franchise values were rising. And so you’ve got the daily double in effect. You’re outperforming the league, and the league in general is doing very well.
It’s a beautiful thing.
And that’s the kind of thing that sets the league up, and sets the economy up, in a way for some kind of correction. When people say things like “you can’t lose money in this business” or “it’s a no-lose proposition to own an asset or own a business in this industry” that can be one of the signs that you’ve got some kind of an asset bubble. Maybe growth has gotten out of hand.
In general, sports have fared better than the rest of the economy. You haven’t had sharp declines in revenue. It may not be growing as fast as it was before. Or maybe it’s declining by a single digit. But you’re not seeing double digit declines in revenue league-wide the way you are in some other industries.
That just speaks well of sports for two things. People are still very passionate about their teams and their leagues. And sports content is going to continue to be a very important part of media. It’s hard to predict exactly what’s going to happen with media but sports will continue to be important across all channels of distribution. Those are the two reasons that sports will probably continue to perform very well, relatively speaking.
Brian Windhorst recently wrote an article saying the Cavaliers are close to a break-even proposition, needing a good playoff run to get into the black. That despite the fact that almost everything is good for them: Ticket sales, suite sales, they have a great TV deal, LeBron James is woefully below market at $16 millon. And yet the team is borderline to make money. Is that a sign of a problem?
One of the things we celebrate in sports is ownership that’s committed to winning, even if they have to stretch beyond what the business itself can afford. So they subsidize the business or enhance its ability to spend by contributing money so they can make a run at a championship.
I think Cleveland probably has a greater incentive to win this year than any other team in the league. They’re trying to retain LeBron James, who’s incredibly important to their franchise. This is a year that, if anybody was going to stretch, it would be the Cavs. And that has put stress on their business. They have spent aggressively. And I think it’s rational for them to make very large bets to be successful this year. … I think they probably stretched as far as they possibly could have to try to win this year.
The Mavericks are the other team that has been very aggressive over a long period of time. They’ve got a very wealthy owner, he’s very committed to winning. I think that’s celebrated.
Sometimes you can lose some flexibility doing that kind of thing. In may not happen in Cleveland or in Dallas, but we saw that in New York over the last several years. They got to the point that they ended up spending far more than other franchises, and they didn’t have a team that was as competitive as they wanted it to be. They had to go through a period of time when they started over, so they could get back to a core that they were excited about. That’s the risk. The Knicks have great resources behind them, in the Dolan family and cablevision, and the largest market. But that has to be managed a certain way.
If things had gone differently in Charlotte, and instead of Michael Jordan it was you chomping a cigar in the owner’s office, wouldn’t you think though, that having LeBron James in his prime at a cheap salary ought to be enough to get you in the black?
I don’t think any one player is enough. Look at Shaq and Tim Duncan. Shaq is a guy who had a lot of success in Orlando, but didn’t stay there. They got to the Finals, they had Penny Hardaway who was elite at that time, and complementary players … but they weren’t able to re-sign O’Neal, and they went through a period where they struggled after that.
In San Antonio, they were able to keep Duncan. And you’ve seen more of this since. He refused to sign a long deal. He signed a shorter deal to be in a position where they would need to demonstrate over a several-year period that they were going to continue to be successful. And they were able to do that. They were able to surround him with good talent. They have had more success, during his tenure, than maybe any other team.
And that’s why I put them at or near the top of the list. They’re in that top group, because they’ve played their cards as well as they could have in every aspect. Nobody’s perfect, and it may be that if you get a guy who’s determined to leave, then you’re going to have a challenge wherever that is. But performance is going to be related to franchise value, and I think that’s something that you drew out of the commissioner, and he said that that’s a good thing, and I think most people would agree with that.
If you’re right, that we’re entering an era that will require owners and managers to be more skilled than ever, might we see that benefit fans?
I think you will. One of the things one of my favorite writers said to me one time is that he roots for the smart guys. Fans want organizations they believe in.
If they have faith that what you’re saying makes sense, and that you have a good track record, they’re going to support you a little longer. There’s a lot of good data that suggest that results are really what matters the most. But, you’re going to have a little more confidence if you’re doing things in a way that fans understand. The media is more discriminating, and the fans are more discriminating than they used to be. They have more choices. You really can follow any team. And so they’re more critical of you.
For you to maintain credibility over a period of time you’ve got to have a strategy that makes sense to them and you’ve got to have credible people in place. If you do that you get rewarded for it.
I guess the people who get beat up here are owners and managers who have always been shooting from the hip and don’t want to adapt to a new approach.
Yeah. I think if you are in a position where you fail to make progress, you’re going to be more vulnerable to criticism than you used to be, and you used to get more criticism than you used to.
It has always been tough to be successful over an extended period of time, and to be well-regarded for an extended period of time. And if you pick out your list of your five favorite owners, they’ve all gone through periods of time when they’ve had very unfavorable reactions from fans or media to key decisions that they’ve made. What sets them apart is that they’ve had success over an extended period of time, and eventually they’ve gotten credit for that.
Can we re-cap the list of NBA teams that are known to be on the market?
There have been stories about the Wizards, the Pistons, the Warriors, the Hornets, the Atlanta teams, over the years there have been stories about the Grizzlies being for sale.
I would just say the Nets are being sold, and expected to close shortly, and the Bobcats just closed, and Michael has said that he’s going to seek additional investment. So that’s activity at eight, and those are public. That’s a large number. And a number of those have been in process for a substantial period of time.
How many will sell? You want to guess?
No. I wouldn’t hazard a guess on that.
Is it part of your job to cheerlead for ownership? Are you a little bit of the real estate agent in that analogy I made earlier?
Not so much so, because usually for me to do well my objective would be that instead of buying a house, where success is determined by whether the people who buy the house enjoy the house, when you’re buying a business, success is really determined by how successful the business is after you buy it. Most people who are looking to buy a sports business at this time have financial goals. For me to be successful, they need to do well.
If you look at the League, they need to be advocates for their teams. The balancing act that they get into is that while they’re out there promoting the sport, and promoting its growth internationally, and as a new media property … they don’t want to get into a position in collective bargaining, which is such a critical part of whether the league’s going to be profitable or not -- because they have to have good and fair agreements in place -- that the players say well look at how you’re pointing at your international growth, and your growth in new media, and look at how you’re pointing at your growth in franchise value … everything’s going great. So there’s no reason for us to make any changes, because things aren’t only going OK. They’re going incredibly well.
It’s a balancing act that the leagues get into. They want to be strong advocates for their owners who may be looking to make a change. And they want to promote their sports. And they want to make a fair and reasonable bargaining agreement. So they’ve got a much tougher time.
For me, I just need to help people find good opportunities to invest in sports. It’s not important for any particular group that every team does well. They just need one team to continue to be successful.
I believe in sports. I believe sports has a great track record and I believe the opportunities are immense, especially if you find a situation where you’re stepping in at the right time. I believe in it. I’ve spent my career in it, and I’m intending to spend the remainder of my career in it. But I’m not responsible for advocating for everybody.
At the All-Star Game, David Stern talked about the owners’ losses. I don’t remember exactly what I wrote at the time, but the general idea was that I sure wouldn’t want to have to take his word of it. As you point out, at the time of CBA negotiations, there’s a strong incentive to say there’s trouble, so the players won’t expect too much money. And the financials are almost all private.
However, since then we’ve learned all these teams are for sale, and that one sold cheaply. That would seem to be confirmation that the pain described on the owner’s side is real. Is that a good interpretation?
Yes. I think that’s good logic. Also, most of these teams, or all of these teams have audited financial statements. The league gets great information from all of the teams. They have a great understanding of where they sit.
I don’t think you can take two different reasonable points of view on whether the league is losing money or not. It’s just a fact. Maybe there could be debate about the extent of the losses. But there’s no question that they’re suffering very significantly. They’re real losses, and they have to be funded. There’s no question about that. I don’t think the players’ association has real questions about whether or not they’re losing money.
The other element that you have to look at is how much pressure there has been on ticket prices, and the changing marketplace for sponsorships, and for other corporate entertainment. The pressure on municipalities to subsidize buildings, and team operations. You can see stress in different places. And the majority of the money that’s going out, on a year in and year out basis, is going to pay players.
The greatest single expense of the business is always going to be player salaries, benefits, and personnel development. That’s always where the expense is going to be. The question is just getting it to grow in line with revenues.
We were in a situation there, for a very long time, where revenues grew every single year, and by a substantial percentage. And so salaries could grow similarly, and the business could stay as profitable as it had been.
On the cost side of the business, a lot of momentum developed. When the revenue slowed down, when you have a year or two without revenue, that creates a lot of pressure on a business. And then you need to have some kind of a correction. And it just takes time to do that, because so many of these large commitments are fixed. And there are contractual obligations, and there big escalators built in. That’s why you’re looking at big changes in the C.B.A.s in all major sports.
What else? What did I miss?
There’s going to more of a case-by-case approach as we go forward, and I think that it could be a good thing for fans. The product should improve. And if and when there is an ownership change, fans should be rooting for good management, because in the long run, they’re going to ensure that the money fans invest in following the team is, in turn, invested well to affect the performance of the team over time. So there is a bond there and there is a connection there, and I think it’s only going to become more important.
I think it makes it more interesting. I’ve seen evidence that fans of sports now pay more and more attention to how the decisions are made and who’s doing a particularly good job in assembling the franchise. And they’ll start to follow the franchise that they believe will be successful over time, and they’ll make their own judgments.
In that way, it makes the marketplace for fans more competitive. I think that’s good.