"I am Donald J. Stewling, Billionaiwe ... I own a mansion and a yacht!"
Posted on 05/31/2014 10:52:18 AM PDT by SeekAndFind
Before former Microsoft (NASDAQ: MSFT ) CEO's just-announced deal to purchase the Los Angeles Clippers, the previous record high price for an NBA team was the $550 million paid earlier this month for the Milwaukee Bucks.
The amount Ballmer is paying makes it look like former Bucks owner Herb Kohl had his pocket picked by new owners Wesley Edens and Marc Lasry. Yes, Milwaukee is the fifth smallest market in the NBA, but it's hard to imagine that being the second most important team in Los Angeles is actually worth nearly $1.5 billion more.
When the Bucks deal was announced in mid-April many thought Edens and Lasry were over-paying for the team. The annual Forbes list of NBA team values, which came out in January, had the franchise ranked as the least valuable in the league at $405 million. The Clippers ranked 13th on that list with an estimated value of $575 million. So the Bucks sold for a 135% premium while the Clippers commanded 375% of their estimated value.
That's a huge multiple, which could change how sports franchises are valued. Previously it was not uncommon for teams to sell for more than their estimated worth, but the Clippers deal suggests that major sports franchises are the new status symbol for billionaires. Making money off a team or even being able to sell it for more than you bought it is not the point. The Clippers now join a growing list of teams being bought as toys by owners rich enough to pay pretty much any price.
How did the price get this high?
Ballmer, who is worth an estimated $20 billion, certainly can afford to buy any toy he wants. He also has enough money to outbid himself for the team just to make sure Shelley Sterling -- who was negotiating the sale on behalf of her family in a very complicated arrangement that is likely to end up in court -- chose his bid.
Ballmer, who was rebuffed in a bid to buy the Sacramento Kings to relocate them to Seattle despite being the highest bidder, left little to chance this time. The other bidders for the Clippers included Los Angeles-based investors Tony Ressler and Bruce Karsh, and a group that included David Geffen and executives from the Guggenheim Group, the Chicago-based owner of the Los Angeles Dodgers. The Geffen group offered $1.6 billion and the Ressler-Karsh group $1.2 billion.
Ballmer's bid was clearly designed to blow the others out the water. Basketball teams rarely come up for sale and Ballmer likes basketball enough that it was worth not only paying more than three times the estimated value of the team, but bidding $400 million more than his closest competitor.
What should the Clippers sell for?
The Clippers are profitable but only mildly so. According to Forbes, the team has revenue of $128 million and player expenses of $80 million. Add in other operating costs (like coach Doc Rivers' $7 million a year deal) and the team has an operating profit of $15 million. In theory Ballmer -- likely a better executive than previous operating owner Donald Sterling -- can wring out some extra profits.
The opportunities to do that, however, are somewhat limited. The team has a long-term lease with the Staples Center that runs through the 2023-24 season. The biggest chance to increase revenue is likely through negotiating an extension of the team's local television deal. The current deal with Fox's (NASDAQ: FOX) Prime Ticket service pays around $25 million a year. That number could go much higher as the Los Angeles Lakers, which share the Staples Center with the Clippers, have a $3 billion, 20-year deal with Time Warner Cable (NYSE: TWC). That's an average of $150 million per season.
The Lakers, however, are the more established team drawing better television ratings despite being much worse on the court for the past two seasons. Last season, the Lakers averaged a 2.15 household rating, or 122,000 households per game. The Clippers only averaged a 1.25 rating or 71,000 households per game, The Los Angeles Times reported.
Still Ballmer can likely expect a bigger deal. The Times suggested a figure closer to the $65 million a year the Boston Celtics are getting from Comcast (NASDAQ: CMCSA) would be a reasonable guess. At that number the team would add $35 million a year in profit. Let's assume Ballmer's touch can eke out another $5 million and the Clippers would pull in an annual profit of $55 million a year. Under that scenario it will take Ballmer nearly 40 years to see a return on his investment.
It's not about money any more
Most NBA owners have been content to earn a small operating profit, scoring the real windfall when they sell their team. That is certainly the case for Donald Sterling who paid $12.5 million for the team in 1981.
It seems unlikely that Ballmer will see a similar 15,900% return on his investment when he ultimately sells. But it's clear that purchasing the Clippers is not a business decision, it's an emotional one by a man who has professed his love for the sport. Ballmer did not buy the Clippers so he could get even richer. He bought them because owning a basketball team is a more enjoyable way to spend his post-Microsoft days than playing a lot of golf.
This deal will likely set a precedent that makes the value of sports franchises more about how many billionaires want in than any financial metrics.
-- Daniel Kline is long Microsoft. He is a Boston Celtics fan. The Motley Fool owns shares of Microsoft.
This will backfire (hopefully).
I know I'm not the only one thinking that the owners can damn well BUY THEIR OWN sports stadiums. Not one more nickel of public money!
“They say I’m crazy but I have a good time”
.,.,.,..,.,,.
“Life’s been good to me so far”
It didn't end well for anyone.
First, Wells impugned the Morlocks, they were the industrious workers who provided the lazy multi-multi-multigenerational Eloi with their every need; food, clothing and shelter.
Wells glorified the Eloi who wouldn't lift a finger to save one of their own from drowning, had absolutely no curiosity about anything, not even where their food came from (someone's stash maybe?) but happened to be pretty by his standards.
Then Wells had the Time Traveler break the Eloi's rice bowl!
The Morlocks were burned in their underground factories. The Eloi lost their only means of sustenance, and I'm pretty sure the Time Traveler got lynched for starving them out of house and home while trying to get across the concept of working to survive!
he just wants to own slaves..
Free market economics say that people are free to spend a lot on rare commodities that the covet.
Nothing wrong with that.
Having a rich owner is good for the fans, because the owner is willing to pay for a winning team.
Sometimes they're willing and sometimes they're not. Often times a losing team is more profitable. Joe Robbie built one of the best football teams ever, but he was relatively poor. You are right that it takes a commitment from the owner to having a winning team.
At his level of wealth that is like you taking your wife out for a feast at the “Outback” including the ‘Bloomin’ Onion”.
Taking the argument a tad too far, I think.
This is just like a billionaire buying a giant yacht. There’s no way it will produce an ROI. The purchase is for enjoyment and status.
“Owner of a major league team” provides a lot more status than “retired rich guy.”
Status and “stuff” actually operate on separate, though often parallel tracks. That in our society wealth is the primary way of acquiring status misleads many into the vulgar Marxist notion that nobody ever does anything at all except for base monetary reasons.
In actual fact, status is the main driver. This can be seen from those willing to invest tens or hundreds of millions of dollars of their own money to gain political office. And from the longstanding ambition of rich guys to be appointed to federal office or ambassadorships.
Such office is not going to provide a financial ROI. Most could clearly make more money in private fields. But being addressed as “Mr. Ambassador” for the rest of your life is a nice perk. All of this equates, to some extent and informally, to the British honors system of knighthoods and titles.
It’s the rage in European soccer, rich Arab businessmen and Russian oligarchs are buying teams right and left.
The problem is when you have only four or five teams with rich owners, and it squeezes out the smaller teams. A Luxury Tax is nothing to a guy like Ballmer.
But as this article points out, this new breed of rich owner can’t be in it for the operating profit—it’s a vanity/fun purchase and they’re in it to try to win.
That’s always going to be an issue.
Expect your cable bills to go way up.
I thought so too, so I stole it.
Hereafter, any team owner contemplating selling will be sure to make some comments that can be perceived as racist/xenophobic/sexist. Then watch the fuss, and rake in the $$$$. Brilliant!
Microsoft investors—and executives—are happy that Ballmer is wasting his own money, and not the company’s. Ballmer was a terrible choice for CEO, and Microsoft paid the price. Now, he’s paid almost four times what the Clippers are actually worth, and inherits a bad lease deal and local TV contract to boot.
But, he gets to hang out with his fellow libs courtside. Ooops...all of them go to the Lakers games. The only celeb who’s been a long-time season ticket holder for the Clippers is Billy Crystal.
I look at the Morelocks as a kind of gated community that gets so dependent on literally feeding off the masses, that they've deteriorated into monsters who no longer have contact with the real world. HG Wells in THE TIME MACHINE predicted the world of a global elite that amassed great fortune and power, at the expense of their humanity and souls. The Eloi, representing the rest of us, will be far better off when that world collapses.
<^..^>
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