Cheer up kid, the SuperSonics are returning soon enough.
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.
LOL!
The infamous XP “BSOD”...and so many freepers still love XP!
Cheer up kid, the SuperSonics are returning soon enough.
Prob’ly call them the “Sub-Sonics” .....
I assume it is because, unlike Bill Gates, Ballmer didn’t really have to work that hard for his billions, so he has no real appreciation for it.
I wonder if Ballmer is getting bailed out in part by others to avoid the major lawsuits that would come if Magic Johnson, the guy who first showed up with an offer for the team and was in the pictures with the mistress that she tweeted and provoked Sugar Daddy Sterling with, wouldn’t get the team.
$2billion.
Sterling aint so crazy after all...
Looks like Sterling got thrown into the briar patch.
If Sterling is being punished, I wish someone would punish me twice as hard.
The idea and practice of carrying over so called royal titles after service doesn’t increase my feelings or opinions of such individuals. Gives me the impression the person is/was good and worthy for all times. Certainly not true for so many who have done poorly and even evil while holding such title. For me once out of title/office no more public honor puffing.
Noooooooo ... and he said he wouldn’t take them away from us.
Just popped in to say the Lakers were recently assessed at around $1.3 million. So, yes, it is not about money. Given what the team will bring in revenue, even in 20 years, the team will look high at $2mil.
$8.99 an hour?
Who really cares about the Clippers? They have no history, like the Lakers do. The only reason anyone cares about them is because the Lakers stink so much right now. Once they’re good again, the Clippers will go right back to being an afterthought in LA.
UNLESS....Ballmer makes a big splash and does something like bring LeBron James to LA.
Good move re LeBron.
I got to Clippers games sometimes, not too often. But there will be a buzz about them, I’m assuming.
Unless Balmer runs the Clippers like Microsoft.
I quite agree. But that’s not standard protocol, and ex-presidents are frequently addressed for the rest of their lives as “Mr. President,” despite this not being technically correct.
If I were an ex-president, I would take enormous pride in returning to being just plain Mr. Logan. That is the essence of republicanism.
Sterling said he is suing the NBA, so I don’t think the Clippers are sold yet...
A guy who has 2 billion to spend on a team I guess could take it anywhere he wants. But maybe the NBA will have something to say about it. Dunno ... but it’d be a mistake to take it to Seattle ....
Thanks SeekAndFind.
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