When June turned into July, the NBA came to a screeching halt. Free agency went on hiatus. Team employees are now prohibited from contacting players, preventing someone from Memphis’ staff to warn Zach Randolph that it may not be a good idea to (allegedly) use his home as a marijuana depot. But on the ownership landscape, the league is still active in a big way.
Still, since the lockout began, two buyers have reached tentative deals to purchase teams: Joshua Harris, a private equity executive, heads an investment group that will soon secure the Philadelphia 76ers. Alex Meruelo, the founder and CEO of La Pizza Loca, is on the verge of landing the Atlanta Hawks. The purchases, which need approval from the league’s board of governors to be finalized, continue a large, recent turnover among the NBA’s owners club. Since 2010, eight teams have changed majority ownership hands: Charlotte, New Jersey, Golden State, New Orleans, Washington, and Detroit, along with Atlanta and Philadelphia.1
That list alone encompasses a considerable amount of the league and does not include the Sacramento Kings (the Maloof family would have likely been forced to sell the team had it relocated to Anaheim, which remains a distinct possibility) or the Toronto Raptors (owned by the Ontario Teachers’ Pension Plan, which is looking to sell majority ownership of Maple Leaf Sports and Entertainment, which includes the Raptors and Toronto Maple Leafs). With those two teams added, one-third of the league is in some sort of current or recent ownership transition.
It is doubtful that the new owners will have an effect on the lockout. The NBA is built on a seniority system. The voices heard from the ownership side have overwhelmingly come from the old guard. (Michael Jordan is a noticeable exception and one of the most adamant owners in favor of reducing player salaries.2) For the most part, the newbies are waiting in line.
“They’re coming into a well-set position and they are of the view that a better financial profile for our teams is something to be desired in these collective bargaining negotiations,” commissioner David Stern explained in a recent telephone interview.
“We have a sport that people still like. In the cases of Charlotte, Atlanta, Philadelphia, New Jersey, and New Orleans, buyers were able to make the purchases at a reduced valuation without the amount of cash up front that was historically required. When Philadelphia sells for less than $300 million because Comcast is tired of writing the check necessary to support it, the buyer got themselves either a good deal or a bad deal, but their investment is low by historic standards.
“The game is at a high level,” Stern said. “But the percentage that we are paying the players is substantially high. It has to be reduced and there has to be a reset. In the case of the NFL, where all the teams are making money, there was a substantial decrease in player compensation. In our case, where the league is losing money, we expect the players to ultimately be willing to agree to a reasonable reset so the league can continue to prosper.”
Stern and Billy Hunter, the executive director of the National Basketball Players Association, agree that the recent ownership push proves the league is a valuable commodity with invested personalities. But they differed on what that change ultimately means. Hunter argued that it makes little sense for seasoned businessmen to buy into a league in which all but eight of 30 teams lost money last season, as the league’s numbers show.
“I think it demonstrates that there is still a robust ownership market and that the NBA has great appeal,” Hunter said. “A lot of it has to do with the fact that they realize that the game is growing globally. It’s probably at a high-water mark in terms of popularity in the U.S. and the domestic market, and I think it’s about to explode internationally. People are just lining up to get in place, coupled with the fact that David has commented from time to time that the franchise values will go up and there will be great interest once he puts in place the new labor agreement. Obviously, that’s assuming he gets everything he’s asking for.”
Michael Jordan paid $25 million less than Robert Johnson did when he first bought the Bobcats. Mikhail Prokhorov paid $100 million less for the Nets than the $300 million Bruce Ratner paid in 2004, and received a majority stake of the franchise and 45 percent of the years-awaited Barclays Center in Brooklyn. Harris and his partners paid a reported $280 million for the 76ers, a transaction that does not include the Wells Fargo Center, down from the $330 million that Forbes estimated the franchise’s value at earlier in the year.3 Meruelo paid in excess of $300 million to secure the Atlanta Hawks, or, as they say in Atlanta: 2½ Joe Johnson contracts.
In those cases, the new owners paid more than the Forbes estimates, but the trends haven’t all pointed downward. The Warriors were purchased for $450 million, a price much higher than the $363 million Forbes estimate. The Pistons sold for $420 million — $80 more than their Forbes estimate. Tom Gores obtained The Palace at of Auburn Hills in the deal, unlike Joe Lacob and Peter Guber, who did not receive the rights to the Oracle Arena in their transaction with Golden State. Ted Leonsis bought the 56 percent of Washington Sports & Entertainment that he did not own for $551 million.
The bidding war with Larry Ellison jacked up the price of the Warriors. The team also sits in a desirable TV market and boasts one of the most loyal, dedicated fan bases in the league. The inclusion of the arena increased the price of the Pistons. Leonsis probably overpaid, but gained ownership in two Washington, D.C., sports by also owning the NHL’s Capitals.
Only the Hornets remain in basketball purgatory. The NBA obtained the Hornets for $310 million. Forbes pegged the franchise at $280 million. The league purchased the organization from longtime owner George Shinn — who lost millions of dollars annually — after negotiations with minority owner Gary Chouest collapsed last December. “We’re working hard to, in effect, shine it up for sale to keep it in New Orleans,” Stern said. “But we’re funding the losses.”
The Hornets would be the primary example that not every team can locate viable ownership. The logic unsurprisingly does not bode well with Hunter. “The league can find somebody,” he said. “If you remember, Larry Ellison tried to purchase the Warriors and offered more than what the current owners paid. Then he attempted to buy the New Orleans Hornets. My understanding is that he was unsuccessful because Stern was concerned he would attempt to move or would move the franchise from New Orleans to San Jose, Calif., so as a result, they held off. But I’m sure that they’ve got other prospective owners in the wings and it’s just a question of time. Once the new CBA is agreed upon, then they’ll close a deal with somebody.”4
The newcomers are an eclectic mix and include several firsts: the first former player to secure majority ownership (Jordan with the Bobcats), the first foreigner to head a team (Prokhorov with the Nets), and the first Hispanic owner (Meruelo with the Hawks). Gores, who bought the Pistons, and Harris head equity groups. Lacob is a venture capitalist, and Guber is the CEO of Mandalay Entertainment. Meruelo, who tried to buy the Bobcats, but ultimately lost out to Jordan, owns a pizza chain and a construction and real estate firm. Leonsis is a capital investor and worked for AOL.
“The fundamental reason that owners are selling is because they are tired of paying cash out of pocket for the cash losses that teams are losing with no end in sight unless David Stern negotiates a new collective bargaining agreement,” said Marc Ganis, president of the sports business consulting firm SportsCorps. “But these new owners are absolutely taking a risk.
“In most cases, you have sophisticated financial investors buying these teams. They are buying based on the terms they are getting. None of them are necessarily laying out a huge amount of cash. They are assuming debt, paying some cash, and assuming future losses. The fact that they don’t have to go out of pocket too much makes it an interesting leverage opportunity. These guys are used to taking those types of risks.”
Rapid turnover among NBA owners is not a new phenomenon. The Boston Celtics have been owned by about 10 different people/entities5 since the death of founder Walter Brown and were even headed by the Ballantine Brewery. But the motivation of the influx of new owners is not always grounded in buying low and selling high. Buying a sports franchise can also enhance an owner’s public profile. But Ganis said he advises prospective buyers against that tactic.
“In some cases, of course that’s part of it,” he said. “I explain that’s a negative not a positive. They’ll find that out for themselves soon enough. The attention, the glare of the spotlight can be very damaging. The passion, the fans have, the interest over the Internet and ESPN, the various means in which the sports are covered, makes it a challenging environment to slip under the radar screen.”
Jordan, Lacob, and Leonsis were minority owners of NBA teams before becoming majority owners. Gores, Meruelo, and Guber all live in Los Angeles and were perhaps influenced by the success and draw of the Lakers or the continued profitability, despite years of mediocrity from the Clippers.
“It’s owner fatigue, but it is my hope that the long-term prospects, particularly digital, global, and collective bargaining, can improve the prospects of the teams,” Stern said. “But teams that have had to pay for a long time get owners’ fatigue, and they’d rather see someone come in who seems more optimistic, upbeat, and may be prepared to fund it a little bit while times get better.”
David Carter, a professor of sports business and USC’s Marshall School of Business executive director, termed the turnover differently and described it as the “greater fool theory,” in that there will always be a prospective buyer who thinks he or she can run an operation better than current management.
“The realist may think you can’t extract any more money,” Carter said. “It’s the newbies who come in and think they can do a better job. They may be thinking they are getting a relative bargain, but they are also taking a huge risk in acquiring a business that could go dark for a long period of time.”
Leonsis provided the quote that hangs over the negotiations (or lack thereof).
“In a salary cap era — and soon a hard salary cap in the NBA like it’s in the NHL — if everyone can pay the same amount to the same amount of players, it’s the small, nuanced differences that matter,” Leonsis told a group of local businessmen in Virginia last September. The comments drew a swift rebuke from Stern in the form of a $100,000 fine. The comment is why Hunter thinks the new owners have been told that stripped down costs and increased revenue sharing will be part of the new deal. “I have to suspect or believe that’s a part of it,” Hunter said of new owners’ buying into the league under the impression that they will be arriving to a restructured and favorable (for them) model.
That mentality is akin to a person buying a house on the cheap in a run-down neighborhood slated for improvement and development. The faith is thrown into the next five years and not the past five.
The majority of the new owners have already been directly involved in team decisions. One of the NBA’s most surreal moments occurred last season when Prokhorov flatly told reporters he had ended the Nets’ negotiations for Carmelo Anthony only to meet with him in Los Angeles less than a month later.6 Leonsis traded Gilbert Arenas and his albatross contract. Lacob and Guber hired Mark Jackson to replace Keith Smart (Lacob is also known to play pickup basketball with team employees during the day). Gores hired Lawrence Frank to coach and retained Joe Dumars. “He’s been great to work with,” Dumars wrote in an e-mail. “He’s passionate, smart and committed to winning.”
Because of Leonsis’ comments and the general closed-mouth state of the league, none of the new owners agreed to speak on the record for this article. They are an ambitious bunch according to their public comments the past few months.
“Bill Davidson put these championship banners up, and I have to build on that,” Gores said in his introductory conference.
“If everything goes as planned, I expect us to be in the playoffs next season and championship in one year minimum and maximum in five years,” Prokhorov said in a video message to Nets fans.
“I want to bring a championship to the city of Atlanta,” Meruelo told the Atlanta Journal Constitution.
“The plan for the Capitals and the Wizards is similar,” Leonsis told Modern DC Business. “We want to produce generationally great teams that are in position to compete for a championship each year.”
“There is no reason that we can’t turn this into a championship contender,” Lacob told the San Francisco Chronicle.
The vast majority of the new owners will be disappointed in the years to come. The enclave of new voices will only fortify the stance laid before them in these labor negotiations. How they develop their voices and teams in the next few years will be the most important first step. Without that, they will be hard-pressed to compete for that championship they all desire, their losses will probably compound and confound, and the cycle of new owners will likely begin again with another eager set — or as Carter would term them, “greater fools.”