Hard Cap

[Agenda42]

I don't research these numbers because it's not something that I've ever needed to know, but I seriously doubt that "other companies in similar sectors" (whatever a "similar sector" is supposed to mean) limit their debt to 10%. In fact, I bet the vast majority of businesses run a far bigger debt load and your 10% feels like some sort of arbitrary threshold you've created out of air.

I didn't do anything fantastically complicated to assess this. I just looked at similar entertainment businesses with publicly available books and averaged out the debt to equity ratios and took the average. I'm not looking to make some arbitrary restriction, only to find a capital structure for comparable business models.

It looks to me like new NBA owners are systematically making bad business decisions.

The NFL can't be used as a realistic financial model for the NBA since their economic system is very different and is much more advantageous to the owners. But ignoring that, there are still only 6 NFL franchises out of 32 that have a debt ratio of less than 10%. That further underscores that looking at 10% debt as some sort of ideal number is unrealistic and pollyanna-like in today's world.

The median NFL team has a 14% debt to equity ratio, and certainly the NBA economic system needs some reworking to be more favorable to owners. One would assume the new CBA will fix the underlying problems in operating profitability that we have already discussed.

Absent that, though, there is still the problem that prospective owners have proven very willing to overpay to buy into the NBA game. The Warriors were valued at $315M by Forbes's 2010 appraisal before the acquisition of the team for $450M. If they had been bought for what they were appraised at, the team would have a debt to equity ratio of 8% instead of the 41% they have today.

You call on the NBA owners "to change the way they do business" and there is absolutely no way you can unscramble that egg to the degree you propose since they can't repudiate the debt they already have. So the thing they must do is to tackle the hard job of aligning their ongoing expenses with the realities of their situation. Given the fact that player payroll far exceeds all their other expenses added together, that's clearly the primary problem to be attacked, and resistance by the players at addressing reality isn't going to change things.

So long as prospective NBA owners are overpaying for a toy and not making a business transaction, long-term profitability will remain elusive; even if the owners get everything they want in this CBA negotiation, we're just another round of leveraged acquisitions away from the same problem.

[DBoys]

"I just looked at similar entertainment businesses with publicly available books "

Such as..? Earlier you said "most NBA franchises have more debt than steel mills or airlines" but I looked at American (approx 10B in debt on a co with a mkt value less than 2B) and US Steel (4B debt with 6B value) out of curiosity, and found you're way off the mark.

"The median NFL team has a 14% debt to equity ratio"

Yet you think the NBA, with a tougher economic model, has poor ownership when they end up with debt higher than 10%? Simply not a reasonable or evenhanded assessment.

"prospective NBA owners are overpaying for a toy"

A toy? Don't kid yourself. When you pay as much as these things cost, it's always a business. And the idea they aren't being treated as such simply ignores what's going on. Today's NBA isn't a league of jock-sniffers wanting to impress their friends, it's a business where owners are going to the mat to get their costs in line with their economics.

In addition, choosing to ignore the economic realities of the franchises as they exist is not going to change those realities. We can say they paid too much, have too much existing debt, or whatever other objection we want to make ....but at the end of the day, you have a league full of owners who have to deal with what is, not what we theorize it should be in an ideal world.

[Agenda42]

"I just looked at similar entertainment businesses with publicly available books "

Such as..? Earlier you said "most NBA franchises have more debt than steel mills or airlines" but I looked at American (approx 10B in debt on a co with a mkt value less than 2B) and US Steel (4B debt with 6B value) out of curiosity, and found you're way off the mark.

I took my information off of the industry overviews available at my broker. Looking at individual companies is not a particularly good method for evaluating the general working order of the sector, especially if the company is as distressed as American. That said, if you want concrete businesses to examine, I will point you towards Southwest, Allegheny Tech, and Posco as good case studies.

For other entertainment businesses with available books, examine the WWE and the Packers. I also looked at companies in showbiz and retail entertainment, although they're not as conveniently relevant.

"The median NFL team has a 14% debt to equity ratio"

Yet you think the NBA, with a tougher economic model, has poor ownership when they end up with debt higher than 10%? Simply not a reasonable or evenhanded assessment.

Let me make sure it's clear. The question I was answering was how much debt was reasonable to incur in the course of business operations. In my view, there is not much reason to have a high debt structure to run an NBA business -- the business isn't particularly cyclical and capital costs are low.

The amount of debt an owner chooses to take on is their business, but they are responsible for deciding whether they can operate the business profitably while servicing that debt. In the event that the owners of teams like the Warriors, Nets, or Thunder turn out to be wrong about how much debt they can handle, that's their problem.

"prospective NBA owners are overpaying for a toy"

A toy? Don't kid yourself. When you pay as much as these things cost, it's always a business. And the idea they aren't being treated as such simply ignores what's going on. Today's NBA isn't a league of jock-sniffers wanting to impress their friends, it's a business where owners are going to the mat to get their costs in line with their economics.

If owners are treating their franchises as business ventures, why are they paying such a premium to appraised asset value to acquire their teams? It seems like there are many better ways to make money than an NBA team of late.

[DBoys]

"I will point you towards Southwest, Allegheny Tech, and Posco as good case studies"

I see nothing that validates your assertion that a 10% debt ratio is some sort of "normal" business model.

While i don't think these are really comparable companies, they still don't validate your point - and these are companies you've cherry-picked out of their industries!! Southwest's long-term debt is about 30%, and ATI is about 25%. (Posco is a Korean company.) The Packers are a cherry-picked team out of 32, in an industry where 26 of the 32 are above the 10% "norm" you posit, so obviously it's not the norm either.

The point is this - if a 10% limit is not the way business and corporate debt typically works, then it's not a realistic expectation to say NBA owners are acting irresponsibly.

The actual problem is not the existence of debt, but rather the fact that the NBA's current economic model makes owners pick between being competitive (by paying more for player payroll than the franchise revenues can support) and breaking even. As a result, those debt loads aren't getting reduced over time, instead they're growing. The only reason franchises are getting sold is because new owners are speculating that what's presently a loser can become a financial winner with a better CBA - the same core reasoning used by people who buy stock in companies that are not profitable.

[ranger001]

As to how to do the accounting to strike a balance between player and owner interests, ultimately I think that compromise will be more about the relative strength of the two sides' bargaining positions rather than equitable compromise. I doubt the question will even be raised.

Well the question did get raised since the players are complaining that interest on debt shouldn't even be considered.

That said, I think you could study comparable businesses and conclude that a debt to equity ratio of about 10% is reasonable for operations.

I'm curious as to how you picked 10%. For instance, entertainment industries like theme parks, movie theatres typically have much higher ratios than 10%. Even retail stores also. Which industries did you compare it to and why?

[Agenda42]

"I will point you towards Southwest, Allegheny Tech, and Posco as good case studies"

I see nothing that validates your assertion that a 10% debt ratio is some sort of "normal" business model.

While i don't think these are really comparable companies, they still don't validate your point - and these are companies you've cherry-picked out of their industries!! Southwest's long-term debt is about 30%, and ATI is about 25%. (Posco is a Korean company.) The Packers are a cherry-picked team out of 32, in an industry where 26 of the 32 are above the 10% "norm" you posit, so obviously it's not the norm either.

The point is this - if a 10% limit is not the way business and corporate debt typically works, then it's not a realistic expectation to say NBA owners are acting irresponsibly.

You keep arguing against points I'm not trying to make. I give up.

The actual problem is not the existence of debt, but rather the fact that the NBA's current economic model makes owners pick between being competitive (by paying more for player payroll than the franchise revenues can support) and breaking even.

This is precisely what I'm talking about when I say that some teams are toys and not businesses. If another firm in your sector is willing to run their business in the red, it's going to be bad for your business too.

[Agenda42]

As to how to do the accounting to strike a balance between player and owner interests, ultimately I think that compromise will be more about the relative strength of the two sides' bargaining positions rather than equitable compromise. I doubt the question will even be raised.

Well the question did get raised since the players are complaining that interest on debt shouldn't even be considered.

Yes. Owners are saying "all debt should be considered", players are saying "no debt should be considered". I was trying to figure out what's a reasonable compromise to make between those two positions. I think it is obviously reasonable for debt that is taken on to fund business operations to also be counted in profitability, don't you?

That said, I think you could study comparable businesses and conclude that a debt to equity ratio of about 10% is reasonable for operations.

I'm curious as to how you picked 10%. For instance, entertainment industries like theme parks, movie theatres typically have much higher ratios than 10%. Even retail stores also. Which industries did you compare it to and why?

Again, I didn't commission a study here. I spent an evening looking at the capital structure of other businesses in the entertainment industry -- the WWE, pro sports, showbiz content providers, touring performers. The question I was seeking to answer is not "how much debt is on the books?" but rather "how much debt is needed to operate the business?" My 10% estimate could be off by a factor of 2, I just wanted to get a feel for things here.

Some industries have high cost structures and long returns on investment. Steel mills, airlines, theme parks, and movie theaters are all good examples. Whether an NBA franchise fits into that group comes down to how their arena is financed. Absent arena stuff, there's essentially no reason to have long term debt on the books at all from an operational standpoint. Each season is quite self contained, and because you get so much of your revenue up front from season ticket sales you have no worries about balance of payments.

There are different models for how to fund and finance arenas, but most of the modern ones look to be public/private partnerships that limit the cost to the franchise. The actual capital structure of a given NBA team is going to vary based on how old their arena is and how it was funded, of course. On the one extreme, you have the Thunder, who essentially got handed an arena to play in funded by the municipality. On the other extreme, you have the Rose Garden, which took on $150M in debt and $50M in capital from the team; of course, the team still found a way to improve the debt structure here when the holding company went bankrupt.

To get a better estimate we'd have to do case-by-case work that sounds pretty boring, so take what I said as a back-of-the-envelope estimate. Or you could do it

[ranger001]

Well the thing with entertainment like the WWE is that they don't have a stadium to maintain and they don't have franchises that compete with each other driving up player costs. I'd personally look at other sports franchises with stadiums and compare those. Or stuff like theme parks. In that case you get a lot higher than 10%.

We're in for a long "negotiation" imo. I wouldn't be surprised if the nba lost a season.

[Agenda42]

Well the thing with entertainment like the WWE is that they don't have a stadium to maintain and they don't have franchises that compete with each other driving up player costs. I'd personally look at other sports franchises with stadiums and compare those. Or stuff like theme parks. In that case you get a lot higher than 10%.

We're in for a long "negotiation" imo. I wouldn't be surprised if the nba lost a season.

I wouldn't be surprised either.

If you have a purely privately financed arena, I would expect the debt structure to look a lot like a theme park. Of course, a lot of things about NBA arenas would look different if they were purely private enterprises.

[JCWalters]

JC, what you're trying to explain now looks contradictory to what you originally said. But my honest attempt to reply to what I thought you said seems to have bothered you (bring out lots of insults and hollering), so let's start over and leave this discussion of semantics.

I think you are lying when you claim you perceive contradictions in my posts, but, to avoid you feeling insulted, I will just say that you are misunderstanding plain English, again. Also, I saw you accuse another poster of semantics in another thread. Please stop it; you look like you don't even know what the word "semantics" mean.
You still have not answered my questions:
1) How did you come to interpret the words, "in recent times," to mean "always?"
2) Also, how did you come to interpret my talking about the sales price of a franchise to mean the profit or loss from the sale of the franchise? I was talking about a stand alone number, whereas you, somehow, delusionally read one # being subtracted from another # to get a profit/loss #. Your behavior is not normal.

You said the following: "Every time a franchise had been valued or sold in recent times, the amount was a BIG POSITIVE NUMBER. The value of an item is the present value of all income generated by the item in a set time horizon. Therefore, the positive numbers conclusively prove that NBA franchises are not money losers at all."

What do you mean by "big positive number"? If you are NOT asserting they are being sold "every time" for a profit, I misunderstood your point. What is it?

I was not talking about profit, gain, or loss on sale. I was talking about PRESENT VALUE. I explained this to you at least twice already, so I will simply tell you to read my posts again, slowly. If you do not know the concept of present value (you should if all your rather entertaining bragging about buying businesses, building businesses, and knowing about busiensses were genuine), look it up. Then you will know why I maintain that big positive "sticker" prices of franchises refute the owners' implied argument of consistent losses/nonviability

As for your other point about viability vs profitability as so on, that's so focused on semantics and terminology that it feels like a sure recipe to lead to more insults and hollering, so I'll just walk past it. I don't think I agree with it, I think it misses some important points, it sounds like the criteria in your valuation and economic models are different than mine, but who knows?

Here, you are going to the "semantics" well too often. Also you are using it when the situation is not even close. There is a vast difference between viability and profitability. You should know that difference if you actually possess the business acumen that you try so hard to convey through all your huffing and puffing of your supposed business expertise. Nevertheless, I explained viability v. profitability to you in my previous post already. Read it again slowly. If you continue to claim contradictions or semantics or whatever abnormal interpretation you may choose to sputter, then I guess...

[JCWalters]

1) Viability analysis excludes interest expenses.
2) Profitability analysis--this is what you are doing--can validly include interest.
3) BUT I AM TALKING ABOUT VIABILITY, NOT PROFITABILITY==> SO INTEREST EXPENSE IS EXCLUDED.

How reasonable is it though that the players just throw out interest expenses when discussing whether a franchise is making money?

You got the whole context wrong. Owners are not "discussing whether a franchise is making money" with players. The players are not shareholders of franchises attending a shareholders meeting. Owners are using financial #s to try to prove nonviability to persuade players, who have market power over the owners, to take less salary.

With this correct context, ask yourself how reasonable it is to INCLUDE interest expense when owners are trying to convince players to take salary cuts b/c of nonviability.

When I say nonviability, I am referring exactly to the owners' MAIN argument: 1) some owners are richer than other owners--> 2) Richer owners can buy up James, Howard, Wade, Durant, Bryant, etc.--> 3) richer owners can buy up the top talent year after year--> 4) this will lead to year after year of zero parity--> 5) this will lead to year after year of no competition--> 6) this will lead to year after year of unwatchability due to no competition--> 7) this will lead to declining and eventually zero revenue--> 8) zero revenue means nonviable business==> So the owners are asking player to break this line of cause of effect by leveling the playing field between the richer owners and the not so rich owners.

The objective of the salary cap, luxury tax, etc. is to create this level playing field; It is not to ensure that any or all owners make a profit.

If an owner cannot afford top talent b/c competitor Paul Allen can bid his entire Microsoft fortune, then the owners' argument of nonviability has merit (not enoguh merit for me to accept, but enough that I would not laugh at their argument outright all the time). But, if an owner cannot afford top talent, b/c that owner wasted all his money on debts or other bad business decisions, then this is not a viability issue. That is, the market is not making the industry nonviable. That owner's greed and/or stupidity has made his specific franchise under his ownership nonviable.

[DBoys]

JC you can think I am lying, but you'd be wrong. Through this thread I've tried to reach a conciliatory tone with you and work with you on a discussion. But from your repeated replies lathered with insults, It appears you simply want to joust.

Were you intentionally misconstruing my words to try to twist them into something worthy of insults in return? I don't know. But you keep returning with insults despite my best attempts to talk with you collegially. In any case, at this point an item-by-item replay and rehash of wording (yes, that's a focus on "semantics") makes no sense to me since you don't appear to have an interest in a friendly two-way interaction.

I know for a fact you've completely confused (or miscast) what I was saying. But it's not worth the trouble to try again to explain. And I still think you're far off base on your opinions as to what is logical, and what should be accepted, in NBA ownership's stance in these negotiations. We'll leave it at that.

[ranger001]

You got the whole context wrong. Owners are not "discussing whether a franchise is making money" with players. The players are not shareholders of franchises attending a shareholders meeting. Owners are using financial #s to try to prove nonviability to persuade players, who have market power over the owners, to take less salary.

From the news reports I gather they are trying to prove non-profitability not "nonviability" according to your definition.

When I say nonviability, I am referring exactly to the owners' MAIN argument: 1) some owners are richer than other owners--> 2) Richer owners can buy up James, Howard, Wade, Durant, Bryant, etc.--> 3) richer owners can buy up the top talent year after year--> 4) this will lead to year after year of zero parity--> 5) this will lead to year after year of no competition--> 6) this will lead to year after year of unwatchability due to no competition--> 7) this will lead to declining and eventually zero revenue--> 8) zero revenue means nonviable business==> So the owners are asking player to break this line of cause of effect by leveling the playing field between the richer owners and the not so rich owners.

The objective of the salary cap, luxury tax, etc. is to create this level playing field; It is not to ensure that any or all owners make a profit.

Disagree, most owners are in the NBA to make money. These guys are not investing billions in the hope that they can be the 1 of 30 teams that hoist a championship.

If an owner cannot afford top talent b/c competitor Paul Allen can bid his entire Microsoft fortune, then the owners' argument of nonviability has merit (not enoguh merit for me to accept, but enough that I would not laugh at their argument outright all the time). But, if an owner cannot afford top talent, b/c that owner wasted all his money on debts or other bad business decisions, then this is not a viability issue. That is, the market is not making the industry nonviable. That owner's greed and/or stupidity has made his specific franchise under his ownership nonviable.

Yes this argument we've heard before, the owners are shooting themselves so they should only blame themselves. Even if that is true they still have every right to attempt to institute rules that protect them from shooting themselves in the foot. If they want to lose a year to institute those rules then they pay the bills and they can do it.

[ClosetMonkey]

One thing, which I don't understand is, what will happen with all the huge contracts (kobe, j. johnson, arenas) ?

[Agenda42]

One thing, which I don't understand is, what will happen with all the huge contracts (kobe, j. johnson, arenas) ?

Well, the owners are pushing for a hard cap that takes effect starting with 2013 and a 25% rollback in existing contract values. They will likely add a cap amnesty clause that allows each team to cut one player (but still pay him) in exchange for his contract coming off their salary cap.

Big picture, if the owners can convince the players to agree to a hard cap, they'll find some transition mechanism that doesn't break the league. Convincing the players that a hard cap is a good idea is likely to be a hard sell, though.

[JCWalters]

Check your messages. HMFFL

Dboys, you are really playing up the wounded victim. It is very amusing. However, on more substantive matters, I do think that you are lying. I think that you are a liar. But I have given you the benefit of the doubt through at least 2 exchanges already; yet you continue with the mischaracterization of my posts. Now you are saying that I have mischaracterized your replies. I simply asked you to explain yourself, w/o the huffing and puffing that you are prone to, as to how you can, among other things, believe "in recent times" means "always." Again, such behavior is not normal. Also, your accusation of me "intentionally misconstruing" your words needs a lot of work to be a credible lie. I stated a point and then you responded to that point after having twisted my point to mean what you wanted to fabricate. I then instructed you as to what I meant and then told you to read my post again. How can I misconstrue your words when I was repeating my words and telling you to reread?

But I thank you for your last post. You clarified that I was mistaken to have given you the benefit of the doubt. You are not ignorant. You are an ignorant liar.

[JCWalters]

You got the whole context wrong. Owners are not "discussing whether a franchise is making money" with players. The players are not shareholders of franchises attending a shareholders meeting. Owners are using financial #s to try to prove nonviability to persuade players, who have market power over the owners, to take less salary.

From the news reports I gather they are trying to prove non-profitability not "nonviability" according to your definition.

They are trying to prove nonviability to argue nonviability, not nonprofitability to argue nonprofitability.

When I say nonviability, I am referring exactly to the owners' MAIN argument: 1) some owners are richer than other owners--> 2) Richer owners can buy up James, Howard, Wade, Durant, Bryant, etc.--> 3) richer owners can buy up the top talent year after year--> 4) this will lead to year after year of zero parity--> 5) this will lead to year after year of no competition--> 6) this will lead to year after year of unwatchability due to no competition--> 7) this will lead to declining and eventually zero revenue--> 8) zero revenue means nonviable business==> So the owners are asking player to break this line of cause of effect by leveling the playing field between the richer owners and the not so rich owners.

The objective of the salary cap, luxury tax, etc. is to create this level playing field; It is not to ensure that any or all owners make a profit.

Disagree, most owners are in the NBA to make money. These guys are not investing billions in the hope that they can be the 1 of 30 teams that hoist a championship.

The objective of the salary cap, luxury tax, etc. is to create this level playing field; It is not to ensure that any or all owners make a profit. This is true irregardless of what the owners are in the NBA for. Remember, the owners are not kings who can just institute a salary cap, luxury tax, etc. They need the players' consent. Thus, players have a say in the intent of any caps, taxes, etc. Are you saying that the objective of the players is: "owners being in the NBA to make money?" I am pretty sure the players' objective is to make money themselves.

If an owner cannot afford top talent b/c competitor Paul Allen can bid his entire Microsoft fortune, then the owners' argument of nonviability has merit (not enoguh merit for me to accept, but enough that I would not laugh at their argument outright all the time). But, if an owner cannot afford top talent, b/c that owner wasted all his money on debts or other bad business decisions, then this is not a viability issue. That is, the market is not making the industry nonviable. That owner's greed and/or stupidity has made his specific franchise under his ownership nonviable.

Yes this argument we've heard before, the owners are shooting themselves so they should only blame themselves. Even if that is true they still have every right to attempt to institute rules that protect them from shooting themselves in the foot. If they want to lose a year to institute those rules then they pay the bills and they can do it.

No. No one has the right to attempt to break the law. And no owner(s) has the right to attempt to collude to fix prices. The US code is quite clear on the legality of colluding to fix prices. And the code (and probably many state laws as well) says it is illegal. And the owners can pay the bills 1000x over and lose a 1000 years, but that will not change the anti-trust strictures against price-fixing and collusion.

[DBoys]

JC, I don't see any sense in spending time on fighting some sort of internet war. There are plenty of people to talk with and places to spend time, without such nonsense.

I'm not a liar, nor am I ignorant. But I'd rather invest my time talking with others than try to prove myself to you somehow. I tried a couple of times to explain where I think you misunderstood, so we could go back to topic, but you simply replied with more insults. If you don't recognize you can misunderstand or there can be accidental miscommunication, among people of good will, hopefully you will figure it out eventually. In the meantime, I'll talk with others who have that understanding.

[ranger001]

They are trying to prove nonviability to argue nonviability, not nonprofitability to argue nonprofitability.

For an owner if a franchise is non-profitable then its not worthwhile.

Disagree, most owners are in the NBA to make money. These guys are not investing billions in the hope that they can be the 1 of 30 teams that hoist a championship.

The objective of the salary cap, luxury tax, etc. is to create this level playing field; It is not to ensure that any or all owners make a profit. This is true irregardless of what the owners are in the NBA for. Remember, the owners are not kings who can just institute a salary cap, luxury tax, etc. They need the players' consent. Thus, players have a say in the intent of any caps, taxes, etc. Are you saying that the objective of the players is: "owners being in the NBA to make money?" I am pretty sure the players' objective is to make money themselves.

Both the players and owners are in it to make the most money possible. The CBA is a way of balancing these interests, levelling the playing field is a happy byproduct of each owner making money. Where are you getting that the sole purpose of the CBA is to level the playing field?

Yes this argument we've heard before, the owners are shooting themselves so they should only blame themselves. Even if that is true they still have every right to attempt to institute rules that protect them from shooting themselves in the foot. If they want to lose a year to institute those rules then they pay the bills and they can do it.

No. No one has the right to attempt to break the law. And no owner(s) has the right to attempt to collude to fix prices. The US code is quite clear on the legality of colluding to fix prices. And the code (and probably many state laws as well) says it is illegal. And the owners can pay the bills 1000x over and lose a 1000 years, but that will not change the anti-trust strictures against price-fixing and collusion.

They are exempt from antitrust because the CBA was agreed upon between the union and the owners. If there is no NBA it hurts the players more so the owners have more power in this little war thats about to unfold.

[ranger001]

Dboys, you are really playing up the wounded victim. It is very amusing. However, on more substantive matters, I do think that you are lying. I think that you are a liar. But I have given you the benefit of the doubt through at least 2 exchanges already; yet you continue with the mischaracterization of my posts. Now you are saying that I have mischaracterized your replies. I simply asked you to explain yourself, w/o the huffing and puffing that you are prone to, as to how you can, among other things, believe "in recent times" means "always." Again, such behavior is not normal. Also, your accusation of me "intentionally misconstruing" your words needs a lot of work to be a credible lie. I stated a point and then you responded to that point after having twisted my point to mean what you wanted to fabricate. I then instructed you as to what I meant and then told you to read my post again. How can I misconstrue your words when I was repeating my words and telling you to reread?

But I thank you for your last post. You clarified that I was mistaken to have given you the benefit of the doubt. You are not ignorant. You are an ignorant liar.

You're crossing the line here into personal attacks which is against the realgm TOS. You can attack the poster's ideas not the poster. If you continue down this road you will get banned.