Has "financial Armageddon" for the NBA arrived?

[DBoys]

The NBA feels compelled to buy the NO franchise because they can't find a single interested buyer. Is this significant news? Will this have an impact on upcoming CBA negotiations? Does it have the potential to impact how owners do business, or how potential buyers look at the idea of buying into the NBA?

[ranger001]

When David Stern talked about contraction he wasn't kidding. On the current model there are teams that are not financially viable. NO likely won't be sold until the new CBA is done and the system is brought back to financial stability.

This is the first time in NBA history that a team was unable to find a buyer. This should help people understand that the over simplistic reasoning of "just don't spend money" is unfeasible and unrealistic.

[HartfordWhalers]

The NBA feels compelled to buy the NO franchise because they can't find a single interested buyer. Is this significant news? Will this have an impact on upcoming CBA negotiations? Does it have the potential to impact how owners do business, or how potential buyers look at the idea of buying into the NBA?

I saw several articles about the sale claim there were 2 interested buyers (besides Chouset), with one wanting to move the team.
I wouldn't take this as a sign of contraction. I would take this as a sign about whether NO keeps a team, and whether the area is currently viable as a home team market. And if the team is going to be allowed to move, of the nba's desire to be involved with the relocation choice.

[Dunkenstein]

Shinn thought he had sold the team to Chouest, but he's having trouble with his offshore oil equipment business and couldn't close the deal. Because of a loophole the the Bush tax laws, there is no capital gains tax in 2010, so Shinn was desperate to unload the team before the end of the year. Plus he had loans from the league which he didn't have the cash to repay. You notice in all the stories about the sale no sales price was mentioned. I'm sure Stern got the team for a discounted price and will make a nice profit for the league when he ultimately sells it.

They keep talking about wanting to keep the team in New Orleans, but I bet if a deep pocket buyer with a decent stadium comes along, they'll move the Hornets to another city. Kansas City has an up-to-date arena. So does San Jose, and we know Larry Ellison wants to be an NBA owner. And though they don't have a proper arena in Seattle, it's interesting to note that Steve Ballmer just sold $1 Billion of his stake in Microsoft (no doubt to avoid capital gains taxes as well). He was interested in the Sonics before they were shanghaied to OKC.

[HartfordWhalers]

Shinn thought he had sold the team to Chouest, but he's having trouble with his offshore oil equipment business and couldn't close the deal. Because of a loophole the the Bush tax laws, there is no capital gains tax in 2010, so Shinn was desperate to unload the team before the end of the year. Plus he had loans from the league which he didn't have the cash to repay. You notice in all the stories about the sale no sales price was mentioned. I'm sure Stern got the team for a discounted price and will make a nice profit for the league when he ultimately sells it.

They keep talking about wanting to keep the team in New Orleans, but I bet if a deep pocket buyer with a decent stadium comes along, they'll move the Hornets to another city. Kansas City has an up-to-date arena. So does San Jose, and we know Larry Ellison wants to be an NBA owner. And though they don't have a proper arena in Seattle, it's interesting to note that Steve Ballmer just sold $1 Billion of his stake in Microsoft (no doubt to avoid capital gains taxes as well). He was interested in the Sonics before they were shanghaied to OKC.

This was only for estate tax. Capital gain rates were constant in 2010 with the original Bush tax cuts, and as of the agreement Monday night, will stay the same for the next two years (actual legislation pending of course). I think taxes had nothing to do with it, while the loans had a lot.

http://deadspin.com/5708313/the-new-orl ... s/gallery/

Team finances weren't pretty.

[ranger001]

Interesting link. According to it partners deficit was $83 million as of 2009. That's a lot of money to lose on an investment evaluated at $300 million. He would have done better with bonds and US treasuries.

Several teams are likely in the same situation, Indiana, Memphis, Milwaukee, Minnesota. Tape some games guys, looks like its going to be very tough negotiating. The players dont get it at all.

[HartfordWhalers]

Interesting link. According to it partners deficit was $83 million as of 2009. That's a lot of money to lose on an investment evaluated at $300 million. He would have done better with bonds and US treasuries.

Several teams are likely in the same situation, Indiana, Memphis, Milwaukee, Minnesota. Tape some games guys, looks like its going to be very tough negotiating. The players dont get it at all.

Some initial thoughts after looking over the income statements:

13 million jump in regular season ticket sales was huge from 08 to 09. Its nice to see the revenue jump of switching from a just lottery to a 2nd round team, so we can now have at least one data point on the trade board.

There debt load was massive, 110 million. Add in the 80 they had borrowed from themselves, and you are looking at close to 200 in debt for a 300 million business. Maybe a normal business can take that debt load, but an NBA franchise is definitely not valued solely based on its income stream, so even in the good year of 09 they made 6 million and owed 8 in interest.
They were still having to take on debt to pay interest on current debt, even when things worked out well.

Who would loan that much money to Shinn?
Lets see:
~74 million from the nba borrowing scheme in 2008, which was increased after they borrowed the maximum of 65 million.
11 and also ~23 million from the nba in 2004, with the 11 due in 2010, and interest due on December 7th for both...

Say, what day did the nba decide to buy the Hornets? December 6th? Anyone want to bet on whether the team would default on the 7th otherwise?
The borrowing from the nba had a hard cap of 125 million in secured debt and the team was at ~124 as of 2009, so it looks like the team might have past reaching the cannot borrow out of your debt state.
Obviously something crazy could have happened in 2010, but
I think the hornets had 1 day left before default when Stern stepped in.

[ranger001]

I wouldn't doubt it. Makes it cheaper for Stern to buy them.

Another thing to note on slide 11 is that salaries are around 70%(74m) of total operating expenses(104m)! A service industry is usually around 50% AFAIK. Hard cap of 50m coming. And an extra 20m less expense means the Hornets would be profitable.

That information is gold. Now we know why Stern is seeking a 38% reduction in salaries. Its to bring it in line with the service industry standard.

[DBoys]

Because of a loophole the the Bush tax laws, there is no capital gains tax in 2010

Wish that was accurate. But it's not.

And though they don't have a proper arena in Seattle, it's interesting to note that Steve Ballmer just sold $1 Billion of his stake in Microsoft (no doubt to avoid capital gains taxes as well).

Not sure what his motivation was, but this wasn't it.

[mysticbb]

That information is gold. Now we know why Stern is seeking a 38% reduction in salaries. Its to bring it in line with the service industry standard.

Either you have no clue what you are talking about or you can't do the math. Last season the total salary for all teams together was $2,077m while the total revenue was $3,643m. That, and you will not believe it, means 57% of the BRI was spent on salary. The Hornets are an outlier here, not the rule. If Stern is seeking a 38% reduction, that would bring the salary to 35% of the revenue. If that would be the goal, it would mean a $42.9m hard cap. Which is not even in the interest of the teams at all.

There will be no hard cap, and I doubt the most teams even want that anyway, and if there is a hard cap, it will be closer to the luxury tax threshold than to the current salary cap. It is more likely that they will reduce the designated percentage from 57% down to something between 50 and 54%. That alone gives the teams together at least $110m more. There will also raise the ESCROW back to 10% to give them more flexibility.

[ranger001]

That information is gold. Now we know why Stern is seeking a 38% reduction in salaries. Its to bring it in line with the service industry standard.

Either you have no clue what you are talking about or you can't do the math. Last season the total salary for all teams together was $2,077m while the total revenue was $3,643m. That, and you will not believe it, means 57% of the BRI was spent on salary. The Hornets are an outlier here, not the rule. If Stern is seeking a 38% reduction, that would bring the salary to 35% of the revenue. If that would be the goal, it would mean a $42.9m hard cap. Which is not even in the interest of the teams at all.

There will be no hard cap, and I doubt the most teams even want that anyway, and if there is a hard cap, it will be closer to the luxury tax threshold than to the current salary cap. It is more likely that they will reduce the designated percentage from 57% down to something between 50 and 54%. That alone gives the teams together at least $110m more. There will also raise the ESCROW back to 10% to give them more flexibility.

Read my post again and notice I am talking about operating expenses, not BRI. Hornets player salaries are 71.5m, 38% of that is ~27. Take away 27m from the slide 11 figure of 74m means that salaries would be reduced to 47/104 = 45% of operating expenses. So he's leaving around 5-15% that he can give back in negotiations.

If you had a 300 million dollar investment what kind of return would you expect? Negative return is not what most NBA owners want.

[mysticbb]

Read my post again and notice I am talking about operating expenses, not BRI. Hornets player salaries are 71.5m, 38% of that is ~27. Take away 27m from the slide 11 figure of 74m means that salaries would be reduced to 47/104 = 45% of operating expenses. So he's leaving around 5-15% that he can give back in negotiations.

You are using the Hornets as an example as if they are representative. That is your mistake here. It is also not useful to use the expenses here, because the players are direct responsible for the revenues.

If you had a 300 million dollar investment what kind of return would you expect? Negative return is not what most NBA owners want.

Shinn invested $33m in 1987! He made a lot of money.

And seeing that a couple of teams were sold recently for a lot of money too, it makes no sense to assume that the Hornets are representative for the NBA. In fact they are the exception.

[ranger001]

Shinn made money on the Hornets? Says who?

And how do you know the Hornets are not representative of the small market teams? Teams like the Bucks, Pacers, Grizzlies have been losing money for years.

[mysticbb]

Shinn made money on the Hornets? Says who?

Well, do the math. ;)

Unless you believe he got less than $33m, he made money. In fact the Hornets had a net income in a couple of years. And I seriously doubt that Shinn didn't put that money in his pocket. He isn't one of the rich owners who can afford to have a NBA franchise as a toy.

And how do you know the Hornets are not representative of the small market teams? Teams like the Bucks, Pacers, Grizzlies have been losing money for years.

Oh, now you are talking about small market teams only? How funny. Just change the subject and you are fine? Seriously, the numbers for the whole NBA are available and they tell a different story than the numbers for the Hornets.

The problem is revenue sharing between the teams, not the expenses for the players. Some teams (like the Bulls, Knicks, Lakers or Pistons) have a huge net income while other teams with even lower payrolls are not. Reducing the overall salary will just make the owners of those teams richer while the small market teams will still have no chance at competing while making money.

I know that the owners want to make money, especially if they aren't named Allen, Cuban, Arison or DeVos. But a hard cap will not get that done. The owners have to make smart decisions. Nobody forced Shinn to agree to the deal for Stojakovic or Posey, he agreed to that, because he wasn't smart. And seriously don't cry, because Shinn made his fair share of money anyway.

[ranger001]

Did you read the statements? Hornets are not making money period. The NBA has had to loan them money. Shin has had to put money in the franchise to keep them going.

The NBA as a whole loses money, so revenue sharing would spread the losses not make the Hornets profitable. Where are you getting this info that the NBA is profitable?

And I never said the Hornets are the same as LA, Chicago. Obviously the big market teams are making lots of money.

[mysticbb]

Hornets are not making money period.

Actually the Hornets had a $1.8m net income last year. Maybe you should read that statement more carefully.

The NBA has had to loan them money.

And I would like to know what kind of expenses they had to cover with that. And still, the debt is $111m while the franchise is worth $300m (according to your idea).

Shin has had to put money in the franchise to keep them going.

Shinn didn't put money into it, he gave them a loan. He will get his money back, don't act like he lost money due to that.

The NBA as a whole loses money, so revenue sharing would spread the losses not make the Hornets profitable. Where are you getting this info that the NBA is profitable?

http://www.plunkettresearch.com/Industr ... fault.aspx

$233m for the 2008/09 season.

Obviously the big market teams are making lots of money.

Well, you agree that this is a problem of revenue sharing?

[HartfordWhalers]

Shinn made money on the Hornets? Says who?

Well, do the math.

Unless you believe he got less than $33m, he made money. In fact the Hornets had a net income in a couple of years. And I seriously doubt that Shinn didn't put that money in his pocket. He isn't one of the rich owners who can afford to have a NBA franchise as a toy.

And how do you know the Hornets are not representative of the small market teams? Teams like the Bucks, Pacers, Grizzlies have been losing money for years.

Oh, now you are talking about small market teams only? How funny. Just change the subject and you are fine? Seriously, the numbers for the whole NBA are available and they tell a different story than the numbers for the Hornets.

The problem is revenue sharing between the teams, not the expenses for the players. Some teams (like the Bulls, Knicks, Lakers or Pistons) have a huge net income while other teams with even lower payrolls are not. Reducing the overall salary will just make the owners of those teams richer while the small market teams will still have no chance at competing while making money.

I know that the owners want to make money, especially if they aren't named Allen, Cuban, Arison or DeVos. But a hard cap will not get that done. The owners have to make smart decisions. Nobody forced Shinn to agree to the deal for Stojakovic or Posey, he agreed to that, because he wasn't smart. And seriously don't cry, because Shinn made his fair share of money anyway.

Running the numbers isn't really practical. Shinn both bought and sold additional stakes over the years, no one has seen the final sale price, there was significant related party transactions that I wouldn't want to say if they equalled benefits or not, and I don't know how much equity he really invested in 87 versus debt.
But lets say he invested all 33 and borrowed none (i doubt this).
The firm sells for 300million (plausible).
Net partnership contributions are accurate, but are totally by him and not any minority owners.
Selling nets 300 million - 125 million debt, -82 million in paying back partners accumulated deficit.. So 100 million?
And Shinn owns 75%, so 75 million?
And 75 million from 33 over 23 years is a 3.6% annual return.

It looks much better if he can pocket the ~60 million chouset paid him, then we are talking a 6.3% annual return. If Chouset gets paid back his 1/4th the paid in 80, then we are back down to 5.6%.

Add in leverage, maybe 50% of the 33 million, and those scenarios jump to 6.8, 9.6, and 8.8% annualized returns off an initial 16.5 million.
The NBA, where you can use significant debt to get only average returns after being bought right before defaulting (all while angering 2 full cities)!

As per the salary level of the NO team, you need to take back the escrow figure for your dispute above. So if salaries in 09 were 70, subtract the 6.5 of escrowed salary money the team got back.

BRI from 57 to 48-50 would be a 12%-15% reduction, and have compensation rates around the typical investment bank, and should move teams from a minuscule profit to a 5-7% profit. NBA franchises do increase in value each year and that is part of the business model...

[mysticbb]

And 75 million from 33 over 23 years is a 3.6% annual return.

Yes, not great, but he still made money. And it wasn't just bad luck or so, but also wrong decisions. If you want to make money, there is also risk involved. He didn't make as much as he could have made with a different investment, but that is also HIS fault.

BRI from 57 to 48-50 would be a 12%-15% reduction, and have compensation rates around the typical investment bank, and should move teams from a minuscule profit to a 5-7% profit. NBA franchises do increase in value each year and that is part of the business model...

That sounds reasonable, but I doubt that they will go below the 50%. The increased value is indeed a part of the buisness model and something some people seem to ignore.

The players will get some of the stuff they want (see the leaked proposal) while agreeing to the reduced designated percentage. Neither the players nor the owner will want a lockout. The league needed a lot of years to get back on track after the last lockout. The NHL is another example, they are also still struggleing after the lockout.

Also true about the Escrow, didn't figure that in.

[ranger001]

Actually the Hornets had a $1.8m net income last year. Maybe you should read that statement more carefully.

That's only because the NBA decided to let them defer 4million they owed them. Check this out:-
http://www.atthehive.com/2010/12/7/1862 ... profitable

Shinn didn't put money into it, he gave them a loan. He will get his money back, don't act like he lost money due to that.

Well i dont know if I was Shinn and had to put in 3 million dollars its still 3 million less in my pocket. Unless I sold the team which he did.

http://www.plunkettresearch.com/Industries/Sports/SportsStatistics/tabid/273/Default.aspx
$233m for the 2008/09 season.

Hmm, that does contradict Stern. I tend to believe Stern who has actual figures over a guess from plunkett.

Obviously the big market teams are making lots of money.

Well, you agree that this is a problem of revenue sharing?

No. Stern says that as a whole the NBA lost money. There are fewer big market teams than small market ones.

[SJSF]

Lets keep it very simple. There are about 20 teams that are losing money. Thats not good. There will be a hard cap just like hockey and football. I say it will be around 50m. Hockey didn't want one. They got one after a lengthly lockout. Same will happen to basketball. The players have no leverage at all. They rely on the owners to pay there bills. The owners dont rely on basketball players to be rich. Its just an investment for them. If anyone thinks that there will be basketball season next year your crazy. And after about a year of no salaries for these prima donna athletes, they will crumble. You know they don't save money. Just ask Iverson, Sprewell, and many others. LOL