Friday, September 25, 2009

Did Prokhorov get his shares of the team and arena at a two-thirds discount? It looks that way, reports the Times, but the deal's not simple

A little more than two days later, the major media are waking up to the notion that the agreement between Bruce Ratner and Mikhail Prokhorov might be a bargain for the oligarch, despite Ratner calling it "a great deal."

In an article headlined Russian’s Stake in Nets Seems to Be a Bargain, the New York Times reports:
Mikhail D. Prokhorov’s $200 million investment for 80 percent of the Nets and 45 percent of the team’s proposed Barclays Center is just one-third of what his share of the team and arena should be worth, according to Michael K. Ozanian, the national editor of Forbes, which compiles an annual list of professional team valuations.

Ozanian, in response to my query, explained that he valued the Nets at $295 million and the arena, as reported, at $800 million. Prokhorov's share of the team would be worth $236 million and his share of the arena at $360 million.

More to the deal

"What we don’t know of course is the amount Prokhorov has promised to invest in the team as part of the deal," Ozanian explained. Assuming the investment was zero, he said, Prokhorov made the purchase at one-third fair value.

Surely, however, Prokhorov plans to invest in the team; the Nets' payroll is quite low. So he'd be spending in order to put a team on the floor to generate additional revenue.

Beyond that, there's more to it for Ratner: Prokhorov would make “certain contingent funding commitments” that apparently would cover accumulated losses and debts. And Prokhorov would assume 80 percent of the more than $200 million in team debt.

But those losses could be made up, and the debt paid off, by success in Brooklyn, assuming the team moves. That's the risk Prokhorov is taking.

And we don't know, as Neil deMause points out, what the lease arrangement would be between the arena and the Nets, which could bring Ratner more revenues.

Steep discount

Still, even if Ratner needed Prokhorov's investment to provide cash flow and avoid losses on the team in the next couple of years, it looks like he's accepting a loss with the assumption that Brooklyn will bring new revenues.

The Times adds:
Prokhorov’s investment is also far less than the total cost of $360 million in acquisition costs and working capital that Bruce C. Ratner, the team’s owner, paid for the Nets in 2004.

True, the team has floundered, its best players are gone and it plays to thin crowds in New Jersey. Ratner and his investors in the Nets have also lost nearly $400 million since buying the club. But few teams in recent years have been sold at such a steep discount.

1 comment:

  1. While David Stern is apparently all rah-rah over this absurd deal, doesn't it actually portend serious repercussions for the value of all NBA teams, and perhaps all U.S. professional sports franchises? If a team in the country's largest media market sells for a fraction of its book value, that can't bode too well for teams in Sacramento, Oklahoma City, Memphis, Indianapolis, etc., etc. And if I'm an owner of one of those franchises, I don't think I'd be too quick to approve a new owner in a fire-sale transaction.

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