Thursday, January 23, 2014

Nets fifth most valuable team in NBA: valuation up 47%, largest jump in league, to $780 million, thanks to new market, arena

Graphics adapted from Forbes
The numbers are staggering.

Thanks to a new arena and market, the value of the Brooklyn Nets, according to Forbes, has continued to skyrocket, from $357 million in 2012 (#14 in league, a 14% rise) to $530 million last year (#9, a 48% jump), to $780 million this year (#5, a 47% leap), the largest increase in the National Basketball Association.

Particularly instructive are the components of that $780 million figure, which values the Nets during their first season (2012-13) in their new Brooklyn arena.

The value of the team attributed to the sport itself has gone down from $292 million to $141 million because the big-spending Nets are no longer the recipients of league-wide revenue sharing.

However, the value attributed to the new Brooklyn market has more than doubled, from $143 million to $297 million. The value attributed to the arena has more than quintupled, from $50 million to $257 million. And the more amorphous "brand" value has more than doubled, from $45 million to $91 million.

Nets losses, team's value

Given the NBA's collective bargaining agreement, national TV rights deals, and league-wide revenue sharing most teams are doing very, very well.

The Nets, with a loss last year of $19 million, are also the team with the largest operating losses, attributable in part to the very high salaries Prokhorov agreed to pay to make the team competitive. Indeed, as Forbes writes:
Owner Mikhail Prokhorov is not sparing any expense in his attempt to bring a NBA title to Brooklyn. The Nets are on track to lose at least $50 million this season even with an extended playoff run, thanks to a $101 million payroll and luxury tax bill of at least $80 million.
Only three other teams--the Philadelphia 76ers, the Minnesota Timberwolves, and the Atlanta Hawks--are losing money, between $2.7 million and $3.8 million a year.

That said, the enormous increase in the value of the team--Prokhorov spent $365 million, according to Forbes' calculations--to buy 80% of the team from an ownership group led by developer Bruce Ratner, surely will make up for those losses.

It also makes it ever more likely that Ratner, and parent company Forest City Enterprises, will sell their share of the Nets, since the team is not part of the real estate company's core competency.

Graphic from Sports Illustrated
As I wrote 1/29/13 after the valuations last year, shouldn't the increase in value make New York City and State officials rethink their pattern of agreeing to renegotiate deals for the Vanderbilt Yard and other subsidies/project benefits?

The key is the market

A winning team does not make a team valuable but rather the market, which includes the ability to charge high prices for seats and negotiate lucrative TV deals.

The New York Knicks are the top team, valued at $1.4 billion, thanks in part to a "second round playoff run and higher revenue from the $1 billion renovation of Madison Square Garden." The Los Angeles Lakers are valued at $1.35 billion.

The Brooklyn Nets have the ninth-best local TV deal, according to Forbes:
When the team moved from New Jersey to Brooklyn it negotiated a 10-year extension on its TV rights deal that started payments at $20 million and increase annually through its expiration at the end of the 2031-32 season.
Update: from Field of Schemes

Neil deMause doesn't agree, given the lack of profits:
Um, okay, then. There are three possible takeaways from this. One, which is Atlantic Yards Report’s view, is that it doesn’t matter how much money you lose on a pro sports team, since you’ll make it up when it’s time to sell. Two would be that Forbes’ team valuation figures are on crack. (It’s worth noting that the magazine’s annual profit and loss figures have been pretty much on target when compared to data later publicly released, but their team valuations haven’t matched up that well with sale prices.) Or three, people who buy sports teams will pay crazy money to sit in the owner’s box, even if it’s to own a team that has no hope of ever turning a profit. I wouldn’t have picked owner stupidity at one time, but recent evidence has me less certain.
Commenters debated:
Trueblood on January 24, 2014 at 1:33 pm said:
The profit margin is a result of the Nets ridiculous player payroll. They are paying an insane luxury tax this year and it was pretty high last year as well. The current Forbes numbers are based on last year’s finances. If this team gets below the lux tax level, they will have a very high profit margin.
Ben Miller on January 24, 2014 at 1:58 pm said:
The key is cash flow. If someone were to buy the Nets they’d have a profitable (not counting construction debt) arena, local TV money from the New York market and a fan base that seems willing to pay high prices for NBA tickets.
John Bladen on January 26, 2014 at 3:22 am said:
I lean toward the view that Forbes valuations are highly suspect. In one year their valuation of the Maple Leafs franchise jumped from $450m to $1bn despite no significant year over year revenue changes.
What happened? Two media companies desperate for content bought the parent company of the Leafs (apparently Forbes didn’t notice that the purchase price included 3 other teams and a couple of stadiums as well) for $1.5bn give or take.
Sale price is not always indicative of actual market value. When there is just one example of the asset being sold, sale price almost always is far in excess of the actual value of the asset (see Batmobile, Toronto Maple Leafs, and a bunch of alleged Van Gogh paintings that might be fakes).
IF Forbes actually did it’s homework, insane auction transactions would not be used to establish a value for franchises. Balance sheets (or reasonable estimates thereof) are required… not cheap and lazy research completed by interns (or less).

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