Tuesday, October 21, 2014

Current management seen as continuing at Barclays Center (operating company), though not clear how long; why is Ratner selling for seeming low price?

Forest City Enterprises and Bruce Ratner are selling their 55% share of the Barclays Center--actually, the arena operating company--and only a few details have emerged since Sports Business Journal broke the news yesterday.

Sports Business Journal noted that investment bank Evercore, which is packaging the arena deal, declined to comment, and "Forest City referred questions to Nets and arena spokesman Barry Baum, who declined to comment."

Yesterday, however, there was a statement, as ESPN reported:
"Our goal is to identify a strategic partner as we continue to capitalize on the great performance of Barclays Center and the promise of Nassau Coliseum," Barclays Center spokesman Barry Baum said in a statement. "The current management team [Ratner and Barclays Center CEO Brett Yormark] will continue in its existing role."
That doesn't mean much. The current management team could continue as long as those owning the arena operating company decide to keep it. And the mention of the Nassau Coliseum suggests that the expected buyer/strategic partner might also get a piece of the Long Island arena.

Capital New York added this detail:
Exactly what sort of ownership structure will be created for the Barclays Center remains to be seen, but any deal will keep the Nets in place as the controlling owners. The team has a 45 percent stake in the arena.
I'm not sure of that syntax, because the Nets are not currently "in place as the controlling owners." Prokhorov, who owns 80% of the team, is a minority owner of the arena holding company. That might simply be an awkward interpretation of the statement that the current management would remain.

The Daily News reported:
Still, insider sources said that the best way to drive the value for Barclays Center is to keep the key players in place, meaning Ratner and CEO Brett Yormark could maintain their roles as day-to-day operators of the arena.
I'd bet those "insider sources" were current management.

A tenant/occupant owner, or not?

The new Islanders ownership has been mentioned as a potential buyer, as well. Sports Business Journal observed:
Indeed, if one of those two teams’ owners does not buy the arena — the Nets’ controlling owners hold the other 45 percent stake of the building — the structure would join a select list of venues in sports: an arena hosting two professional sports teams, but all three entities having separate ownership.
That runs counter to the traditional model of a team wanting to control the arena it plays in, enabling that franchise to benefit from having non-sports revenue at the facility as well.
If and when Prokhorov takes a majority, that means that almost all of the Atlantic Yards project--the arena plus 15 planned towers--will be under the control of foreign owners.

Ownership of the Barclays Center and the Brooklyn Nets
I'd bet that the one remaining building, the stalled B2 modular tower, will eventually be owned by Greenland Forest City Partners, the joint venture 70% owned by the Shanghai government-owned Greenland Group.

Public ownership

Note that neither Porkhorov nor Ratner actually own the arena, which is technically publicly owned and leased for a dollar.

The arena is nominally owned by the Brooklyn Arena Local Development Corporation, a creation of the Job Development Authority, which is an alter ego of the Empire State Development Corporation. That enables a complicated process for the developer to save money via the issuance of tax-exempt arena bonds.

The arena is then leased (I believe) to Brooklyn Arena, LLC, which is currently owned 55% by a Forest City affiliate and 45% by a Prokhorov affiliate. (See graphic at right from the 2010 Official Statement for the arena bonds, and click to enlarge.)

The new owners will still have to pay PILOTS (payments in lieu of taxes) to pay off the $511 million in tax-exempt bonds.

Sale at a loss?

The Daily News picked up (without credit) my observation that the $750 million assumed valuation, based on revenue flow, appears to be a loss, based on $930 million or $845 million in project costs (which add infrastructure). Ratner's share would be some $400 million.

The Wall Street Journal reported:
The move stands as a test for the value of the arena. In its first full year of operations, the building generated just shy of $30 million of operating income, less than its debt expenses, Forest City reported, leading to a loss for the year.
Since then, the performance has improved—it reported $21 million in operating income in the first six months of this year.
But at a pace that is still well below initial projections, which envisioned more than $70 million in annual operating income.
Even so, that doesn't mean Ratner should be selling at a loss, especially since the Barclays Center appears poised to reap more consistent revenues when the Islanders move in September 2015.

Could the concert business be that variable? Were some of the big-name concerts achieved by giving the artists particularly sweet deals?

Or is there more to the price and the contours of the deal than meet the eye?

One thing to note is that Forest City will still remain in the arena business, with the project to revamp the Nassau Coliseum. One of the selling points for that detail was potential synergy with the Barclays Center.

A wild-card explanation

Here's a wild-card thought as to why they might be selling the arena: maybe Forest City recognizes that, even with the coming green roof on the arena, it won't muffle sound enough before it hits the adjacent apartment buildings that they are building (two of them with Greenland). And they don't want to be responsible.

Ratner's selling the Nets

Ratner has been unable to sell his 20% share of the Nets, though the paper valuation of the team has rocketed, to a potential $1 billion or more. There's apparently a gap between the paper value and the lack of annual profits.

 Sports Business Journal reported:
The problem, market insiders said, are the steep financial losses at the Nets, which incurred a U.S. sports record loss of $144 million last season, according to published reports. The team has committed to stop the red ink after this season, but with an owner, Prokhorov, seen as willing to tolerate losses to sign top players, finding a willing partner subject to capital calls is not easy.
...Forest City paid Prokhorov a fee to avoid capital calls through July 2015, according to Forest City’s annual report, so the purchaser of the stake would apparently enjoy one capital-call-free season — the coming, 2014-15 season.
Murkiness about Prokhorov

Prokhorov's future is up in the air, too, as the Daily News reported:
Meanwhile in Russia, a leader of a political party said Monday that Mikhail Prokhorov could again dive into Russian politics “at any moment” ahead of the 2016 elections. As part of Russian law enacted under the rule of President Vladimir Putin, the 49-year-old Prokhorov would either have to divest his majority shares of the Nets or place the basketball team under control of one of his Russian companies if he again wants to run for office.
ESPN reported that at least one interested party said Prokhorov would be willing to give up majority ownership for the right price.

1 comment:

  1. Interesting to see the David Offensend-connected Evercore popping up here again in another AY (aka "PP") related article.

    On another front, David Offensend (at the NYPL as COO starting 2004) and his wife Janet (at the BPL as Trustee starting 2005) have both been heavily involved in the new agenda of selling off and shrinking NYC libraries. The developer recently named as chosen by the BPL to sell and shrink the Brooklyn Heights Library (David Kramer of the Hudson Companies) has recently come to the defense of Mr. Offensend to describe him as well meaning and has also been arguing that any Ratner connections to the sell-off of libraries behind the scenes should be disregarded as minimal, nonexistent and irrelevant. No matter taking on that argument, it is an interestingly small world where a few players seem to keep recycling through.

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