Thursday, September 03, 2015

Post: Prokhorov nearing deal to buy Forest City's share of arena and team for less than long-discussed value

The New York Post's Josh Kosman has a scoop, based on anonymous sources, Prokhorov nears deal to buy all of Barclays Center, Nets, which upends some of the public discussion about the value of the arena and the team and suggests Forest City Enterprises will take home little cash:
Prokhorov has been in talks to buy the 55 percent of the arena and 20 percent of the NBA team he does not already own. Under the deal being discussed, he would kick in little cash beyond forgiving the roughly $40 million Forest City owes him to cover team losses, according to two sources familiar with the situation.
Onexim Group, Prokhorov’s investment vehicle, earlier extended until Sept. 8 a deadline for when Forest City needs to pony up roughly $15 million to cover its share of the Nets’ losses for the 2015-16 season. That’s on top of the $25 million it owes for last season.
There's a larger business reason for Forest City to sell--the plan for the company to convert to a real estate investment trust (REIT)--but it's surprising how little Forest City would get.

Part of the reason, according to Post sources, is that Prokhorov withheld financial information that might have made it easier to sell to another party. A self-serving but smart move, apparently.

Team value: $700 million?

According to an analyst quoted by the Post, the team is worth only $700 million, which after subtracting debt, produces an equity value of $490 million. This past January, Forbes estimated that the value of the Nets nearly doubled in the past year, from $780 million to $1.5 billion.

Perhaps the team's continuing losses factor into it, plus the fact that a minority owner would have to eat the losses but not have a say in management. By contrast, if the entire team were up for sale, a trophy buyer with full control might pay an astonishing sum, as with Steve Ballmer's $2 billion purchase last year of the Los Angeles Clippers.

Forest City’s stake thus works out to nearly $100 million, but it owes $40 million, which means a gain of some $60 million. 

Arena value: $550 million?

The arena cost some $900 million to build--or $1 billion counting transit improvements--but the Post suggests its worth far less:
Meanwhile, Barclays Center is projected to generate $55 million in annual operating income but has debt of $640 million. That leaves little equity value even at a sale price of 10 times annual operating income.
That suggests an overall sale price of $550 million, or $302.5 million for Forest City's share. But the $90 million equity value would result in a 55% share of $49.5 million for Forest City.

Note that all these numbers and calculations are provisional.

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