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Was Brooklyn Nets sale a record? Arguably, no. Seller Prokhorov instantly gave up $345M; most went back to buyer Tsai. (So, it was a better deal than Forbes said.)

In August 2019, it was widely reported that billionaire Joe Tsai would complete his purchase of the Brooklyn Nets from billionaire Mikhail Prokhorov for $2.35 billion, a record price for a U.S. sports franchise. (The previous NBA record was $2.2 billion.)

The two-stage transaction, which started in April 2018 with the sale of a 49% stake, closed in September 2019.

However, documents shared with investors in the Barclays Center construction bonds suggest a less impressive bottom line: the deal involved Prokhorov immediately giving up $345 million, which later translated into a Tsai rebate of about $300 million.

In other words, the deal, arguably, was not a record, given that haircut. And that rebate cut Prokhorov's profit, estimated in media reports between $1 billion and $2 billion.

A complicated deal bails out Barclays

That valuation adjustment derives from the awkward relationship between the Nets and their arena, which—though supplying a crucial, value-boosting home in the nation’s media capital—has struggled to avoid red ink.

May 2018 investor presentation
When the NBA in 2018 approved the Prokhorov-Tsai deal for the Nets, it also placed the financial screws on Barclays: the league required that certain revenues from Nets games, worth initially $15 million a year and expected to rise to $18 million a year, be reallocated from the arena to the team, according to a May 2018 presentation to investors.

That reversed a previous deal that disfavored the Nets. (When the team and the Barclays operating company shared an owner, that skewed split wasn’t an issue, but Prokhorov as of the 2018 stage of the Tsai transaction still owned the arena company, and it wasn't clear that Tsai would acquire it.)

May 2018 investor presentation
But Barclays already was struggling, and the NBA didn’t want the Nets to play in a fiscally shaky arena.

So it ensured a rescue plan.

It required the newly enriched Prokhorov to set aside $345 million of Tsai’s money, sending $17.2 million to support the arena and parking the remaining $327.8 million in a reserve account, primed to deliver cash infusions to help pay arena operating expenses and pay off construction bonds.

(Note: the bold print said that, formally, the reserve account was not pledged to bondholders, and that another line said that the investments "can be liquidated at any time subject to the approval of the NBA.")
In other words, whatever the sticker price on the Nets deal, Prokhorov never pocketed $2.35 billion, but closer to $2 billion.

Reversing the terms

Less than a year-and-a-half later, when Tsai completed his Nets purchase and bought the arena operating company from Prokhorov, the original revenue split between team and arena was reinstated.

That was expected to help Barclays, to the tune of $15.7 million in the first year, and disadvantage the Nets, as explained in a September 2019 investor presentation.

September 2019 investor presentation
To compensate team owner Tsai, the arena's reserve account was eliminated, with the remainder—some $300 million by my estimate (see below)—delivered to the team.

In other words, Tsai got a significant kickback. He was never $2.35 billion in the hole specifically for the Nets.

So however much the deal sounded record-setting, it deserves a significant asterisk.

A bad lease?

It may seem odd that the rebate compensated Tsai as team owner for an arena lease that the NBA considers onerous. While that lease apparently constrains team income compared with other NBA leases, the move to Brooklyn boosted team value, given what Forbes said was the second most dramatic increase in the NBA over a decade.

Also, Tsai—at least before the coronavirus crisis--has said the league’s “socialist” economics ensures financial success. If and when the NBA returns to post-pandemic crowds, with the Nets featuring Kyrie Irving and Kevin Durant, Tsai might need that cash cushion not so much to cover Nets losses but rather to meet arena shortfalls.

A bad deal for Tsai?

In an analysis this past February, Forbes valued the Brooklyn Nets at $2.5 billion, at first glance an uptick in value from Tsai’s reported purchase price.

The fine print, however, was harsh: "Our appraisals are what we think the team would sell for. So while Tsai paid $3.3 billion for the Nets [and arena operating company], we think the team is worth more like $2.5 billion because he paid around $1 billion for a money-losing arena business."

Forbes didn’t explain its math, but Tsai, in a tweet Aug. 3 after the issue surfaced again, responded, “The understanding of a deal from outside-in is never as good as that of the guy who did the deal.”

Tsai didn’t elaborate, but it’s a good bet that his calculation relies, at least in part, on that Prokhorov rebate.

Fiscal notes

Tsai bought the arena operating company for an unconfirmed price, reported by the New York Post as “more than $700 million,” and by the Associated Press as “nearly $1 billion.” It’s not implausible that the discrepancy regards whether and how to credit Tsai for that $300 million rebate.

May 2018 investor presentation
Here’s my math on the rebate. The $327.8 million reserve account established in April 2018 was to distribute a cumulative $43.9 million by the time the Tsai-Prokhorov deal closed in September 2019, according to the May 2018 investor presentation, as shown in the graphic at right.

However, at a 3.6% interest rate—the expected return in one credit ratings agency report—that reserve account may have generated $15 million in interest during its brief existence.

That suggests the $327.8 million deposit was diminished by less than $30 million. Hence my estimate that about $300 million was left for Tsai and the Nets.

We'll know more once the arena operating company releases its FY 2020 financial results.