Bolstering the assets of the Barclays Center operating company, an enormous $467.6M for ethereal "Goodwill," triple the previously claimed value of "Intangibles"

The most recent annual report from the Barclays Center operating company, Brooklyn Events Center,  as I reported, indicated that FY 2020 revenue fell well short of projections, unable to cover the required annual bond payments.

Another page in the document raises some questions. The balance sheet below shows an enormous sum, $467.6 million, for "Goodwill," a previously unstated portion of the asset owned by Joe Tsai. 

So, with Goodwill representing more than 41% of the total, the arena company's assets, said to be $1.1 billion, can meet the commensurate liability.

It also suggests a bet that the arena company, which has not been able to cover required bond payments with revenues, will recover after the pandemic, with the Brooklyn Nets at star-studded strength, and be worth the approximately $1 billion that Tsai reportedly paid. (Not only should revenues be sufficient to pay off bonds, they also were supposed to deliver tens of millions of dollars in profits.)

That figure for Goodwill represents a tripling of the value attributed to the similarly ethereal "Intangibles" previously claimed as assets, when the arena company was owned by Mikhail Prokhorov. (Note: the new document says that the Tsai and Prokhorov eras can't be fully compared, since they rely "on two different historical-cost bases of accounting," but I'd argue that these factors can be roughly compared.)

That large sum for Goodwill seemingly--if indirectly--counterbalances a significant liability, $297 million in member's equity, which previously was counterbalanced by a significant amount of available cash, a tangible asset.

What's Goodwill?

Goodwill, according to the arena's FY 2020 document, "arises from business acquisitions/combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the Acquisition Date." 

Goodwill, according to Investopedia, is "the portion of the purchase price" higher than the value of assets and liabilities. "The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represent some reasons why goodwill exists.""

That said, in this case, that value attributed to Goodwill seems used to ensure that the assets associated with the arena match liabilities.

Value at acquisition

How was it arrived at? As shown in the screenshot at right, an independent valuation firm backed management estimates as of the September 2019 acquisition:

To determine the fair value of the assets acquired and liabilities assumed, the Company engaged an independent third-party valuation firm. The independent third-party valuation firm supported management’s conclusion of the following estimated fair values of the assets acquired and liabilities assumed as of the Acquisition Date...

In determining the fair value of the assets acquired and liabilities assumed, several valuation methodologies were considered and relied upon, each as appropriate for each asset or liability valued. These methodologies relied upon included the income, market, and cost-based approaches.

Well, maybe the market is what Tsai paid for the team, so he made the market. At the time, note that Goodwill was valued at $507.8 million. As to the income approach, presumably they figured that the current value of Goodwill would transfer into future revenue once Kevin Durant returns to a full house at the Barclays Center.

FY 2020 balance sheet

Note that $507.8 million turned into a $467.6 million for the purposes of the June 2020 balance sheet, as noted below.

FY 2019 balance sheet

In FY 2019, as shown below, the arena company--owned by Prokhorov--reported an ethereal sum of $149.5 million in "Intangibles, net," but also $322.1 million in restricted cash, investments, and escrowed funds. 

That represented money Prokhorov was obligated to put into arena support after his first transaction with Tsai, as I reported. That sum was roughly comparable to the $329 million in member's equity.

FY 2018 balance sheet

In FY 2018, as shown below, the arena company reported $161.2 million in intangibles, and $346.9 million in restricted cash and escrowed funds, with the latter a little less than member's equity. That reflects the 2018 requirement that Prokhorov fund a reserve account.

FY 2017 balance sheet

What about before that reserve account was required?

In FY 2017, as shown below, intangibles were valued at $172.8 million, but there was barely $15.8 million in restricted cash and escrowed funds. 

However, the overall sum attributed to assets and liabilities was much lower, in significant part because of the lowered amount of member's equity (a little more than half of intangibles).