Today’s post is courtesy of guest blogger Sreesha Vaman.
The most interesting subplot of the Donald Sterling saga is the reaction of the other NBA owners to the ousting of one of their own. It’s clear now that Sterling’s reputation amongst his fellow owners was, well… less than sterling (Sorry – too easy). And clearly you run a significant reputational risk of being “outed” if you vote against the guillotine for the Clippers owner. But beyond all of that, there are two other reasons why NBA owners should be happy with the idea of the forced sale of the Clippers: liquidity and price discovery.
There are only 30 NBA franchises, and they don’t get sold very often. According to the oracle that is Wikipedia, and including the recent sale of the Milwaukee Bucks, while 11 NBA franchises were sold in the past three years, it took 25 years for the other 19 franchises to turn over. And of the past 11 franchise sales, two of them were not to new owners: Ted Leonsis bought the remaining stake of the Wizards from the estate of former partner Abe Pollin; and the Buss Family transferred the Lakers to a trust vehicle in their name.
Thus, the sale – even the forced sale – of the Clippers will help generate price transparency and liquidity for the other NBA franchises.
Every financial asset benefits from liquidity and price transparency. For those unfamiliar: “liquidity” refers to the ability to sell an asset. Given two assets, the more-liquid Asset A is considered safer than Asset B because if the investment turns sour, the investor can more easily sell Asset A and mitigate downside risk.
The sale of the Clippers, whether forced or voluntarily, will bring out several investors out of the woodwork. It has been well documented that the new breed of sports owners have been primarily new money, those who made their fortunes growing businesses from scratch. These new owners view their new sports franchises primarily as investment opportunities; and when they see a new investment opportunity, they typically become highly competitive to close the deal first.
So it’s not hard to imagine that after the Clippers are sold, there will be several disappointed investors (or teams of investors) who would have felt that they were shut out of the chance – and who would entertain opportunities to buy other NBA franchises. This increased liquidity will be a positive to any NBA owner who had been planning to sell – or (to paraphrase Don Vito Corleone) would listen to “an offer they can’t refuse”.
That segues into the second benefit – “price discovery”, which is the ability of an investor to understand the value of his investments at any given time. This is straightforward for, say, a company whose stock trades on the New York Stock Exchange, but is much more difficult for assets that don’t trade often. The sale of the Clippers would provide the other NBA owners a critical data point: the sale of a trendy team in the second-largest media market in the country, in advance of the upcoming TV rights renewals, that is hindered by being the third tenant in their crowded and heavily-booked building.
When the group headed by Peter Guber and Joe Lacob bought the Golden State Warriors in 2010, their vehicle – GSW Sports LLC – was widely panned for shelling out over $450 million (according to CNBC) for an NBA franchise that Forbes had just valued at $315 million, with a decrepit arena and an under-motivated fan base. Of course in hindsight, it’s clear that the new owners had a vision in mind to bring fans back into the building, and are now executing on their vision for a new arena in downtown San Francisco.
However, even before those successes, the sale price of the Warriors grew the asset value of every other NBA franchise. Suddenly, there was a price point at which every other owner could compare against. The best example of this is the recent sale of the Milwaukee Bucks to Wes Edens and Marc Lasry, who, according to Forbes, paid $550 million last month for an even worse situation: the NBA’s fifth-smallest market, second-smallest local TV audience, and one of its oldest and most TLC-craving arenas. Would the Bucks have fetched so much if the Warriors had been sold closer to the value posted by Forbes? Probably not.
This isn’t to say that the NBA owners who are voting to force a sale of the Clippers are only focused on their own franchise values. The reputational risk for the entire league is enormously heightened by the presence of Mr. Sterling at NBA functions, at a time when the future of the NBA seems very bright. But it certainly doesn’t hurt that there are several significant positives for the franchise value of all of the other NBA teams if indeed Mr. Sterling is relinquished of his ownership.
Sreesha Vaman has been a capital markets professional for over 10 years, including advising clients in the sports industry. He currently lives and works in New York. The views and opinions expressed here are his own and do not represent the views or opinions of any other company or organization.