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NBA Buying Hornets Is Good Business, If It Happens
Posted By Lang Greene On December 5, 2010 @ 6:00 am In All,NBA | No Comments
The atmosphere surrounding the New Orleans Hornets franchise is heating up and it has nothing to do with the better than projected performance on the court. As recently reported, the NBA is believed to be contemplating whether to purchase the franchise from longtime owner George Shinn after talks with potential buyer and minority partner Gary Chouest fell apart late last week.
The intervention of the league in this instance is all about taking a proactive stance from a business standpoint and protecting other owners’ investment in the association. There are plenty of topics negatively impacting a potential sale of the Hornets, such as the looming lockout next summer and the club’s low attendance which could lead to a very inexpensive relocation penalty. The league’s involvement would essentially give the association more control when the franchise is finally sold to a new majority owner.
If the decision to buyout Shinn is made, the league will appoint a czar to oversee the operations of the team and allocate a budget for employee payroll, expenses, handle trades/signings and any costs usually incurred running a franchise.
Buying out Shinn would ideally be a year (or less) holding pattern in a worst case scenario for the NBA. The move would also allow Shinn to relinquish the reigns of the franchise he founded back in Charlotte in 1988.
The move, according to reports, would be similar to Major League Baseball’s (MLB) purchase of the Montreal Expos from Jeffrey Loria for $120 million in early 2002. MLB would subsequently own and operate the franchise (renamed the Washington Nationals in 2005) for nearly four years until real estate tycoon Theodore Lerner purchased the team for $450 million.
The latter point is the most important issue in this case.
Turning a potential profit, a boatload of it.
MLB profited $330 million by keeping the Expos "in-house" until the future scope of the franchise could be sorted out. Following this same strategy would benefit the NBA, but it won’t come without facing its share of obstacles.
As stated earlier, there are two reasons why the NBA is concerned about a short-term purchase from any investor outside of Chouest. The first revolves around the uncertainty of the league’s next labor deal. Over the last two weeks Billy Hunter, executive director of the NBA players association, has been adamant that he’s 99 percent certain that there will be a lockout next summer since owners and players are very far apart on a new collective bargaining agreement.
To put it simply, any threat of a work stoppage substantially increases the financial risk of buying a franchise from an investor point of view. That same financial risk would in turn seriously reduce the value of the Hornets in the short term.
An outside investor would potentially be faced with losing millions in ticket, merchandise, advertising and concession revenues if the work stoppage extended into the 2011 regular season like the lockout shortened 1999 campaign. Those lost millions would be after the buyer had already spent nine figures to become a NBA owner of a soft market team. So the only way an investor would continue the pursuit of a team in this situation is if they paid a much lower purchase price on the front end.
And franchise devaluation and lowered selling prices is exactly what the league and its owners don’t want to transpire. Especially not after former Golden State Warriors owner Chris Cohan fetched a record $450 million for the club this past July.
Think about it.
The NBA’s popularity is arguably at an all-time high and as a result the Warriors franchise sells for $450 million. Owners are naturally business people first and foremost so don’t think for a second that all of them didn’t celebrate the news of that transaction. One day they might want to divest from the business of basketball and the potential payout compared to their initial investment is always front and center. As an example, say you live in a subdivision where the average house is worth $300,000. If a neighbor suddenly undergoes financial hardship and cashes out of his house for $150,000 then your house and all the other houses in the neighborhood take a hit on the future selling price.
Keeping the franchise within league control would allow the true value of the squad to be assessed after any potential work stoppage.
Secondly the Hornets can opt out of their current lease agreement with the state of Louisiana if the club averages less than 14,735 in attendance from Dec. 1 and Jan. 17. Last season the Hornets’ average attendance finished a little over 15,000, but so far in this season the team is averaging less than 14,000. Further, if the attendance mark isn’t achieved the Hornets could relocate by paying a relatively inexpensive $10 million exit penalty and giving the state of Louisiana formal notice by March 1, 2011.
Undoubtedly the league wants to be in a strong leveraged position when dealing with the Hornets’ future. The team has proven that it can generate a profit in the city of New Orleans; however, there are plenty of potential relocation options that could be explored if that route of action is desired — especially with a MVP candidate running the point for the franchise.
Last week, Hall of Fame player and coach Lenny Wilkens’ name surfaced in reports that he was trying to round up a group of investors in order to bring a franchise back to Seattle (the city lost the SuperSonics to Oklahoma City in 2008).
Oracle CEO Larry Ellison, who lost out on the bid to buy the Warriors in July, has stated in the past that he’d like to bring a team to San Jose, California.
The NBA scheduled preseason games in Anaheim, Kansas City and Las Vegas this past October and interest in bringing a NBA franchise to each city remains high — though Las Vegas doesn’t have a NBA ready arena.
With the uncertainty engulfing the status of the 2011 season because of the lockout and attendance woes in Louisiana, the NBA would be extremely wise from a business perspective to protect its assets, seize control in the short-term and plot out a strategy that would ultimately turn a profit and keep their owner base happy.
Now that sounds like a valid plan.
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