Who Loses More With Sales of NJ Nets: Ratner or Team?

To no surprise, at least in this camp, reports surfaced late in the week that Bruce Ratner plans to sell the New Jersey Nets. Though the team indicates ownership is “as committed to ever” on moving to Brooklyn, that’s a tough statement to make when you don’t know who exactly ownership is. Brooklyn is Ratner’s project, without it he has no interest in the Nets, without the Nets he’ll probably pull the plug on the project since he’ll lose most of his upside. It appears the Nets face an uncertain future – Brooklyn, Newark, new ownership, possible move out of the area, free agent players or dumping more salary. These questions always lingered now they are reality. Across town the Islanders and owner Charles Wang face a similar predicament. Before criticizing the owner, and rightfully so, is it possible the owners end up losing more than the team and its fans?

For anyone who ever doubted Ratner’s intentions with buying the Nets, here is a statement directly from Forest City Ratner’s most recent 10-K, right up front in the business description:

“The purchase of the interest in The Nets was the first step in the Company’s efforts to pursue development projects, which include a new entertainment arena complex and adjacent urban developments combining housing, offices, shops and public open space. The Nets segment is primarily comprised of and reports on the sports operations of the basketball team.”

A few other tidbits from the 10-K analysis. The company views this project as the top business risk it faces given the economy and other uncertainties. Further, media coverage has focused on the $42mm loss Forest City suffered on the Nets investment. In fact, Nets Sports & Entertainment incurred a $77mm loss in fiscal 2009, the same as the previous year, and only slightly more than 2007. However, as a partial owner with less than 50% ownership, Forest City assumes a percentage of the loss. Due to its investment in the Brooklyn project and the financing it needed to make those investments, which it listed under the Nets subsidiary, Forest City recognized a larger portion of the teams loss on its financial statements. Without further analysis of the Annual Report it’s difficult to accurately uncover the entire financial situation, but it appears revenue dropped slightly, as did player expenses, though neither enough to create a financial disaster, and Operations remained a stable loss as I mentioned. The difference this year, Ratner was unable to use as much debt to finance the losses. His company had another poor financial year, and is already financing much of its losses, leaving highly overlevered. Forbes team valuations report the Nets have by far the highest Debt/Value ratio in the NBA. My thought is Ratner can no longer fund this project as expenses mount and revenue gets pushed further into the future, so needs to pull the plug and regain some liquidity. In fact, he probably held on too long.

Again, this requires further analysis, but Net fans can take some solace, since Ratner has pushed his entire company into poor financial condition partially thanks to this project. Where was the league as this situation developed? I’m sure Stern had his staff monitoring the situation and league consultants reviewing the Nets financial situation, but how did they allow it to go this far. These leagues either have control or the don’t. The owners either flex muscle, run the show or they should stay out of everything. The NHL wants to dictate the Phoenix situation, the NBA did something similar with Seattle, they rescue clubs failing to meet payroll, yet nothing once on the Nets situation. Leagues should show more consistency, and remain transparent on what they can and can’t involve themselves in.

Now, what’s to come of the Nets. It’s guaranteed that out of town suitors will come calling, its possible the Devils ownership can rescue them from the Meadowlands and put them in Newark, and its almost a guarantee that no owner is stupid enough to buy the team and leave them in the Izod Center. With this uncertainty, are they even a player in the 2010 free agent market. Better yet, do fans have any reason to support the team?

The NHL has shown at least some interest in the situation with the Islanders and Charles Wang, which differs from the Nets since Wang seems genuinely interested in owning the team and his other investments are not linked to the team nor suffering as much as Ratner’s. But the lesson is that leagues need to step in, and when owners welcome a new member it needs to be for the right reasons. Sometimes less money for a good fit creates a better long term fit.

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2 Responses

  1. In order for the Nets to be financially successful in the NYC market, if they do NOT move to Brooklyn, two factors need to be covered:

    1. They need an arena where they have control over suite and advertising revenue that fans would want to go to. They got that control at Izod Center, but it does not have an atmosphere that fans enjoy. If they moved to the Prudential Center, they would have a good fan experience, but the Devils and not the Nets would get ad & suite revenue for Nets games. This is why the Phoenix Coyotes built their arena, because the Suns and not the Coyotes were getting the suite and arena revenue, and therefore are in the financial ruin they are in today.

    2. They need control over their broadcasting revenue. When Ratner bought the team from YankeeNets, it did not include the team’s ownership stake in the YES Network. That actually is in the hands of the team’s pre-YES owners. Ratner planned on running the Nets as a loss leader for the Atlantic Yards project. The former Nets owners have absolutely no incentive to sell their share of YES back to the Nets, because they are pocketing profits from the network on the strength of the highly successful Yankees. However, the Nets are still receiving more money from YES than they would from a regional sports network in a smaller market, even if the team had ownership in it.

    Outside of the Brooklyn deal happening, the Nets best bet is to move to Newark, with the Devils conceding major arena revenue streams to them. Perhaps if Jeffery Vanderbeek buys the Nets…

  2. Yes,
    Excellent and informative work.
    thanks for the information.
    Good luck

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