Nets Ownership Bid Opens New Doors, May Change Buyer Profile

What has already been an active off the court off-season became even more intriguing over the past week with the bid and sale of majority interest to Russian billionaire Mikhail Prokhorov. It’s and unprecedented deal on many levels – the focus is on the first foreign owner of major US sports team, but the motivation and rhetoric also strikes me.

Prokhorov was quoted in an article last week calling this a “hostile bid”. Hostile or not, Prokhorov seems more interested in the team as an investment vehicle, not as the typical sportsman owner (ie Mark Cuban, Steinbrenner, John Henry, etc.). The team is bleeding money, Bruce Ratner’s real estate company is has collapsed under the economic pressure, and just like many other American corporations the Nets (and its current ownership) needed a fresh infusion of cash to continue operations and keep the dream of moving to Brooklyn alive. The deal looks to be more Venture Capital than typical team ownership transaction, an outsider investor providing operating cash in exchange for equity.

While the league is probably excited about the new international frontiers that become available with a Russian owner, could it simply be that most American businessman have shied away from the risk and low annual profitability of sports team ownership, and VC type investments in the broader market have all but disappears in this economy, forcing Ratner to turn elsewhere.

Funding the deal with up front cash, extremely rare in what I’ve seen of these type of transactions, further supports the transaction of more VC investment than new ownership team. Ratner apparently stays in the picture and gets new cash flow to continue the Brooklyn venture and will now share in the upside with his fellow investor, in the process disintermediating himself from the team, which he had little or no interest in to begin with.

Following this hypothesis, will having a different perspective in the owners chair effect how the team is run? Does Prokhorov have a short-term exit strategy in place to sell out of his investment once he can boost the value of the team after it moves to Brooklyn? If so, what are the implications of that relative to how most owners manage with a long-term horizon focused on winning?

If the numbers reported in SBJ are accurate, Prokhorov bought in for 80% at a valuation of $250mm for the team alone (no venue) and has the option for a stake in the venue. The $250mm valuation is below what Ratner paid in 2004, which I don’t fully understand since teams rarely depreciate in value, especially one on the brink of a move that would tremendous value. It states Prokhorov will provide “other financial considerations”, unless they are substantial he could yield a significant ROI. The minute the Nets move to Brooklyn and Brooklyn on their uniforms, the teams brand value jumps at least 50%, if not doubles, and its upside for fielding a quality team becomes much higher. Throw in the potential for an improved economy early next decade, the possibility the team improves, and its not unrealistic to think the Nets are worth closer to $500-600mm in 5-7 years, allowing Prokhorov to sell out for over 100% return.

The league and team can certainly benefit from the new international doors this opens, but that’s a different discussion. The speed and nature of the deal intrigue me most, and how this affects team management will be interesting to watch. Sports rarely attract owners with short-term mindsets focused on building value more than winning, so this could be an interesting precedent.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: