Why the Clippers are worth $2 billion to Steve Ballmer

The NBA has announced that former Microsoft chief executive Steve Ballmer has closed the deal on his record $2 billion purchase of the Los Angeles Clippers and is now owner of the team. Here's what you should know about him. (The Washington Post)

 

A winner appears to have emerged for the Los Angeles Clippers.  Former Microsoft CEO Steve Ballmer has signed a binding agreement to buy the Los Angeles Clippers for $2 billion.

 

 

“Traditionally basketball teams have sold for around three times revenue,” explained Forbes’ senior editor Kurt Badenhausen. “The Bucks were just sold which reset everything and shocked people by how big the price tag was because I think it is well accepted that the Bucks are the least valuable franchise in the NBA.”

According to the latest Forbes valuation, the Bucks were worth a league low $405 million based on revenues of $109 million but ended up being sold for $550 million to a hedge fund group headed by Wesley Edens and Marc Lasry – a higher multiple than many thought possible. They weren’t the only franchise to sell for higher than Forbes estimated they were worth.

The Golden State Warriors were purchased for $450 million in 2010 — more than the $315 million that Forbes estimated they were worth the prior year. The Washington Wizards were bought for $551 million that same year, nearly 76 percent  over Forbes’s then estimated price of $313 million.

The Los Angeles Clippers, on the other hand, are worth $575 million based on revenues of $128 million and could fetch an even higher multiple of earnings.

“It is a unique situation,” said Badenhausen. “The auction process drives it up. You also have the second biggest market in the U.S. where a basketball franchise has not come up on the market for more than 30 years. The longest tenured ownership in the NBA are in Los Angeles – the Clippers and the Lakers. You have a lot of people who have been interested in buying a team in Los Angeles for a long time and it might be their only chance.”

Not only are there a lot of people interested, but they are people with a ton of star power and a boatload of money:  Oprah Winfrey, David Geffen, Larry Ellison, Magic Johnson, Grant Hill, Sean Combs, Floyd Mayweather Jr. and Matt Damon have all been linked as possible suitors. And why wouldn’t they be interested? The Clippers are a franchise on the upswing. According to Forbes, the Clippers were generating revenues of $108 million in 2012 and that has since jumped to $128 million in 2014. They have also become more profitable — their net operating income margin was estimated to be 11.7 percent last season versus an average of 8.6 percent the two years prior.

And don’t expect franchise values to come down anytime soon.

“We had values up significantly this year, 25 percent this year and they will be up dramatically again next year, particularly in light of the Bucks sale and where the Clippers final number comes in,” said Kurt Badenhausen. “We will absolutely see franchise values up across the board for the NBA [next year] and by that point probably a new TV deal in place as well, which will give some clarity to what future revenues will look like.”

The Clippers television deal generates an average of approximately $20 million a season from Fox Prime Ticket, but that expires after the 2015-16 season and there won’t be a shortage of interest.

“You are going to have two bidders, Fox and Time Warner,” explains Steve Lepore from Awful Announcing. “It’s not going to be Fox bidding against themselves or Fox bidding against an upstart like Comcast who wants a presence in the market. It is going to be two companies – two multi-billion dollar cable companies – that have a presence in the Los Angeles market, so you are going to have them bidding against each other so the money could get high.”

Badenhausen agrees. “The NBA is in a very nice spot right now. A new TV contract is coming online, national television deals are about to be done. The sport has much better global potential than Major League Baseball or the NFL. And the Clippers are in a nice situation because they are in line to get a new local TV deal with their current deal expiring in a couple of years. The Clippers have the potential to increase their local TV deal by 200, 300, 400 percent.”

The other team in Los Angeles, the Lakers, recently signed a 20-year TV deal with Time Warner Cable reportedly worth $3 billion, making it the NBA’s richest local television deal in sports.

“Los Angeles is a basketball town. It is the most popular sport in the city,” said Lepore. “Heat-Pacers tripled the rating in Los Angeles the Kings-Blackhawks drew. A Heat-Pacers game drew a six rating and a Kings game on NBC game in the market drew just a two rating. Having rights to the local basketball team is a form of cultural currency and a way to stay relevant within the sports market in that city.”

Its popularity is not limited to just the Los Angeles area. According to last week’s Nielsen Ratings, the top five most-watched programs on cable were the NBA Conference finals.

So let’s say the Clippers get a new TV deal worth an extra $50 million per year in revenue and sell at the same EBITDA multiple the Milwaukee Bucks did earlier this year. That would put the valuation – without any factor for growth – at $997.6 million. Here is how we get to a $2 billion dollar (or more) valuation for the Clippers: they could get an equity stake in the cable channel. That would allow them to generate a revenue stream on par with what the Lakers have owning the Staples Center and what Washington Wizards’ owner Ted Leonsis has with the Verizon Center.

“When it is based on one team it is typically a 50/50 split,” explains Lepore. “The Mets own about 65 percent of SNY, Time Warner owns 27 percent and Comcast 8 percent. The Yankees only own 20 percent  of YES where 21st Century Fox owns 80 percent of that network.”

Not a bad return for a team Sterling bought for $12.5 million in 1981.

Neil Greenberg analyzes advanced sports statistics for the Fancy Stats blog and prefers to be called a geek rather than a nerd.
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