By Thomas Heath
Washington Post Staff Writer
Monday, January 18, 2010; A01
Washington Capitals owner Ted Leonsis is negotiating against a Wednesday deadline to buy the Washington Wizards and Verizon Center from the estate of sports entrepreneur Abe Pollin, a deal that could put him as lead owner of the region's biggest sports and entertainment empire.
The outcome could have far-reaching implications for the Washington sports scene, determining whether Leonsis -- or someone else -- will run Washington Sports & Entertainment, the sports holding company Pollin built over five decades before his death on Nov. 24.
Since buying the Capitals from Pollin a decade ago, the former AOL mogul has transformed the franchise from a National Hockey League also-ran with a niche following into a marquee team and the hottest sports franchise in the Washington region. After a few bumps in the road over the years, the Capitals have one of the NHL's best records, not to mention one of its top players, Alexander Ovechkin.
Local sports fans wonder whether Leonsis could do the same for the Wizards. They are one of the worst teams in the National Basketball Association, and their off-court antics have become the butt of jokes nationwide.
At 54, Leonsis is one of the most accessible owners in professional sports. He maintains a blog and a public e-mail address, and he frequently walks the concourse between periods at Capitals games to greet fans. To remake the Capitals, Leonsis endured the ire of fans as he traded away high-priced stars so he could start from scratch with prospects and draft picks. It was a risky process that paid off.
"In a short amount of time, he has turned the Capitals into one of the premier franchises of the world in a non-hockey town," said businessman Mark Ein, a Wizards season-ticket-holder and owner of the Washington Kastles, the city's World Team Tennis franchise. "Given that Washington is a basketball town, the opportunity for the Wizards [under Leonsis] is almost limitless."
Representatives of Leonsis and of the Pollin estate have been in discussions since Jan. 6, hoping to settle on a price that Leonsis's investor group, closely held Lincoln Holdings will pay for 56 percent of the Wizards and Verizon Center. It already owns 44 percent.
If no agreement is reached by Wednesday on the total value of the team and arena -- which could range from $400 million to $500 million -- both sides could agree to extend the exclusive talks.
If not, an appraisal process would kick in, allowing Leonsis further opportunity to reach a deal.
The purchase could be crucial for Leonsis because Verizon Center generates revenue that could put an end to a decade of losses for his Capitals.
"The franchise is most valuable to Ted, who might be willing to pay a slight premium because he already owns the Capitals and doesn't want to continue to be a tenant in that building," said Paul Swangard, managing director of the Warsaw Sports Marketing Center at the University of Oregon. "Being a renter is not good, modern sports business."
Leonsis bought the Capitals, as well as a share of the Wizards and what was then called MCI Center -- it was renamed in 2006 -- from Pollin in 1999. Leonsis's stake in Washington Sports has gradually increased over the years and now stands at 44 percent, which includes ownership of the WNBA's Mystics. At the time he bought the hockey team, Leonsis and Pollin set conditions that would allow Leonsis an exclusive period to negotiate a purchase of the basketball team and Verizon Center upon Pollin's death, according to a memo that the Pollin organization sent to the staff of Washington Sports & Entertainment.
"It's important that you all know that Mr. Pollin was very careful and wise when he planned for this day," according to the memo, a copy of which was obtained by The Washington Post. "He put a specific transition plan in place, so that, when this time came, there would be an orderly transition.
"When Ted Leonsis and his partners purchased the Washington Capitals and a minority interest in Washington Sports & Entertainment Limited Partnership in 1999, Mr. Leonsis was also granted an option to purchase the remainder of Mr. Pollin's interests in Washington Sports," according to the memo. "At the time of the 1999 purchase, a process was established for the exercise of this purchase option. That process will begin now and it will move forward as expeditiously and prudently as possible while respecting the Pollin family."
The transaction is expected to be closely watched in professional sports circles because the price could influence the value of NBA franchises.
Both sides have hired investment bankers to advise them. Leonsis retained Steve Greenberg of Allen & Co., a New York boutique investment bank. Greenberg's portfolio includes working on the sale of baseball's Milwaukee Brewers in 2004 and the sale of the NBA's Cleveland Cavaliers in 2005. Greenberg declined to comment.
The estate's trustees -- Pollin's widow, Irene; their son, Robert; and Abe Pollin's longtime attorney, David Osnos -- have hired Goldman Sachs.
While negotiations continue, Washington Sports has installed a management structure that makes Irene Pollin principal owner. Robert Pollin is chief executive. Another son, James Pollin, is president. Osnos and Richard Brand are legal counsels to management.
When Leonsis bought the Capitals, according to interviews at the time, it was agreed that he would have 10 business days from the day discussions began to reach a deal. That means he has until the end of the day Wednesday to reach agreement on a price with Pollin's trustees.
If the two sides do not agree to extend the talks, each side selects an appraiser to estimate what the building and team are worth. If the two appraisers cannot agree on the value for the team, they together pick a third appraiser.
Leonsis can then agree to pay the amount set by the third appraiser, which would also bind the Pollin estate to sell at that price. If Leonsis passes on the third appraiser's price, the Pollin trustees can put the team up for sale on the open market. But Leonsis would still have the right to match any outside offer. He could also sell his 44 percent of the Wizards and Verizon Center to the new buyer.
Through a spokesman, Leonsis declined to comment.
"If Lincoln doesn't pay their price, [the Pollin trustees] can go out and test the market," said an ownership source from the NBA, who spoke on the condition of anonymity because the person was not authorized to speak about the matter.
The sale of the team must be approved by a three-quarters majority of the NBA's 30 owners, which means 23 votes to approve. A spokesman for the NBA declined to comment.
Since the Wizards and Verizon are part of a closely held private company, it is difficult to estimate their revenue and profits.
The most recent estimate by Forbes magazine, published on Dec. 9, estimated the value of the Wizards at $313 million, down from $353 million the previous year. That ranked the team 19th out of the NBA's 30 franchises. According to Forbes, the Wizards earned a $4.9 million profit for the 2008-2009 season.
In December 2009, a Russian billionaire agreed to pay $200 million for an 80 percent stake in the New Jersey Nets and a 45 percent interest in an arena the team is building in Brooklyn. The Seattle SuperSonics were sold in 2006 for $350 million to a group from Oklahoma City. Robert Johnson, founder of BET, paid $300 million for the expansion Charlotte Bobcats in 2004.
One source who spoke on the condition of anonymity because the person could become involved in the transaction offered a "guesstimate" that the Wizards and Verizon Center, which seats 20,173 for basketball and 18,277 for hockey, together could be worth about $500 million, given their location in the nation's capital.
Several factors could reduce that price significantly.
Arguing against a high price, Swangard said, is that "all the [NBA] league teams are challenged. And with [star guard Gilbert] Arenas thrown in, any new owner doesn't assume momentum for the business. They are going to have to create that on their own."
Arenas had been the face of the franchise for several years until he was suspended Jan. 6 without pay by NBA Commissioner David Stern for bringing guns to the locker room. Arenas pleaded guilty Jan. 15 in D.C. Superior Court to a felony count of carrying a pistol without a license, leaving his NBA career in jeopardy. He will be sentenced March 26.
Arenas signed a six-year, $111 million contract extension in July 2008 but missed most of the 2007-08 and 2008-09 seasons because of knee injuries. With $80 million remaining on his contract, his situation -- and whether he would be viewed as an asset or a liability to the franchise -- could affect the price a new owner would pay.
Then there is the team's performance on the court. Underperformers for decades, the Wizards reached the playoffs for four straight years until 2008-09, when they finished with 19 wins against 63 losses, tying the franchise record for fewest victories in an 82-game season.
Despite a $78.2 million payroll, the Wizards are marginally better than last season. As of Sunday, the team had one of the worst records in the league at 13-26.
There is also about $250 million in debt on both the team and building, according to sources, which could affect the amount a buyer would have to furnish.
Even in these lean times, the Leonsis group should have no trouble raising the money. His partners in Lincoln Holdings include Raul Fernandez, former chief executive officer and founder of Proxicom; Richard Fairbank, founder and chairman of Capital One; Jack Davies, former president of AOL international; Jeong Kim, head of Bell Labs; former software executive Rick Kay; BET co-founder Sheila Johnson; real estate entrepreneur Dick Patrick; Michelle Freeman, widow of former Lincoln partner Josh Freeman; Mark Lerner, son of Washington Nationals owner Ted Lerner; and attorney George Stamas.