Leonsis, Pollin estate reach agreement on price for Wizards

By Thomas Heath
Washington Post Staff Writer
Friday, March 26, 2010; A01

Washington Capitals owner Ted Leonsis and the estate of sports entrepreneur Abe Pollin have reached agreement on a price for Leonsis to purchase the Washington Wizards and the Verizon Center, overcoming the single biggest obstacle in his path to take ownership, according to several sources familiar with the negotiations.

The total value of the team and arena is pegged near $550 million, according to sources, although the exact cost to Leonsis's group would be far less because it already owns 44 percent of the franchise.

If the agreement is finalized, it would cement Leonsis's status as one of the most powerful figures in Washington business and sports. He would control a mid-Atlantic sports and entertainment empire spanning three professional leagues, and an arena that hosts everyone from presidents to rock bands, as well as performers including the Ringling Bros. and Barnum & Bailey Circus.

The sources cautioned that the deal could fall apart if the sides fail to reach agreement on other, nonfinancial issues such as the operations of the arena in the period before Leonsis takes control. But settling on a price was critical to clearing the way for Leonsis's ownership, sources said.

"The financial terms are tentatively agreed to," said one high-level negotiator for the Pollin side, who spoke on the condition of anonymity for fear of upsetting the talks. "In every complex legal agreement, there are significant nonfinancial terms. The parties are negotiating those in good faith. I certainly hope we will cross the finish line. But no guarantees."

Spokesmen for both sides declined to comment.

The exact cost to Leonsis is clouded by a number of factors, including $250 million in debt on the arena and the Wizards, which Leonsis's group would assume in full. After the debt, the net cost to Leonsis for the rest of Pollin's empire would probably be about $170 million, according to sources who spoke on the condition of anonymity because they were not authorized to discuss the deal. Perhaps $50 million of that would be paid in cash, and the rest would probably be financed, according to sources.

The agreement must receive approval by a three-quarters majority of the NBA's 30 owners, which means 23 votes. Sources said the NBA is aware of the status of the negotiations and timetable for a closing. A deal must also clear an antitrust review by the U.S. Justice Department. If Leonsis closes by June 1, his group would be able to make decisions on the NBA draft and free agency, both of which are critical to the team's success.

Ownership would give Leonsis overall control of a state-of-the-art arena that hosts 220 or so events a year, allowing him to start directing arena revenue to his hockey team, which has been losing money for years despite its recent success. The Capitals received no revenue from the arena's estimated 108 luxury suites and 3,000 club seats, which had been controlled by Pollin's estate.

Leonsis, 53, is expected to reorganize the Pollin empire, which has been known as Washington Sports & Entertainment (WSE), and bring a rebirth to the ailing Wizards, one of the worst teams in the NBA with a record of 21-49.

The tentative deal is the result of a detailed process that Leonsis and Pollin agreed to when Leonsis bought the hockey team, along with a share of the Wizards and the arena, in 1999. It follows three months of negotiations between Leonsis's closely held sports investment group, known as Lincoln Holdings, and the estate of Pollin, who died Nov. 24 at 85.

Both sides hired investment bankers to advise them. Leonsis retained Steve Greenberg of Allen & Co., a New York boutique investment bank. Greenberg previously worked on the sales of baseball's Milwaukee Brewers in 2004 and the NBA's Cleveland Cavaliers in 2005.

The estate's trustees -- Pollin's widow, Irene; their son, Robert; and longtime attorney David Osnos -- hired Goldman Sachs. Amid the talks, WSE installed a management structure that made Irene Pollin principal owner and Robert Pollin chief executive. Another son, James Pollin, was named president. Osnos and Richard Brand were legal counsels to management.

In late January, the discussions appeared to unravel as the Pollin estate declared the right to put the franchise and arena on the open market, which contradicted assertions by Leonsis that he had exclusive rights to negotiate to buy the team. The talks were also stalled for two weeks because of the region's giant snowstorms last month.

One of the sticking points in the negotiations was the value of the Wizards and the team's financial prospects. Before the current season began, many expected the team to do well, but it has floundered on and off the court, raising questions about its ability to draw fans in the future. The Leonsis group did not want to purchase a team burdened by huge salaries and heavy financial losses, which could hamper efforts to rebuild the franchise.

Over the past two months, however, the Wizards unloaded several stars with big salaries, including Antawn Jamison, Caron Butler, Brendan Haywood and DeShawn Stevenson, moves that saved the organization nearly $3.2 million. The team also saved money because it was no longer subject to an NBA luxury tax for exceeding league payroll limits. Sources said the player trades helped clean up the team's balance sheet and clear the way for a deal that would give the team a fresh start under new ownership.

If there had not been an agreement on price, the parties would have each hired appraisers, who would have tried to reach a deal. Even if the appraisers did not agree and the team was put on the open market, Leonsis would still have had the chance to match any outside offer. He also could have sold his 44 percent of the Wizards and Verizon Center to the new buyer.

The most recent estimate by Forbes magazine, published in December, put the value of the Wizards at $313 million, down from $353 million the previous year. That ranked the team 19th in the NBA. According to Forbes, the Wizards made a $4.9 million profit for the 2008-09 season.

One wild card was star guard Gilbert Arenas, who had been the face of the franchise for several years until he was suspended for the season in January 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. He will be sentenced Friday.

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 -- has an impact on the Wizards' value, according to people close to the talks.

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 and 63 losses, tying the franchise record for fewest victories in an 82-game season.

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 and founder of Proxicom; Richard Fairbank, founder and chairman of Capital One; and Jeong Kim, head of Bell Labs.

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