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The $2.2 billion price for the Houston Rockets isn’t so crazy

Houston Rockets’ James Harden goes up for a shot against the Los Angeles Lakers during an NBA game in March. (David J. Phillip/AP)
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The owner of the Houston Rockets must be a happy camper after reports this week confirmed that he is selling his franchise for an eye-popping $2.2 billion, a record for an NBA team.

Seller Leslie Alexander bought the team in 1993 for $85 million. That would make Alexander’s return on a $2.2 billion sale clock in at a Buffett-like annual compound rate of 14.52 percent. The cumulative return over the entire period is 2,488 percent.

The sale is particularly impressive when you consider that Forbes magazine earlier this year estimated the Rockets to be worth $1.65 billion, the eighth-most valuable franchise in the NBA behind the New York Knicks ($3.3 billion), Los Angeles Lakers ($3 billion), Golden State Warriors ($2.6 billion), Chicago Bulls ($2.5 billion), Boston Celtics ($2.2 billion), Los Angeles Clippers ($2 billion) and the Brooklyn Nets ($1.8 billion).

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Professional sports teams have been on a financial tear the past few years, with two Los Angeles franchises — Major League Baseball’s Dodgers and the NBA Clippers — each selling for more than $2 billion.

The Dodgers were bought by Guggenheim Baseball Management for $2.15 billion, while the lowly Clippers franchise — a longtime backwater in the NBA — was captured in 2014 by Steve Ballmer, the former Microsoft chief executive whose net worth is north of $30 billion.

Businessman and television personality Tilman Fertitta is the Rockets’ buyer. He is the chairman and sole owner of Landry’s, a Houston-based company that owns restaurants, hotels, aquariums and the Golden Nugget casino.

To be sure, despite the devastation of Hurricane Harvey, Houston has several things going for it: The city has been the fourth biggest in the United States and growing. It has a desirable demographic, an international airport and a competitive team with stars James Harden and Chris Paul.

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I called economist Andrew Zimbalist of Smith College — author of several books about the business of sports — to explain why the Rockets would fetch such a staggering sum.

“When Ballmer signed his contract to buy the Clippers, he was anticipating the television deal,” he said. “The purchase of the Clippers seemed outlandish, and probably was outlandish, because you are sharing the city between two NBA teams (the Los Angeles Lakers) and you are playing in somebody else’s arena. To be sure, Ballmer was paying above the team’s worth at that time.”

The Staples Center is owned by Anschutz Entertainment Group, one of the world’s largest owners of sports teams and sports events.

“Ballmer was in large part somebody who had a $20 billion net worth and he was spending 10 percent of his net worth in order to have a fun plaything in the second-largest media market in the country,” he said. “It was eye-popping.”

Fast forward three years to 2017, and the $2.2 billion mega-sale of the Rockets, which Zimbalist called “a very rich price, but I don’t think it’s outlandish. The team is throwing off around $65 million a year in profit and around $250 million in revenue.”

With NBA franchises generally selling at six to 10 times their trailing revenue, the Rockets sale price doesn’t seem crazy.

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The real reason behind big sale price is that the economics of the NBA have improved dramatically in recent years. The league has a favorable contract with the NBA players’ union that contains labor costs at about 50 percent of revenue.

The average NBA player salary of $6 million a year has dampened the union’s enthusiasm for a strike that could erase half or even a full year of their career at a time when the average career is four to five years, Zimbalist said.

As he put it: “How do you get people making that much money to go on strike and lose a third or a quarter of their career?”

The league last year signed a lucrative, nine-year, $24 billion media rights deal with ESPN and Turner Sports. Zimbalist called the NBA television deal, “extraordinary.”

“This isn’t a 10 percent, 20 percent, 30 percent increase. This is a television deal that practically triples the amount the teams get per year, per team, from $30 million to $90 million per team,” he said. “The NBA today is a seriously profitable league, and hence it raises franchise values.”