An NBA Franchise Bubble?

Excellent reporting from ESPN.com’s Ramona Shelburne gives us new numbers on the sale of the Los Angeles Clippers. Currently former/current owner Donald Sterling is contesting his wife’s sale of the team to former Microsoft CEO Steve Ballmer for $2 billion, saying that the team is legally his by right and he is being defrauded. These figures came from Bank of America people and were given during the court proceedings:

The book, called “Project Claret” so as not to give away on the cover sheet that these numbers are indeed the financials of the Clippers, reveals that the team is projected to finish this season with $62.3 million in revenues from ticket sales, $25.8 million from its local cable contract and $24.1 million in additional team revenue. The Clippers are also projected to receive $52.7 million on the season in shared national league revenue, according to the document. After taking away player payroll costs, total operating revenue for the 2013-14 season is projected to wind up at $100 million.

Without player costs, the team revenue totals $164.9 million. Let’s back up a moment and remind ourselves that the Clippers sold for $2 billion. That’s 12 times the revenues from the last year. What? Why would you buy something for 12 times more than it made last year?

“No team in the history of sports has sold for six times total revenues, so that should give you an idea of how crazy this purchase price is,” said a sports banker, who was not involved in this transaction.

Even according to Bank of America, no team has been purchased for more than five times its total revenues. Before the bidding commenced, Bank of America valued the Clippers between $1 billion and $1.3 billion dollars, double the $550 million sale price of the Milwaukee Bucks, which set the league record for a sale price just months before. The document cites a five-year mean of teams that have been purchased during that time of a sales price of 3.4 times total revenue.

Bank of America people went on and on at the trial about how the price was so much higher than they ever expected and that this sale should definitely not be rescinded because the Clippers (and by extension the NBA) would never get a better offer than this. Of course in large part these things were said to convince the judge not to return control of the team to Sterling, but there has to be at least some validity to their claims. To me it’s concerning. Yes we know that the popularity of the NBA has increased a ton the last five years and there’s a huge new TV deal coming for the 2016-2017 season, but we have to wonder if it’s really worth paying 12 times the yearly revenue of a team for ownership. The Milwaukee Bucks just got $550 million, which is also striking considering that the Hornets/Bobcats (in a similar size market) were bought for a paltry $275 million just four years ago.

The value of NBA franchises is increasing at a massive rate, and while that’s great for owners, it could spell trouble for the overall business model. Even after projecting the Clippers increased revenues from the new TV deal, Ballmer’s price tag is still more than seven times greater. It feels like a bubble to me. People think these franchises will be worth it and, in a way, I hope they’re right because it’ll be good for the NBA. But I’m skeptical.

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2 thoughts on “An NBA Franchise Bubble?

  1. Pingback: An NBA Franchise Bubble? Ctd. | The Hobbes Fan Club

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