Are the L.A. Clippers really worth $2 billion?
A high-profile NBA franchise in a major media market was suddenly available. A handful of power brokers from the technology, entertainment and venture capital fields were lining up for a chance to join the party.
And all the while the clock was ticking on the bidding, with the league waiting and threatening to impose its will on the process if Donald and Shelly Sterling didn’t unload the Los Angeles Clippers.
The result? A $2 billion record bid from former Microsoft executive Steve Ballmer that sent sticker shock through the worlds of sport and finance.
The offer, which comes after recorded racist comments made by owner Donald Sterling prompted the NBA to force a sale of the Clippers, is among the highest amounts ever paid for a pro sports team. It roughly ties the $2 billion paid for baseball’s Los Angeles Dodgers in 2012 and exceeds the $1.47 billion paid for soccer’s Manchester United in 2005.
A perfect storm may have inflated the price.
A small time frame to negotiate, skyrocketing television rights fees that pushed professional sports franchise values through the roof, an owner-friendly collective bargaining agreement negotiated in 2011 and Ballmer’s own desire to land the team after missing out in his bid to buy the Sacramento Kings last year collided to drive the Clippers price into the stratosphere, experts say.
“I’m completely hornswaggled – if that isn’t a word, it should be – by the going price,” said Michael Leeds, professor of economics at Temple University. “It is almost unimaginable that the Clippers would go for about the same price as the Dodgers did just a year or so ago.”
Ballmer may have overpaid for the Clippers through an economic theory called “the winner’s curse,” which states that the winning bid is always the highest bid and not necessarily the most accurate one.
But with a meeting scheduled for Tuesday in which the NBA was expected to vote to oust the Sterlings as owners of the Clippers, the window for negotiating a deal was closing quickly. That can often prompt prospective buyers to be more aggressive with their initial offers than they normally would be, according to John Vrooman, profressor of sports economics at Vanderbilt.
But Ballmer had good reason to overpay, Vrooman said. The Clippers will soon be renegotiating their local television packages. Their current deal reportedly nets them about $20 million annually.
Thanks to the team’s recent success, star power on the roster with Blake Griffin and Chris Paul and a voracious Los Angeles marketplace that could include bids from three networks, the revenue gained from a new contract will be much closer to the estimated $200 million that the Los Angeles Lakers earn annually as part of their deal with Time Warner, Vrooman said.
On top of that, the NBA will get a new national television contract in 2016 that figures to add another $50 million to each team’s balance sheet.
The expected television revenue alone – not even taking into account revenue from tickets, luxury suites and in-arena advertising – pushes the value of the Clippers to the $1.2-$1.6 billion range, Vrooman said.
“These buyers are perhaps irrational and exuberant but not altogether foolish,” Vrooman said. “There is method to Ballmer’s ‘madness.’”
The extra $400 million added to Ballmer’s bid is what Vrooman called the “blowaway factor” – additional money aimed at grabbing the seller’s immediate attention and emphatically distancing his bid from others.
“About $1.6 billion of the price is sustainable investment and the extra $400 million may be what a billionaire owner with a Harvard degree in economics simply wants to pay for his NBA buzz,” Vrooman said.
Owning a sports team has always been one of the ultimate status symbols, with billionaire playboys flexing their financial muscle to purchase the biggest, shiniest toys available. But in recent years, thanks to resounding victories by owners over players in collective bargaining negotiations, sports teams are getting closer to becoming fool-proof moneymakers as well.
“You would almost have to be the dumbest kid in class if you didn’t make money on professional sports teams today,” said Red McCombs, who has owned the San Antonio Spurs and the Minnesota Vikings in the past.
Teams are also rarely available, and there are lots of interested buyers, so the sales prices continue to rise. McCombs was on the front end of the trend when he sold the Vikings, a team he purchased for $220 million in 1998, for $640 million in 2005.
McCombs made his deal before the NFL owners won a labor battle to reduce the players’ portion of the revenue split to 50 percent in 2011, an arrangement the NBA duplicated later that year. Reducing player salaries – the biggest recurring expense for an owner – provided cost certainty to prospective buyers.
“Essentially, the commissioners and the owners have done a great job of pretty well identifying from the cost side what their total nut is going to be on salaries,” McCombs said. “Through a lot of sweat and tears and lockouts, we have a fairly decent feeling as to what the cost to the players is going to be.”
The rising prices have led to concerns about a bubble in the pro market similar to the one that brought about the housing crash. Vrooman said the lack of inventory separates pro sports from real estate.
“The housing bubble was caused by too many houses being built whereas this bubble is caused by too few franchises being created here and abroad,” Vrooman said.
Ballmer, who stepped down as CEO of Microsoft in February, may also view the purchase – which still has to be approved by the NBA’s owners – as a way to cast himself as a savior swooping in to rescue the Clippers from Donald Sterling after the fallout from the racist comments.
“Add to that the fact that he is a serious basketball fan, and, again, you have a formula for a higher-than-usual bid,” Leeds said. “Still, all this reasoning comes after the fact and does not significantly lessen my astonishment.”