Sports

Nobody but Ballmer Thinks the L.A. Clippers Should Cost $2 Billion


Steve Ballmer in Berlin on Nov. 7, 2013

Photograph by Krisztian Bocsi/Bloomberg

Steve Ballmer in Berlin on Nov. 7, 2013

The legal fight between Donald and Shelly Sterling over her $2 billion agreement to sell the Los Angeles Clippers to former Microsoft (MSFT) Chief Executive Officer Steve Ballmer provided a glimpse of the team’s balance sheet. In a court filing this week, Shelly’s lawyers included a report by Bank of America (BAC) that attempts to nail down the value of the Clippers. The document (PDF), first reported by ESPN (DIS), gives a banker’s-eye view of the National Basketball Association. Here’s what it shows:

1. Ballmer is willing to pay a premium. Shelly Sterling wants the court to see this document because it refutes her husband’s claim from the witness stand that he could have sold the Clippers for as much as $5 billion. But Ballmer, as the numbers show, is offering more than any previous NBA buyer—and more than any buyer would pay for an asset with this caliber of financial performance. Over the last five years, according to Bank of America, NBA teams have sold for an average of 3.4 times their annual revenue. Ballmer’s bid comes in at 12.1 times an estimated annual revenue of $164.9 million for the year ended in June. In other words: Donald Sterling’s hypothetical $5 billion buyer doesn’t exist, and there’s probably nobody other than Ballmer willing to go as high as $2 billion. Which means …

2. The Clippers sale is an outlier. Ballmer’s bid sparked questions over whether the price was a sign of things to come. The Bank of America report supports the general consensus that it’s not. Analysts tried to account for two big revenue boosts coming for the Clippers: a new regional TV contract and the NBA’s new national TV deal. Both existing television contracts are set to expire at the end of next season, and Bank of America estimates a fivefold increase in annual revenue from local TV money (from $25 million to $125 million) and a doubling of national TV revenue (reaching $60 million). Even with those adjustments, Ballmer’s offer is 7.1 times the team’s revenue. The Clippers will probably end up as a dot hovering above the rising trend line of NBA sales (seen in this handy chart from Bank of America):

Bank of America Merrill Lynch via ESPN

3. NBA owners won the lockout. Point No. 2 in the report’s list of “positives” for the league is a “new collective bargaining agreement struck in 2012.” That agreement reduced the players’ share of annual revenue from 57 percent to roughly half, definitely a positive for a prospective owner. Under the bank’s scenario for TV revenue increases, the Clippers would bring in $178.5 million per year. That would make for a profit margin of 55.1 percent with the team’s current costs.

4. The owners are not done arguing with one another. While they may have vanquished the players’ union, big- and small-market owners are still at odds. Under “considerations” for the Clippers, Bank of America lists “risk to teams in larger cities from future changes in revenue sharing mechanism to favor smaller markets.” As it stands, that mechanism forces the NBA’s haves to send annual payments of as much as $22 million to the have-nots.

5. The NFL helps make the Clippers valuable. In the report’s appendix is a ranking (below) of the top 16 sports markets by population per team, with Los Angeles at the top. The city hasn’t had an NFL team since 1994.

Bank of America Merrill Lynch via ESPN

6. The L.A. Lakers are garbage right now. This little nugget appears in the list of positives for the Clippers: “Lakers going through a recycling period.”

Boudway_190
Boudway is a reporter for Bloomberg Businessweek in New York.

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