Selling the Nets Just Got Easier for Mikhail Prokhorov

The NBA approved the remaining shares of the Brooklyn Nets to be sold to Mikhail Prokhorov

Last winter, Mikhail Prokhorov hired investment bankers to explore selling his share of the Brooklyn Nets. In the world of finance, the Nets mediocrity was not a deal breaker; it had little impact. It was the $1.5 billion dollar price tag that came without full ownership that was the sticking point. Buyers putting up that much capital wanted to own the Nets and Barclays Center outright, particularly since Barclays Center added a new tenant in the fall, the New York Islanders. So Prokhorov ended his exploration.

But now, at year’s end, a sale is in the books.

Prokhorov owns 100% of the Brooklyn Nets and Barclays Center. Full ownership of the team and the arena by Prokhorov makes the team and the arena a far more attractive commodity for prospective buyers.

The Barclays Center was partially owned by Forest City Enterprises whose ownership stake was 55%. Forest City was in debt by more than $31 million. In the proposed deal, Prokhorov bought their shares, not in money, but by forgiving their debt. His ownership in Barclays means he will reap all revenues for the Nets home basketball games and musical events, and now hockey.

Owning your own arena is the vehicle for unlimited revenues, lining the pockets of NBA owners but also creating regional leverage to be able to overspend when necessary. To put it another way, concessions and parking pay for houses in the South of France, trips to Dubai and the ability to bid for Kevin Durant.

Two years ago, the Clippers had one incredible asset: Donald Sterling. He was the sole owner of the team. Although he didn’t own the Staples Center, he was a tenant who paid rent, his 100% controlling interest in the Clippers meant that the new owner would be able to control the team and its supporting revenue.

Of the $31 million that Forest City owed, $6 million was due in September. Selling to Prokhorov was a win for Forest City in that their debt is erased, those huge losses incurred by the Nets overspending on a payroll without any compensative value.

The Nets, since Prokhorov bought the team, has had a payroll at the top of the NBA food chain, Lakers-like, but with none of the corresponding local television revenue to offset costs. In 2012-13, the Nets payroll was $84 million. In 2013-14, it ballooned to $102 million with a $90 million luxury tax bill. In 2014-15, they downsized to $88 million. In those three seasons, the Nets won 10 playoff games, making one appearance in the Eastern Conference semi-finals.

It’s easy now to say their big mistake was signing Deron Williams to a $100 million dollar deal, an investment that failed because Williams could not perform to the level he was being paid. Trading for Joe Johnson with $90 million dollars left on his contract was the second disaster. And to think Johnson was their consolation prize. The Nets had been chasing Dwight Howard for two years.

Clearly Prokhorov fell into the trap that all new NBA owners fall into once they are admitted into the club. As outsiders, they fall victim to the star player bling. Only when they start shelling out huge amounts of dough do they understand that while the star culture drives the NBA marketing complex, success is dependent on the other 12 players on the roster.

Shaq and Kobe took 4 years before they made it to the NBA Finals. Lebron made it to the NBA Finals in his 4th year. Jordan needed seven years. Steph Curry needed six years. Team building is an exercise in patience.

Prokhorov is a billionaire because he knows when to buy and when to sell. This is prime season for making a fortune in the NBA, particularly if you are in a lucrative market and have assets. Owning 100% of the Nets and Barclays puts Prokhorov in an enviable position which he needs since there are certain blemishes on his commodity that he can’t change.

The Nets had the lowest local television ratings of any NBA team last year. Unlike the NFL, NBA teams don’t share local television revenue. The Lakers get to keep their $200 million a year all to themselves. And the Nets have to make do with their $20 million. The team not being very good is an asset though, not a lot of big contracts a perspective buyer might be scared off by. The Joe Johnson mega-salary is off the books this year, a good thing for an aged scorer shooting 36%, making $24,894,863.00 million. Because the team is in New York, it automatically adds value.

Deron Williams was the Nets biggest loss and gain this summer. But that is trumped by Prokhorov himself and his acquisition of the Nets as sole owner which means when he sells them for what Forbes has valued them at, $1.9 billion, and once he pays his debts, his four year NBA experiment would have been very much worth it. Even without the NBA title he once predicted.

 

photo via llananba