Considering the Sale of the Hornets

Published: February 28, 2012

Let’s take a look at what’s going to be a factor in the sale of the Hornets.

Let me say first off: I’m absolutely exhausted by everything regarding this ownership transfer. In one way or another, this has been the core of my interest in this team from prior to the initial failed transfer in April 2010 . . . nearly two years ago. From working on the news generally, to studying attendance, the CBA, the TV deal, and more . . . all the boring stuff . . . it’s been what I’ve been preparing for because having an NBA team here in New Orleans is important to me.

I love this city. I love my home.

Thus, following this very important deal has been a passion.

I said that February will be a good month, and that it has been. The gears are turning, and this deal is going to get done.

Let me say right now, so those who are interested can just click away happily: I’m not talking about any eventual owner here, nor am I presenting anything juicy. I’m just summarizing things I’ve said in various places. The new owner won’t be me, and other than that, I can’t say anything on that front with confidence, so I won’t say anything at all. Some of what I say I consider to be fact, some is a look at possibilities, and some is a little myth busting.

Most people know the rumors, and everyone has their thoughts and their preferences. Some will end up being right. Some of those will have good reasons for thinking this. That doesn’t mean that the reasons are the right reasons. Things are always changing here; there is no right reason.

Let me set the table with a quote from our quasi-owner: He did not originate the phrase, but the Commissioner quoted it for us in another context this weekend: “Life is a negotiation.”

If those involved are alive, then they are negotiating, and they will be until the ink is dry and beyond to the next deal and more. Keep this in mind.

What We Know

A deal can not really get done until at least March 12th, 2012, Noon CST. That is when the legislative general session begins. The Hornets, Saints, and other related issues come up in such sessions due to the lease agreements that include possible payments to the teams (yes, the Saints, too). The ownership transfer will not take place until all revenue is accounted for that can be accounted for, and part of that will come with the lease. The issue of possible relocation is also in play. All parties have been told that the relationship between Hornets, LSED, and Louisiana is not expected to change as a result of NBA ownership or due to the upcoming ownership transfer.

Prior to this date, anything is unofficial. This means that negotiations are ongoing, regardless of whether anyone is actually negotiating. Anything can happen.

Once the 12th is upon us, we are not guaranteed answer, but that point actual `answers’ are possible. I’ve heard `into June’ as an eventuality, and not necessarily a worst case scenario.

The deal will involve improvements to the Arena. Governor Jindal mentioned being able to use money to improve the Arena that is set aside for upkeep and improvement of State assets, rather than taking money from, say, education. He said this without prompting, so I take this as a given.

It is well-known that the NBA wants its home arenas to be at a certain level, and keeping such things up is key to holding a team.

The renegotiated lease will have no opt-out clauses. Let’s be clear: No team is unmovable. The proper frame of reference is whether our lease will be easier to break than other team leases. If so, there will be teams that are just as easy or easier to dislodge than ours, at least in that dimension.

The current lease was amended after the franchise returned to New Orleans on a full-time basis to allow a lower cost penalty for breaking the lease. Such benchmarks will not exist. They will not. This has been reported by numerous sources in no uncertain terms. I have no reason to doubt this. I do expect revenue benchmarks, just like the current lease and the Saints’ lease to guarantee certain revenue to the team. The State, so the fans, would cover shortfalls.

What We Might Know

There are at least two parties negotiating to buy the team. This is likely just two parties, but it’s possible that someone who bowed out may unbow in, or whatever the reverse of that phrase is. Why not? I’m not counting anyone out.

The lease will include tens of millions of dollars in improvements. As a point of reference, the Superdome was brought back to its original condition with ~$145m of FEMA money, and upgrades were made at a cost of ~$64m by the LSED. Improvements could not be made with FEMA money. This $64m was spent over a couple of off-seasons, and some of the improvements were significant. A fraction of this money would be needed to upgrade the Arena due to its size, and with the Dome as a reference, tens of millions can take the 12.5 year-old Arena forward a great deal. It’s got no shot at being the size of the larger arenas in the NBA, nor does it have a prayer of being the game-changer that the Amway Center is, but this level of funding can keep the Arena as competitive choice compared to some of the empty arenas in North America, as it was in 2002 and 2007. Reported figures are around $50m, but those are not well-substantiated at this point.

The lease will be through 2024. I was told this flat out, but things change. This is 10 years beyond the current term. Now, the current lease has two 5 year extensions built-in, so the extension could be the activation of those extensions, forcing a renegotiation in 2024. Any additional revenue to the team or other changes can be taken care of by amendments, including adding in other options. The current lease has two amendments already, for reference.

Champions Square is a big part of the picture. How Champions Square relates to the Benson family, the LSED, and other parties is not simple, but after sufficient revenue covers various expenses, the LSED and the Benson family split all revenue equally. With plans to expand the Square to include things like permanent food court, and speculation that a residential tower, restaurants, and other commerce could move into the area, increasing the number of events in the area that draw over 10,000 attendees increase the money for the State and for the Saints’ owner. Thus, efforts to hold the Hornets here are in effect discounted to a degree.

Additionally, part of the draw of the new wave of arenas and stadia are built-in restaurants and shops. With a limited footprint, the Arena can only expand so much. By creating an integrated sports and entertainment district, the team can be more profitable directly or to the State, which can then hand money to the team in some fashion, than it can by just using the Arena with some touch-ups.

The TV deal will be a key source of revenue for the new owner. The Hornets’ current TV deal expires after this season. It is worth around $10m per year, which is likely the worst in the NBA. TV deals have been skyrocketing, so I expect this deal to increase by millions of dollars per year if not at least ten million per year. The current president of the team, Hugh Weber, has stated that the raw dollar value of the deal is not the primary driver in deal selection. Rather, broadcast quality, availability, and other factors will share the importance. I see no reason for this to change should a new president be appointed. They want eyes on games for more than one reason. This will be finalized between late summer and the season’s tip.

This is revenue that will be the result of new owners’ negotiations as an owner and not as a buyer. It will be telling.

The sale price will be $350m – $375m, give or take. This gives a NBA a pretty good shot at both turning a profit on this transaction and propping up the values of other franchises. With the prior sale being around $300, adding in the value of increased revenues and certainty, this is the neighborhood that falls out naturally. Reports indicate that this is right range.

The current negotiations involve local interests. Hornets247’s Michael McNamara tweeted from the All-Star Weekend that Stern said that Mardi Gras slowed the pace of negotiations. If an out-of-state group was only dealing with the NBA in New York on the sale, Mardi Gras wouldn’t be an issue. Stern said this to a small group of people, so I believe it. The simplest inference is that local interests are involved in the negotiations, which is a positive sign for those who wan the NBA in New Orleans.

What We Definitely Do Not Know

It’s all about the largest bid. Nope. There’s more to buying a team than plunking down money, and there’s even more than that to buying this team. Things would be easy if it were just about the largest bid. Ask each bidder for their best bid. Write down the top one. Pass that number around. Then ask again. Rinse. Repeat. Assuming it takes a bit for the bidders to formulate their raises, this should not take that long to complete. This has taken a while, hasn’t it?

Stability after the sale is a factor that is as important profit from the sale. The attempted sale of the Hawks was stopped at the NBA approval level (3/4 approval is required) because the buyer’s financial stability after the sale would have been less than some acceptable level. This has to do with debt ratio and the degree of financing involved in the bid. If any bidder is too heavily financed, that bid may face a similar impediment at the owner or NBA approval level.

Stability is important because the owners know that not all owners are profitable owners. Those money-losing owners have cost the other owners tens of millions of dollars by way of revenue sharing, as key point surrounding the recent CBA negotiations. The NBA owners will tolerate such owners already in their midst, but they will not be adding more such owners to their cabal.

At the other end of the table is the franchise and the city. This franchise has moved three times, and this city has already lost an NBA franchise. The NBA does not want to have to deal with either ever again. Ever. They want this done so they can focus on the other 29 franchises, and hopefully 27 other cities (I’ll count Brooklyn as part of NYC, thanks), without having to peek at a 28th. The NBA had a hand in this, and a very active hand at that. They want no stench of failure on their involvement, even if `we’ get the blame.

Lastly, a pet theory of mine (one that some well-placed people seem to find interesting to say the least) is part of the NBA’s benefit from this whole purchase and sale is that NBA will have taken a franchise that was not really set up to make a profit and turned it into a franchise that will not need revenue sharing (per Stern). That means the franchise is not expect to lose money. New Orleans is the smallest market with an NBA franchise and the smallest market with two sports franchises. Beyond that, the Super Bowl XLIV World Champion New Orleans Saints are a top flight franchise than commands the hearts and wallets of the region. The Hornets turned their business around in the shadow of their titanic older brothers, during a lockout, without an owner, and during tremendous uncertainty about the competitiveness on the court. This has to be, should it work, a clear signal to the owners that are not turning a profit.

The deal is done. If the deal was done, they’d say it. They said it was done before and it wasn’t done. One might say that would make them more than cautious this time. Yes. Agreed. 100%. Certainement. But done is done. Done.

It’s not done.

This team is poised to move. There is nothing to stop a team from moving to a better financial situation. Until this lease is clarified, butted up with the TV deal, naming rights, full activation of Champions Square, and the reaction of the community to the new owner at least are settled, we can’t answer this question. We can say that the NBA has chosen for the fourth time to put a franchise here (Jazz, Hornets in 2002, Hornets in 2007, and Hornets in 2012). If we make ourselves at least as competitive as the next NBA market, we make ourselves harder to dislodge. This team moving is about how the market, government, arena, and broadcasters financially relate to the team. When those relationships are strong, no move is worth the risk financially. Emotionally, who knows?

Local ownership is better in terms of relocation. Nope. The local fixation is based on fear. We can eliminate fear by being an attractive place for a team. As a friend of mine said a long time ago when asked (by me) how he did so well with the ladies: “I’m the prize.”

We’re the prize. At least, we better act like it until we are.

This fear is justified, but that doesn’t mean that a local owner will not move the team before the end of this lease term. The Jazz situation, along with the constant attendance drumbeats from the Hornets, and even Saints relocation threats have taught us to fear losing franchises. The lesson of Seattle adds fuel here, but it also shows that if we are hitting on all the major points of team support, then we have a chance to have a different fate.

Profits and losses determine franchise moves more than the whims of owners these days. Once a team is a regular money-loser, the owners’ whim becomes a key factor in the future location of a team. When a team is making money, however, and doesn’t need any public investments to stay that way, the other owners would be far less charitable to their cohort without a staggering financial case being made. As a team that is not expected to need revenue-sharing, most owners will want the team right where it is and focus on their problems: the teams losing money and requiring revenue sharing (their revenue).

Engaging the locals and embracing the local culture and how we rouler will be important, but this can be done whether the majority owner is from here or not. Why we think some stuffy old rich guy can’t fall in love with New Orleans is beyond me. Why that’s required for us to be a good place for a team and a business is almost as beyond me. Drew Brees isn’t from here, and people are fairly confident that he’ll stick around for the duration because the Saints and offer him what he needs on and off the field. Tom Benson, the local guy paying him kept his TV station off of Dish in the New Orleans area for almost 3 weeks while negotiating price increases.

Local ties only go so far. Profits go farther.

Final Thoughts

It seems we’ll get a leak or informal announcement about an owner, then a formal announcement of a deal and a lease at some point after Noon on March 12th. After that the deal will go to the NBA for approval. Should it be a approved, there may be one last round of paperwork before this chapter is closed.

Rumors are flying. Listen to them all. Then, think about them. Think about them relative to facts, not fears, at least at some point. Remember most of them are just informationless recycled old rumors, perhaps mutated.

Discount information that is in favor of the person telling you. Discount information that seems leaked, no matter how specific. What aren’t you being told? Discount it further if it is inflammatory.

Remember that what’s a fact one day will be fiction the next. This is not necessarily because someone was wrong or lying. It could very well be because the situation changed.

Don’t fear other markets today. Another market may look to be a good place for a team, especially in the proper light. Things change. Things don’t always go according to plan. We know that all to well with respect to things here, but plans get derailed in other places, too. We can affect the future of this franchise by supporting it. We need to, though thick and thin.

The media, traditional and otherwise, including this site, may be witting or unwitting part of a grand negotiation. Question everything. Question everything in this article. Question everything on this site and every other site. Question everything, and question it again. Never stop.

Don’t disbelieve. Question. There is a big difference.

You are better off just waiting for it to happen, frankly. I would be better off if I just waited, at any rate.

If you choose to wade into the rumors, that’s ok . . . it’ll all be over soon . . .


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