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Tuesday, April 29, 2014

How Donald Sterling Will Cash In On His NBA Ban

Racist comments attributed to Los Angeles Clippers owner Donald T. Sterling have gotten him banned from any association with either the Clippers or the National Basketball Association "for life."

The wording of the ban, according to the NBA press release, prevents Sterling from "participat[ing] in any business...decisions involving the team."  This means he cannot exert any authority over business decisions involving the team.  For an active owner of a franchise, this is a hard condition to accept and suffer, for it prevents the owner from taking autonomous steps to cut costs or enhance revenues if the team's income stream or long-term interests should be compromised.  In short, Sterling becomes an absentee owner whose financial interest is now controlled by and dependent on the remaining league owners.

A sale of the franchise may not be eventually required, but as a practical matter, it is likely to happen.  The reason is simple: Donald Sterling now has leverage.  This is his time to cash out (whether he likes it or not), but how he plays this opportunity (and it is an opportunity for him, trust me) can differ in several respects.  As I will explain, this will not be a fire sale or distressed sale where he is selling at a discount.  Not at all. In fact, I believe the opposite is true, because he has leverage. 

Follow the logic. The latest controversy has shown that one wayward owner can cause significant, short-term brand damage and revenue losses to the rest of the league.  The prevention of a recurrence has a value.  It is a powerful reason why the rest of the league's franchise owners will pay Sterling to go away.

And they will pay...a premium.

On Sterling's side, I would be asking for a premium. (While he would be stripped of decisionmaking authority, the team is still is and no court would force him to sell on terms to which he would not agree.) And why not? The Clippers are an underdeveloped franchise in the nation's second-ranked media market which is also a gateway of sorts to the untapped and begging-for-sports Mexican and Latin American markets.  

If I am repping Sterling, I am asking to either hold on to a portion of the interest in the team -- maybe as a silent 49% owner -- or to get residuals on future revenue streams that can be developed by any other owner with the vision and capital to develop the huge basketball market to the south.  

A visionary with credibility in those global markets -- say, a Carlos Slim, but it could be anyone with capital and quiet cross-border credibility -- could turn even this cruddiest of perpetually underperforming NBA franchises into a global team.  After all, basketball is the second sport (ahead of baseball and after only soccer) in much of Latin America. 

A real visionary might even change the name of the franchise from the Clippers to something harkening to a global ethnic identity.  The Los Angeles Aztecs, anyone?  If there is a sports league that recognizes the power of branding, it is the NBA.  Franchise name changes are not uncommon, either; just this year, the New Orleans Hornets (formerly the Charlotte Hornets) became the New Orleans Pelicans, and the Charlotte Bobcats will become the Charlotte Hornets for next season.  In these cases, you had bland brands being changed with little or no fan dissension.  There is no "brand" for the Clippers beyond being the Not-Showtime, Not-the-Lakers, or just being a bad basketball club with a laughingstock of an owner.

Even on a more modest, domestic, regional scale, the Clippers can finally gain even footing with the Lakers, with whom they share the Staples Center for home games.  The Lakers have dominated the Southern California market since the days of Jerry West (i.e., 40-45 years ago).  Since the Clippers moved from San Diego to Los Angeles in 1984, the Lakers always cast a dark shadow over the Clippers by any metric (media ratings, sponsorships, licensing, attendance) you use.  But the Lakers have now faded on the court, the Clippers are the playoff team, and the balance of local attention can finally shift to afford the Clippers some local market growth at the possible expense of their more established co-tenant. 

The right vision can turn this one franchise into a huge moneymaking operation.  

The right deal advisors would make sure that Sterling either shares in the future gains, or gets a huge premium on the present value of the franchise in order for Sterling (who made his money as a harscrabble Los Angeles personal injury attorney) to surrender that upside potential without a protracted court fight.

Now, one report, quoting one sports business analyst, suggests the Clippers' franchise might sell for as much as $780 million. Given the reported annual net income of $15 million, this is a price to earnings valuation of fifty (50).  That number makes one pause, even if you consider the various avenues of untapped potential. (Note: The same report also states that Sterling denies any intent or willingness to sell the franchise.) That's why anyone considering a purchase or joining a syndicate has to have a plan, not just to do the deal, but how to create value in the franchise for the long term.

What do you think?

Eric Dixon is a New York corporate lawyer and strategic consultant.  

1 comment:

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