Hedge Fund Managers Look to Make a Few Milwaukee Bucks

Marc Lasryand Wesley Edens built successful investment firms on the back of their ability to find value in distressed assets. Their latest venture will put those skills to the test.

With their recent agreementto buy the Milwaukee Bucks, Lasry and Edens are certainly focusing on the distressed end of the National Basketball Association. The Bucks finished the regular season with a woeful 15 wins and 67 losses, easily the worst record among the league’s 30 teams. (Even the pitiful Philadelphia 76ers, who tied a league record by losing 26 straight games, had a better season record.) Yet the pair of investors has agreed to shell out $550 million, the largest sum ever paid for an NBA franchise.

Welcome to the new sports economics. Whereas Lasry and Edens typically look to buy undervalued assets on the cheap, major sports franchises today can command top dollar, even without a winning record. The value of a team has long depended as much on broadcast revenues and other ancillary activities as it does on ticket sales, but those factors are becoming even more prominent. Today’s owners can tap into more upscale concessions, both at the team’s venue and in the surrounding neighborhood. Sports broadcasts have become more valuable to sponsors than almost any other programming because audiences generally don’t prerecord games or fast-forward through the commercials.

The attraction is so great, in fact, that buyers increasingly are willing to value teams based on projected sharp increases in broadcast revenues. Such was the case in March 2012 when Mark Walter, CEO of the New York–based investment firm Guggenheim Partners, led a group of investors including basketball Hall of Famer Earvin (“Magic”) Johnson to buy the Los Angeles Dodgers after the baseball team had filed for bankruptcy protection in 2011under its previous owner, Frank McCourt. Amid the fallout this past week from former Los Angeles Clippers owner Donald Sterling’s taped racist remarks, which resulted in his lifetime ouster from the NBA and a $2.5 million fine, Johnson and Guggenheim Partners have voiced their interest in bidding for the team.

In any other industry, buying an asset based on its potential future earnings would sound precariously pre-2008. Indeed, the Bucks bear watching, if not for their jump shots at least for whether those future earnings will beat the overhead.

“有一个问题是否存在explosion in media rights fees,” says Andrew Zimbalist, an economics professor at Smith College in Northampton, Massachusetts, who has written more than 10 books about sports economics, most recently co-authoring with former New York Mets statistician and fellow Smith faculty member Benjamin BaumerThe Sabermetric Revolution: Assessing the Growth of Analytics in Baseball, about the evolution of algorithms described infinancial pundit Michael Lewis’s 2003 book,Moneyball. “There could be a bubble in this,” Zimbalist adds.

Herb Kohl, 79, a former U.S. Senator from Wisconsin and onetime president of discount department store Kohl’s, has owned the Bucks since 1985. At the time he began seeking buyers,Forbesmagazine estimated the franchise was worth about $405 million. Forbes calculates sports teams’ worth based on revenues, earnings, the size of the team’s market, its performance and comparable prices for rival teams. It based that $405 million figure on the Bucks’ existing broadcast rights, says Zimbalist. The NBA’s current national television deal with Time Warner’s TNT channel and with Walt Disney Co.’s ABC and ESPN networks is worth $930 million a year. That deal will expire after the 2015–’16 season, however, and analysts believe the league can generate nearly double those revenues when it negotiates its next television contract. In addition, teams can strike local broadcast deals, a factor that favors teams in major media markets such as New York and Los Angeles.

“For sports teams everywhere, a big driver of valuation is media markets,” says Jeffrey Phillips, who analyzes sports teams in his role as a managing director in the valuation and financial opinions group at financial advisory firm Stout Risius Ross in Tysons Corner, Virginia. It helps to have a winning team to boost ratings and television revenues, of course. Lasry and Edens will get some help on that front. Thanks to the Bucks’ last-place finish, the franchise will have one of the top picks of young talent in the 2014 draft. The investors can only hope to replicate the success of the Bucks back in 1969 when, in the franchise’s second year as an expansion team, they drafted Lew Alcindor out of UCLA and turned the club from a league doormat into a championship contender overnight. The team won its only title in Alcindor’s second season. Shortly thereafter, in light of his conversion to Islam while a college student, Alcindor would change his name to Kareem Abdul-Jabbar and move to the bright lights of Los Angeles. Bucks fans have had few reasons to cheer in the decades since.

In the case of the Dodgers, so far the media rights deal seems to be paying off for Walter’s consortium, known as Guggenheim Baseball Management. The group paid $2.15 billion for the team at a time when estimates of its value were around $1.1 billion. In January 2013, however, the Dodgers signed a 25-year television rights deal with Time Warner Cable for $8.35 billion. Of that total, some $1.9 billion will be divided among other Major League Baseball teams under the league’s revenue-sharing system.

For Lasry, co-founder of the $13.6 billion hedge fund firmAvenue Capital Group, and Edens, a co-founder of the investment management firm Fortress Investment Group, with $61.8 billion in assets under management, the other great unknown is how much they can earn through real estate from a new arena for the Bucks, assuming it gets built at all. They have pledged $100 million toward the construction of a venue to replace the BMO Harris Bradley Center, which opened October 1, 1988. Kohl has pledged another $100 million toward a new arena. Once the NBA approves Edens and Lasry’s purchase of the team, which NBA commissioner Adam Silver has said should happen this month, they can start negotiating with Milwaukee voters and politicians about whether the further costs to build the arena, estimated to be at least an additional $200 million, will be borne by private or public funds. Lasry and Edens have a deal under which the NBA will buy the team back from them if the arena is not under construction in three years, so they have minimized their risk. But if the new venue flies, they stand to gain revenue from the luxury suites, club seats, restaurants, stores, office space and other amenities that are now common in and around sports arenas, says Stout Risius Ross’s Phillips. They could emulate Rogers Communications, which bought the Toronto SkyDome in 2005 and expanded it into the Rogers Centre, home of the Blue Jays — which Rogers Communications also owns — and the Argonauts, along with luxury suites, a hotel, a concert and exhibition hall and 8,000 square feet of retail space. Or they could build condominiums like those operated by Ritz-Carlton in the L.A. LIVE entertainment complex, which is a ten-minute drive from Dodger Stadium.

比没有体育场馆融资with public funds in the past decade. Yet the owners of another NBA team, the Golden State Warriors, might be about to set a new precedent. The owners, led by Joseph Lacob, partner emeritus at Menlo Park, California–based venture capital firm Kleiner Perkins Caufield & Byers, and Peter Guber, CEO of Los Angeles film production company Mandalay Entertainment Group, have said they will pay all of the construction costs for a new arena in San Francisco, estimated at $600 million. The investors paid $450 million to buy the team in 2010; nowForbesputs the value at $750 million. That would mean in theory that the owners have earned 10 percent a year, with more on the horizon through the real estate earnings from a state-of-the-art arena.

“Once the purchase price of sports teams got beyond the reach of most individuals, we thought there would be more pressure for leagues to allow corporate ownership,” says Kenneth Shropshire, a professor of legal studies and business ethics at the University of Pennsylvania’s Wharton School and co-editor with Scott Rosner of a textbook on the sports industry,The Business of Sports. But as that book points out, owning a sports team can be problematic for a publicly traded corporation because it is rarely the core business and it doesn’t produce a regular quarterly earnings flow.

Says Shropshire: “This whole new generation of wealth developed and turned out to be interested in owning sports teams.” Increasingly, however, billionaire owners, when figuring out how to fund their childhood dream, might have to factor in the cost of developing real estate around the team’s home.

Follow Jan Alexander on Twitter at@jananyc.