Thursday, April 26, 2018
Business

Ballmer's $2 billion play for L.A. Clippers is big bet on NBA

To most sports fans, player salaries, new stadiums and team sales always seem excessive. Whether it was Nolan Ryan's $1 million salary, George Steinbrenner paying $10 million for the Yankees or Jerry Jones spending $1.3 billion for a new Cowboys stadium, the numbers were considered eye-popping at the time.

Add Steve Ballmer's $2 billion offer for the Los Angeles Clippers to the list of sports deals that seem to make no sense.

Ballmer, the former Microsoft chief executive, appears willing to pay 31/2 times more than what the team was recently valued at by Forbes.

The bid was also 20 percent more than the next-highest offer for the franchise, which had been a perennial doormat, has never made it past the second round of the NBA playoffs and does not own an arena. He would inherit a team held by Donald Sterling, who was barred from the NBA for life after making racist comments and is considered to be one of the league's worst owners.

Yet deals for pro sports team seldom resemble ordinary business transactions. They involve incredibly wealthy people who willingly spend hundreds of millions of dollars to shine in the civic spotlight and rub shoulders with other owners in a very exclusive club.

Ballmer appears to be a likely candidate to join that group. He left Microsoft in February, is reportedly worth about $20 billion and is 58 years old. His interest in the Clippers might also have been fueled by his failure last year to buy the Sacramento Kings and move them to Seattle.

"This comes on the heels of Ballmer going through a wretched fight for the Kings, and he's leaving Microsoft and wondering about what to do next," said Marc Ganis, who advises owners and potential owners. "Now he'll be a hero for stepping up to take over a franchise that the nation wants taken away from Donald Sterling. He will ride in on his shiny steed."

In strictly financial terms, it is hard to justify spending $2 billion for the Clippers, Ganis and other sports advisers said. But they said Ballmer far outbid his rivals, including a group with Oprah Winfrey, so he could quickly end the auction and persuade Sterling, who claimed he would fight the NBA, to drop any legal challenges.

Ballmer took a similar approach when he ran Microsoft, paying what some analysts thought were obscene amounts for companies. He raised eyebrows, for instance in 2011, when Microsoft paid $8.5 billion for Skype, more than triple what eBay had paid for the company years earlier.

But successful businessmen ultimately become successful by betting successfully on the future. In that sense, Ballmer believes the Clippers will make enough money to justify most of what he intends to pay for the team, if not all of it.

"L.A. is one of the world's great cities — a city that embraces inclusiveness, in exactly the same way that the NBA and I embrace inclusiveness," Ballmer said in a statement.

Rob Tilliss, who runs Inner Circle Sports, which advised one of the other bidders, said there were reasons to be optimistic about the Clippers' financial outlook, though Ballmer's offer is based on a lot of wishful assumptions that will all have to come true for him to get his money back.

On the positive side, the team is on the upswing, with marquee players such as Chris Paul and Blake Griffin. Their intracity rival, the Lakers, failed this season to make the playoffs for the first time in a decade.

The team's local cable TV contract is coming up for renewal, and estimates suggest that the Clippers could see the value of that deal triple, if not more. Ballmer would benefit from the NBA's next round of national television deals, which begins in the 2016-17 season.

"Everyone looking at this is looking at the future of the NBA and the upcoming TV deals," said Sal Galatioto, the president of Galatioto Sports Partners.

It is hard to know how much the sale of the Clippers will help other owners lining up to sell their teams. In some sense, the recent $550 million sale of the Milwaukee Bucks, one of the least-valuable NBA franchises, might be a better barometer because it establishes a floor, not a ceiling, on future deals, Ganis said.

Clubs in big-market cities such as New York and Los Angeles, and teams that are considered cornerstone franchises, such as the New England Patriots and the Dallas Cowboys, are always going to generate significantly higher bids because there are so few of these assets available. The Clippers have never been a marquee franchise, but they play in Los Angeles, a city with cachet.

Though the specific details of a sale will be kept private, Ballmer is likely to enjoy significant personal financial benefits. The acquisition of teams can often generate goodwill, in accounting terms, that can be used to offset tax gains elsewhere, a legitimate concern for Ballmer, who no doubt receives a lot of ordinary income from stock dividends.

Given how low interest rates are, he could finance part of the purchase relatively inexpensively, and he could later bring in minority shareholders to recoup some of his purchase.

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