Golden State Financing Hints at Wild Overpayment for the Warriors

ALERT … WONKISH INTERSECTION OF SPORTS AND FINANCE

Be warned, this post is not for everyone. In fact, there are probably twelve people in the world that care about this subject and that includes me. But this is my blog so I am going to write it up.

There was a story out earlier this week that has details on how the new owners of the Golden State Warriors intend to finance their recent purchase. It turns out, at least according to Sports Business Journal, that the new buyers – Joe Lacob and Peter Gruber – will plunk down $300 million in equity as part of the $450 million purchase. The balance will be financed with debt.

Now I admit I am not a project finance expert. And as much as I would love to run JP Morgan’s IB team for pro sports, I concede that I don’t have much knowledge of how sports franchises have been financed in the past. But I do know that the Warriors new capital structure, at least as it’s being reported, is far from optimal. In fact, it is so skewed toward equity that it almost guarantees that this acquisition will return punk ROIs as far as the eye can see.

But we all know that guys don’t buy teams to generate big profits, right? After all, winning (and capital gains appreciation) is what matters, no? Well, I think that is debatable and varies depending on each particular mgmt. group. But in this case, we now know one thing …… this ownership team either doesn’t care about returns, was burdened with restrictive league rules on debt or wildly overpaid for a team that can’t possibly service a better capital structure. Just a hunch, but I think the real story here is a combination of points two and three.  

Let me explain.

I doubt these new owners are financial imbeciles. In fact, they most likely are pretty sharp guys (one has made bazillions in private equity) and if they aren’t, then their bankers and lawyers certainly are. So believe me when I say that if the Warriors were a power plant, this project would not be financed with 66 percent equity. Maybe ten. Perhaps 20. But not 66.

More likely, the skewed ratio probably has some link to guidance from the NBA or even a league rule on equity. Just a hunch, but I gather the NBA isn’t too keen on letting new owners buy a team, load it up with debt and then struggle to stay afloat.  This isn’t good for the new owners, the league’s existing owners, the players (just  ask Arod), or the fans . So I suspect there are rules in place to prevent such happenings.

But 66 percent? Call me crazy, but I can’t believe that the NBA imposes such a restrictive financing rule on its owners. That just seems awfully hostile to returns and as a result, such a rule would invariably lead to lower valuations.  (Not good for the guys already owning teams.)  

As such, my gut tells me something else is perhaps in play. And that something else is the Warriors just don’t spit off enough cash to service much debt. It’s no secret that a number of NBA teams have been struggling, especially since the beginning of the downturn, and I am guessing that the Banks (and perhaps the league) might have looked at the numbers and said no way to 350M in financing.

And that raises the question …… why did these guys pay $450M for the Warriors? If the cash flows can’t support even tepid levels of debt, then the acquisition price in this case seems awfully inflated. You know, I always laugh when Forbes comes out with its valuations of Sports Teams because the estimates are completely divorced from the estimated cash flows, but this case proves the clowns at Forbes might be right …. That there are buyers out there who will pay wild multiples of cash flow just to own a team.

I wish I knew more details of this case. In fact, I wish I knew more details about sports “numbers” in general. And I admit that I may be totally in the dark here. That being said, this story caught my attention. And it confirmed what I have long thought ….. guys will do an awful lot to own a sports franchise, even when doing so makes no economic sense.

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