SBD/Issue 172/Franchises

Hong Kong Consortium Denies Involvement In Cavs Investment

NWD Says They Have No Involvement With
Group Of  Investors Buying Share Of Cavs
Hong Kong-based New World Development Co. (NWD) has denied "any involvement in the purchase of a stake" in Cavaliers Operating Co., the holding company of the NBA franchise and Quicken Loans Arena, according to Jonathan Cheng of the WALL STREET JOURNAL. NWD Dir of Corporate Affairs Kwan Chuk-fai in a statement said that the company "has no involvement in the deal involving a group of Chinese investors" buying a share of the Cavaliers. Kwan: "None whatsoever. We didn't even consider such a deal" (WSJ.com, 5/26). In Cleveland, Brian Windhorst cited NBA sources as saying that the Cavaliers sold an ownership stake to NWD, which will assume the "second-largest percentage of team ownership" behind Cavaliers Owner Dan Gilbert. Gilbert will remain majority owner and "retain the final say on all matters with the franchise." NWD has over $21B in "assets in hotels, convention properties, department stores, telecommunications, infrastructure projects and even financial services mostly in Southeast Asia." The company owns a string of Marriott-brand hotels in Hong Kong, Beijing and Manila, "along with other brands that would be familiar to Americans, including a Hyatt." Windhorst noted NWD is a "financial powerhouse with numerous ways to take advantage of its pending investment in the NBA," and alongside Gilbert, the Cavaliers now "potentially will have some of the deepest backing of all the teams in the NBA." Gilbert "received interest from New World months ago when he made it known" that Cavaliers investor David Katzman "wanted to sell his share." The deal reportedly was brokered by Chinese businessman Kenny Huang, "who has been working with the Cavs on Chinese sponsorships for the last two years." Huang reportedly "will be the group's representative with the Cavs and perhaps even be given a title within the team for next season." Cavaliers sources indicated that the "only reason the club looked for new owners was because Katzman wanted to liquidate his shares" (Cleveland PLAIN DEALER, 5/25). The AP reported the deal could see NWD acquire up to a 15% stake in the Cavaliers and Quicken Loans Arena, but Gilbert's role in overseeing the franchise and the facility "will not be affected by the new partners" (AP, 5/24).

BEEFING UP THE ROSTER: The PLAIN DEALER's Windhorst noted Huang and "several of his partners were in Cleveland and attended" Eastern Conference Finals Games One and Two last week against the Magic. The "direct impact of the move is securing the future of the franchise, which has been in a minority ownership flux for the last couple years as it loses millions in attempting to build a championship-quality team." The deal "will not only mean an injection of capital but will open the Cavs to business in China." Windhorst noted the move, which has been "kept mostly secret in America, is being supported by the NBA as they have encouraged development in China." Meanwhile, another effect of the deal is "how vital this new link" could be for Cavaliers F LeBron James, "providing a huge tie-in with an economy James is eager to tap." If NBA owners approve the deal, it "could help to remarkably strengthen James' relationship with the Chinese fans and consumers that he's been working to reach for the last four years." James and Nike, "by far his largest sponsor, have been on a mission to create a bond with the Chinese over the last three years," and becoming the Michael Jordan of China "from a marketing standpoint would allow James to reach his goal of someday becoming the first billionaire athlete" (Cleveland PLAIN DEALER, 5/24).

A WELCOME INVESTMENT: In N.Y., Barboza & Schmidt wrote the deal "signals the first significant investment in a major American sports franchise by investors from China." The sale "may be the most ambitious move yet in an American sports landscape full of leagues, teams and players striving for a foothold in the expansive and largely untapped Chinese marketplace." Barboza & Schmidt noted the move will be "interpreted as an effort by the Cavaliers to entice James, who will become a free agent after next season, to stay in Cleveland and capitalize on the franchise's connections in China" (N.Y. TIMES, 5/26). In Akron, Pat McManamon wrote about 10 years ago, "we all got mad when Japanese interests bought U.S. properties, like Rockefeller Center." However, now we will "probably all be happy if Huang [injects] Chinese money into the Cavs" because it "might help the Cavs keep LeBron." Meanwhile, McManamon noted the revelation that the Cavaliers have "lost millions in the past couple years" is "pretty stunning -- especially looking at the Q every night, with all the sellouts and all the advertising and all the sponsorship" (OHIO.com, 5/24).

Dominating Chinese Market
A Top Priority For James
FORECASTING THE IMPACT: FANHOUSE.com's Matt Watson wrote it is "abundantly clear that dominating the Chinese market is a top priority for James and his sponsors, and despite their best efforts, he has a long way to go before accomplishing that goal, especially in regards to making up ground" on Lakers G Kobe Bryant. Watson: "But playing for a team with Chinese ownership? Well, that would make the Cavs the de facto 'hometown team' for the world's largest continent. As much scratch as Gilbert stands to gain, even more could be at stake in terms of future endorsements for James. ... This deal, assuming it goes down, could be a game changer" (FANHOUSE.com, 5/24). But CNBC.com's Darren Rovell wrote it is "total bunk" that the deal will lead to "greater popularity in China" for the Cavaliers. More Chinese people will "like the Cavaliers if there is a Chinese player playing for them than if one of their brethren owns a minority piece of the team." Rovell: "Do the Japanese want to watch the Seattle Mariners because it's owned by Nintendo? No. They want to watch because of Ichiro" (CNBC.com, 5/26). In Portland, John Canzano wrote, "I'm not sold that the best reason for James to leave Cleveland was marketing opportunities, or fresh cash flow." If the Cavaliers cannot win the NBA Championship before James becomes a free agent, "LeBron might find new reasons to be interested in free agency" (OREGONLIVE.com, 5/24).

HOW IT AFFECTS THE NBA: In N.Y., Mitch Lawrence noted although the NBA is "eager to grow its brand in China and has been quietly looking for foreign investors to buy into franchises, it is not known if the league would view the proposed deal and the marketing ramifications as a form of cap circumvention that would give the Cavs an unfair advantage" over other teams (N.Y. DAILY NEWS, 5/25).

SOMETHING TO GET USED TO? Former Portfolio Magazine Wall Street Editor Jesse Eisinger said it is "good" for both the NBA and the U.S. "that the Chinese are buying into assets." Eisinger: "This is our greatest American export, sports and culture, and I don't think there's going to be any controversy." CNBC's Dennis Kneale: "China is going to be investing more, and the more they invest in the U.S., the better it is. It just aligns their interest more with ours" ("CNBC Reports," CNBC, 5/26).

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