SBJ/December 13-18, 2010/Franchises

Shinn lending $70M to NBA in Hornets sale

Tired of shouldering extensive losses, Shinn will forgo the money as part of the NBA’s acquisition, with the league paying it to him in two years at an interest rate of roughly 3 percent. Shinn this week will receive about $90 million in cash from the league, the sources said. The remainder of the purchase price, said by the league to be in excess of $300 million, is debt the league is assuming.

Seller financing is quite rare in pro sports (see chart) and usually occurs when there is a pressing need to sell a club. News Corp., eager to unload the Los Angeles Dodgers, helped finance the club’s sale to Frank McCourt in 2004. Palace Sports & Entertainment lent to the buyers of its Tampa Bay Lightning in 2008 after a critical lender to the purchaser backed out of the deal.

Team Sales with Seller Financing

Team

Year

About the deal

New Orleans Hornets

2010*

Owner George Shinn lends the NBA about $70 million as part of the league’s $300 million takeover of the team.

Tampa Bay Lightning

2008

Palace Sports & Entertainment lends $100 million to buyer Oren Koules to buy the team; Koules several times nearly defaults on the Palace debt, which  would have reverted ownership back to Palace, before selling the club to Jeff Vinik earlier this year.

Los Angeles Dodgers

2004

After two years of searching for a buyer, News Corp. lends buyer Frank McCourt $196 million to facilitate the $421 million sale of the team.

Montreal Canadiens

2001

George Gillett borrows from brewer Molson to buy the team and its arena for $181 million; he ultimately sells the assets back to Molson family members in 2009.

New Jersey Devils

2000

To facilitate the sale of the team to YankeeNets, owner John McMullen lends $75 million as part of the $175 million sale.

* Deal expected to close this week
Source: SportsBusiness Journal reporting

 

“It doesn’t happen that often in sports because usually there are enough bidders out there,” said Rob Tilliss, founder of sports advisory firm Inner Circle Sports. “But in a lot of other industries it happens in distressed situations.”

The Hornets are not distressed, though Shinn had apparently tired of subsidizing the team’s losses. According to documents posted last week on the website Deadspin.com, the Hornets’ auditor, KPMG, raised concerns about the team’s ability to continue as a going concern because of negative cash flows, recurring operating losses and partner deficits, which hit $83 million as of June 30, 2009.

 

The team in 2009 actually earned $1.8 million, according to the documents, even after interest expenses. The result, however, was boosted by the NBA deferring a $4 million relocation payment the team owed. The year before, the team posted a $16.6 million loss.

Regular-season ticket revenue rose $13 million in fiscal 2009 from 2008.

The NBA’s pending purchase appears to have come together quickly, shocking many in the finance and basketball worlds. In fact, while the $90 million the NBA is paying in cash comes from reserves, banking sources said the league is likely to borrow in the future to replenish the money.

Shinn had tried fruitlessly for more than a year to sell the team to his limited partner, Gary Chouest, but no deal was completed.

The NBA last week said it is in no hurry to sell the franchise, and while Commissioner David Stern said the league would like to keep the team in New Orleans, any franchise sale prompts questions about possible relocation.

The Hornets came to New Orleans from Charlotte in 2002 and split time between Louisiana and Oklahoma City for the 2005-06 and 2006-07 seasons in the wake of Hurricane Katrina.

The team’s lease with the state to play in New Orleans Arena expires in 2014. The team also can opt out of its lease for $10 million if attendance drops below an average of 14,735 fans per game. The Hornets were averaging 13,584 fans a game this season as of last week, down 7 percent from the same time last year.

 

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