When the Phoenix Suns owner Robert Sarver agreed to sell his team following the NBA’s finding that he presided over an abusive workplace and used racist language, speculation soon swelled over what record-breaking price the franchise would sell for.
It’s not hard to see why. Team valuations are skyrocketing as sports is one of the few sectors of entertainment that’s a proven ratings winner in an era of cord-cutting and media fragmentation. The Denver Broncos sold for $4.65 billion; the owners of the Washington Nationals are seeking $2.5 billion, investment bankers said; while a report that Magic Johnson is interested in a piece of the Las Vegas Raiders pegged the team value at $6.5 billion (although the equity piece in question is a very small slice of the club that’s been shopped for years, more on that below).
So it stands to reason that an NBA team like the Suns would sell for more than $3 billion, if not more, easily surpassing the record for a basketball franchise, the Brooklyn Nets for $2.3 billion. The Suns play in a major media market, the NBA is the most global of the US major leagues, and most importantly, is on the verge of a new round of media deals that could triple the current rights fees.
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But there is another reason why the price, or more pointedly the valuation, could set a record: Owners of 60 percent of the team do not have what is known as “tag-along” rights, meaning only 40 percent of the club might get sold, three sports investment bankers said.
They said Sarver owns 35 percent of the team, but his shares are the controlling ones. A five percent stake held by private equity firm Dyal has the provision that if the controlling owner sells, its shares must also be bought by the new owner. But the remaining limited partners do not have the tag-along provision.
Robert Sarver is selling the Suns and the WNBA’s Mercury. (Mark J. Rebilas/USA Today)
Sarver could require in any transaction that all the shareholders are bought out, but it is not mandatory.
“I have never had an instance where only one limited (partner) had tag-along rights,” said one of the investment bankers. This is complicating the sales process, this banker said, because prospective buyers are unsure if Sarver will require his partners to be bought out. And if he doesn’t, the valuation is sure to spike, this banker said, as it means one could control an NBA team for only 40 percent of the valuation.
“The (general partner) can get a real premium for just selling control, why would he even want to mess around with the limited partners?” said another of the investment bankers. “There are some people, you know, you get a real big billionaire who comes in and says, ‘Hey, I don’t want any partners,’ that’s a way out. But generally, that’s one of the first things that potential limited partners going into a deal would want to make sure that if the owner changes control, they came in because he was the owner … if he sells, they want to be able to go with him. So I can’t tell you what percentage of deals that have the limited partners in any of the leagues have tag-along but the ones that we know about almost always do.”
The Suns referred questions to Sarver’s lawyer, Tom Clare, who did not respond for comment.
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The situation is not unprecedented. When Vivek Ranadive bought the Sacramento Kings, the limited partners did not have tag-along rights, and he initially bought 65 percent of the team.
A prospective buyer may not want to inherit partners. A name bandied about as a buyer is Oracle founder Larry Ellison, who made a run at the Golden State Warriors in 2010 before the current ownership group bought the team. It’s hard to imagine Ellison wanting inherited partners.
But the situation with the Suns also represents a rare chance to potentially purchase an NBA team at essentially 40 cents on the dollar. Say the team sells at a value of $3.5 billion, which comes to $1.4 billion a buyer needs. Not so long ago that would have been enough to buy the whole team, but now it’s not nearly enough.
Sarver, who bought the Suns in 2004 at a value of $401 million, reportedly hired Moelis & Co. to sell the team and the WNBA’s Mercury. Moelis advised on the purchase of Chelsea FC but has a minimal track record in US sports team sales.
A few thoughts on the report of Magic Johnson looking to buy a stake in the Las Vegas Raiders. A person close to the team confirmed Johnson’s interest.
The equity in the team has been available for many years, and belongs to early investors in the team brought in by the late owner Al Davis. One investment banker pegged the amount at less than five percent. But even that figure is a few hundred million dollars. Johnson has stakes in the Dodgers, Lakers, Sparks and LAFC. He was part of a group that bid on the Broncos.
One thing that is not happening is a rush for cash by owner Mark Davis. There has been some speculation that he can’t afford the estate taxes that would come due when his mother, Al Davis’ widow, passes (there are no estate taxes when an asset passes between spouses). The person close to the team said the estate planning is buttoned up and Davis won’t have to sell the team to pay estate taxes that could be several billion dollars.
One other point: the limited partners in the team have rights of first refusal on any equity sale. This means if any partner agrees to sell their shares to an outsider, their other partners can raise their hand and buy the stake instead. It’s possible the group on the East Coast that bought 20 percent of the Raiders in 2007, which includes David Abrams, director of Abrams Capital, might want to step in front of Johnson for the position.
(Top photo: Mark J. Rebilas / USA Today)
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