Sally Davitt is a Director in the Sydney office of
KordaMentha. She knows nothing about sport, and is unlikely to
agree to pay $2 billion for a basketball team.
Steve Ballmer, former CFO of Microsoft, has just paid $2 billion
for basketball team, the LA Clippers:
'It's not a cheap price, but when you're used to
looking at tech companies with huge risk, no earnings and huge
multiples, this doesn't look like the craziest thing I've
The offer was made in May, but the sale was delayed because of a
lawsuit relating to the former owner, Donald Sterling (the
80-year-old billionaire whom the NBA banned earlier this year for
making offensive remarks). The lawsuit opened up some fascinating
insights into the valuation of the team, including a document from
Bank of America Merrill Lynch ('BoAML') which provides a
series of valuations assuming different multiples (both revenue
based and EBITDA based). According to that document, a price of $2
billion for the Clippers represents a much larger valuation and a
higher revenue multiple compared to other transactions for NBA
Interestingly, the previous NBA sale transactions set out in the
BoAML document suggest that, although the Clippers have a positive
EBITDA, few other basketball teams sold over the last few years
have been profitable at that level. This may be why revenue
multiples are used in the preferred approach of the BoAML valuation
– even though this does not represent the profitability or
cash flow of the team.
BoAML say that the appropriate multiple range to apply is
5x–7x revenue, which is higher than historical comparable
transactions due to factors such as:
The 'trophy' nature of the LA Clippers
LA demographics, including the fact that there isn't an NFL
team in the city to dilute support for the NBA
The Lakers (the rival LA team) 'going through a recycling
period' [quite the insult -ed.]
In any event, $2 billion appears to be at the higher end of the
range suggested by BoAML, and relies heavily upon the renegotiation
of TV deals to increase its revenue by almost 100%:
So, if the TV deal does not result in close to a 100% increase
in revenue, then the implied multiple in the deal is over 12x
revenue (or 103.5x EBITDA!). This is much higher than the
5x–7x revenue multiple range suggested by BoAML.
Interestingly, the next two highest bids after Ballmer were for
$1.6 billion and $1.2 billion. Also, in January 2014, Forbes valued
the team at [only! – ed.] $575 million (valued on
the 'current arena deal' – the exact basis of which
Quite a difference to $2 billion. Can Steve Ballmer really see
that much more value in the team than other bidders?
Maybe this transaction is an example of special value, where a
specific person may place a higher value on an asset than the
hypothetical purchaser assumed in assessing market value? [This
is a favourite topic of discussion for the Forensic team here at
KordaMentha – ed.]
In any event, with few teams making a profit, such large sums
for basketball teams don't appear to make commercial sense.
Perhaps this means that purchasers of basketball teams are looking
for something other than cash flow from their purchase –
But what is the value of this 'prestige', or can it even
be valued? Could this 'value' simply relate to the ego of
the purchaser and, in fact, the price paid by a self-confessed
basketball nut was not at all related to 'value' in an
Even BoAML expert Anwar Zakkour said in court 'None of
us even believed we'd get to the $1.8 billion number, so that
says it all.'
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