When news of Steve Ballmer's $2 billion bid for the Los Angeles Clippers broke last month, there was little question it was expensive. Now, according to new numbers from the transaction's "bid book," we know just how costly it is. First reported by ESPN, the documents contain a range of financial estimates, most notably valuation multiples.
How expensive is $2 billion?
Assuming that is the deal's closing price, Bank of America estimates the team will sell at a whopping 20 times EBITDA, not including payroll costs. That's by far the most expensive sale in NBA history. In fact, only Mark Cuban's purchase of the Dallas Mavericks in 2000 notched an EBITDA above 10. More recently, the report says, 11 NBA teams besides the Clippers have changed ownership since 2010 -- none sold for more than 8.1 times EBITDA.
Revenue numbers tell a similar story. BofA estimates the Clippers will finish 2014 with $164.9 million in total operating revenue, so a $2 billion price tag equals a revenue multiple of just over 12. As one unnamed sports banker recently told ESPN, "No team in the history of sports has sold for six times total revenues, so that should give you an idea of how crazy this purchase price is."
Of course, the multiples could shrink -- and Ballmer's bid could look more reasonable -- if the Clippers outperform these projections. According to BofA, the team can theoretically reach revenues as high as $324 million this year if it signs a new local cable contract and the NBA boosts national TV rights fees. Under that scenario, the Clippers' valuation would drop to 7.1 times revenue.
While upgrades to both revenue streams can certainly happen before the end of the summer, it's also possible negotiations take much longer than that. The team's local contract, will terminate after the 2016 season.
The obvious upside
Aside from an increase in TV revenue, the bid book highlights a few other reasons Ballmer would overpay. Among them are: global growth opportunities, most notably in China; a major presence in the U.S.'s second-largest media market; and a unique period where the Clippers are playing significantly better than the crosstown Lakers.
Not mentioned in the report, another reason for Ballmer's premium bid could simply be exclusivity. The possibility that Ballmer simply wanted to be "part of the ownership club" is a major factor that can't be overlooked.
Two lesser-known risk factors
With that said, BofA also details a couple risk factors that have flown under the radar. One potential issue, it warns, is that the Clippers don't "control" their arena, the Staples Center. While the team is a tenant in the arena through 2024, the fear is that, over the longer term, fees could increase. Exact rental costs are currently unknown.
Just as important, BofA says, is the "potential risk to teams in larger cities from future changes in the revenue sharing mechanism to favor smaller markets." Forbes reports the team finished 19th in the league in revenue last year, indicating the team is likely a net beneficiary from the NBA's current revenue-sharing system. The outlet, in fact, estimates that about one-third of the Clippers' total value could be tied to it. The NBA's collective bargaining agreement can be renegotiated as early as 2017, so it's possible this revenue stream could shrink in the future.
Assuming Steve Ballmer's bid is cleared, it will go down as the most expensive ownership acquisition in league history, both on a total-dollar and multiples basis.
Given that average NBA team values have risen by almost 15% a year this century, it's easy to see the upside of Ballmer's purchase. And, because it's not exactly easy to become a basketball owner, a case can be made that a 20-times-EBITDA multiple is justified.
If anything, though, this saga indicates franchise acquisition costs may continue to rise. Rights fees look set to maintain their upward ascent, because, unlike other TV programming, live sports truly are DVR-proof. And that, as Steve Ballmer surely knows, makes teams very valuable.