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September 26, 2009
Russian’s Stake Gives Ratner a Safety Net
New York Timess
By Ken Belson and Richard Sandomir
Since buying the Nets in 2004 and immediately planning to move them from New Jersey to a new arena in Brooklyn, Bruce C. Ratner has entertained a tantalizing, if risky, vision of marrying basketball to real estate.
But after absorbing enormous financial losses and enduring lengthy regulatory and legal delays, Ratner, a real estate developer, needed a safety net to preserve part of that dream. He has found it in the Russian billionaire Mikhail D. Prokhorov, who earlier this week announced his agreement to buy 80 percent of the team and 45 percent of Barclays Center, the Nets’ proposed home in Brooklyn.
Although Prokhorov’s cash investment was announced at $200 million, he will also finance future Nets losses, up to $60 million, that are expected to accumulate before the move to Brooklyn, according to an executive involved in the transaction. The team has reported nearly $400 million in pretax net losses for its dozens of investors, including $129 million by Forest City Enterprises, Ratner’s Cleveland-based parent company.
Prokhorov will also be responsible for 80 percent of the $207 million in debt the team holds if the sale goes forward. The transaction requires the approval of 23 of the 30 National Basketball Association owners, and is contingent on Ratner’s obtaining financing for the arena and control of all the land required for it by Dec. 31.
Prokhorov’s arrival helps Ratner do what he ultimately wants most: build the delayed arena, the centerpiece of the $4.9 billion Atlantic Yards commercial and residential complex near downtown Brooklyn.
He appears to be getting a good deal. Ratner and his investors paid $300 million for the team in 2004 and assumed salary obligations of another $60 million. Prokhorov’s purchase of an 80 percent stake in the team values its equity at about $150 million; add the $207 million in debt, and the franchise’s value has barely budged.
This article goes on to give further details on the implications of the deal between Prokhrov and Ratner. Also covered is the implications for possible foreign ownership of other sports franchises.
This article appeared in print and was updated later on line. Commentary was forthcoming for both versions of the article from the Atlantic Yards Report:
First, issues raised by the first version::
A little more than two days later, the major media are waking up to the notion that the agreement between Bruce Ratner and Mikhail Prokhorov might be a bargain for the oligarch, despite Ratner calling it "a great deal."
In an article headlined Russian’s Stake in Nets Seems to Be a Bargain, the New York Times reports:
Mikhail D. Prokhorov’s $200 million investment for 80 percent of the Nets and 45 percent of the team’s proposed Barclays Center is just one-third of what his share of the team and arena should be worth, according to Michael K. Ozanian, the national editor of Forbes, which compiles an annual list of professional team valuations.Ozanian, in response to my query, explained that he valued the Nets at $295 million and the arena, as reported, at $800 million. Prokhorov's share of the team would be worth $236 million and his share of the arena at $360 million.
...
"What we don’t know of course is the amount Prokhorov has promised to invest in the team as part of the deal," Ozanian explained. Assuming the investment was zero, he said, Prokhorov made the purchase at one-third fair value.
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True, the team has floundered, its best players are gone and it plays to thin crowds in New Jersey. Ratner and his investors in the Nets have also lost nearly $400 million since buying the club. But few teams in recent years have been sold at such a steep discount.
The later version of the Times article brought answers:
The New York Times has updated its article suggesting that Mikhail Prokhorov got his Nets and Atlantic Yards investment at a two-thirds discount, now calling the investment a "safety net" for Bruce Ratner.
I and others had pointed out that financing for losses and debt would have to be factored in.
The Times reports:
Although Prokhorov’s cash investment was announced at $200 million, he will also finance future Nets losses, up to $60 million, that are expected to accumulate before the move to Brooklyn, according to an executive involved in the transaction. The team has reported nearly $400 million in pretax net losses for its dozens of investors, including $129 million by Forest City Enterprises, Ratner’s Cleveland-based parent company.Prokhorov will also be responsible for 80 percent of the $207 million in debt the team holds if the sale goes forward. The transaction requires the approval of 23 of the 30 National Basketball Association owners, and is contingent on Ratner’s obtaining financing for the arena and control of all the land required for it by Dec. 31.
...He appears to be getting a good deal. Ratner and his investors paid $300 million for the team in 2004 and assumed salary obligations of another $60 million. Prokhorov’s purchase of an 80 percent stake in the team values its equity at about $150 million; add the $207 million in debt, and the franchise’s value has barely budged.
...
Prokhorov will be responsible for paying off 45% of the arena, which in total might be worth $800 million.
Does that mean he gets the package at two-thirds off? The Times is no longer quoting Forbes editor Michael Ozanian to that effect.
Rather, the Times quotes a consultant:
“The Russian is taking on a lot more risk for the potential of greater reward,” said Marc Ganis, president of Sportscorp, a Chicago-based sports consultant. “He’s getting a good deal on the team, but he’s taking on a great deal of risk with the arena and with debt.”Well, so is Ratner. In fact, Ratner is putting equity into the arena, about $200 million, and will have a 55% stake. Prokhorov is not putting equity into the arena, and will have a 45% stake. So that looks like a significant bargain for him.
Posted by steve at September 26, 2009 6:32 AM