Why Chris Hansen getting a deal done is not surprising, and why it doesn’t matter anyway

You shouldn’t be surprised. We knew this was coming for months. Hansen has just now gotten plans almost formalized here. This is not really news.

So I suppose, I guess I know why some are surprised. But, this isn’t about Virginia City (sorry Carmichael Dave) anymore than this is about Sacramento. This is about what David Stern and the Board of Governors (aka the other owners) want. What do they want? Historically that’s always been one thing: Money.

So why should today be any different?

So I’m going to break this down bit by bit after the jump.

 

What does Seattle bring?

Let me make this clear: Having lived in Seattle for 5 years, I know a bit about it. Which is all it is, and that’s all that means. Living in a locale doesn’t necessarily make me right (or wrong) no matter how right I think I am. With new information comes new opinions yadda yadda yadda.

Question One: What does Seattle have that Sacramento does not?

Answer: Lots of things. Starting with the concept of corporate support and a bigger market. But what Seattle also has lots of competing interests for corporate advertising dollars, and it’s not just sporting endeavors (although there are plenty of those too). The bigger market is what it is, but one of the things I’ve been hoping to impress upon people is the difference between market share and market size. You can be in a big market like the Wizards are in the Washington DC metro area (which realistically includes Baltimore), but have a smaller market share than Georgetown basketball for instance. But because it’s DC, and because people love to say whatever they want, some say the Wizards are a small market. Likewise, with Seattle there is significant competition, and it’s not just sporting competition. Discretionary income has plenty of competitors because there are a lot of options and significant streams of discretionary income available.

Then you have to note the presence of the University of Washington program (which is king of all the sporting endeavors there IMO), the Seahawks, the Sounders (yes I know it’s an MLS team) and then the Mariners rank somewhere in there depending on how they (and the other entities) are doing.

The other important part to note is that Seattle is the biggest city for about 800 miles in every direction with the exception of Vancouver BC.

In short, moving into Seattle isn’t like moving a team into a non-sports market. The expectation is that having a minority of the Seattle sports/entertainment market than a real majority of the entertainment market in Sacramento.

Question Two: Who controls the sale of the Kings?

Answer: This is something that I feel is confusing the living beejeezus outta people for no real reason. The outright truth is that the Maloofs own 43% of the ownership block of 53% that controls and is the de facto actual ownership worth noting. There is 47% of minority ownership, but that minority ownership doesn’t change the majority ownership group. The remaining 10% is owned by a Maloof friend Bob Hernreich who realistically stands to gain more money by aligning himself with a sale of the Maloofs (and the 53% which is total control of the team from every conceivable angle) than as an outside entity angling to sell his 10% outside of a potential Maloof sale. More so, the real sale of the Kings comes down to whether the Maloofs sell (that is admittedly tricky), what happens with the 7% of Kings ownership from Bob Cook that is kicking around in the bankruptcy courts (we think), and what Stern/BoG wants.

That’s a hefty equation to calculate, and by no small measure do I really have a firm grasp of it all yet, but I have a feeling I got a rought outline of the equation. That’s what I’m sharing at this juncture for clarity sake.

First, you have to understand that control of the franchise means owning the debts (including the debt to the city), running the day to day operations of the basketball franchise which include funding said operations, and of course the bastard known as something Arena. Yes, that means 53% of the franchise effectively owns all of the franchise.

But, while being a minority owner is a titular formality, there is also another factor at play too: Minority owners also get first crack at ownership if the majority owners (still the Maloofs) decide to sell. This is why the story of the 7% share in bankruptcy court is so important. What’s going on? Has anyone bought it? Will the NBA regain control of those shares as it is once rumored? Is there any other part of this discussion being left out? Either way, whatever is going on with the Kings including the tentative agreement Chris Hansen reached with the Seattle City Council Monday night, the reality is that the most important story of the Kings fate in Sacramento is what’s going on with that 7% and which particular entity controls it.

Question Three: What kind of numbers could be thrown around in a sale if it’s true the Maloofs did turn down Chris Hansen’s 400 million dollar offer?

Answer: Excellent question. Even better, exactly what will a purchase of the Kings exactly take? In the past, I’ve opined that I thought 425 million was a safe guess as to where the Kings might sell. Now? I think it might be as high as 475 million (more than the Warriors sold for!) if it’s including the right things. Then again…..I’m not necessarily that confident about 475 million. Maybe as high as 450 million if things get really wacked out. (And I do mean, wiggity wiggity wack.)

What are those right things? Let’s go through it bit by bit.

  1. The Maloofs have at least 100 million dollars in loans to the NBA that makes up a huge chunk of why, if you value the franchise at 300 million dollars as Forbes has recently, they have little equity. Even if you ignore the not owning a full 100% of the team as part of the value equation, the fact that the arena discussion created a much harder time to sell the team from the Maloofs perspective when it came to making a significant chunk of money (I think it’s a 100 million dollars of profit the Maloofs are looking to make) and that not having an arena agreed to in Sacramento makes it harder to start a bidding war. Hence all the dumb things that have been done by the Maloofs in the public eye since April. If you think about it, and don’t happen to be a neurotic adolescent, it makes quite a bit of sense to raise a ruckus over here so people aren’t noticing what’s really going on over there. As Liam Neeson said in a movie,” Theatricality and deception are powerful agents.” I wouldn’t go so far as to say George Maloof is theatrical or deceptive, but I would say that the focus around the 7% share of the Kings has gone entirely away since April. That’s a pretty important sticking point for any potential upcoming ownership group, and especially if one potential ownership group has that minority ownership and one doesn’t.
  2. The City Loan still exists, and I’d be shocked if the loan is not paid off entirely by the time an ownership agreement comes through. It’s believed that Stern in particular, and I’m sure the BoG echoes the sentiment, that the loan itself is not a viable thing to have around a NBA team and that settling this loan should be an emphasis from the NBA and a precedent standpoint. It is simply bad monetary policy from the NBA to allow metropolises to loan a NBA team money and then mandate they pay it back. Especially with recent history of the City of Indianapolis subsidizing the Pacers in order for the Pacers to stick around in Indy.
  3. The Arena deal. Contrary to popular belief in, say, Seattle, I think the NBA still prefers the Kings to be in Sacramento. The deal the NBA negotiated was one the NBA/Stern believed in, I do believe, and I don’t think the NBA ever had a problem with it. However, any owner worth their savvy will insist on paying the arena cost as part of the purchase price. The Maloofs know that. Hence the 425-450 million dollar figure.
  4. Remember, the Maloofs only own 43%, and while Bob Hernreich is their friend, a chance to make a hefty profit over his 10% ownership which has more value aligned with the Maloofs ownership share than on an individual basis, it’s also true that Hernreich has an interest here in making a profit.
  5. So what do the hard numbers look like? I’ve heard the Maloofs owe as high as 125 million in debt, and it wouldn’t surprise me if there was a bit more than that floating around in some way or another. There is the 67 million city loan, the likely 73 million for a new arena (especially if the NBA is serious about issuing a hefty relocation fee according to Aaron Bruski), and Hernreich’s share. That adds up to about 265 million. If the team sells in the 450 million range, you could be looking at Hernreich getting 20% of that difference, or about 37 million. That’s not a bad chunk of money for something that Hernreich almost certainly didn’t kick in more than 15 million of his money in. Then again, it depends on what the value of Hernreich’s shares were. The Maloofs bought the Kings for 168 million from Jim Thomas, and if judge Hernreich’s shares off that number it’s probably 16.8 million. But it was probably more like 20 million, and that’s a fairly likely and safe guess given when Hernreich bought into the team. 40 million, and possibly 50 million, is not out of the question, and it’s possible that the Kings could sell for only 425 million or so. (Quite a bit lower than the 475 million I just opined isn’t it? Yikes, that’s a lot of money for a sports team. And do we even want to discuss sticker shock? Jeesh…)

Umm, who would buy this sinkhole of a team?

Ron Burkle, and I’ve already discussed what I think the likelihood of Burkle’s ownership here, is often mentioned as a candidate. But the real deal Holyfield candidate, I think, is Larry Ellison as crazy as it seems after Ellison lost out on bids to buy the Warriors and then the Hornets in his attempts to bring a NBA team to San Jose. Which is the real problem I think the NBA has with Ellison.

The question I think with Ellison is not only how much, but under what conditions would he be buying the team. While it was said that Ellison turned his bid for the Warriors in too late at the time in 2010, I’m beginning to suspect that was a smokescreen. I think the real issue with Ellison’s bid was that he wanted to move the Warriors to San Jose, and in part because the HP Pavilion was subsidized by San Jose voters. Ellison probably wasn’t interested in financing a new building on the Docks in San Francisco like Peter Guber and Joe Lacob are doing. Lacob and Guber are paying 500 million for a new arena in San Francisco, and I doubt Ellison wished to do just that. (That’s nearly a billion dollar investment if you factor in the 450 million they paid for the purchase of the team originally. Whole lotta cheddah……)

Short of San Jose, what other markets are there for Ellison? That’s the problem Ellison has. San Jose is off limits (especially when you have NBA owners in the Bay Area building a swanky new arena and fixing a dock in San Francisco), and that isn’t changing anytime soon. The question then becomes: Will Ellison pay the right amount of money to acquire the Kings? Your guess is as good as mine at this point. And to that end, I’ll stop speculating on other owners. I do think that, though, the Kings should be on Larry Ellison’s short list if he is interested in owning a NBA team because there isn’t another Northern California NBA team out there with a potential subsidized arena. Which limits Ellison’s options up to a point, but that could also work the other way in limiting the Maloofs options when attempting to set a bidding war.

Conclusions…

Taking this thing back up top, I doubt anything has changed with Seattle and Chris Hansen. Sure, Hansen has the Nordstrom brothers and Steve Ballmer (the CEO of Microsoft) as investors, but it depends on who a potential owner of the Kings would be that would be interested in keeping the Kings in Sacramento. If that’s Ron Burkle or Larry Ellison, say, I can’t see how Hansen’s ownership group has more financial werewithal than either Burkle or Ellison, but especially Ellison since he’s worth more than all 4 of those Seattle connected gentlemen combined. That’s financial clout any way you slice it.

So the question then becomes, in my mind, does a relocation bid play a part in all of this? If so, what is the worth of having a team in the Seattle market by 2013 as opposed to a potential expansion team in Seattle in say 2015? Especially when relocating the Kings away from Sacramento not only takes away the 20th biggest TV market, but the 20th biggest market that doesn’t have any major competition to boot. You factor in what will surely be at least 300 million dollars as an expansion fee, and there will likely be another franchise announced because it makes a lot more sense to have two franchises as opposed to just one for scheduling, continuity and monetary purposes, and that would make a lot of sense. In fact, I suspect most people in Seattle, while I’m sure a significant or majority would like a NBA team, one with no history like an expansion franchise would be preferable. Plus, there is always the point that the NBA still seeks out public subsidies (which I’m sure the city of Sacramento is still offering) and that screwing a city that offers a major subsidy on the heaviest cost a franchise has –an arena– is not a good precedent to set. (Aaron Bruski mentions this yet again in his fine piece on the latest twist on this neverending topic. If you haven’t read it, please do.) The amount of public money that owners could seek from their respective metropolis in the upcoming years can be affected by negative precedents, and especially when the public is starting to sour on the idea of subsidies in the first place.

While the Maloofs are not exactly Golden Boys anymore in the NBA, or whatever, the real reality is that Sacramento is still in the game if the arena deal is still in place (would be surprised if that was not the case), and if the right ownership group decides they want to be owners in the NBA. But unless Burkle, or Ellison, or unknown mystery wealthy person entering stage left right about now, comes in and decides that owning a NBA team in Sacramento is worth it, chances are that eventually Hansen will get his shot at a NBA team. The real question for me is, again, what happens with that seven percent of Bob Cook’s that is in bankruptcy court, and whether or not Seattle gets an expansion team down the line. Everything else is an over-discussed talking point that has been hashed out to here and back. It’s about time that Kings fans, and the city of Sacramento, get some closure on the topic and get to move on. We’ve earned that after 27 faithful years of caring about the Kings and the NBA. The only question is whether the Maloofs are smart enough to see the jig is up, and only the Maloofs know that question. Either way, because it’s the Maloofs, and because the NBA always finds it tricky to push owners out the door no matter how much they may wish to do so, we are stuck for some nasty days ahead because the Maloofs are insipid annoying brats who simply don’t get it. If they are looking to be liked, I can guarantee that place is not Sacramento. Not after what happened during the arena negotiations, and not for the reasons the Maloofs claimed that the arena deal they initially agreed to did not work in their final analysis.

Not a single thing that has happened in Seattle to date with Chris Hansen, the Seattle City Council, the King County Board of Supervisors, Sonics faithful, the national media, or anyone else for that matter, changes anything when it comes to Kings fans deserving a clean and respectful end to this ridiculous bufoonish clown ridden drama the Maloofs have created. That’s the bottom line, and not a single thing that happened in Seattle last night, or the last 6 months to a year for that matter, will ever change that.