Prokhorov's Profitable Future

NEW YORK - MAY 18: (EXCLUSIVE) Nets owner Mikhail Prokhorov with cultural icon and Nets investor JAY-Z celebrate Prokhorov's purchase of the team at lunch today at JAY-Z's 40/40 club on May 18, 2010 in New York City. Prokhorov is representing the Nets tonight at the NBA Draft Lottery in which the team could secure the first pick. (Photo by Larry Busacca/Getty Images for New Jersey Nets)

A lot has been written about how NBA owners' pleas of poverty don't take into account how much profit they make when their team is sold.  The history of such sales show an almost perfect record of big profits (one exception: the Nets).

Paul Shirley, the former (barely) NBA player wrote about it last week for Yahoo! and cited a few examples, like Jerry Colangelo and fellow investors buying the Suns for $44 million in 1978 and selling the franchise in 2004 for $404 million or Peter Holt, et al, buying the Spurs in 1996 for $76 million and watching the value rise to an estimated $404 million now. Tom Ziller of SB Nation writes about it as well Tuesday. Again, with the exception of the Nets sale to Mikhail Prokhorov in 2010, all six sales of NBA teams in the past 18 months have meant big immediate profits for the seller.

So what about Prokhorov? He's spent about $400 million so far on the Nets. How quickly can he turn a profit?  If you look at the data...and a little known interview with a Russian newspaper, he expects a big return on his investment and rather soon.

First things first, how much has Prokhorov invested?  Looking at data his CEO, Dmitry Razumov, provided NetsDaily and the Nets 2010 financials, as reported by Darren Rovell, the numbers look like this: between $200 million and $223 million for 80% of the team, 45% of Barclays Center and an option to purchase up to 20% of the rest of the 16-tower, 22-acre Atlantic Yards project, which itself is valued at about $4 billion when fully built out.  He also agreed to service 80% of the team's $220 million debt.

Beyond that, he also agreed to pay up to $60 million in Nets' losses while the team remains in New Jersey.  That includes operating losses; debt service on the Nets' $200+ million debt, some  of which is owed to the league; cash considerations to facilitate trades, which we estimate amounts to about $7.5 million; the $4 million IZOD Center lease buyout; and reimbursement of losses paid by Bruce Ratner's parent, Forest City Enterprises, for the period between March and May 2010 when Prokhorov was approved as owner. That "Jersey Fund" was supposed to last two years, through the end of the Nets' stay in Newark. Instead, it ran out to months ago and Forest City Enterprises is now, once again, eating Nets team losses, something they admit they didn't expect.

Finally, and this is important, Prokhorov agreed to lend Ratner's interests $76 million for arena infrastructure in September 2010. Under terms of their arrangement, Ratner will have to pay Prokhorov the $76 million plus 11% annual interest (or about $100 million) plus a million dollar fee, by September 2013 or Prokhorov will be able to swap the debt for equity, that is more ownership in the arena.  According to two sources, if that happens, and it may very well, Prokhorov's interest in Barclays Center will rise to between 75 and 80%, giving him control over both the team and the arena.

So round it all about to around $400 million plus the debt service. There may be additional funds here and there.  Also he's likely to make other investments, like the training facility. That alone would cost in excess of $10 million. 

So how much does he think the team will be worth and how soon?  A lot and very soon.  In a little known December 2010 interview with reporters from Vedomosti, the Russian business newspaper, Prokhorov was quite clear in terms of where he thought the valuations would be once the team moves to Brooklyn...and how much profit the team will make.

"We have a team, we're building the arena, we've hired professional management, we have the option to buy in to another large project, the building of an office center.  For me, this is a project with explosive profit potential," he told Vedomosti, as translated by his Moscow staff.  "The capitalization of the team will be $700 million after we move to Brooklyn.  It will earn approximately 30 [million].  And the arena will be worth around $1 billion.  We are planning to become NBA champions within five years."

Assuming he continues to own 80% of the team and gets 80% of the arena, that would mean his interest in the team would be worth $560 million and the arena $800 million.  That's a grand total of $1.36 billion...on an investment of around $400 million.

And what of the "option to buy in to another large project, the building of an office center", which we have to assume is his option to buy up to 20% of Atlantic Yards. The price of that option has never been revealed and it is believed to be in negotiations now. Another story in Vedmosti suggested a price that seems impossibly low: $120 million for one fifth of a $4 billion project. According to Vedomosti, "a source close to one of the parties to the transaction" said Prokhorov is prepared to invest $120 million for a 20% stake in Atlantic Yards. The report added that Prokhorov plans to "participate in the development".  Ratner has said he expects Prokhorov to make a decision on the investment before year's end.

By all accounts, Ratner didn't make an immediate profit on his sale of the Nets and Barclays Center interests, and David Stern has said his ownership group lost "hundreds of millions of dollars". Long term, of course, he will do well if Prokhorov's vision is realized. He will still own 20% of team Prokhorov thinks will be worth $700 million and a significant piece of a $1 billion arena. As developer of Barclays, he also gets a $50 million fee. Not to mention that without an investor in the team and arena, the likelihood of a complete build-out of Atlantic Yards was limited.

Bottom line: you may not make a lot of profits on a basketball team, but oh, those capital gains.

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