NBA Franchise Values Soar Under New CBA

Yesterday Forbes released its annual list of the most valuable teams in the NBA. The consensus? The financial health of the league is stronger than ever thanks to the new collective bargaining agreement signed after the 2011 NBA lockout. In 2013, NBA franchise values soared; the average team is now worth $509 million, a 30% increase from 2012. For the first time ever the league has a pair of billion dollar franchises – the #1 New York Knicks ($1.1 billion) and the #2 Los Angeles Lakers ($1 billion). The #3 Chicago Bulls are now valued at $800 million, representing a 33% increase from last year. The bottom line is 22 out of 30 teams made money in the first year of the new CBA, while only 15 out of 30 did so in the last year of the old CBA. Additionally, Forbes predicts that many of those teams losing money currently will move into the black after the new revenue-sharing measures dictated by the new CBA are fully enacted by the 2013-2014 season.

Forbes credits the lock-out shortened 2011-12 season for diminishing the league’s cost structures leading to this year’s record profitability.

The average operating income (earnings before interest, taxes, depreciation and amortization) for the league’s 30 teams during the lockout-shortened 2011-12 season was $11.9 million, the most since Forbes began tracking the finances of NBA teams in 1998.

The NBA’s record profitability last season was a function of the new CBA and player costs (owners’ biggest expense) being slashed 20% due to the 66-game season. Yet revenues only fell 7% as teams were locked into long-term media and sponsorship deals that in many cases did not require teams to refund any money from lost games.

Yet while the record profitability of last season can be regarded as somewhat of a fluke due to a 20% cut in payroll obligations resulting from the shorter season, there is good reason to believe the value of NBA franchises will only continue to rise in the year ahead. For one the new CBA greatly constricts player costs by slashing them from 57% of revenue under the old agreement to nearly 50% in the new one. Additionally the league’s sponsorship and television deals continue to distribute an increasing amount of revenue to its franchises. The league expects its $5 billion in revenues to double by the conclusion of its $930 million a year television deal with ESPN and TNT in 2015-16. Lastly, organic revenue growth from at the club level has been achieved by teams either moving into new stadiums or improving their old ones. For example the New York Knicks valuation was boosted by a $980 million renovation of Madison Square Garden which will allow the team to increase its luxury box and premium seating capacity. Moreover, the Nets high rise is largely due to the team’s move to the $1 billion Barclay Center in Brooklyn.

While the NFL remains America’s most popular professional sports league, these rising franchise values show that the cachet of owning an NBA team is increasing. Of all the big four North American professional sports leagues, investing in an NBA team would seem to be far and away the most worthwhile investment. Basketball has long eclipsed baseball, football, and hockey in terms of global popularity. Its clear that of the big 4, the NBA is the most well positioned to eventually ship some of its franchises to Europe and Asia, a goal David Stern has said will be achieved within the decade. For such a global game, the NBA has so many cities in suboptimal locations. How does it make economic sense that Indianapolis, Memphis, and New Orleans have NBA teams while Athens, Rome, and Tokyo do not? Imagine how much more valuable the Bobcats would be in Berlin or the Bucks would be in Beijing (side note: I’d probably change their name to the Peking Ducks). Foreign expansion of the NBA has the potential to be enormously lucrative and franchise values will eventually continue to soar in anticipation.

Moreover as the link between the head trauma suffered while playing contact sports like football and hockey and the debilitating brain disease CTE become clearer, I would imagine owning an NFL or NHL team will one day become a liability. In the long term, both sports will suffer as more athletes choose to forgo playing them for fear of developing dementia and suicidal depression later in life. These defections will over time decrease the quality of play at a time that franchise owners will likely be hit with more litigation and pension liabilities from ex-players who claim the league didn’t do enough to protect them. Bottom line, if I had an extra $500 million lying around I would definitely look to scoop up a small market NBA franchise and collect revenue sharing until the league is ready to send my team to London.

Click here for full Forbes article.

Most Valuable NBA Teams:

#1 New York Knicks: $1.1 billion

#2 Los Angeles Lakers: $1 billion

#3 Chicago Bulls: $800 million

#4 Boston Celtics: $730 million

#5 Dallas Mavericks: $685 million

#6 Miami Heat: $625 million

#7 Houston Rockets: $568 million

#8 Golden State Warriors: $555 million

#9 Brooklyn Nets: $530 million

#10 San Antonio Spurs: $527 million

#11 Sacramento Kings: $525 million

#12 Oklahoma City Thunder: $470 million

#13 Phoenix Suns: $474 million

#14 Orlando Magic: $470 million

#15 Portland Trail Blazers: $457 million

#16 Cleveland Cavaliers: $434 million

#17 Utah Jazz: $432 million

#18 Los Angeles Clippers: $430 million

#19 Denver Nuggets: $427 million

#20 Philadelphia 76ers: $418 million

#21 Toronto Raptors: $405 million

#22 Detroit Pistons: $400 million

#23 Washington Wizards: $397 million

#24 Indiana Pacers: $383 million

#25 Memphis Grizzlies: $377 million

#26 Minnesota Timberwolves: $364 million

#27 New Orleans Hornets: #340 million

#28 Atlanta Hawks: #316 million

#29 Charlotte Bobcats: #$315 million

#30 Milwaukee Bucks: $312 million

Biggest surprises:

Sacramento Kings #11. The Sacramento Kings valuation was boosted by the team’s recent sale to a Seattle-based group led by Microsoft CEO Steve Ballmer and hedge fund titan Chris Hansen. The new ownership group expects to bring the NBA back to Seattle for the first time since Clay Bennett and Aubrey McClendon moved the Seattle SuperSonics to Oklahoma City in 2008-09.  Former NBA star Kevin Johnson, the Mayor of Sacramento, has pledged to not lose the Kings without a fight. The franchise’s sale and potential relocation shocked no one as the Maloof brothers have spent nearly a decade fighting for a new arena for the Kings to boost revenue. Arco Arena is generally regarded as the worst in the NBA. The $525 million valuation prices in the team’s pending move to new $490 million arena in NBA-crazed Seattle.

Atlanta Hawks #28: It really is unacceptable that the city of Atlanta shows such poor support for its professional sports teams. Now while I understand why the NHL wasn’t able to survive in Atlanta – its a poor fit culturally- the NBA would appear to be much more aligned with the city’s DNA. Maybe Atlanta, where college football is king, is just a terrible pro-sports town. Even the dominant Atlanta Braves of a decade ago often had trouble selling out playoff games as any Cubs fan who remembers when Northsiders turned Turner Field into ‘Wrigley Field South’ back in ’03. They really do need to sign hometown kid Dwight Howard in the worst way.

Cleveland Cavaliers #16 and Orlando Magic #14: Despite recently losing their franchise’s marquee players in recent seasons LeBron James (2010) and Dwight Howard (2012) both teams have retained considerably more value than would be expected due to both team’s reputation as ‘small market.’

Milwaukee Bucks #30: While its not surprising that the ball team team from the ‘little hamlet up north’ was near the bottom of the list, it was shocking to see them below the MJ owned Charlotte Bobcats. While most of the other teams at the bottom of the list were losing tens of millions each year the Milwaukee Bucks only lost $500k making it a prime candidate to turn profitable by the end of the year.

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