Thursday, June 11, 2015

The Bucks and the billionaires

I think that there are very respectable arguments against public support for a new arena. But one that is not respectable goes like this: The guys who own the Bucks are billionaires. They can afford to pay for an arena.

Over at Right Wisconsin, I explain why. The point is not whether Marc Lasry and Wes Edens could pay for a new arena. It's whether it is in their interest to do so. Few people, even billionaires, give money away simply because they can. If Milwaukee wants someone to buy the Bucks and keep them here, it may need to pay them because it is asking them to do something that is not profit maximizing. The team would be worth more in Seattle. It is a fair criticism to say that we ought not give money to billionaires. But we've got to acknowledge that, in asking some billionaire to keep the Bucks in Milwaukee, we are asking him to give something to us.

But it turns out to be that it is very likely that Edens and Lasry should be willing to contribute something to the arena. You can thank Herb Kohl for that.

Descriptions of of the sale of the Bucks form Kohl to Edens and Lasry gives the NBA the right to buy the Bucks for $ 575 million should the arena not be built by 2017. In technical terms, the current owners do not have a "put" (the right to make the NBA buy the team), the league has a "call" (the right to make Edens and Lasry sell it.) The distinction is critical.

Edens and Lasry bought the team for $ 550 million. It may well be worth more than that today. Shortly after the Bucks were sold, the Los Angeles Clippers sold for $ 2 billion. The NBA has a very lucrative TV deal and, while the Bucks in Milwaukee are not going to be worth what a team in Los Angeles is worth, they may are almost certainly worth more than what they sold for. In a larger market (say Seattle), they would be worth a lot more.

But Edens and Lasry can't just move the team to Seattle. As Dan O'Donnell points out, if Milwaukee refuses to build an arena, the NBA will make them sell the team to the league. The league will then auction it off to the highest bidder. The profit (save $ 25 million) will be enjoyed by the NBA and the other 29 owners - not Edens and Lasry. If this is so, then Edens and Lasry need the arena deal to get done. They should be willing to pay something to make that happen - not because they "can afford it" but because it is in their interest.

But they won't necessarily be willing to pay for the entire cost of the building and perhaps not more than they have already agreed to pay. It all depends on what the team is worth - in Milwaukee. That is also critical. Unless the people negotiating this deal for the state are incompetent, the final arena deal will be structured in a way that ensures that the team remains in Milwaukee for a long time. The Milwaukee Bucks may be worth more than $ 550 - or even 575 - million, they will not be worth what the Seattle Bucks would be worth.

Let's try an example. Forbes estimates that the Bucks are worth $ 600 million in Milwaukee, but that's not necessarily all they would sell for -  even if they must remain in place. Forbes says, for example, that the Clippers are worth $ 1.6 billion. Yet that franchise sold for $ 2 billion. If you assume that the Bucks could be sold for a comparable 25% premium over Forbes evaluation, they might fetch $ 750 million. If that's so, then Edens and Lasry's $ 150 million is close to the top of the range of what  we can expect them to contribute.

I don't pretend to know what the team is worth or what the owners should be willing to pay. I make only two points. First, if they believe that the team is worth more than they paid for it, they should be willing to contribute something for the arena because they may lose that added value if it is not built. Second, because they must keep the team in Milwaukee if the arena is built, what they will be willing to contribute is going to be less than what it would be if they were free to do whatever they wanted with the team.

Cross posted at Purple Wisconsin

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