Posted by John Vrooman on Tuesday, September 5, 2017 in National Basketball Association.

Interview with Houston Chronicle. 

Most of the increase in NBA values across the board is the anticipation in the tripling of rights fees in the new media rights deals with ESPN and Turner 2016-25. When TV rights went from $29 million to 81.25 million per club the values of the clubs all increased by as much as $250 million-$300 million each.

Also when a NBA club scores a new arena deal the value of the franchise automatically appreciates by about 25 percent.

Other than Beyonce (as reported), I have no idea who the other legit bidders were for the Rockets.

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Just wondering what you thought about the sale of the Houston Rockets for $2.2 billion to restaurant and casino mogul Tilman Fertitta?  My big question: Are the Rockets worth that much? And what will Fertitta get out of it?

There is a very short list of potential NBA buyers with deep enough pockets to pony up a legitimate bid of $2.2 billion, including a blow away premium factor of about 25 percent.  The real auction for the Rockets was probably run silent and run deep, but Pertitta was a natural at the top of the big-boy list and Les Alexander knew it from the get go.

Here’s an interview I gave to David Barron back in July about the Rockets potential sale. Looks like I got lucky in my analysis.

Rockets Financial Pack

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1. The Rockets seem determined to shoot for the Clippers record of $2 billion plus. Is that realistic? Could that happen?

Yep, the Rockets will easily go for more than $2 billion. The fundamental true price for the Rockets is probably around $1.8 billion, but the final selling price will be around $2.2 billion.

Sports franchises are systematically overpriced in monopoly auctions, because while the average appraised price of all bidders is approximately true, the winning bid is the highest bid rather than the true bid. This is called the winners curse in economics and it is a direct result of the large number of bidders spreading out bids in competition for one monopoly franchise.

When the LA Clippers franchise was put up for sale in 2014 there were three bids spread from $1.2 billion and $1.6 billion to $2.0 billion. Based on the expected value of future cash flows from new regional and nation TV deals, the accurate appraisal of the Clips was about $1.6 billion. Because of the winners curse, the winning bid of Steve Ballmer was over-priced by about 25 percent at $2 billion.

Here’s what I told the Associated Press:

“These buyers are perhaps irrational and exuberant but not altogether foolish. There is method to Ballmer’s ‘madness.’”

“About $1.6 billion of the Clippers price is sustainable investment and the extra $400 million may be what a billionaire owner with a Harvard degree in economics simply wants to pay for his NBA buzz.”

2. Do you expect an individual or a group to buy the team?

Given the expected $2.25 billion price tag the actual sale should normally require 8-10 small private equity groups or syndicated partnerships, but with the extreme scarcity of NBA franchises up for sale I expect the Rockets bidding to come down to 3 or 4 individuals with deep pockets and an intense NBA ownership jones.

3. What impact do you expect Asian investors to have, given the Rockets’ longstanding marketing efforts in China?

Asian investors could play a role in the auction, but the primary owner will probably be North American, and possibly Texan.

4. Have those efforts to market in China boosted the value of the team?

Yes, given the increased revenue sharing under the new CBA any uniquely protected cash flow will generate additional value for the individual clubs.

5. What is the state of NBA franchise values these days? Yes, i do realize that all it takes to set a new market paradigm is an eager buyer for the Rockets. But is now a good time to have a team on the market in a city like Houston?

Yes, the monopoly power of the NBA artificially restricts the number of franchises to max out the franchise values for sales, relocations and expansions. An NBA franchise is literally a license to steal through extorting public money, price gouging fans, and exploiting players.

Over the last quarter century, the average value of a NBA club has increased at an exponential rate of about 10 percent. The value of the Rockets has increased at about 12 percent, which is twice the growth rate of the S&P 500 index—the best competitive rate available. This clear a present evidence of the incredible monopoly cartel power of NA sports leagues.

6. Similar question to the one on the college front: Did ESPN so overpay for its NBA deal that the only way for league finances to go in the next deal is down?

The timing of the sale may be slightly off for the buyer because the current prices already reflect the blast of cash from the tripling of media revenue in the most recent NBA rights deals with ESPN and Turner. Given the cord cutting revolution, increase in cable carriage fees and drop in subscribers, the growth in NBA media revenue is not likely to continue after the expiration of the current mega-deal in 2025.

7. You’ve seen the success of hockey in Nashville. Les Alexander was not big on the NHL. Should the new owner be more receptive to seeking a hockey franchise here?

Houston is the largest media markets in NA without an NHL team. One of the reasons is that the Rockets control most of the revenues at the Toyota Center. There is apparently no room for a joint NHL tenant as long as the Rockets get a piece of the action at Toyota Center.

An NHL relocation or expansion franchise would probably require a significant chunk of the arena cash now flowing to the Rockets. This could also be accomplished through revenue sharing or joint ownership package of an expansion or relocation NHL club and the Rockets. The NHL is currently in expansion mode for an inflated expansion fee of $500 million, and ther are at least 3 franchises struggling financially in their non-tradtional hockey markets.

8. Do the Rockets have anything going for them that makes them particularly attractive, or are they just the next team on the market?

Most of the recent NBA clubs that have been sold have been financially weak and/or from marginal edge markets. Houston is the 1oth largest TV market and the Rockets are the 8^th most valuable NBA franchise.

As a team, the Rockets have a tradition as one of the 10 clubs of 30 clubs that has won a NBA championship in the salary cap era.

The Toyota Center lease deal is also very favorable and a possible game changer for the franchise. Les Alexander’s ownership has been straight up and clean and the cash flow for the Rockets appears to be relatively certain and risk free well into the 2030s. In the sports business cash flow certainty is stone cold money and the Rockets will go for stone cold $2.2 billion.

V