So You've Decided to Buy the Los Angeles ClippersBy
Like any self-respecting billionaire, you were probably in a walking meeting when you heard the news that the commissioner of the National Basketball Association had banned Los Angeles Clippers owner Donald Sterling from the league and would press to have the team taken from him. Or maybe you were shooting baskets on your yacht with a powerboat following behind to retrieve balls that go overboard. And you thought to yourself: Why don’t I buy the team? It’s fun, and I can afford it. So you said, “OK, Glass, buy the Los Angeles Clippers.” And then you called Oprah. Now what?
Your courtside seat will not be ready tomorrow. Purchasing the team, even in the best case, will be a drawn out process that ends with wiring a gargantuan sum of money to an infamous racist. But first, at least 23 of the 30 NBA owners will need to vote to strip Sterling of his team, an outcome that seems like a foregone conclusion at this point. #StandWithSterling is not the hashtag any owner wants to be associated with right now.
From there, it gets cloudy. Most likely, the moment the owners vote Sterling out, he will file for an injunction to keep them from proceeding any further. He could claim breach of contract and argue that the league broke California and federal antitrust laws by conspiring to damage the value of his team in a forced sale.
It could take years for the courts to settle questions such as whether Sterling “willfully” violated league rules when somebody else recorded him or whether the other owners unfairly targeted him for his racist remarks. Sterling might like to find out whether one of them also said something racist in the past 30 years. Depositions, anyone? Bidding on the Clippers while that is still going on, if it’s even possible, would be like trying to buy a house without a clear title. (Saying you would like to buy the Clippers as the dispute drags on will still be a good way to get on TV.)
But let’s say the NBA prevails and Sterling is forced to sell. Now you will be competing against the richest of the rich. This, more than anything about the specific finances of the Clippers, will drive the price. There are only 30 NBA teams, and only two located in the megalopolis of Los Angeles. Many teams have been in the same hands for decades, and the chance to buy is rare. Before the Milwaukee Bucks were sold for $550 million last month, Forbes valued the franchise at $405 million. The magazine values the Clippers at $575 million—and the team will almost certainly sell for closer to $1 billion.
Some of this cost can be defrayed by carrying debt against the value of the team, but not much. League rules limit franchise debt to $175 million, with $125 million against the team itself and another $50 million against a holding company that includes the team, if there is one. If Sterling is already borrowing at these levels, any buyer can assume that debt from him. If not, you can add debt up to the limit at the time of the transaction.
The good news is that league has a preapproved a $2.3 billion credit facility with good rates that you can draw from. Still, you will likely need to come up with at least $825 million in equity. And that usually means cash.
Sometimes the current owner will allow for payment in installments, but don’t expect that from Sterling. “In our experience dealing with other deals, it would be more common than not for the money to be up front,” says Kevin Schulz of Foley & Lardner, who represented the seller, Herb Kohl, in the Bucks sale. Nor will Sterling be able to hold onto a piece of the team for you to help decrease your bill, as owners sometimes do.
You can borrow against your own assets to come up the money, but the league will want to know that you have plenty in reserve. “There will be some requirement to show that, in addition to the equity for the purchase price, there is enough powder available for short-term losses coming up,” says Bob Whitsitt, former general manager of the Portland Trail Blazers and now a consultant on franchise transactions.
The NBA will also want to know that you are not another Donald Sterling. The background check will be thorough. Irwin Raij, another lawyer from Foley & Lardner who represented Magic Johnson and Guggenheim Partners in the purchase of the Los Angeles Dodgers, says he asks plenty of questions of prospective buyers even before the leagues do. Here’s Raij’s partial list of inquiries:
“What type of business are they in? Do they have ties to gaming? Do they have criminal ties? Have there been any public issues that could be potentially embarrassing to the league? Do they have ties to anything like performance-enhancing drugs? Have they made any statements that are critical to the various leagues?”
Price, approvability, and a willingness to close quickly will be the three main factors determining the winning bid. Getting there is arduous. Raij conjures the image of a “very long conference-room table where there are documents from the beginning all the way to the end, and then back.”
The final step will be wiring money to Sterling. When Raij closed the Dodgers deal, it took hours to transfer roughly $1.6 billion to Frank McCourt, who was on hand to watch it move. ”We had to coordinate with the Fed out of Chicago to make sure we weren’t going to stall the system,” says Raij.
Congratulations, you now own the Los Angeles Clippers. Just in time for another lockout.