Farewell speech?

Photographer: Nathaniel S. Butler/NBAE via Getty Images

You'd Sell the Nets, Too

Kavitha A. Davidson is a former Bloomberg View columnist.
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Bloomberg News's Scott Soshnick reports that Mikhail Prokhorov is shopping the Brooklyn Nets. My message to Nets fans, and New Yorkers at large: Be angry, but don't be surprised.

This announcement has been a long time coming. Prokhorov's interest in owning the Nets has appeared for months to be wavering. In May, a report emerged that Prokhorov planned to move the Nets' parent company to Russia, possibly as a sign that he wanted to return to politics. (Candidates in Russia are prohibited from holding foreign assets.) And while Prokhorov might have designs on becoming the next mayor of Moscow, his motivations for repatriating, and now selling, likely go a bit deeper.  

With the ruble collapsing, oil prices continuing to fall, and heightened sanctions by the West, the economic picture in Russia is particularly bleak. According to CNBC, capital flight is expected to surpass $100 billion for last year. In December, President Vladimir Putin responded with a law designed to clamp down on offshore capital, requiring the full disclosure of foreign assets and imposing new taxes, effective Jan. 1. Days later, he implored Russian businessmen to repatriate their capital, promising amnesty from retroactive taxes and criminal investigations -- though any vow of leniency by Putin should be taken with a grain of salt. With Putin pointedly invoking the patriotic duty of entrepreneurs earlier this year, it's possible that Prokhorov is feeling some political pressure to bring his billions back to his homeland.

But the full story is most likely told on the balance sheets -- and, again, it isn't exactly a surprise. Back in October, NetsDaily reported that the Russian billionaire was engaged in "ongoing discussions" to sell a portion of his 80 percent stake in the Nets while possibly still retaining a controlling interest. As I wrote at the time, all signs pointed to Prokhorov looking to cash in on the anticipated increase in franchise values resulting from Steve Ballmer's $2 billion purchase of the Los Angeles Clippers. That's still the case, magnified by with the bump from the National Basketball Association's recent television megadeal, a nine-year, $24 billion contract extension with ESPN and TNT. So despite the fact that the Nets lost $144 million last year, Prokhorov's share in the team he bought for $220 million back in 2010 is worth between $1.1 billion and $1.8 billion, according to Bloomberg.

The picture is quite different with Prokhorov's Russian assets, most of which are in the commodities market. His stakes in Rusal, the world's biggest aluminum producer, and Uralkali, Russia's biggest potash producer, are worth $1.7 billion each. While aluminum is faring well, potash has not been so lucky: The value of Prokhorov's share in Uralkali declined by more than 50 percent last year. Yet, as my colleague Leonid Bershidsky noted last month, Prokhorov's Uralkali stake had delivered $127.2 million in free cash flow over 12 months, a healthy return if still not enough to put the Nets into the black. 

If you look at it this way, especially given the current state of relations between the Kremlin and the West, it stands to reason that Prokhorov might have simply grown wary of using Russian money to subsidize an American sports team, widely regarded as a plaything that was mostly valuable for allowing him to gain access to New York society. Instead, he gets to sell high on a losing company and see a hefty return on investment. It's a pretty sweet deal.

And as I said at the top, this realization should be infuriating to Nets fans and New Yorkers alike. For four years, fans have been asked to invest their patience and their disposable income buying tickets to watch games at the shiny new Barclays Center. Taxpayers, meanwhile, have been on the hook for around $726 million in subsidies for that arena. Their reward? A poorly run team that has traded away countless meaningful draft picks and has yet to yield any real economic benefit for the city.

So, New Yorkers: Be angry, but don't be surprised that a foreign owner is bailing on a team that loses games and money at an appalling rate. If he's unwilling to invest in its future, it's simply because he knows you already have.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Kavitha A. Davidson at kdavidson19@bloomberg.net

To contact the editor on this story:
Tobin Harshaw at tharshaw@bloomberg.net