I think I finally figured out the strategy of Magic Johnson and Co.
The Los Angeles Clippers basketball team are a classic value investing play. Owner Donald T. Sterling long followed a worst-house-on-the-block strategy with them, same as with his real estate strategy: buy in Beverly Hills and Koreatown and hold on. Los Angeles isn`t going to run out of nouveau riche Koreans, and it`s not going to run out rich guys who want to own an NBA team.
So, Sterling was content to employ cheap but elderly and inept general manager Elgin Baylor for 22 long, terrible seasons. He was happy to benefit more from the inflation in the price of generic NBA franchises than from his own efforts to build a winning franchise.
Recently, however, several factors have conspired to drive the value of being the owner of the Clippers up. The Clippers actually have exciting players now, the rival Lakers` old stars (Kobe Bryant, Pau Gasol, and Steve Nash) aren`t getting any younger, the stock market is high, and the cable companies are theorized to be increasingly desperate for live sports programming that can`t be obtained more cheaply over the Internet.
However, Sterling has tax reasons for not wanting to sell during his lifetime. And he loves being the center of attention, and doesn`t seem to care much whether people are acting obsequious or hostile toward him as long as they notice him. This has increased the demand for ways to force Sterling into selling, and the supply has apparently arisen to meet the demand.
(A forced sale would likely work out to a lower price than an unforced sale because one of the main competitors in an unforced sale is the owner who might just call it off if he doesn`t get a high enough price.)
From NBA supremo Adam Silver`s news conference:
Magic Johnson knows he`s always welcome as an owner in this league. He`s been a part owner in the past of the Los Angeles Lakers, and he`s always welcome and a close friend of the NBA family.
After all, the HIV-infected basketball legend is the “ultimate cleanser in sports.”
Ironically, the Los Angeles Times reports today, but without naming any names because that would be awkward this week and off-Narrative:
The Dodgers charged $8 billion for broadcast rights to their games, knowing full well that pay-TV companies would have to pass along this sky-high cost to all customers.
By David Lazarus
May 1, 2014, 5:16 p.m.
A troglodyte of a team owner got his comeuppance this week for making incredibly stupid comments about race. But let`s be clear.
Racism isn`t widespread among sports team owners.
Exhibit A: The $8 billion charged by the Dodgers for broadcast rights to their games knowing full well that pay-TV companies would have to pass along this sky-high cost to all customers.
Time Warner Cable is the Dodgers` partner in crime. It paid that whopping sum for exclusive rights to distribute the Dodgers channel to other pay-TV companies, assuming, like the team, that it would get away with sticking both fans and non-fans with an extra $4 to $5 fee every month.
That`s an extra $48 to $60 per year from practically everybody in Southern California (not me, though, I don`t have cable), whether they watch the Dodgers or not. And baseball is a pretty boring sport to watch on TV, at least until the games matter in October. When I was a kid, Dodger games were a pleasant thing to have Vin Scully on the radio while you were outside doing chores or whatever, but sitting in the dark watching seems …
… This is why DirecTV, Dish, Verizon and AT&T have balked at adding $4 to $5 to people`s bills for a Dodgers channel.
So, as I mentioned earlier in the week, 70% of Southern California Dodger fans who have cable TV haven`t been able to see the first month of the Dodger`s season. The local cable companies are worried that raising their fees will drive their fans who don`t like sports to start cutting the cable and turn to Netflix-like alternatives for movies and shows. I don`t have cable, but the only sports I feel like I really want to watch are the Olympics, the Masters, the U.S. Open, maybe the British Open if I get up early enough, a few baseball playoff games, and maybe some college football. Most of that`s available on broadcast. The cable companies are worried about pushing more people to follow me.
Clippers owner Donald Sterling is paying the price for being a narrow-minded jerk.
Why should the Dodgers` owners get a pass?
Of course, there`s an irony here: the public face of the new Dodger ownership team that`s stiffing its fans is that “ultimate cleanser in sports,” Magic Johnson.
One reason the new Dodger ownership is stopping Dodger fans from seeing their team on TV in their game of chicken with the cable companies is because they overpaid so badly for the franchise in 2012. From the NYT in 2012:
PRIVATE EQUITY | DEALBOOK COLUMN
By ANDREW ROSS SORKIN APRIL 9, 2012, 8:59 PM 76 Comments
When the numbers don’t seem to add up, it’s worth asking some questions.
For the last two weeks, I’ve been puzzled by the announcement of a $2.15 billion deal to buy the Los Angeles Dodgers by Magic Johnson and a group of financiers.
Of course, Johnson got most of the attention. But his celebrity has obscured a drumbeat of questions about the businessmen behind this headline-grabbing sale, which doubled the record for the price tag of an American professional sports team, set by the Miami Dolphins when it was sold for $1.1 billion in 2009.
The winning bid was led by Mark Walter and his firm, Guggenheim Partners, which most people in sports — and frankly, even on Wall Street — know very little about. (Peter Guber, the film producer behind “Rain Man” as well as Stan Kasten, the former president of the Atlanta Braves, are also involved.)
A quick background check and some back-of-the-envelope math raises an obvious red flag: how on earth can this group of individuals afford to pay $2 billion in cash?
The answer is that they probably can’t — at least, not by themselves.
Mr. Walter, along with his colleague Todd Boehly, Guggenheim’s president, appear to be living out a childhood fantasy using other people’s money, some of whom may not even realize it.
In addition to their own cash, Mr. Walter plans to use money from Guggenheim subsidiaries that are insurance companies — some state-regulated — to pay for a big chunk of his purchase of the Dodgers. Guggenheim controls Guggenheim Life, a life insurer, and Security Benefit, which manages some $30 billion, among others.
Using insurance money — which is typically supposed to be invested in simple, safe assets — to buy a baseball team, the ultimate toy for the ultrarich, seems like a lawsuit waiting to happen. …
The transaction seems even more questionable when considering Mr. Walter’s own words to The New York Times two weeks ago: “I don’t want to realize a return on investment on buying the Dodgers. I want to have a multigenerational relationship that changes my life, Magic’s life, Magic’s grandchildren’s lives and all of our lives.”
So let’s get this straight: Mr. Walter, who has a fiduciary duty to the firm’s policyholders, plans to pump their money into a baseball team, even though he says he’s not seeking to realize a return on the investment. And he is seemingly wildly overpaying by some $500 million more than the next highest bidder — he outbid Steven Cohen, the hedge fund manager, among others — so that he can be the league-designated owner of the Dodgers.
“Paying $1.5 billion or $1.6 billion — I can get there. But anything after that is pure ego,” said a longtime sports banker who worked for a rival bidder for the Dodgers. “We’ve done the math. At that price, it just doesn’t make any sense unless you want to be the king of Los Angeles.” …
On the other hand, if you can bully your way into adding $55 per year to the annual bill of every cable TV subscriber in the five-county area of 17 million people …
Guggenheim Partners started relatively recently, in 2000, by a great-grandson of Meyer Guggenheim, the patriarch of the famously philanthropic family. It now manages some $125 billion for the very wealthy — including Michael Milken — and has proved itself to be a skilled risk manager. Under Mr. Walter, the firm has grown beyond money management into insurance and recently hired Alan D. Schwartz to run its advisory practice. Mr. Schwartz is the former C.E.O. of Bear Stearns, who sold it as it was collapsing to JPMorgan Chase.
The Bear Stearns collapse in early 2008 was the warm-up for the Lehman Brothers crash later that year that brought the world economy to its knees. So, the Bear Stearns guy, Michael Milken, Peter Guber, … To be honest, I can`t find anything all that bad about Stan Kasten, but still …
Magic has some of his ultimate cleansing to do all right.
Kurt Badenhausen writes in Forbes that the favorites of ten contenders to wind up owning the Clippers are:
Johnson has been a part of the Sterling story from the beginning. It was pictures of Sterling’s girlfriend with Johnson on Instagram that set Sterling off on his racist rant. Johnson and his financial backers, Guggenheim, are interested in buying the Clippers, according to Yahoo’s Adrian Wojnarowski. If interested, the Johnson group is the clear favorite. The NBA would love to bring Magic into the fold. He is royalty in NBA circles. The Johnson/Guggenheim group blew other bidders out of the water paying $2 billion for the Dodgers. Guggenheim would also love to get its hands on the Clippers for TV purposes. The Dodgers’ rich price tag was fueled by an expected local TV deal with Time Warner Cable, which eventually climbed to $8.5 billion. TWC is having trouble getting carriers to pick up the Dodgers’ new regional sports channel, but adding another team to the mix would make the channel more valuable.
So, here`s where it all finally fits together: Magic, the Guggenheim Partners, and their unofficial and utterly unpaid advisor Michael Milken are on the hook for a lot of money for the Dodgers purchase.
So, let`s try to think about this like Milken would. He`s banned for life for getting any compensation for his investment advice (he had to pay the government $47 million in 1998 for cheating on his lifetime ban), so I will stipulate that when he talks on the phone to Guggenheim`s president Boehly several times per week it`s just to check up on the $800 million he has invested with Guggenheim Partners and to offer free advice out of the goodness of Mike`s heart.
The Dodgers will turn out to be a goldmine for them if they can wield enough market power to extract the money from the local cable companies. At present, it`s unclear if the Dodgers alone provide Guggenheim with enough local monopoly power. But, the Dodgers and Clippers (whose contract is up after the 2015-16 season) together could make the recalcitrant cable companies cry uncle to whatever outrageous demands Magic and Mike come up with.
This is Hollywood Econ 101: the way an agent gets ahead is by assembling a valuable stable of assets and then threatening to withhold all of them unless he gets his way over one of them.
In the huge Southern California media market, Magic et al don`t have that many options for buying another major league sports franchise. They own the Dodgers, they probably wouldn`t be allowed to buy the Angels baseball team, there are no NFL teams, the NHL teams aren`t vastly popular with locals, you can`t exactly buy USC football or UCLA basketball, and the Buss family turned them down when they asked about buying the Lakers. So that leaves the Clippers as the obvious second asset to use in their battles with the cable companies.
And that may explain a few things.