Why the Houston Rockets Team Sale Left the NBA’s Stratosphere

Hurricane Harvey did not seem to put a damper on the valuation of the National Basketball Association’s Houston Rockets franchise. Just days after the storm subsided, Leslie Alexander, who has owned the professional basketball team since 1993, agreed to sell the franchise to fellow Texan Tilman Fertitta for a reported $2.2 billion (subject to approval by the NBA’s board of governors). If it goes through, this sale provides another data point suggesting NBA franchises are now viewed as multi-billion dollar assets in the wake of the game’s rising popularity and lucrative recent broadcast deals.

Nearly half of the 32 NBA franchises have changed hands in the past 10 years with price tags ranging from $200-$550 million. But in August 2014, the NBA notched its first multi-billion dollar sale when Microsoft’s Steve Ballmer purchased the Los Angeles Clippers for a then-record setting $2 billion. Many questioned whether this was an excessive price, particularly after the Milwaukee Bucks were purchased just four months earlier for $550 million (at that time a record price). But the changing media rights landscape, as evidenced by lucrative local NBA team renewals and national deals for the National Football League and Major League Baseball, foretold of a windfall upon the renewal of the NBA’s national broadcast deals. In October 2014, the NBA hit pay dirt with a nine-year agreement with Disney (ESPN/ABC) and Turner (TNT/TBS) that would provide the league $2.7 billion per year in rights fees, a nearly three-fold increase over the prior deal. Two months after Ballmer’s “overpay”, the price suddenly seemed much more reasonable.

The Rockets and Clippers share a similar status in the league as teams operating in major metropolitan areas but not considered in the top tier in terms of franchise notoriety. That distinction belongs to franchises like the Los Angeles Lakers, New York Knicks, Boston Celtics, and more recently, Golden State Warriors. None of these is thought to be “on the block” but it is reasonable to conclude that any would command another record-setting multi-billion dollar price.

The NBA is now invading NFL territory

MVP-candidate James Harden slashes to the hoop for the recently sold Rockets.

The sale price for the Houston Rockets is notable as this is a dollar amount typically reserved for NFL franchises. Football franchises do not trade hands often but when they do the price tags are staggering as evidenced by the recent sales of the perennially underachieving Cleveland Browns ($1 billion in 2012) and Buffalo Bills ($1.4 billion in 2014). These sales represent the floor price for any future franchise purchase. Major League Baseball’s Los Angeles Dodgers priced at $2 billion in 2012, but it was the only MLB franchise to ever command a 10-figure price. Baseball clubs typically trade in the $200-$800 million range, while recent National Hockey League team sales have topped out south of $400 million.

Is 10-figures too much to pay for an NBA team?

Benchmarking team sales is an exercise fraught with pitfalls. Data points are few, timing is everything, and the assets within the sale are not always comparable. Whereas the Clippers purchase was a franchise-only deal (the team leases court time at the Staples Center for its home games), the Rockets deal also includes the business unit that operates the Toyota Center.

Assessing the value of a weaker franchise operating in a small market is a similarly difficult task. It is safe to say that they league’s frothy recent long-term broadcast deals have been a rising tide lifting all boats. But whether these higher valuations correlate to improved profitability is far from certain. A massive boost in league broadcast revenues generated a spike in the league’s salary cap and a corresponding wave of free agency spending. Over the span of a few offseasons, annual contract values from superstars to bench players increased by 50–60%. Across the NBA landscape, team operating expenses have never been higher, driven by record salaries. Spending caught up to the cap this offseason and the torrid increase in salaries ebbed, but an outright decline in payroll is highly unlikely, except for the odd team tanking its season for a high draft pick.

It is conceivable that sale prices could be overblown. Team operating income can be highly variable year-to-year and the ever-changing media landscape provides no guarantees of long-term stability, though live sports have been a key beneficiary thus far. But team ownership is not purely about profitability and finances. Ownership is an exclusive club and that matters to the ultra-rich. After all, there can only be 30 owners of an NBA team.

Conclusion

The sale of the Houston Rockets franchise further signifies a turning point of the NBA’s global clout. It is not just the size of the deal, but the fact that a second tier team commanded such a record-setting price. The full spectrum of the league’s teams from Oklahoma City to New York are benefiting from the NBA’s its global reach and popularity within key demographics. With the 2017–18 season one month away, the NBA’s business model has never been in better shape.

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