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  • Billionaire Joseph Tsai is on the verge of acquiring full control of the Nets for a staggering $2.35 billion, the highest dollar figure in the history of U.S. sports franchise sales. The Crossover on what it means for the NBA and its players.
By Michael McCann
August 15, 2019

Joseph Tsai, the vice chairman and co-founder of Alibaba Group, is expected to become the majority owner (governor) of the Brooklyn Nets by September. The pending transaction was first reported by the New York Post. Tsai, 55, currently owns 49% of the Nets, thereby making him the alternate governor of the franchise. Russian billionaire Mikhail Prokhorov owns the other 51%.

Last year Tsai, who is reportedly worth $9.2 billion, purchased 49% of the Nets for $1 billion. Tsai’s agreement with Prokhorov gives him the right to purchase the remaining 51% by the conclusion of the ’21-’22 season. The price for the 51% of equity is $1.35 billion. The prospective transaction therefore values the Nets at a staggering $2.35 billion, the highest dollar figure in the history of U.S. sports franchise sales.

This prospective sale raises three key implications:

1. Breaking down how the NBA will evaluate the proposed sale

Buying equity in a franchise is a very different transaction from buying equity in a standalone business. While a standalone business can operate as it likes, a franchise is governed by a franchisor. To that end, the franchisor contractually limits how the franchise conducts business, interacts with customers and sells services and products. Those limitations are normally found in a constitution or bylaws that govern each franchise. Unlike a standalone business that looks out for itself, a franchise must advance the best interests of the franchisor and the joint venture as a whole.

This is true in the NBA, where the league’s interests are paramount. Prokhorov can only sell his equity in the Nets if the NBA approves the transaction. The league constitution, which is an agreement that governs the relationship between teams and the league, conditions ownership upon a favorable vote of at least three-quarters of all governors. As a practical matter, this means that the pending transaction must be approved by at least 23 of the 30 majority owners.

Before a vote is taken, the league conducts considerable due diligence on a prospective owner. The league attempts to ensure that a prospective owner’s alleged wealth is accurately measured, that he or she does not have conflicts of interests and that there are no outstanding legal issues of concern.

The NBA’s due diligence is extensive. It includes reviews of financial statements, tax records and any legal filings in which the prospective owner is named. The league utilizes a finance committee, which consists of a group of governors, to evaluate records and make a recommendation to all 30 governors. The league also retains a security firm and other relevant service providers to turn over every stone. Under Article 4 of the constitution, the NBA can demand any document from a prospective owner. He or she must provide “such information as the commissioner deems pertinent.”

The NBA, like other major pro leagues, has occasionally encountered governors whose financial challenges interfere with their ability to own and operate a team. In 2010, the league purchased the New Orleans franchise (which at the time was called the Hornets) from George Shinn for approximately $300 million. This amount reflected not only the value of the franchise but the league also agreeing to assume the team’s debts.

The league owning the New Orleans franchise proved less than ideal. Then-NBA commissioner David Stern had authority over the franchise’s trades yet Stern was also expected to look out for the best interests of the league. In 2011, executives for New Orleans, the Los Angeles Lakers and the Houston Rockets had agreed on a three-way trade that would have sent Chris Paul from New Orleans to Los Angeles. Governors of other teams reportedly complained to Stern about the pending deal. They thought it was too advantageous for the Lakers to pair Paul with Kobe Bryant. Stern then nixed the proposed trade, which in turn generated controversy for the league. The league markets itself, and operates, as a competitive enterprise of individually owned franchises; to have one team owned by the league, even for a short period of time, can undermine that core objective.

In addition to finances, the league will confirm that Tsai becoming the Nets governor would not pose any conflicts of interest. Article 3 of the constitution instructs that no team executive can have any direct or indirect control over another franchise. Further, if Tsai is a party to any litigation, he would need to clarify to the NBA the status of the litigation and the extent to which it might expose him to liability.

The timing of the NBA’s review is guided largely by the timing of Tsai’s deal with Prokhorov. Tsai and Prokhorov are expected to reach an agreement in principle by this Friday. Their deal will contain an accompanying schedule that indicates deadlines for attorneys and banking institutions retained by Tsai and Prokhorov to complete related tasks. The deal will probably close at around the same time as the NBA’s governors vote on the sale. That vote will likely occur at the next governors’ meeting, which is scheduled for the third week in September. Any unforeseen complications could postpone the process into the fall or beyond.

It is also expected that Tsai will purchase the Barclays Center, where the Nets play, from Brooklyn Events Center, LLC. Such a transaction would be separate from the sale of the team and beyond the scope of NBA governance.

AP Photo/Mary Altaffer

2. The NBA will almost certainly approve the Prokhorov-Tsai transaction

There are a number of reasons why the league will enthusiastically support Tsai as the Nets new governor.

First, the league has already vetted Tsai and he emerged favorably from that process. The vetting occurred when Tsai successfully sought to buy the 49% stake in the Nets. At this stage, the NBA will merely refresh its vetting on Tsai. The refresh will be a less exhaustive inspection into Tsai’s background than the original vetting.

Second, Tsai is already part of the NBA family. Not only does he own 49% of the Nets, but he owns the WNBA’s New York Liberty. Tsai is also on the board of directors of NBA China. He is clearly someone who the league has embraced.

Third, Tsai’s professional background and areas of expertise appeal to Silver, league officials and owners. Tsai, who was born in Taiwan and now resides in California, is, like Silver, an attorney. He is a Yale Law School alumnus and a member of the New York Bar. Tsai practiced corporate tax law at a prestigious law firm, Sullivan & Cromwell, before turning to business ventures. He has deep ties in the ecommerce and online retail industries, both of which expect to grow in the years ahead. Silver, for his part, has effusively praised Tsai. In October 2018 the commissioner said he was “looking forward to working closely with [Tsai] to continue to build our business in China, particularly our media and e-commerce business, in which he has tremendous expertise.”

Tsai’s business contacts are particularly advantageous to the NBA as it eyes substantial growth in Asia. The NBA recently signed a $1.5 billion deal with Tencent, an internet services provider that is the league’s digital partner in China. According to figures published by SportsPro, approximately 490 million fans in China watched NBA programming on Tencent’s platforms during the ’18-’19 season. By comparison, there are 327 million people who live in the U.S. This means there are more people in China who watch NBA programming than there are people who live in the U.S.

Fourth, Tsai’s wealth is massive and, most likely, recession-proof. The global financial crisis of 2008 was damaging to the finances of many people. If a similar crisis were to occur in the coming years, the NBA and other leagues would hope that their owners can weather the storm. No league wants to see its owners abruptly sell franchises in order to meet other financial obligations. That type of “rush to sale” activity could deflate the value of franchises, including those not up for sale. Given Tasi’s fortune, he seems well insulated from potential financial downturns.

Tsai is not without controversy. In April, Silver fined him $35,000 for making a public statement detrimental to the NBA. Tsai authored a tweet in which he complained about “wrong calls and missed calls” in a playoff game between the Nets and the Philadelphia Sixers. Publicly criticizing referees is a nearly certain way for a governor to get fined, particularly since it suggests that NBA games are unfairly decided. In light of legalized sports betting in now 10 states (and counting), the NBA and other leagues are determined to ensure not only the integrity of games but also the perception of games as legitimate contests.

Tsai hasn’t encountered any other known issues with league officials. Also, even though he broke an NBA rule by complaining about the officiating, Tsai likely became more popular with Nets players and fans by doing so. He showed that he genuinely cared at a moment when Nets players and fans were very annoyed by the officiating. As the Nets expect to compete with Kyrie Irving and Kevin Durant in the Eastern Conference, Tsai is well positioned to become a popular figure for his franchise.

 

3. The Nets valuation is good news for governors—and players

The valuation of the Nets at $2.35 billion is the latest indication of how well the NBA is doing. According to Forbes, the average value of an NBA franchise is $1.9 billion. Since there are 30 franchises, the collective value of NBA franchises is approximately $57 billion.

For those with equity in an NBA franchise, the Nets sale is, of course, fantastic news. It suggests that their investment has grown in value since the time of purchase. Not only is possessing equity in an NBA franchise a source of enjoyment, but it also appears to be quite profitable. Moreover, the league continues to identify revenue streams that capitalize on its brand without requiring additional games. It has wisely embraced esports and recently partnered with Walt Disney Co. to create the “NBA Experience” at Disney World in Orlando. Its growth in Asia and Africa suggests only more revenue streams ahead.

The Nets sale is also excellent news for NBA players (and for other employees of franchises, arenas and businesses connected to the NBA). While players do not receive proceeds from a sale, they gain financially gain when the league does well financially. Per the collective bargaining agreement between the NBA and the National Basketball Players’ Association, franchises and players almost evenly divide “basketball-related income” or BRI. BRI refers to revenue generated by NBA broadcasts, intellectual property (including video games), apparel, arena signage and other physical and digital properties. Depending on various factors, each side receives between 49% and 51% of BRI. Therefore, BRI is basically split down the middle between teams and players.

The salary cap and, by extension, players’ salaries correlate to BRI. While this is a simplification, a higher BRI means a higher salary cap, which in turn means higher player salaries. According to Statista, the average NBA player salary during the ’18-’19 season was $7.8 million, which far outpaced average player salaries in MLB ($4.5 million), NFL ($2.9 million) and the NHL ($2.8 million). Expect NBA salary figures to only climb, as the league’s salary cap will jump by more than 7% in the ’19-’20 season. It is expected that the average player salary in the NBA will approach $10 million by the early 2020s. NBA player contracts, unlike those in the NFL, are also generally guaranteed.

None of this is to say that players won’t have demands in the next round of collective bargaining. The current CBA runs through the 2023-24 season (with a mutual opt-out clause after the 2022-23 season). There will likely be substantial debate about a variety of topics, including the controversial age eligibility rule and privacy and data issues connected to wearables. Yet while the NFL and NFLPA could be entering an acrimonious labor battle, the key stakeholders in the NBA are all making a lot of money and should expect to make even more in the years ahead. That suggests that owners and players will reach a deal on a new labor agreement without a work stoppage.

Michael McCann is SI’s Legal Analyst. He is also an attorney and Director of the Sports and Entertainment Law Institute at the University of New Hampshire Franklin Pierce School of Law.

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