Wednesday, December 8, 2010

New Orleans Hornets: The Books Are Open, And It Ain't Pretty!

So, the New Orleans Hornets financials are available for public consumption (Deadspin’s got ‘em), and it is NOT pretty!

Let me say this: I am not a big fan of doomsday stories about the financial state of pro sports teams and leagues. It’s not that I don’t “get” financial data (I work in corporate finance) or that I want to “keep real life out of my sports” (I’d like nothing more than to put my education and experience to use in a sports-related finance gig). More than anything it’s that these stories are a) written by individuals that have far greater knowledge of sports than financial analysis (this may be me as well, though I like to think I know both rather well) and b) based largely on speculation and flawed data, as opposed to legitimate financial statements of pro sports teams, which tend to be rather tough to come by.

Plus, as an incorrigible NBA fanatic, they make me really sad.

However, given the apparent authenticity of these financials (the KPMG letterhead goes a long way) and the figures contained herein (more red flags than a Communist rally), they really couldn’t be ignored.

I’m going to try and keep this brief, but man this is quite the clusterf#@k!

In the interest of full disclosure, I will say that I have not reviewed the financial of NBA teams in the past, and certain accounting practices that appear problematic may be standard for the industry. This is not to say that all teams can’t be wrong, but out of context, there’s no need to vilify the Hornets any more than is deserved.

So… want an idea of why- outside of the stated reason of keeping the franchise in New Orleans, a market that clearly cannot support two major sports franchises- the NBA had to buy the Hornets? Buckle up!

  • ·      A dwindling asset base (down 5.7% year-over-year, to $119.5M), including an ~80% drop in Cash & Cash Equivalents (from $3.3M to $654K)
  • ·      Current Liabilities ($75.4M) almost double Current Assets ($40.5M).
  • ·      Total Liabilities ($202.6M) almost double Total Assets ($119.6M).
  • ·      Trailing 12-month Interest Expense (~$9M) of roughly 13.8x Cash & Cash Equivalents ($654K)
  • ·      More than 93% ($37.9M of $40.5M) of Current Assets represented by Accounts Receivable (unlikely to be collected in full- in any business, there are going to bad receivables). Although, on the plus side, at least in 2009 they collected on ~$3.6M, rather than racking up $25M of AR, as they did in 2008.
  • ·      A total partners' deficit (money paid in to get the Balance Sheet to, y’know, balance) of $83M, or just under 70% of the overall asset base.
  • ·      Almost $12M of Long-term Debt maturing (remember, only $654K in cash), with another $111.5M still on the books. Not reflected in these figures is another $11.4M of notes that matured in June 2010 (presumably rolled over).
  • ·      On the Income Statement, “NBA Revenue” (a helping hand from the Commish) more than tripled (from $1.4M to $4.7M), allowing the Hornets to eke out a $1.8M profit for 2009. 
  • ·      Also, I’m sure (SPECULATION ALERT) the nebulous, non-cash “Gain on Modification of Relocation Obligation” ($4M in 2009, up from $0) didn’t hurt.
  • ·      Despite a net profit of $1.8M, an operating cash outflow of $1.5M. It should be said however, that this was a huge improvement over 2008 (-$7.4M), when much of the damage was likely done to the franchise (negative cash flow of $25M on receivables and a gain of a whopping $19.6M in Unearned Revenue).
  • ·      Cash Flow from “Investing Activities” fell from $2.2M to -$814K, due entirely to subsidies from the State of Louisiana dropping from $2.4M to $136K.

So, the NBA has agreed to take on $100M+ in debt and a flowing river of red ink. Why? Well, some might say karma for its treatment of the fans of Seattle.

Had Commissioner David Stern not cleared the road, paved it, bought a truck and handed his buddy Clay Bennett the keys and the most direct Mapquest route from Seattle to Oklahoma City- a city that welcomed these very Hornets and gave them a loving home (in fairness, not unlike its treatment of the Thunder) in the aftermath of Katrina- he could have orchestrated a sale of the Hornets from professional hack George Shinn to Bennett (the Hornets’ financial issues didn’t just pop up last week) and in one fell swoop avoided a pair of PR disasters.

However, from a much more practical perspective, it appears as though Stern is falling victim to his own pride. Thanks to his irrational commitment to avoiding a George W. Bush-esque perception of having abandoned post-Katrina NOLA, Stern is subjecting the league that he’s nurtured, poured his soul into and built into a global success to the risk of ten of millions of dollars in losses going forward.

The unfortunate part is that these losses could ultimately be suffered in vain, given the very real possibility that even under sound management, the New Orleans market is simply unable to support an NBA team, combined with the presence of larger, more viable markets (Seattle, Kansas City, Louisville. The Hornets exit from the Bayou could be unavoidable- regardless of Stern’s willingness to throw good money after bad.

Plus, by taking over the Hornets, Stern and the league are stepping onto a slippery slope. The Hornets are not the only NBA team reported to be in dire financial straights. It was widely reported last year that the Indiana Pacers lost somewhere in the neighborhood of $30M in the 2008-09 season. It’s long been reported that the Memphis Grizzlies are hemorrhaging cash. If they are unable to secure a new, state-of-the-art arena (that their owners do not have to pay for most of), the Kings may not be long for Sacramento.

Should the owners any of these franchises face financial troubles the likes of which Shinn finds himself in, will Stern show a similar level of commitment to these NBA cities?

1 comment:

Anonymous said...

Is there anymore information you can give on this subject. It answers a lot of my questions but there is still more info I need. I will drop you an email if I can find it. Never mind I will just use the contact form. Hopefully you can help me further.

- Robson