Monday, October 27, 2014

Why Did Steve Balmer Pay $2 Billion For A NBA Team?

Steve Balmer paid $2 billion for the LA Clippers.  The was almost for times the previous record for a NBA franchise set in May when the Milwaukee Bucks were sold for $550 million to a couple of hedge fund managers.  This article describes the unique tax advantage that is available to owners of sports franchises.  Balmer can save around $1 billion in taxes through that loophole.

The tax loophole allows franchise owners to deduct goodwill from the other taxable income.  Goodwill is the purchase price of the asset less the value of the cash and fixed assets in the LA Clippers.  If it is assumed that the value of the Clippers is around $500 million, and subtract that from $2 billion, Balmer has $1.5 billion of goodwill.  At a reinvestment rate of 7%, that gives him a tax credit of $1 billion that can deducted from his other taxable income over 15 years.  Its certainly one of the factors that influenced his decision.

NBA owners also share in the rights that are sold to media providers.  The NBA just closed a $24 billion deal with ESPN and Time Warner.  NBA games will be available over the Internet from Time Warner's cable operator (Comcast).  The LA Clippers will share in that revenue without having to compete for it.  Balmer purchased an annuity along with the team. 

The NBA deal is not unique.  Media rights for sports rose 18.7% last year.  The NFL just signed a deal with Direct TV for its Sunday Package.  The eight year deal for $12 billion is twice the value of its previous deal.  If one wants to have every Sunday NFL game available for viewing one must have a Direct TV contract.  Media rights have also risen dramatically in England for teams in its top soccer league.  Its a great time to own a sports franchise.  Consumers can't get enough sports on TV and advertiser love to be associated with sports.

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