September 24, 2009

Prokhorov Nets deal: Who's getting paid?

More details are trickling out on Mikhail Prokhorov's deal to buy into the New Jersey Nets. The New York Times' Charles Bagli reports that "the deal is conditional on [current Nets owner Bruce] Ratner's obtaining financing for the [Brooklyn] arena project and control of all the land required for it by the end of this year." That means that if the lawsuits over seizing land for the project by eminent domain drag on too long — the state's top court is scheduled to hear arguments next month, and more lawsuits are reportedly waiting in the wings — the Prokhorov offer could evaporate along with the rest of Ratner's tax-exempt bond financing.

Still somewhat a mystery, though, is exactly what Prokhorov would be getting in the deal, and what Ratner would be giving up. We know that Prokhorov would be getting 80% of the Nets and 45% of the as-yet-unbuilt arena (he'd also get the right to buy into the larger development, but presumably at market value); Ratner would be getting $200 million, plus handing off unspecified Nets debts to his new Russian partner. Norman Oder writes that given Ratner paid $300 million for the team in 2004, "If 80% of the team goes for $200 million, that's a $40 million loss. Then the arena's a gift." But we don't know what the Nets balance sheet looks like: If the team has borrowed heavily since 2004, then 80% of it could be no longer worth anything close to $200 million.

The big question, though, remains not who's getting the team or the arena, but who's getting the team and arena revenues. As has been noted previously, the only way anyone would want to buy into the whole project would be if they could get a cut of any resulting boodle — if you're going to own the Nets, you want them to keep any revenues they make at the arena, while if you're going to own the arena, you want the Nets to either hand over revenues to you or pay a high rent. For Prokhorov, who'd own a larger stake in the team than the building, you'd think he'd want to ensure a low rent so that he doesn't end up owning 80% of a Huizengaesque boondoggle. But no details have been released about any lease agreement between Ratner and Prokhorov, which makes you wonder if there's more that hasn't been reported, or if the two are just throwing up their hands and figuring they'll work that out later.

Look at it this way: Regardless of who owns the team or the arena, at the end of the day, there needs to be enough cash rolling in to pay back the investments of the folks who are building it. Though Prokhorov's offer has been described as a "cash infusion," it doesn't really change the financial calculus here: It's just that you have two guys now trying to figure out how to divvy up the revenues to make a $900 million arena pay, instead of just one. Unless Prokhorov is happy to take some losses in exchange for the publicity boost of now being known for something other than nickel mining and prostitutes, that nut remains uncracked.

Of course, it's always possible that this whole deal is more p.r. than reality, giving both Ratner and Prokhorov some much-desired positive media attention. Keep in mind that the last "tentative deal" reported by Bagli (for a land sale and redevelopment plan in Coney Island) still hasn't materialized two months later.