Friday, June 15, 2012

Questions and Speculative Answers on the Griz Sale

Posted By on Fri, Jun 15, 2012 at 9:08 AM

Time to hurry up and wait. As the week began, most of us had never heard of Robert Pera, the 34-year-old one-time billionaire tech entrepreneur who is now bidding to buy the Memphis Grizzlies.

Four days later, Pera has an initial agreement in place with current owner Michael Heisley, including a reportedly $10 million deposit, and has not been heard from beyond a canned quote in a team press release.

Pera's purchase bid is in the hands of the NBA, where a vetting process will lead to an ultimate decision by the league's Board of Governors on whether to approve the purchase. The league may not seriously begin the vetting process until after the Finals. The endgame isn't likely to come for another couple of months and if Pera's really not going to submit himself to local inspection for awhile, this story might not move much until then.

Like everyone else, I've got a lot of questions. And, like everyone else, I don't have much in the way of answers. But I'll give it a shot:

How seriously should we take the Pera bid?
The two names mentioned most frequently as a comparison for Pera have been the Brian Davis/Christian Laettner tandem that attempted to purchase the Grizzlies a few years ago and Dallas Mavericks owner Mark Cuban. This makes sense to a degree: The Davis/Laettner duo is the only prospective buyer who has made it this far in the process in the all the years Heisley has been trying to sell the team, and Pera fits the rough Cuban mold of being a young self-made tech tycoon.

The reality is that, in substantive terms, Pera lands somewhere in the middle of a vast continuum between these two poles. Davis/Laettner were comparative small-timers with nowhere near the means to pull off their purchase who were desperately trying to cobble together real-money investors to prop up their bid.

Cuban, on the other hand, may have had a similar background to Pera, but was much further along in the process. At the time Cuban bought the Mavericks he had built up his tech start-up — — and then cashed out, pocketing nearly $6 billion from Yahoo in the process and leaving him with both the means to buy a team (several teams, really) and the time to focus on running one.

Pera, on the other hand, is still working day-to-day building a company — Ubiquiti Networks — that has been wildly successful very quickly but is also far from stabilized, with a bundle of potential problems driving his company's stock — and Pera's paper net worth — down significantly since he first approached Michael Heisley about a purchase a few months ago. Pera's wealth is significant, but it's not unquestionable to the degree Cuban's was. And he seems to have his hands more than full right now keeping Ubiquiti from losing momentum.

CNBC analyst Herb Greenberg wrote about Ubiquiti's problems earlier this month. More recently, he's addressed Pera's Grizzlies bid from an investor perspective, a must-read take that underscores many of the significant questions about this bid.

Is this really a solo purchase or does he have partners?
Pera's bid has been presented to this point as a solo purchase attempt. Given the apparent volatility of his personal wealth and the apparent demands of his primary business in terms of time and attention, this just doesn't feel right to me.

I suspect there are partners involved, and that they will emerge in the coming weeks, which would bring its own set of questions. If not, then I would think that would make Pera's bid more problematic in terms of league approval.

If it is solo, how is Pera paying for it?
There's been a conflicting response to the question of exactly how Pera could pull off this purchase. The Commercial Appeal referenced a financial analyst in suggesting Pera has the ability to make a purchase without selling or pledging his shares in Ubiquiti, but doesn't explain exactly how that's true. Greenberg at CNBC reached the exact opposite conclusion, suggesting Pera couldn't make the purchase without doing so, while pointing out that he doesn't appear to have taken any action in those regards yet. Again, my bet is that there's more money behind the Pera bid that just his personal wealth.

Did this start as mere leverage?
While the Pera bid is clearly more serious than the Davis/Laettner bid, I suspect it might have the same roots: As a way to try to goose the locals into meeting Heisley's price. Pera's agreed purchase price, which has been reported as anywhere from $350 to $380 million, though I've heard it's closer to the former, was apparently presented to a local group to match, and they declined to do so.

Will it go through?
If this is indeed a pure solo purchase, it seems questionable, but after the farce of Davis-Laettner, it's hard to believe Heisley would proceed without at least a reasonable belief that the deal can get league approval. People I've talked to with knowledge of this particular situation and the general process suspect it will go through but don't seem to think it's a sure thing. The smart odds seem to be that it's about 60%-70% to go through.

How does it impact franchise stability if it does go through?
While I've always been dismissive of the alarmist notion — prevalent in some circles since the day the Grizzlies landed in Memphis — that the team is destined to leave, I've grown equally dismissive of pollyannaish suggestions that there is no threat of relocation.

The Commercial Appeal's initial story leads with the assertion that Michael Heisley believes he's found a new owner who will keep the team in Memphis for the long term. Based on what? Heisley has admitted that he hasn't had discussions with Pera about that very subject.

And whatever Pera's intentions, the odds of an attempted relocation in the future obviously rise if he — or any other owner without Memphis ties — acquires the team. This is a legitimate long-term concern.

But I do think it's a long-term one. Unlike Larry Ellison, Pera doesn't seem to have the juice — financial or otherwise — to pull off a costly and complicated move in the near term. And he's signaled that he's not interested in this anyway.

The chances of an attempted relocation before the lease lightens in 2021 seems remote. And there are still plenty of factors weighing against relocation even after that point. Beyond the lease itself, which has been the focus of most relocation speculation, there's the role of the NBA itself, which would have to approve any move.

Given that most franchise stability issues over the past decade or so have been arena-related, I would think the NBA would be very reluctant to remove a viable franchise from a city that built a world class arena with public funding but without a public referendum. That precedent would damage future negotiations with municipalities over arena issues. As long as this team is viable in Memphis — and the fact that the team could be more profitable in other markets doesn't mean it isn't viable here — I suspect the league would push back against any potential move.

There's also the issue of where to go. Pera is from San Jose, which is where Ellison apparently had designs on moving the team, but there's a thought that Golden State Warriors ownership might try to block any relocation to that area. Seattle is obvious but still hasn't sorted out its arena issues. Arena questions — immediate or down the road — are going to loom large in most potential markets. And, for the moment at least, there's at least one team — the Sacramento Kings — who are a much more likely relocation candidate than the Grizzlies.

What's the role of potential local ownership in either scenario?
If the Pera deal goes through, it would likely include the remaining few percentage points still owned by locals, meaning there would be no local ownership stake in the team. But even in this scenario, the importance of the local group won't lessen too much.

If Pera is what he presents himself as — someone who wants to keep the team here and work to make it thrive in Memphis, the local group — even without a financial stake in the team — will be a key asset for him. My sense is that the locals are hopeful about Pera's potential ownership. That they're prepared to welcome Pera warmly, work aggressively with him to rebuild strained relationships, sell tickets and sponsorships, and promote the franchise.

The best way to lower odds of an attempted relocation: Sell more tickets. Make the team a more successful civic entity than it already is.

If, at any point, there's an indication of the Pera group looking at relocation, I think the push back won't just come from the city itself. I'd look for the business community — not just former minority ownership, but also FedEx, which has its name on the building and is one of the main reasons the team came here to begin with — to be very forceful in trying to keep the franchise here.

Either way, the locals, as we've come to call them, are going to be important in this process.

But what if the Pera bid doesn't go through? My sense is that it would force Heisley and the locals back to the table.

Heisley claims he'd prefer to sell to locals, but apparently he cares a lot less about that than trying to get his preferred price and not a penny less. And that's obviously his right. Similarly, it seems the local owners want a team here but don't want to own it for Heisley's price. There have been many discussions over the past decade about a transfer to local ownership, but my understanding is that the sides remain tens of millions of dollars apart.

If Pera's bid fails, I think the pressure on Heisley and the locals to cut a deal would increase and I wonder if the NBA wouldn't step in more forcefully to try to mediate an agreement. (Complicating this potential scenario: If Heisley has a strained relationship with potential local owners, he seems to also have a strained one with David Stern.)

While I think there's a chance Pera's ownership could turn out to be good for the franchise in Memphis, I still think local ownership is by far the best thing for the NBA basketball in Memphis. My suspicion that a failed bid here would increase the odds of a deal between Heisley and the locals has me hoping Pera's bid doesn't go through. That would be a gamble, but one I'd be willing to take.

Is there something tangible Pera can do to show local commitment?
The Commercial Appeal's Geoff Calkins came out of the gate with an interesting suggestion in this regard: Extend the lease. I like this as a rhetorical gambit but I suspect it's very unlikely. However, were FedEx to put up more naming rights money in exchange for a lease extension, then maybe this is something that could be more than a pipe dream.

I also had a daydream scenario in mind that's a little different from Calkins': Instead of buying the locals out, convince them to buy back in. In exchange for locals purchasing a more substantial minority share, re-institute the old contract language giving locals matching rights on a future sale or some other considerations in terms of blocking a potential relocation.

Should we be concerned about Pera's relative silence?
Some I've spoken to find Pera's silence odd. Others think it's smart. But no one thinks it can last until league approval that might be a couple of months away, if not more.

Nature abhors a vacuum. At this point, all we know from Pera directly comes via a canned quote in a team statement. The less we hear from Pera now the more we're forced to speculate. And the more outside sources — witness the disconcerting perspective of CNBC's Greenberg — will influence the narrative. Pera was probably smart not to hold a presumptive public press conference that would only remind locals of the Davis-Laettner circus. But not emerging from the shadows until he has full control of the team seems equally problematic. I suspect we'll be hearing from Pera sometime in the next few weeks.

What about on-court and basketball ops questions?
Short term, you have to wonder how ownership uncertainty impacts this off-season, especially regarding the potential trade of Rudy Gay. Given that Heisley was already reluctant to move Gay, the sense that he may be operating as a lame-duck owner would seem to only increase his resolve not to make a major shake-up. I'd say the odds of a Gay deal sometime around the draft, already under 50%, have now gone down.

As for how Pera's ownership would impact team-building process and strategy, the questions are legion and I would be on firmer ground dealing with them. For starters, would Pera's tech and efficiency background lead to more emphasis on analytics and contract/cap expertise in a front office that currently tends more toward traditional scouting? Would he be willing to be a short-term tax payer if he feels like the team can be a contender? Those would be initial questions. But I don't want to delve too deeply into that stuff until we know if Pera will really own the team.


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