This past week, the Memphis Grizzlies found themselves in a couple of different types of stories that had to do with the ownership and economics of the team. The first story that came out was about Grizzlies owner Robert Pera’s business being called a fraud by an activist on Wall Street. The second (and in my opinion more important) story came from a confidential report that was acquired by ESPN claiming that 14 of the 30 NBA teams lost money last season.
And, of course, one of those fourteen teams was the Grizzlies.
Both of these stories impact the Grizzlies in their own specific ways. For this coming season, they don’t change much in terms of the product on the court. However, the similarities in these two stories are the underlying economic message included in how they may affect ownership of the team. They go into great detail that will be hopefully broken down here. This article is to try and make sense of both stories while speculating a bit for the future. First, the two stories.
Robert Pera and Ubiquiti
Last Monday, Citron Research published a negative report against Pera’s business Ubiquiti Networks, calling the company a “total fraud.” Andrew Left, the managing editor at Citron, went after Pera and Ubiquiti with damning text in this report giving seven red flags on the company, such as questionable cash flow and instability of top executives. Citron is a notable research company which looks into finance reports to see the underlying numbers of Wall Street companies. They are known to expose companies for deceiving the public when the case may be.
From this report, Ubiquiti’s stock dipped about five points when this article came out, but now has risen slightly over the days following. Pera did not take kindly to this as he fired back on Twitter:
I just put my head down and let the products and numbers speak for themselves. My apologies to those affected by these clowns— Robert J Pera (@RobertPera) September 18, 2017
I am consumed with product development and don't have time to entertain accusations of stock manipulators. But, will take questions here— Robert J Pera (@RobertPera) September 18, 2017
Robert Pera is not a guy who avails himself for interviews or press, so his Twitter Q&A was a rare sight.
It surely made a statement that he thinks the report is garbage, and his tweet calling Left a clown speaks for itself.
ESPN’s Confidential NBA Finance Report
With an explosive TV deal and expanding salary cap, the NBA was thought to be sitting pretty as a rapidly expanding market. However, after ESPN broke news saying 14 of 30 teams lost money last season, thoughts changed quickly. The report showed that these teams lost money before the revenue-sharing payout. This payout comes from the large-market teams paying the small-market teams a set percentage of overall league revenue to keep the competitive balance.
For the Grizzlies, this article speaks to the disparity between Memphis and Los Angeles, which is the example the article highlights. The Grizzlies last year lost nearly $40 million after handing out big contracts last offseason despite being in a smaller market. This, plus only having a league-low $9.4 million in local media rights come in, equated to the Grizzlies taking on the most revenue sharing in the league at $32 million according to the article. So, the net loss is not as bad because they are compensated the most by the rest of the league which is based on a complex formula based on market size, expected revenue, and expense levels.
The disparity in the league will always be there. The league has gone for a socialistic sort of solution to this problem which has worked thus far. Some are worried that the accounting methods used for these teams inflate their value. The report is telling of just how big that gap actually is, and that could turn worrisome for the league.
So, what does it all mean?
All of this comes at a strange time for Memphis. Next month, two of the Grizzlies’ minority owners, Steve Kaplan and Daniel Straus, are eligible to purchase enough shares to have controlling ownership essentially buying out Robert Pera. According to an ESPN article two years ago, if they do make a bid to do this, Pera would have to buy out Kaplan and Straus at a certain price or sell his shares to them based on a price at a certain valuation of the team.
Now, the one thing that stands out from this same ESPN article is that Kaplan had been planning to sell his Memphis shares to get a shot of owning the Minnesota Timberwolves when they went through an ownership change. If Kaplan still wants to be a majority owner of an NBA franchise, he may have his shot come October.
However, it all comes back to Pera and the problems he may be facing. According to Forbes, this negative report dropped Pera’s net worth down $248 million (but don’t feel too bad for him because his wealth was still $3.1 billion after the blow). This, of course, won’t change anything of his ability to make a payment for a buyout, but it shows the problems stemming from the negative report. Unfortunately, he would not take any Grizzlies questions on Twitter which may raise questions as well.
Depending on the severity of these allegations, Pera may not have the time to deal with a Kaplan and Straus bid. He is always traveling all over the world and never has time to go to Grizzlies’ games anyway. Other teams such as the Los Angeles Clippers or the Dallas Mavericks have their owners courtside every game cheering the team on which truly makes an impression on the fans of those teams.
What is his purpose for being a majority shareholder and owner for a team he doesn’t publicly support very often? Especially when the NBA financial report says the team is losing money? The fact of the matter is the league disparity is going to continue to grow. It is going to put a strain on smaller market teams, like Memphis, who may not be able to constantly pay a luxury tax to compete on a high level against the larger markets.
This is the problem that the Grizzlies are going to face in the future. The team needs an owner who is passionate enough about it to be able to keep the team in Memphis for as long as possible. If Robert Pera is that guy, then great. If not, Steve Kaplan and/or Daniel Straus (or a group of other minority owners) need to take over with the passion for the Grizzlies the city of Memphis deserves.