Hollinger’s Showcase notebook: Suns’ $4 billion sale renews NBA expansion buzz

LAS VEGAS — Usually the G League Winter Showcase marks a beginning point for a big chunk of the NBA’s trade conversations. Even in our networked/texting/Zooming world, face time matters. Nearly every exec in the league spends at least a day here hobnobbing.

Front office members and staffers see each other at the two courts where the event is held, and perhaps at the bar at the end of a long day, too, since virtually everyone is in the same hotel. Relaxed without the prying eyes of fans around, they trade bits of information and crop up conversations. Next thing you know, there’s a three-team, eight-player deal on the table. It still takes the urgency of the trade deadline in February to actually get these conversations to the finish line, but this week is often the catalyst.

This year has felt … different. The overarching theme is that things seemed quieter than usual.

“Quiet” isn’t the same thing as “dead,” of course, and flickers of trade market life could be detected if one looked closely enough. Teams spent the week kicking the tires on Chicago’s situation. Phoenix’s exiled Jae Crowder remains a target for several contenders. Oh, and have you heard Atlanta’s John Collins is available?

Nonetheless, the cold math remains: It’s tough to have buyers without any sellers, and there just aren’t many sellers right now. That may change as we get closer to the trade deadline and more teams see their preseason hopes collide with the realities of their rosters. Right now, however, the potentially interesting sellers are either straddling .500 or, in a few cases, clinging resolutely to the delusion that they can get there. Instead of actual trade talks, we’re left speculating about guys who might, maybe, at some point, want to be traded. Fun times.

Instead, it was a different transaction that got everyone’s attention this week.

Four billion dollars? Now that got people talking. That was the valuation Mat Ishbia agreed to this week in purchasing a controlling stake of the Phoenix Suns and the WNBA’s Phoenix Mercury.

It’s one thing when the LA Clippers go for billions, but Phoenix? A growing but transplant-heavy market, with a tired arena and lots of pro and college sports competition? That’s news. In October, Forbes rated the Suns the 13th-most valuable NBA property, at a value of $2.7 billion. Ishbia went much higher than that.

The sale of the Suns and Mercury should have a big impact on NBA business in two areas. First of all, it could precipitate moves in other markets. The working presumption by many insiders is that we would see a raft of sales after the new collective bargaining agreement and next TV deal are finalized, since secure labor peace and a potential TV money bonanza would likely increase valuations. (As would expansion fees that might happen concurrently, but more on that below.)

However, economists who believe in efficient market theory would tell you this knowledge should already be baked into bidders’ valuations. The Suns’ sale seems to be a perfect example. At first glance, it seems like a wild overvaluation, but it makes a lot more sense if one is looking at the post-2026 market.

So the question becomes: What other owners might realize that they don’t need to wait and can cash out right away? Certainly, Portland comes to mind. There may be other reasons for Paul Allen’s estate to wait a while longer, but getting a price in the $3 billion to $4 billion range right now could easily trump them.

Similarly, Michael Jordan in Charlotte has been whispered about for ages as a potential seller. Though the Hornets haven’t exactly set the league afire, he bought the team for relative peanuts in 2010 (a reported net price of $175 million) and would make a mint on a sale, perhaps 10 times what he paid. New Orleans is another franchise that many insiders mention as a sale candidate, although the search for a local buyer could stymie a transaction. Those are the known knowns, in Rumsfeld-speak.

But what about the known unknowns? Are there other owners who weren’t really thinking about selling a week ago, but now might suddenly be tempted if they can get a number like $4 billion?

And whither the T’wolves? The bizarre multi-installment sale from Glen Taylor to Alex Rodriguez and Marc Lore is still creaking along toward its Dec. 31, 2023 completion date, but should anything go amiss, Taylor could seemingly make a lot more money from another buyer. Needless to say, if the new dudes so much as misplace a comma in a document, Taylor is massively incentivized to nuke the deal and start over. The valuation on that Timberwolves sale was $1.6 billion, so Taylor might make an extra billion if the team went back on the market! Fortunately, this is the Minnesota Timberwolves, so nothing crazy like that could possibly happen.

However, even that pales in comparison to the other important piece of the Suns’ sale news: what it means for expansion.

Sonics fans celebrate during a 2022 preseason game

The chances of the NBA returning to Seattle keep growing. (Joe Nicholson / USA Today)

Basically, it makes it seem almost inevitable that we’ll have two new teams within the next half decade. (Not breaking any news here, but every single person I asked thinks those teams will be in Seattle and Las Vegas. My personal crusade for Bali and Kauai appears to have gained little traction.)

If you want to understand why the Phoenix sale is so important to this, do the math. The biggest obstacle to expanding from 30 teams to 32 is not a lack of available markets in which to sell tickets or pipe in local TV broadcasts. It’s because they dilute the national TV money.

The league’s national TV deal has become an increasingly large portion of teams’ budgets, and that amount is only expected to rise in the next TV deal. Adding two new franchises dilutes each one’s share of that piece by roughly 1/16, and does so in perpetuity. That would be fine if adding teams grew the TV pie proportionately, but it doesn’t, because the NBA already has more games than ESPN and TNT can possibly air. Sure, they might get slightly higher ratings in Seattle and Las Vegas than many other cities, but that’s a barely noticeable blip on a national level.

The only thing offsetting the loss of national TV money is the expansion fee, which is shared by the 30 current owners. That fee, alas, is only paid once, and not year after year, and thus needs to be many multiples of the lost annual TV revenue for the league’s owners to come out ahead — and thus, presumably, vote in favor of expansion. This is why some of my spies were pouring cold water on expansion speculation: The financial math wasn’t guaranteed to pencil out for the 30 owners.

The exact break-even point is a complex calculation based on projections of future TV revenues, future interest rates and investment returns, an estimate of the expansion fee and what economists call the discount rate for the time value of money, accounting for the fact you’d rather have your money today than 10 years from now.

Instead, let me make some grossly simplifying assumptions to walk you through the exercise. I have an economics degree and I stayed at a Holiday Inn Express last night. This should go great.

The last TV deal was $24 billion over nine years. Let’s say the next one is $75 billion over nine years, which some have estimated.

Now, for some math. (Sorry). Divide by 30 and you have each team’s share of that package ($2.5 billion). Divide that number by nine and you have each team’s annual share ($277 million). That share, in turn, is diluted 1/16 by expansion. The dilution, then, is worth about $17.3 million annually. If an owner’s financial mandarins end up with a 10 percent annual discount on future revenues (this is a quasi-reasonable ballpark), they will want the expansion fee to be at least 10 times the diluted revenue to justify a yes vote.

And that is why an expansion fee in the $4 billion to $5 billion range is so important. It’s so much easier to pencil out the owners coming out ahead than if the fee were, say, in the $3 billion to $3.5 billion range.

Which, in turn, is much easier to imagine happening if an existing franchise just sold for $4 billion. Most observers I spoke with see a Vegas team as being of similar or slightly greater value than Phoenix, and a Seattle team as being worth considerably more. Suppose, for argument’s sake, it was $4 billion for Vegas and $5 billion for Seattle. That’s an instant $300 million windfall for every owner … and a roughly 17x ratio to the diluted TV money.

Yes, my math here involves sweeping assumptions and simplifications. Nonetheless, let’s exit the financial weeds here and conclude with the big-picture takeaway from this exercise. If the expansion fees were $3 billion, it would seem like a close call for the league’s owners to approve it.

If it’s at $4 billion? It’s a no-brainer.

Jalen Brunson against his former team, the Mavericks

The Knicks’ punishment for tampering with Jalen Brunson was as tame, as expected. (Brad Penner / USA Today)

Some other thoughts from the Showcase:

That’ll show ‘em, huh?

The other hot topic in league circles was the collective eye roll at the NBA’s decision to penalize the Knicks a 2025 second-round pick for tampering in signing Jalen Brunson. As many have already noted, giving up a second-rounder to sign a max-level free agent is a trade every team in the league would make in a nanosecond. Once you’re dealing with All-Stars and max players, there is no amount of second-round picks the league could penalize a team to disincentivize them.

On the flip side, league personnel I talked to recognized the impossibility of the league’s situation. The underlying issue isn’t that the Knicks (or Sixers, for that matter) cheated the letter of the rule this summer, but that the current rules on free agency are virtually unenforceable. There is only one rule most execs really care about: Tampering with a player whose team is still playing games remains an absolutely uncrossable red line, one that should be punished with a decades-long banishment to a dank, windowless cell, containing only a bed made of carpet from the visiting locker room in Oracle Arena and a big screen TV showing games from the 1998-99 lockout year.

As for jumping the July 1 deadline on contacting free agents by a few hours (or days, or weeks) …. whatevs. There are rules written on paper about audits and commandeering phones and whatnot, but nobody wants to actually do that.

In reality, the league’s de facto policy is “just don’t embarrass us.” Which is hard to write about, because we’ve become part of the problem.

News flash: Teams have been jumping the gun on free agency for years and years and years. The news just didn’t get out nearly as fast in the past. It worked in 2012. It doesn’t in 2022.

You can see the problem: The league doesn’t want news leaking of complicated sign-and-trades mere seconds into the alleged start of free agency, nor does it want breathless coverage of back-and-forth free agent negotiations on June 26. Well, good luck with that. Unless every social media outlet simultaneously fails while cutthroat reporters throttle back to Andrea Bargnani-esque tameness, it’s virtually impossible to keep the genie bottled.

The Elam ending factored prominently in the Showcase, even if the word Elam was never mentioned.

The G League has used it in overtime all year to generally positive reviews, requiring teams to score eight points rather than playing for a specified amount of time. That change got a thumbs-up from NBA personnel I spoke to, with the consensus being that NBA overtimes are too long right now and deflate drama from the end of the fourth quarter. The target score also eliminated the chance of multiple overtimes and the crazy player minute situations they can engender. The G League staffers all love it, too.

However, using it for the entire fourth quarter generated opposite reactions. Playing a fourth quarter with a “target” of 25 points more than the leading team’s score, rather than a set time, created a host of new issues. For starters, coaches were left guessing on substitutions without a clock to indicate how long players had played (or rested).

This was particularly true in lower-scoring games, a couple of which became interminable as teams struggled to hit the target score. And this was in today’s more open, offensive era! Imagine my Grizzlies playing, say, Utah in 2016, and try to figure out how long they’d need to play for one team to get to 25.

Secondarily, the target score produced some interesting strategy of its own. If your opponent is three points away from the target score, do you foul to eliminate losing on a 3-pointer? Concede a layup to do the same? (I saw a couple of teams in this situation hug all the shooters and leave gaping holes down Main Street). What about in a one-point game? Would any ref dare call defensive three seconds?

For those reasons, the Elam ending seems much more likely to gain eventual NBA-wide adoption in overtime than in regulation. Regardless, kudos to the league for continuing to use the G League as a lab to experiment with improvements to the game.

(Top photo: Lucas Peltier / USA Today)


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