Mikhail Prokhorov turned the Brooklyn Nets into a club with the highest salaries in the NBA. Will he be able to recoup the costs?

On July 18, 2013, at its home arena Barclays Center in Brooklyn, the Brooklyn Nets basketball club introduced new players to journalists - stars Paul Pierce, Kevin Garnett, Jason Terry and Andrei Kirilenko. Of the announced participants, only Kirilenko was not present, but the surprise was the appearance of the owner of 80% of the Brooklyn Nets, Mikhail Prokhorov, who paid for the new acquisitions. The total annual salary of the owners of championship rings Pierce, Garnett and Terry in the new club exceeded $30 million. Kirilenko moved to the Brooklyn Nets for $3.2 million. As a result of the high-profile trade, the salary list of 15 club players in the 2013/2014 season swelled to $115 million, more than exceeding the National Basketball Association (NBA) cap by $50 million. According to NBA rules, the club was forced to pay a league-record luxury tax of $90 million.

“I promised to create a team in Brooklyn capable of fighting for the championship title. At this stage, I did everything I could,” Prokhorov explained his increased spending on players at a press conference at the Barclays Center. The Brooklyn Nets ended the 2013-2014 season with a loss of $144 million and lost in the conference semifinals, which did not correspond to the spending on a star roster. Pierce, Garnett and Terry played in other NBA clubs in the 2014/2015 season, Andrei Kirilenko returned to Russia and ended his sports career.

In the new season, the salaries of Brooklyn Nets players dropped to $94 million, the “luxury tax” is estimated to slightly exceed $40 million. Sports achievements also became more modest - Mikhail Prokhorov’s club made it to the playoffs, but lost in the first round and from there fight dropped out.

When Prokhorov bought the basketball club in 2010, he promised to make it an NBA champion in five years. As a result, the second round of the playoffs became his greatest sporting achievement. Perhaps he made a great business out of his American basketball project?

Equal Opportunities League

In an interview with Forbes in 2010, Mikhail Prokhorov said that by moving from New Jersey to Brooklyn, his basketball club would become profitable. In May 2010, the NBA Board of Governors approved Prokhorov's purchase of 80% of the New Jersey Nets, which two years later was renamed the Brooklyn Nets. Together with the club, the Russian billionaire acquired from the structures of developer Bruce Ratner 45% in the project to build the home arena for the club in Brooklyn - Barclays Center. All these purchases cost Prokhorov $200 million. According to Prokhorov’s forecasts, the team should have been profitable already in 2012: “Twenty million. Conservative estimate."

Barclays Center, costing approximately $850 million, was built in a record 2.5 years and was inaugurated in the fall of 2012. An entrepreneur from Russia cut the symbolic ribbon together with billionaire Michael Bloomberg, who was then the mayor of New York. Here again, Prokhorov did not miss the opportunity to loudly declare that by 2015 the club would win the NBA title.

For the 2013/2014 season, the Brooklyn Nets underwent a complete rebranding, the club changed its logo and uniform. If in 2012 the club occupied an anecdotal 31st place in uniform sales (there are 30 clubs in the league, but in uniform sales the team from Prokhorov was ahead of the now defunct club from Seattle), then by the spring of 2013 it came in fourth. With a capacity of 18,000, the Barclays Center sold 11,000 season tickets in its first season. Ticket sales (from $25 on the second tier to $120,000 in the VIP area) went so well that one day Michael Bloomberg himself could not get to the match - he did not get a ticket, they boast at the club. The club and the arena have concluded almost 120 sponsorship contracts, including with the Russian Aeroflot, which, with the help of Mikhail Prokhorov’s basketball project, decided to improve its image in North America.

But the club still lacked high-profile sporting achievements.

And in the 2013/2014 season, Mikhail Prokhorov made a breakthrough, throwing unprecedented financial resources into the sports race, even by the standards of the most generous sports association in the world towards players - the NBA (the salary fund of 448 league players in 2014 exceeded $2 billion, the average salary was more than $4 .5 million). During the season, the Brooklyn Nets spent about $200 million on salaries and taxes. But money in the NBA, it turned out, does not solve all problems - the league has long learned to equalize the opportunities of poor and rich clubs. “The 20% rule works in the NBA,” says former CSKA player, Honored Coach of the RSFSR, and TV commentator Vladimir Gomelsky. — Of everything the NBA earns from television broadcasts, merchandise, and licenses, the league keeps only 20% for itself, the rest is distributed among the clubs. Clubs sell local television broadcasts, their merchandise, tickets, and send 20% of these revenues to the NBA. To maintain the competitiveness of clubs, there is also a “luxury tax” that club owners are forced to pay to the league if they exceed salary thresholds.”

The main problem of the Brooklyn Nets, according to Gomelsky, is poor management, which has made a number of mistakes, including in staffing the team. “How can one, for example, evaluate the purchase for that kind of money of Garnett and Pierce, who are 70 years old between them? - the former coach is surprised. “Their legs can’t stand playing for 35 minutes, they will walk, which is what they did.”

Prokhorov believed that with the purchase of these particular players, the club had achieved “an excellent balance between star veterans and young talents.” Paul Pierce told the ESPN cable channel what really happened in the club in April 2015. “We weren't surrounded by young basketball players who were striving for something. On the contrary, there were only veterans around us who did not want to play or train,” Pierce said frankly. “Every day Garnett and I had to persuade one guy or another to work in practice. If Kevin and I weren't on the Nets, the team would have suffered a fiasco of colossal proportions."

According to Brooklyn Nets Chairman Dmitry Razumov, raising the team's profile through investment and an aggressive marketing campaign was a conscious decision. “Basically, both basketball operations and the Brooklyn Nets business are a startup; we had to build everything from scratch,” says Razumov. “Given the size of the market and the competitive environment, this should have been a large investment. At some point, we decided to sacrifice operating profit in order to increase the team’s capitalization.”

The Brooklyn Nets were eliminated from the playoffs in the 2013-2014 season, losing to the Miami Heat, which was assessed a luxury tax of $14.4 million, and the champion was San Antonio, one of 25 clubs that did not exceed the salary threshold. By the way, all of them received $3 million from the “luxury tax” collected by the NBA in 2014.

“They overpaid for Garnett and Pierce,” admits an acquaintance of Prokhorov, “but they contributed to the growth of the club’s popularity. The game wasn't all that good, but we still made it to the playoffs. Mikhail doesn’t blame anyone, he has some negativity towards individual players and their motivation, but the positive from the growth of the club’s value is more important for him.”

Money makes money

In January 2015, the American magazine Forbes valued the Brooklyn Nets at $1.5 billion with annual revenue of $212 million. A year earlier, the value of the club was estimated at $780 million (with revenue of $190 million).

“When planning this deal, we hoped that the team’s move from New Jersey to Brooklyn, to New York, our aggressive approach to basketball and the team’s business would yield results, and, fortunately, it did,” explains Mikhail Prokhorov. “Given that the total investment in the project - the team and Barclays Arena - was about $400 million, the current valuation of the team alone at $1.5 billion is an excellent indicator.”

Vladimir Gomelsky believes that the growth of the club’s capitalization has nothing to do with the actions of Prokhorov and his management team: “The league itself has become rich, billions of dollars in deals have come into it, and last year a fantastic contract was signed for television broadcasts.” (In the fall of 2014, the NBA entered into a nine-year television deal with ESPN and TNT for $24 billion, which increases the league's annual television rights revenue from $930 million to $2.5 billion.)

“Sportsmanship has little to do with the value of a club,” agrees independent sports expert Larry Cool. — The new deal with national television significantly increased revenue, which caused another increase in the value of clubs. Then the sale of the Los Angeles Clippers set a new price level.”

The bar for new owners to enter the NBA has risen dramatically. In April 2014, the Milwaukee Bucks were sold for $550 million, and in May, former Microsoft CEO Steve Ballmer bought the Los Angeles Clippers for $2 billion.

The rising cost of the league's teams amid recent major deals and the signing of new NBA television agreements with Walt Disney and Time Warner forced Fitch Ratings in January 2015 to raise the basketball association's credit rating to a record level of "A-" (for comparison: Gazprom and Russian Railways assigned ratings “BBB–”). The agency's analysts summarized: “The NBA has a strong economic model that provides for equal distribution of revenue from multi-year television contracts and a significant distribution of team revenue. The current collective bargaining agreement between the NBA and the NBA Players Association ensures financial stability and competitive balance. Attendance and match viewing figures among American fans are stable, while the number of fans abroad is growing.” In response, the NBA nearly doubled the combined loan limit of all 30 teams to $1.5 billion.

ROI Sports Group Managing Partner Ray Katz estimates the value of the Brooklyn Nets at $1.2–1.5 billion. The increase in the club's value, in his opinion, is primarily due to the increase in sales of broadcast rights at the national level, and secondly, to an increase in sales on local and regional media market. “Nets has done a great job growing revenue at the local sponsorship level,” explains Katz. “In addition, attendance at the club’s games in Brooklyn is higher than it was in New Jersey.”

The club began to pay special attention to Russian-speaking fans - for the first time in the NBA, promotions and mailings by e-mail and regular mail began to be held in Russian. Even special evenings of Russian culture were held at the home arena. The matches were opened by famous athletes from Russia, Russian opera singers, and fans in the stands were taught to shout “Za-shi-ta” in Russian (similar to the American cry Defense). “In the end, five people came from all of Russian-speaking Brooklyn,” Gomelsky evaluates the results. “The club has no history, it begins with Prokhorov, although the Nets won the championship title twice, in 1974 and 1976.”

Chairman of the Board of Directors Dmitry Razumov says that during Mikhail Prokhorov's ownership, Brooklyn Nets revenue grew by 91%. Sales of goods with symbols per person increased by 320%, attendance at events (the occupancy of the stands) over five years increased from 69% to 94%.

In addition to revenue from ticket sales and events, the Barclays Center receives sports naming money from the British banking group Barclays, which has a 20-year contract worth $400 million.

The purchase of Barclays Center was also appropriate. Bruce Ratner's Forest City company reported revenue of $117 million in 2014, up $12 million from the year before (the arena's 2012 revenue was less than $50 million). In October 2013, Forest City announced that in its first year of operation, Barclays Center became the number one concert venue in the country, with New Yorkers and visitors spending approximately $145 million in and around the stadium. According to Pollster magazine, in 2014 year, the home arena of the Brooklyn Nets confirmed its title as the most popular concert venue in the country and took 11th place in the world. Paul McCartney, Barbra Streisand, Jay-Z, and the Rolling Stones held their shows here. The Barclays Center is slated to host National Hockey League games in 2015 and host the Democratic National Convention in 2016.

“In America now there are few people who don’t know Mikhail Prokhorov,” says Svetlana Ivanova, head of Russian-American Media. — In addition to the basketball world, naturally, the business world is also following him. After all, Prokhorov created a new brand in America - Brooklyn Nets. Its development from the point of view of the growth of the team and the financial side of the issue is very interesting to Americans, and to many outside America.”

The new brand quickly gained a stellar line-up of fans, including Jay-Z, Beyoncé, Rihanna, Nicki Menage, Floyd Mayweather, Maria Sharapova and Kim Kardashian. This year, Prince William and his wife Kate, Michael Bloomberg, David Beckham, Paul McCartney, and Bill Clinton attended the club's games.

In 2013, Mikhail Prokhorov appeared on the cover of American Forbes. The article about him began with the billionaire visiting his club’s match with the Chicago Bulls at the Barclays Center arena.

“By purchasing the NBA club, Prokhorov bought entry into the high society of the United States,” says Vladimir Gomelsky. - They know him, they take him into account. If he wants to meet someone, it is unlikely that anyone will refuse him. But he hasn’t succeeded with basketball yet; he needs to work more closely with the NBA club, but, of course, Prokhorov doesn’t have time for that.”

In March 2015, the American television channel ESPN compiled a rating of the owners of 30 NBA clubs, in which Mikhail Prokhorov took 29th place, in the rating of general managers of clubs Dmitry Razumov took 30th place.

Drive prices up

In October 2014, NetsDaily reported that Prokhorov was negotiating the sale of a stake in the Brooklyn Nets with the owner of the Los Angeles Dodgers baseball team. According to the publication's sources, during the negotiations the Russian billionaire's club was valued at $1.7 billion, and his home arena, Barclays Center, at $1.1 billion.

In January 2015, Bloomberg reported that Mikhail Prokhorov hired investment bank Evercore Partners to find buyers for his stake in the Brooklyn Nets. According to Forbes sources, this time the value of the club and its home arena was estimated by Prokhorov himself at $3 billion - but it was this estimate that slowed down the deal.

In April, he announced that he was not going to sell all of his property in the American basketball project, but only a minority stake.

Did Prokhorov inflate the price too much? “If some Arab sheikhs do not appear, then Prokhorov may not find buyers for the club at the prices he stated,” says Vladimir Gomelsky. In turn, Ray Katz from ROI Sports Group estimates the club and its home arena at $2.2–2.5 billion. “The owners will be able to get $3 billion for them only if an aggressive buyer of the level of Steve Ballmer appears,” Katz is sure.

The Brooklyn Nets have been unprofitable for the entire five years that the Russian billionaire has owned them. During the first half of the 2014-15 season, the Brooklyn Nets' local TV ratings dropped 29% to 0.55, according to SportsBusiness, the fourth-largest drop in the NBA. Interest in the club and its Russian owner among American fans began to wane. To maintain or increase the capitalization of a club, sports results are already needed. Vladimir Gomelsky does not yet see the prerequisites for this in the Brooklyn Nets.

Financier. Not a basketball player