Wednesday, December 06, 2006

Maybe the Dukies don’t have the Dollars

When it comes to the Duke basketball program you either like the Dukies or you detest the Dukies. There is no color in this equation it’s as simple as black and white. The image many have of Duke University, preppy central, a school with an affluent white student body. One issue when it comes to Duke that cannot be denied and must be respected – the school’s men’s basketball team has been one of the most successful college basketball programs in the last 15 years, winning the 1991, 1992 and 2001 National Championship. Two members of the those first Duke national championship teams, Brian Davis and Christian Laettner proposed purchase of the Memphis Grizzlies appears doomed to fail – something the two former Dukies likely never learnt when Mike Krzyzewski was their coach at Duke.

Joel Litvin, NBA President, League and Basketball Operations, issued the following statement Tuesday regarding the proposed purchase of the Memphis Grizzlies: “The NBA has not yet received from Messrs. Davis and Laettner sufficient information to conduct our review of their proposed purchase of the team, in accordance with NBA rules. Among other things, and despite numerous requests from the NBA, we have not been provided with important information about other potential investors, including the sources and amounts of funding that they would supply.”

“In addition, based on the limited information that we have received, it appears that certain elements of the transaction would not comply with NBA rules. As a result, and contrary to their public statements, the NBA is not taking any action at this point with respect to the proposed transaction.”

Earlier Tuesday a story in The Memphis Commercial Appeal suggested the sale to Davis and Laettner was in serious trouble. The paper reported the sale must close no later than January 15, 2007, according to the terms of the purchase agreement Davis (the lead investor) signed with current Grizzlies majority owner Michael Heisley. Davis’ agreement with Hiesley calls for Davis and Laettner to purchase 70 percent of the franchise. If the deadline is not met Davis stands to lose several million dollars.

"I'm going to be patient," Heisley said. "I'm not going to get into speculation on whether he can or can't do it. We can wait until the 15th to see if the guy can deliver.

"I've been supporting (Davis' bid) from the beginning. I expect him to perform on the 15th. I have no reason to believe he won't."

Davis’ bid has been pegged at $252 million for Heisley's share, based on a $360 million franchise value. In 1995 the NBA awarded two expansion franchises to Canadian cities. John Bitove was awarded the Toronto Raptors, Arthur Griffiths the Vancouver Grizzlies. Within a few short seasons both owners where on the outside looking.

Griffiths was forced to bring Seattle businessman John McCaw and McCaw’s Orca Bay Entertainment to Vancouver to help finance the Grizzlies and the building of GM Place. Griffiths lost the Grizzlies, GM Place and the NHL’s Vancouver Canucks in short order once McCaw came to Vancouver.

McCaw first sold the Grizzlies to Bill Laurie. The NBA rejected the sale to Laurie (McCaw sold the team to Laurie for $150 million) believing Laurie had bought the Grizzlies to move the team to St. Louis. A few months later McCaw sold the Grizzlies to Heisley for $165 million (April 2000). Nine months after Heisley bought the Grizzlies (January 2001) Davis and Laettner and saying in no uncertain terms he would keep the team in Memphis, Heisley began the process of moving the team from Vancouver.

A year after buying the team (April 2001), with the NBA’s blessing Heisley announced he was moving the franchise to Memphis. After denying the sale of the franchise to Wal-Mart heir Bill Laurie for ‘suggesting’ he would move the franchise, the NBA embraced Michael Heisley’s decision a year later. In essence Michael Heisley did exactly what Bill Laurie said he would do.

The NBA expressed moral indignation when Laurie tried to buy the Grizzlies, but accepted Heisley and his assurances the Grizzlies would stay in Vancouver. Five short years later, a question that begs to be asked – would it not have been in the best interests of the National Basketball Association to accept Laurie’s bid and not moved forward with Heisley?

A key to Heisley’s decision to move the Grizzlies was based in large part on a decision by taxpayers to build the $252 million FedEx Forum for Heisley. A condition of the arena being built was the franchise stay in Memphis and play in the arena for 17 years. Needless to say the good citizens of Memphis hadn’t paid attention much attention as to how and why Heisley justified moving the Grizzlies from Vancouver to Memphis.

On Monday October 2, 2006, Michael Heisley announced that he has reached an agreement to sell his seventy percent interest of the NBA’s Memphis Grizzlies and the operator of FedExForum, to Grizzly Acquisition Holdings, LLC, to an investment group headed by former NBA player Brian Davis.

"Owning an NBA team in Memphis has been one of the most rewarding experiences of my professional life,” said Heisley. "I will be forever grateful to the people of Memphis, especially our great Grizzlies fans who supported me personally from the very beginning. I am proud of all that this team has accomplished, and confident that the future ownership will continue our success."

“I am honored and thrilled to have an opportunity to become Majority Owner of the Memphis Grizzlies,” said Davis. “I believe very strongly in the future of this franchise and in the future of Memphis. I intend to move my family to Memphis and invest money in real estate developments in this city. I look forward to working closely with our local owners and admire their commitment to the Grizzlies and the entire community. I believe they represent the heart of Memphis.”

Early in the sale process the group that owns a minority stake in the franchise (the remaining 30 percent) had a sixty day window where they could buy the 70 percent Heisley had agreed to sell Davis’ group for $252 million. Last week that group decided to pass on that opportunity. The remaining thirty percent of Hoops, LP (the group that currently owns the Grizzlies) includes: Memphians J.R. "Pitt" and Barbara Hyde, Staley and Andy Cates, Fred Jones and Elliot Perry.

As the December 1 deadline approached where the minority owners would have to decide if they would buy the remaining 70 percent, questions began to be raised in the Memphis Commercial Appeal relating to Davis’ purchase of Heisley’s 70 percent. On Tuesday, November 21 (two days before the start of the Thanksgiving weekend holiday) J.R. 'Pitt' Hyde III expressed ‘concerns’ regarding the proposed sale to Davis.

"We're as aware as anybody else the clock is ticking on this thing," Hyde said. "They say they're going to get us the information."

"There are two questions," Hyde said. "No. 1, we'd like to have the benefit of knowing who our proposed partners would be, obviously, so that we feel comfortable with them and feel like we have the same goals and objectives."

Days later the Commercial Appeal obtained copies of the Davis’ business plan when and if he took control of the Grizzlies. According to the published report the Grizzlies are projecting losses of $29.7 million this year (2006). The Grizzlies current payroll stands at $60 million. However, Davis and Laettner’s plan is to develop a bargain basement NBA franchise dramatically cutting back on the teams’ payroll.

"Davis and Laettner, based on their collective knowledge of professional basketball and the NBA, believe talented players can be recruited at lower payroll costs in order to execute the Business Plan," according to the information.

According to the Commercial Appeal: Cutting payroll is crucial to the prospective owners' plan because of two factors outlined in the information:

"The Memphis market ranks in the bottom quartile of all U.S. NBA markets by total population, media market penetration and household income."

"The team already has strong corporate and community support and it will be difficult to further penetrate the corporate community for additional financial support."

The real question that needs to be asked, if Davis and Laettner are correct in their assessment relating to the demographics of the Memphis market why would the NBA have allowed Michael Heisley to move a franchise from Vancouver to Memphis in April 2001? Did it ever make any sense to allow Heisley to move to an economically depressed market like Memphis?

As co-captains of Duke’s national championship teams Davis and Laettner, had to deal with the media spotlight focused on their basketball achievements. As the potential lead investor in an NBA franchise Davis’ has experienced the media glare few athletes would ever care to experience – being viewed as a businessman. The Wall Street Journal offered an in-depth profile of Davis’ purchase on Monday, November 27 titled “An Unlikely Mogul Attempts to Crash the NBA's Exclusive Owners' Club”. Davis offered little to the WSJ, forcing the WSJ to deal with those close to Davis.

"Brian always has had big dreams and cockiness or a confidence of achieving that. It's like Miracle-Gro with him," says Duke head coach Mike Krzyzewski. "When he got here, he was thrown into an environment on a day-to-day basis with some of the most successful young men and women at the country at Duke. And then you threw him in to a basketball environment where you have Grant Hill, Christian Laettner and Bobby Hurley on the team, he has the ego and the confidence level to feel like he's as good or better than them."

"Downtown Durham was not where I would have suspected that kind of success," says Gary Hock, president of Durham-based Hock Development Corp. Mayor Bill Bell calls the project a "catalyst" for others that have created a nucleus of new residential, office and commercial spaces. A second, larger phase of the project recently broke ground.

The WSJ report raised some serious red flags concerning Davis ability to complete the purchase. According to the report a key component in Davis’ plan to raise the money to pay the $252 million included a Baltimore property Davis owns. Davis the WSJ reported believes the property is worth $20 million. However, Baltimore city tax rolls value that property at only about $4.4 million.

"I have all the money I need to close the transaction," Mr. Davis assured the Wall Street Journal last week, adding that he would be able to reach the $54 million required for his share.

The WSJ report was followed by an Associated Press report where Davis once again refused to say how or who was going to be a part of his ownership group, simply saying he has his business affairs in relationship to the Grizzlies are in order.

"It's generally a product of just respecting the NBA process," Davis said. "We've tried to lay out the best plan we can for long-term success and that's the plan we've submitted to the league."

With David Stern in Sacramento trying to deal with the Kings arena issues, that left Joel Litvin to deal with Davis and Laettner ‘ownership issues’. The NBA had to be thrilled the Michael Heisley NBA ownership era was finally coming to an end. Six and a half years after buying his way into one of the most exclusive clubs in the world (being an NBA owner) the NBA would finally be rid of a businessman who moved an NBA franchise to a market that long-term may not be able to afford to be home to a major league sports franchise.

So what next? The sale to Davis and Laettner barring a midnight call from the Governor is dead. The Grizzlies minority owners have no interest in buying Heisley’s 70 percent. Heisley wants out. When the NBA season started two of the biggest issues David Stern faced where arena issues in Sacramento and Seattle. While both the Kings and Sonics have arena issues, neither franchise have ownership issues. And let’s not forget where George Shinn wants to keep his New Orleans Hornets.

Memphis has serious ownership issues but has a brand new arena and a long-term lease awaiting its new owner. It seems the trials and tribulations David Stern is facing never manage to slow down.

For Sports Business News this is Howard Bloom. Sources cited in this Insider Report: The Memphis Commercial Appeal, the Associated Press and The Wall Street Journal

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