NBA – How to turn $85 Million into $1.65 Billion and get a 13% annual return!

On Monday, the Houston Rockets’ ownership (Les Alexander) acknowledged that the NBA team is now for sale.  Purchased 24 years ago for a mere $85 million, Forbes is estimating that the team will fetch about $1.65 billion (give or take a few hundred million, but who’s counting?).   Rockets’ owner Les Alexander is 74 years old, and he is ready to cash-out now after discussing the matter with his family.

Les Alexander has been a terrific owner and has given Houston sports fans their only two professional championship banners in 1994 and 1995.  According to the Houston Chronicle, the Rockets have posted the NBA’s fifth best record and second-most winning seasons during Alexander’s ownership period.  Les Alexander has regularly stepped-up to pay the price needed to secure All-Star basketball talent (such as Clyde Drexler, Yao Ming, Tracy McGrady, and, of course, James Harden’s recent $40 million/year contract extension).  Having hired a successful executive and management team, Alexander has also uniquely bonded with the Rocket’s ticket-buying fans over the years by not letting his team intentionally lose games (aka “tank”) to rebuild.  Les and his family will now reap significant financial benefits from years of mostly solid decision-making and, importantly, building a successful fan base both in America’s fourth largest city and millions more living in China who became Rockets’ fans during Yao Ming’s nine years playing for the team.

Let’s be honest.  Les Alexander took a significant risk in purchasing an NBA franchise in the 1990’s when Michael Jordan’s best days were nearing an end.  The NBA’s television revenue, while improving, was nowhere near today’s amazing $2.7 billion annually paid by ESPN/ABC and TNT (which equates to $90 million/year for each of the 30 NBA teams).  During the 1990’s, NBA team owners depended a lot more on local television and radio broadcasting revenues as well as season and game-day ticket sales to pay the bills.  After his Houston Rockets won two consecutive NBA championships, Houston sports fans could survive a few leaner years by gazing into the rafters to see the two NBA championships with Captain Les Alexander at the helm.  The fans believed in their owner’s resolve to field a winning team nearly every season.

From a business perspective, major league sports franchise owners live in a very small neighborhood of their own.   Owners obviously need deep pockets to invest the kind of money required to buy a sports franchise, but, unlike your local neighborhood Subway sandwich franchise, very few of these professional sports league owners/investors ever lose significant money year-to-year.  In actuality, most sports franchise owners watch the value of their initial investment grow by leaps and bounds during their tenure.  The idea is to buy low, sell high, right?

Example – Let’s say the Houston Rockets simply broke even every year (they don’t – the Rockets turned an operating profit of $68 million in 2016).  If you take Les Alexander’s $85 million initial investment in 1993, it will have earned a nifty 13% annual interest rate, compounded annually over each of the 24 years, if the team sells for the estimated $1.65 billion this year.  Again, there were no guarantees in the 1990’s that the NBA’s television money would blossom or some upstart competitor (such as the American Basketball Association of the 1970’s) would try to compete for the professional basketball fans’ money.

So, timing is everything.  From paying the right price at the right time to starting your ownership era with two consecutive NBA championships, Les Alexander has been a very smart investor whose timing (along with bit of good luck) has worked exceptionally well for him and for the fans of the Houston Rockets.

Next???  Do you feel lucky…well, do ya?