Memphis Blues
Tom Van Riper, 01.15.10, 05:40 PM EST
Forbes Asia Magazine dated January 18, 2010
Michael Heisley has lost a mountain of money running an NBA team using the same strategy that made him a fortune in private equity.
Memphis Grizzlies owner Michael Heisley insists that he enjoys the perquisites and diversions that come with membership in the National Basketball Association owners' fraternity. Heisley just doesn't sound all that enthusiastic about owning this particular team. "Sometimes I sit back and wonder why I did it," Heisley says.
There's plenty to ponder. The team under Heisley's ownership has been rather dysfunctional. The 73-year-old billionaire financier bought the Vancouver, B.C. team for $160 million in 2000 and moved it south a year later to Memphis, Tennessee. The Grizzlies have lost money ever since in each season save one, and tore through eight head coaches and four player personnel chiefs. Over the past four seasons the team has a cumulative winning percentage of .357, fourth worst in the league (among 30 teams), and the lowest attendance, 2.28 million.
Worth $257 million, the Grizzlies are second from the bottom in value and the third most leveraged (with debt 58% of enterprise value). The NBA team average debt to value is 29%.
Heisley has been contemplating his exit for years but can't find a buyer at his asking price of $300 million-plus, including from among his minority partners. Many feel burned by his failed prior attempt to sell the team. Animus among the owners has driven away talented executives. Coaches show little interest in coming.
Heisley, with a net worth of $1.5 billion, can shrug off his NBA investment as not one of his best. The team has had a cumulative operating loss of $92 million since Heisley bought it, and he's had to fund those losses and service the debt out of his wallet. The minority investors' agreement limited their capital calls to $3 million, and they refused to throw more money in when the league directed the Grizzlies to convert some of its debt to equity. Heisley's infusions have diluted the junior partners' stake down to less than 3%. Given his cash infusions since buying the Grizzlies, Heisley could very well end up selling it at a loss. "I'll get nothing out of this other than ill will in Memphis."
Tennessee basketball fans had reason to believe things would be better when Heisley moved the team. The Chicagoan built his fortune borrowing, buying and flipping distressed assets through his Heico ( HEI - news - people ) Holding network of companies. The Grizzlies were a distressed asset, too, a losing team stuck with an unfavorable exchange rate. The arena pulled in revenue in Canadian dollars that exchanged for only 60 U.S. cents to pay players. When he bought the team, Heisley said he would keep it in Vancouver, but he turned tail and moved it to Memphis. Upon arrival he sold 30% to a Tennessee group of investors, including FedEx ( FDX - news - people ) founder Frederick Smith, AutoZone ( AZO - news - people ) founder Pitt Hyde and asset manager G. Staley Cates.
The new venue, however, which was paid for and owned by the city of Memphis, wouldn't be ready for three years. So the club played at the antiquated Pyramid Arena beginning in 2001 for three seasons and lost some $23 million in that time.
When the new arena went up in 2005 it brought in a naming rights contract with FedEx worth $90 million over 20 years. Heisley needed cash immediately, so he cut a deal to securitize that revenue into a bond. Bondholders would get a coupon of $4.5 million a year from FedEx and Heisley got a lump-sum payment of $60 million.
That was the first big mistake, says Grizzlies minority partner Cates. Stripping out that asset has slashed "tens of million of dollars" from the team's value to a prospective buyer, he says. Marc Ganis, a consultant with SportsCorp Ltd. in Chicago, agrees. "He took the quick arena deal, part of a strategy to take as much cash out as possible and then sell, the hallmark of a flipper. Only no one wants to buy it."
Heisley defends the strategy, saying that securitizing the naming rights provided cash to improve the balance sheet and borrow money more cheaply. "Anyone who thinks I put that money in my pocket is crazy," he says.
The first few years in the new building were good for the fans, including a three-year run in the playoffs, but the club still lost bundles of money as it invested heavily in player payroll, which cracked the league's top ten, and paid several million dollars a year in debt service. Plus, there was no getting around the limitations of Memphis: middling household incomes and few large corporate sponsors in western Tennessee to tap beyond FedEx, AutoZone, International Paper ( IP - news - people ) and a couple of others. Frustrating Heisley was the lack of even a single playoff win to show for his expanding payroll.
Heisley began taking matters into his own hands, with mostly disastrous results. He ordered the payroll to be slashed and ran off President Andrew Dolich, who had built a solid initial season ticket base. Respected General Manager Jerry West, a Hall of Fame former player who had put together the Grizzlies playoff roster, walked away, too. By 2006 season ticket sales had dropped from 11,000 to 9,000, and the club's payroll fell into the NBA's bottom five.
The good news for Memphis is its promising young talent: Rudy Gay, O.J. Mayo and the ever improving Marc Gasol. But fans can't count on much help arriving soon. Heisley says he plans to keep the payroll under $50 million, which would keep the Grizzlies near the bottom of the league.
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