Posted on: March 17, 2016

Source: The Commercial Appeal
Author: Chris Herrington

 

The Grizzlies host the Minnesota Timberwolves at FedExForum tonight, but the more interesting connection between these two franchises right now is happening off the court, where Grizzlies minority owner Steve Kaplan, a Los Angeles venture capitalist, has been pursuing a minority stake in the Wolves.

About a week-and-a-half ago, the Minneapolis Star Tribune reported on a “snag”in Kaplan’s bid to join the Wolves’ ownership group, which would require him reaching an agreement with Wolves owner Glen Taylor while also divesting himself of his stake in the Grizzlies. A couple of days ago, ESPN.com followed upwith a story couching Kaplan’s in-limbo status as exposing “drama” within Grizzlies ownership.

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These issues are mostly pretty murky, but I’ve spent a lot of time looking into them, talked to a lot of people and have access to some information, so I’ll share here what I can.

Robert Pera and Steve Kaplan were something of an arranged marriage back in 2012. Kaplan and fellow minority owner Daniel E. Straus, a New Yorker, were brought in by since-jettisoned Grizzlies executive Jason Levien to join a group that already included Pera and a large bundle of local investors, led by Staley Cates and Pitt Hyde, but including many others. The addition of Kaplan and Straus was ostensibly to shore up the bid at a time when Pera’s Ubiquiti Networks stock was at an ebb. Based on a league memo to the NBA Board of Governors prior to the purchase approval, Pera acquired a roughly 25 percent stake (and controlling ownership), while Kaplan and Straus each acquired roughly 14 percent. (Of note: The final purchasing agreement is likely a little different than the information in this memo, and some ownership details may have changed some since then, but any elements of it cited here have been corroborated with sources as generally accurate.)

In the first year of ownership, Kaplan was a frequent visitor, often seen courtside and in the locker room and, according to some, actively involved in team management. Since the firing of Levien, he’s been generally absent, seen on the court at a couple of road games but, as far as I know, unseen in Memphis.

Whether Kaplan’s closeness to Levien was an active factor in Levien’s departure, as some have suggested, or whether Kaplan’s subsequent estrangement was merely a by-product of a Pera-Levien break-up that was entirely about Levien’s own conduct, as others insist, is unclear. Regardless, Pera and Kaplan are now an arranged marriage on the rocks.

The ESPN piece includes an interesting nugget about a “dispute … over shares” between Pera and Kaplan that seems to have been the “snag” to which the Star Tribune piece alludes. Grizzlies sources decline to comment on this, but whatever it was, it seems to be an issue now firmly in the past, and no longer a hurdle to Kaplan’s departure.

Moving forward, Kaplan would have to sell his portion of the Grizzlies before buying into the Wolves or any other NBA team (he’d previously pursued the Atlanta Hawks), and the hurdle there seems to now be simply finding a buyer and agreeing on a price. The ESPN piece cites Kaplan’s asking price as “close to $100 million” for his 14 percent share based on a $700 million valuation. The valuation will be a matter of debate in any negotiation (Forbes recently suggested a $780 million evaluation), but the $100 million figure seems to derive from a straight 14 percent of $700 million. The problem with that is the $377 million purchase price that Pera/Kaplan/et al paid for the team, per the league memo, included roughly $170 million in assumed debt, with an additional new loan of $50 million. I don’t know how much of that debt remains or exactly how proportionally it is spread among owners, but debt would almost certainly impact the equity value of Kaplan’s share, so the $100 million asking price seems too tidy.

One wrinkle in all of this, which the ESPN piece reports on, is a “buy-sell” agreement among Pera, Kaplan and Straus that could trigger in October of 2017. The league memo on the sale describes this side deal this way:

In addition, Pera, Kaplan and Straus have agreed among themselves to a buy-sell arrangement that provides that after five years, and every three years thereafter, either Kaplan or Straus may submit a bid to Pera at which he is either a buyer of Pera’s interest or seller of his own. Pera will then have the option to either buy the bidder’s interest or sell to the bidder, in which case the bidder to whom Pera sells will assume controlling ownership of the team. In the event that both Kaplan and Straus submit a bid, the higher of the two bids will set the price and Pera will have the option to either buy both Kaplan’s and Straus’ interest at that price or allow the high bidder to buy his interest, in which case the losing bidder will have tag along rights.

This scenario may never manifest, but it could present a bit of real drama down the road if it did. In theory, it could even lead to a change in controlling ownership, but Pera maintains full control of the situation. Kaplan or Straus have the option to trigger it, but the resolution would be entirely up to Pera.

But if Kaplan is going to buy into the Wolves, and there’s some suggestion, in the Star Tribune story and in my own reporting, that hurdles still remain on that end, he probably can’t wait 19 months to trigger a resolution. Some in Memphis think these issues going public are a way of trying to pressure Pera to meet a price at which Kaplan hasn’t otherwise been able to find a buyer.

However it works itself out, it would probably be best for the Grizzlies if Pera and Kaplan can find an equitable divorce in the near future.

There are other implications or assertions in the ESPN piece outside of the Pera-Kaplan issue, about Pera’s general stewardship, that are worth a reaction:

There was a link between Pera’s ownership and the “cost-cutting” trades of Rudy Gay to Toronto and the Mo Speights pu-pu platter to Cleveland: I think this is conflating two different things. One of the big differences in this current ownership group, as I understand it, is that Pera is solely responsible for covering losses. Under Michael Heisley, that responsibility was shared, so that when Heisley made a cash call to his minority partners and they declined, he was able to dilute their shares.

My understanding is that, during the first year of Pera’s ownership, at least, Levien had promised to avoid the need to cover losses. But the payroll trajectory that the Pera group inherited was set to sail past the league’s luxury tax threshold. The Grizzlies were always going to make moves to avoid the tax, regardless of the ownership change. The team had given away a useful player in Sam Young the season before, amid a playoff race, purely to duck under the tax line and Michael Heisley was on the record at that point that the team would not be a taxpayer. Heisley got out before he had to confront the payroll crunch he’d created with Gay’s max-level extension.

In addition to being moves to avoid the luxury tax, trading Gay had a clear basketball rationale. The Grizzlies didn’t feel like he was good value relative to his contract at the time, which was in the context of a much smaller salary cap than the league currently has. The team’s offense had stagnated badly for more than a month leading up to that trade and the team wanted to reorient not only the team’s payroll trajectory but it’s on-court pecking order, elevating Marc Gasol and Mike Conley. It all worked, and the team made the Western Conference Finals that season.

The much-debated salary dump to Cleveland, which preceded the Gay trade, is a move I’ve never loved, but at the time a team source who was no ally of Levien’s told me that the move did indeed loosen up trade discussion for Gay that, up until that point, had yielded nothing productive in return.

But to the wider point of team spending, it’s really been a non-issue. The Grizzlies have spent up to the tax line, which I’d consider the only reasonable expectation for most franchises. They re-signed Marc Gasol to a max deal and seem prepared to make a market-value-and-then-some offer to Mike Conley this summer. After that first season, Pera loosened the purse strings beyond player payroll and the Grizzlies have made significant physical improvements to team facilities, have expanded coaching, front office and business staffs and made other organizational investments. It’s a stark reversal from the final days of Heisley’s ownership, after he’d become determined to sell, when investments in non-player payroll areas were cut back, and morale throughout the organization is palpably better now than it was in the couple of years prior to the ownership change.

As to Pera’s personal financial wherewithal, Forbes currently lists his net worth at $2 billion, while Ubiquiti stock seems to be pretty steady for the past couple of years.

Pera has been distant from Memphis and has excluded minority from meaningful participation: There’s definitely some truth here, especially as regards Pera’s distance from Memphis. But another thing that’s also better than it was before the ownership change is the relationship between local minority owners and the controlling owner. This territory is murky, and you can’t throw in a rock in Memphis without hitting a Grizzlies minority owner, so opinions surely vary, and I’d imagine most of the smaller investors have had little if any meaningful interaction with Pera. But my best read is that Pera is regarded as something of a curiosity by at least some local owners, most of whom come from traditional finance/business backgrounds and operate socially far differently than the quiet, shy, engineer-at-heart Pera. Whatever issues or complaints exist, and I have no doubt there are some, it’s a better situation than the transparent hostility that existed between Heisley and the locals, and it’s helped that Pera has empowered basketball and business execs on the ground in Memphis that are better at the local, relational aspects and who seem to have their operations functioning well.

But Pera has, to my knowledge, not appeared in Memphis this season, and his public statements have been few. Is this a problem? Probably, but I also think Heisley’s louder, more present demeanor has probably had too much influence on local expectations about what the public manner of the Grizzlies owner should be. (Full disclosure: As a bit of an introvert and nerd myself, I identify with Pera’s demeanor more than I did with Heisley’s.) There’s a happy medium between these poles that Pera would probably be advised to find. Memphis is a small city, and pretty (too?) relational. I also suspect, and this is purely a hunch, that Pera may be a little chagrined about some of his public moments early in his tenure. If he’s pulling back, empowering a staff he now seems to trust, and increasing investment in the team, that seems reasonable.