Minority owners face unceremonious demise if Sacramento Kings move to Seattle

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In both Sacramento and Seattle, plenty of folks are scratching their heads right about now. When news broke Monday that Sacramento Kings minority owner John Kehriotis is considering bidding on the team, shock, confusion and skepticism ruled the day. With some time to think about it, it’s difficult to tell if his bid will come to fruition, but we can certainly offer explanation on why he’d step up to the plate today.

Kehriotis and his team have been left out of the conversation. And when both the Seattle-based group led by Chris Hansen and the mayor’s office in Sacramento cut them out of the discussion, the limited partners’ investments in the Kings and their futures as NBA owners were put into jeopardy.

So with his back against the wall, Kehriotis has come out swinging.

A lot has been made of the $525-million valuation of the team.  There are folks out there who don’t understand that the Kings aren’t being sold for that figure.  Rather, the Seattle group has an agreement to purchase 65-percent of the franchise from the Maloofs and Bob Hernreich, which equates to an estimated $341-million sale.

There is a nasty bit of information hiding that Hansen, the Maloofs and probably even the NBA don’t want you to consider.  That the fate of the remaining 35 percent of the team, including Kehriotis’ stake, is scheduled to meet an unfortunate reality because it’s not being brought along in the deal to Seattle.

The minority owners in Sacramento have been handed their death warrants.  They are not needed, wanted or welcome in the Pacific Northwest.  If the deal with Seattle goes through, they will be wiped from the record books within months of relocation, most likely without receiving a penny for their troubles.

How is this possible? It’s called dilution and trust me, they know it’s coming.

Written into the 1992 operating agreement for the Kings is a section on “Additional Capital Contributions”. Within this portion of the contract, it is clearly spelled out how general partners can make a “call for additional capital contributions” from the minority owners for any and all expenditures.

Now some might be wondering why Hansen or Microsoft CEO Steve Ballmer would need funds from a group of California-based minority owners. They really don’t.  But why not force the limited partners to pay a portion of the $290-million construction costs for a new arena in Seattle’s SoDo District?

What would a call for capital contributions look like for that complex? It’s a pretty basic formula. The minority ownership block currently owns 28 percent of the club with an additional 7 percent sitting in bankruptcy court. As a group, they would be on the hook for roughly $81.2 million to build a new arena in a different city even though they had no say in the team’s relocation.

If the general partners send out a written “contribution notice”, the minority owners have 20 days to come up with their portion of the capital contribution or face default. And what exactly happens if they can’t pay up?

Dilution.

Contribute to building a new stadium in Seattle or have your ownership stake reduced.

If the $525-million valuation of the franchise set by the Hansen-Ballmer group holds up, then the initial capital contribution of the minority owners would be worth a 15.5-percent stake in the club. But everyone involved knows that valuation is overblown. So that 15.5 percent could easily grow if the fair market value of the franchise is set at a lower dollar amount. At a fair market value price of $400 million, the initial capital contribution of the minority owners would equal more than 20 percent of the team.

And that is just the first go-around.

As the new general partners, the Hansen-Ballmer group can continue to make capital contribution notices for operating expenses, cost overruns, basketball-related expenses and more. They have carte blanche to call for additional funds until the minority owners either run out of cash or say uncle.

So let’s get back to that original $525-million valuation. Is that really an accurate number (as the value of 100 percent of the team) or is $341 million a more concise figure? Because the minority interest that makes up $184 million of the ownership group has very little chance of survival.

The next logical question might be to ask why the minority owners don’t just sell their stake in the team. There are two issues with that suggestion. First, the Maloof family left them out of the lucrative deal to move the team to Seattle. Second, who would buy an overvalued asset that is about to get cash called for its percentage of the $290-million stadium deal?

The answer is no one. This is how business is done all the time in America and the Kings’ minority owners will be no exception. That is unless they decide to do something about it, like defend their right of first refusal or make a massive bid to purchase the team on their own.

Of course the minority owners would need to have the money to buy the team if they want to walk through the narrow door that is the right of first refusal. And for the sake of full disclosure, this dilution scenario could play out in Sacramento as well.  But it would take considerably more time because the ownership stake is being asked to pay a substantially lower buy-in for a new entertainment and sports complex.

So Kehriotis is making his move. He is fighting for his investment and for the team that he has been part of for a very long time. Will he come up with the cash to buy the Kings, build a new arena and still have a enough capital to survive the NBA vetting process to become a majority owner?

Only he knows the answer to that, but keep in mind that he didn’t make this situation.  He is just playing the hand that he was dealt.

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About: James Ham

James Ham provides coverage through news analysis and in-depth interviews with Kings players and staff. James is also one of the producers behind the award-winning, independent documentary "Small Market, Big Heart". James graduated UC Davis with a degree in history and is happily married with two children.