Rockets is the 4th highest valued franchise in the NBA per Forbes

What's amazing is that Les is making this kind of money with no one coming to the games! Imagine how much the Rockets would make if our attendence was decent.

 

He should be seeing a nice influx of money as soon as we got McGrady with all his jersey sales and stuff. Im sure a lot more packages were bought after that move as well.

Just because people dont' always attend doesn't mean the tickets weren't bought up by coorporations or people that couldn't make it to the game after buying the packages.

 

check out the clippers. look at sterling picture. it's worth it. ooooh baby. what a slut.

 

Yeah, but when you write down an asset, GAAP dictates that you write down to the fair value. And in the case of Mo and Spoon, we have no reasonable experience as to their fair value (which I think is none). So the only way to estimate this fair value (hurts me to say it) is the price of their contracts, in other words what they are earning. So sadly we can write down anything.

PS. The cynic in me says that they are liabilities instead of intangible assets. But there's no way GAAP would allow it.

 

You don't have a single clue what you are talking about. You NEVER use ROI over multiple years. Why? For all you know, Les could have poured $284M of HIS OWN MONEY and increased the value of the company to $369M. In this case he LOST $284M - net income - tax deductions over 11 years.

If you are going to use anything you would have used Return on Assets (ROA). Even if you assume the Rockets have NO liabilities (which is impossible), they would have total asset of $369M, they only only have an ROA of :

$35.5M / $369M = 9.6%

That's much lower than the amount of return I would expect if I was an investor, especially if I and my buddies have $369M tied up in it. Hell, even US treasury bonds pay higher interest.


Not to mention the Rockets are not solely owned by Les, who is simply the largest investor. So the $284M gain in value does not all belong to Les, nor does the $35.5M operating income.

 

You are sooo wrong. The book value for Les is 85 million which is what he paid for. 35.5 mil is EBIT, he still has to pay tax. But still that ROE is very high. You are talking about a low-risk business with very good annual cash flows.

Now even you use the market value of shareholders' equity, A 10% return with a low-risk business is not bad. Lots of investors would be happy with that number. By the way, can you tell me which US treasury bonds pay higher interest than 10% today?

 

By the way, I hate to say this:

Les got from 85 mil to 369 mil in 10 years (1993-1994). On capital gains only, his annualized return is around 11%. But he also received "coupon" payment every year. I won't be surprised that his annualized total return is around 20%, the business has low risk as well. The franchise has monopoly power in Houston in basketball. Les also gets enjoyment from watching the team play. What more can you ask for?

Plus, his investment probably is not much correlated with the stock market return. (think about the market crash from 2000-2003). This adds more attractiveness to the investment.

It is a good business up till now. Insiders can calculate its expected return easily by counting the expected TV revenues, T-shirt/logo/Toyota center/gates receipt. My guess is that the return might be lower in the future, but in today's environment, if you can get 10%-15% annual return, it is not bad.

 

The book value is 85M IN 1993, which has nothing to do with current market valuations. This wasn't a problem in the past when everything was recorded at historical cost. However, with the issuance of FASB SFAS No. 143 and 144 (regarding goodwill and other intangible assets), FASB had to compromise by allowing certain assets to be valued at current market values.

One of the biggest ones that comes to mind is marketable securities (think stock from new investors). In this case, Les' worth went up, but he's not seeing a single penny until he sells his shares, or declare a dividend, in which (with the Rockets most likely being a C Corp), he will be double taxed to the extend of something like 75% tax rate. So his cash flow is hardly significant.

Not to mention the 85M does not include the entirety of the players' contracts (an intangible asset that is significant to the future economic situation of the franchaise) but is included in its entirety circa 2004. This alone adds tens of millions to the books of the Rockets. The Toyota Center, which did not exist in 1993, also is on the books (at least the part Les paid for) in 2004, that's another couple of million.

Also, as I've said already, you have no clue how the value of the Rockets appreciated. While it is possible Les got it from capital gains, you or I have no clue whether it is true or not. Since Les owns the Rockets and pays the bills, it is very possible that he further spend/invested in the Rockets. What does this mean? It means the Rockets' assets go up (a debit entry). But on the other hand, a shareholders' equity account (most likely capital stock and APIC) is credited instead of liability account. So suppose:

Les invested $200M more in the Rockets, the value of the Rockets goes up by $200M, but not Les' wallet (in which he actually loses cash flow).

 

Saturday night's all right for fightin' ..... about accountin!

 

I suppose you are looking from the accountant's point of view. What I look is from shareholder/investor point of view.

What happened is that Les paid 85 mil for the company, his shareholders equity increases to 369 right now.

You are arguing he might even invest more in the corp (either through recapitalization or loan). You know what I highly doubt it. From that Forbes number, they have done a pretty good analysis. What happened is that Les's corp invested more, and that's the corp investment not Les's personal investment.

Even Les lent more money to Les's corp, that would be on the corp's debt side. When Les sells the company to some investor A, the company now owned by investor A would still repay Les money with interest.

I don't believe Les has recapitalized the company by investing more.

So we should be pretty sure the capital gain for Les is from 85 mil to 369 mil. Les might not have received much dividend from Les' company, that I agree with you. Even without dividend, the historical annual return is still around 11% with low risk and not very much correlated with the stock market return. I say it is a good deal.

 

The argument goes both ways. You are saying Les corp invested in the Rockets but not Les alone. Well, when Les decides to sell the Rockets, he's also not going to receive the 369M in its entirety.

There's also no reason to believe that either Les or any other investor didn't further put money into the Houston Rockets. In fact, it is impossible for that to be true. When Les first purchased the Rockets in 93, he was the sole investor. Circa 2004 (according to Forbes) there is AIG, SWA, Anheuser-Busch, Landry's Restaurants and Polaroid. That alone increases the value of the Rockets with no material effect on Les' future cash flow.

Either way you look at it, when it is all said and done, Les' annual return won't be 11%.

 

Huh? These are corporate sponsors. Are you saying they have the claim to the shareholder's equity on Rox's balance sheet??
Not really, they are paying to use Rox's name right. They are adding to the Rox cash flow therefore raising Rox's valuation.

Les owned the company, the company made the physical investment, but the investment didnot DILUTE owners' equity. On the balance sheet, both the assets and liability might increase, but Les still owns 100% of the owners' equity. Therefore any future sale of the team, the proceeds 100% goes to Les. The new owner would assume the ownership's equity while the balance sheet of Rox corp. remains intact.