If the people have spoken, they want Jeremy Lin 1.8 million likes to 1.1 million likes for Carmelo Anthony. Unfortunately this simplified measure of perceived influence is not going to solve the Knicks issues. There are a few good articles which are going through the news of the last few days including this one by the Houston Press. A new better one about the drop in market cap of MSG versus the cost of just matching the offer.
MSG has a billion and a half dollars in revenue and over $800 million in costs which include player salaries. Suddenly an average $8 million year contract doesn’t seem so much, right?
From MSG company filings, total control of MSG is in the hands of the Dolan family.
As of July 29, 2011, the Dolan family, including trusts for the benefit of members of the Dolan family, collectively own all of our Class B Common Stock, approximately 3.6% of our outstanding Class A Common Stock and approximately 70% of the total voting power of all our outstanding common stock. Of this amount, Charles F. Dolan, a director and the father of the Executive Chairman, and his spouse control approximately 46% of our outstanding Class B Common Stock, approximately 1% of our outstanding Class A Common Stock and approximately 32% of the total voting power of all our outstanding common stock… The Dolan family is able to prevent a change in control of our Company and no person interested in acquiring us will be able to do so without obtaining the consent of the Dolan family.
Charles F. Dolan, members of his family and certain related family entities, by virtue of their stock ownership, have the power to elect all of our directors subject to election by holders of Class B Common Stock and are able collectively to control stockholder decisions on matters on which holders of all classes of our common stock vote together as a single class.
This means Charles F. Dolan doesn’t have to listen to anybody. He doesn’t need to listen to the fans, and he doesn’t need to listen to the press. He can do whatever he wants with the Knicks, the Rangers and even the Rockettes (MSG owns Radio City Music Hall). He can even screw over Dish subscribers who could not watch Breaking Bad last night because he also owns AMC (separately from MSG). If he sees the value in retaining Lin, he has 24 hours to act on it, otherwise Lin’s going to be a Rocket.
I’m not going to go into the debate of what is right to do. Obviously the strategy for Houston is to make it prohibitively expensive for Dolan to keep Lin on the Knicks. With the Knicks having expensive star players already and having recently added some newly acquired point guards, the Knicks have publicly signaled that they are ready to dump Lin and have a great excuse of an escalating luxury tax. Of course the prior message from the Knicks was that they would match any offer, so this seems to be the Knicks publicly negotiating in bad faith.
(so here’s where I start making stuff up based on likely strategy)
The Knicks have challenged all other teams to make an offer so that they can keep the offer price down and get Lin back. This is based on the theory that teams would likely not make offers to Lin, rather using their limited time to go after players that they feel could be signed and kept. This limited the competition for Lin’s contract and theoretically this would have kept his price low to be brought back by the Knicks.
Rockets owner Leslie Alexander and GM Daryl Morey might have just made a bet or they are truly desperate. In the second case:
1) The Rockets are willing to spend more than Dolan on Lin
2) The value of Lin is in his marketing appeal as much as his skills
3) Dolan has over-committed on other stars and will not be willing to endure the pain of an additional luxury tax hit.
4) The Rockets get Lin, and it’s a WIN, but it’s not cheap
the flip side if they are betting that Dolan will keep to his word and bring Lin back
1) Dolan decides to spend infinitely on Lin, so he matches the Rockets offer and decides to simply pay the luxury tax.
2) Houston now has cap room for other acquisitions
3) Houston still looks good as an honorable team for promising to make an offer verbally and then following up on that for a good player.
(now I’m back to SEC filings)
NBA Luxury Tax. Amounts in this paragraph are in thousands, except for luxury tax rates. The NBA CBA provides for a luxury tax that is applicable to all teams with aggregate player salaries exceeding a threshold that is set prior to each season based upon projected league-wide revenues (as defined under the CBA). A team’s luxury tax for the 2011-12 and 2012-13 seasons will continue to be generally equal to the amount by which the team’s aggregate player salaries exceed such threshold. Beginning with the 2013-14 season, the tax rates for teams with aggregate player salaries above such threshold will start at $1.50 for each $1.00 of team salary above the threshold up to $5,000 and scale up to $3.25 for each $1.00 of team salary that is from $15,000 to $20,000 over the threshold, and an additional tax rate increment of $0.50 applies for each additional $5,000 (or part thereof) of team salary in excess of $20,000 over the threshold. In addition, for teams that are taxpayers in at least four of any five seasons beginning in 2011-12, the above tax rates are increased by $1.00 for each increment. For the 2011-12 season, 100% of the aggregate luxury tax payments collected by the league will be used as a funding source for the revenue sharing plan described below; beginning with the 2012-13 season, 50% of such payments will be used as a funding source for the revenue sharing plan and the remaining 50% of such payments will be distributed in equal shares to non-taxpaying teams. As of March 31, 2012, we do not project the Knicks to be a luxury tax payer for the 2011-12 season.
The Luxury Tax. The total penalty is determined by the cost of all players, so the change of any single teammate will change what will be owed. If other players had not already been signed, then this would not have been as-large an issue. That said, the last one in the pool is the one who will be blamed for making it overflow. Other stars have some expensive contracts, but none of them probably have the big lift at the end.
Total company revenue over the last four reported quarters: 2011 Q4 – 2012 Q3 = $1.515 Billion = $1,515 Million and YOY 3rd Quarter revenue bumped up from $330MM to $400MM. That’s a nice jump, and I wonder how much JLin had to do with that.
Total net income for the same time period: Only $105.61 Million (That’s ONLY 7% of revenue) EBITDA is $287 Million, but this is a company that owns property as part of its core. The addition for next year that will impact MSG is their first piece of west-coast real-estate. They just bought The Great Western Forum in Los Angeles for $23.5MM in June, and that also includes provisions where they will spend an additional $50MM to renovate it. This is likely to promote their musical interests (FUSE) and perhaps to be used as a shield against revenue.
Cost of revenue is about 58% of total revenue, and I guess from other sports teams the average is 50% for player salaries, so this doesn’t seem excessive. If the total cost of revenue was $871 Million across the last four quarters, then the average salary of Lin at $8MM per year is only an impact of 1% of that. That 1% increase for Jeremy Lin sounds pretty darn fair.
Dolan has already made more than the cost of the lifetime value of the contract based on market cap. The decline in MSG today from the anticipated information that Jeremy Lin will no longer will be with the Knicks should be his indicator that he needs to keep him for 1) the fans 2) his company’s valuation.
All financial records found at http://investor.msg.com/sec.cfm and http://investing.money.msn.com/investments/stock-income-statement/?symbol=us%3AMSG&stmtView=Qtr