Maloofs doubted AEG revenue estimate in spurning Sacramento arena

04/20/2012 12:00 AM

04/22/2012 10:12 AM

The arena deal rejected by the Sacramento Kings' owners would have brought the team around $11 million a year in profits, according to the company that would have operated the building.

Confidential revenue and profit projections developed by Anschutz Entertainment Group were submitted to Kings co-owner Gavin Maloof last November. Those numbers outlined the fundamental assumptions behind the $391 million project – but failed to persuade the Maloofs that the deal made sense.

Even though a Kings executive provided historical input, the Maloofs dismissed AEG's projections. That played a big role in their decision to scrap the deal last Friday, according to the family.

The estimates were contained in a letter from Joel Litvin, the NBA's president of league operations. A copy was obtained by The Bee.

AEG, a worldwide operator of arenas and concert tours, predicted that a downtown arena would almost completely transform the Kings. The team would have reaped the benefit of millions in new revenue from arena signage and VIP seating – plus a richer TV contract. The windfall would have enabled player salaries, currently the lowest in the NBA at $46.5 million, to skyrocket to $75 million, according to AEG's projections.

A new building would have left the Kings with "positive cash flow of $11 million in the first year of operations in the new arena," Litvin wrote. The arena was supposed to open for the 2015-16 season.

NBA spokesman Mike Bass said Thursday the numbers "reflected our view at the time. Since then, we've revised the number up slightly to $13 million to reflect additional projected revenue from team sponsorship inventory."

Those numbers didn't include another $15 million the Kings expect to receive that year under the NBA's new revenue-sharing plan for small-market clubs, Litvin wrote.

He said AEG's estimates included input from John Rinehart, the Kings' senior vice president for business operations, and NBA marketing officials.

Maloof family spokesman Eric Rose said the team "provided raw historical data" but no analysis or projections.

What isn't known is how AEG's estimates of profits compare with the Kings' current financial picture. Co-owner Joe Maloof said last weekend the Kings are "one of four or five teams making money." But the Maloofs haven't given a more specific breakdown of team finances.

The Maloofs' finances are an ever-present issue in the arena controversy. City officials suggested the Maloofs abandoned the arena deal because they're short of money – a notion flatly rejected by Joe Maloof. "We have tremendous personal wealth," he said over the weekend.

The family owns nearly $330 million worth of stock in Wells Fargo & Co., according to filings with the Securities and Exchange Commission. Still, the Maloof fortune has shrunk in recent years. The family lost controlling interest in the Palms Casino to creditors last summer.

To pay for their share of the arena, the Maloofs were going to borrow $67 million through an NBA line of credit. The NBA had agreed to simply contribute another $7 million, roughly the rest of the Maloofs' share.

AEG, meanwhile, had committed to paying about $59 million toward the arena's construction, and the city was to put up $255 million. The city would have owned the building, and AEG would have run it. The Kings would have been a tenant.

With the Maloofs' rejection of the deal, the team's future is again in doubt. The Kings will play next season at Power Balance Pavilion and say they still want to work out a long-term arrangement with the city, either at a renovated Power Balance or a new building. Mayor Kevin Johnson has said he is skeptical of their commitment to Sacramento.

While the Maloofs were also upset with certain terms of the arena deal, their dismissal of AEG's numbers was a key reason they say they walked away from the project.

In a news conference last Friday, co-owner George Maloof scoffed at projections that the team would take in nearly $160 million in total revenue, including TV dollars and other sources, in the first year.

"A lot of other (NBA) owners came up to to me in the last few days saying it's the craziest thing ever, it's crazy," he said last week.

The family's economic consultant, Christopher Thornberg, said at the news conference that AEG based its projections on the Kings' performance in 2005 and 2006 – when the team was a contender and the Sacramento economy was overheated by a real estate boom.

Separately, Thornberg has also said the deal would be an economic disaster for the city. City officials dispute that.

According to AEG, the team would have collected about $60.4 million in ticket revenue in its first year downtown. Thornberg said ticket revenue would have had to nearly triple from the current levels for the Kings to meet AEG's projections.

He acknowledged an improving economy, and the allure of a new building, would improve the team's popularity – but he said the team wouldn't suddenly be awash in money. A more likely scenario: The team would fall well shy of AEG's estimates.

"I didn't say they wouldn't see an increase in revenue – what I said was they were going to come up $5 million to $15 million short," he said this week. "It's just puffery."

AEG has consistently declined comment on the controversy.

But the company clearly was factoring in new revenue streams when it developed its projections for the arena. In an interview last month, AEG Chief Executive Tim Leiweke said corporations would line up to become "founding partners" – advertisers paying big dollars to slap their names on lounges and concourses throughout the building.

The team would get $5.4 million a year from those advertisers alone, according to the estimates submitted to the Maloofs.

In its forecast, AEG said the Kings' success also would depend heavily on a new TV deal worth $23.7 million a year. That would be roughly double the team's current deal with Comcast SportsNet, according to industry experts. Comcast has said it would bump up the fees if the Kings make a long-term commitment to Sacramento, but it hasn't said by how much.

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