Among the many reasons that it’s nice to be a billionaire hedge fund manager: If you want the ultimate status symbol badly enough, you can buy it, even if the price looks inflated. That is just what Avenue Capital Group co-founder Marc Lasry — tied for No. 40 on Alpha’s Rich List, Second Team — did when he and his longtime friend Wesley Edens, a principal and co-chairman of the private equity and hedge fund firm Fortress Investment Group, agreed to buy the Milwaukee Bucks for $550 million. It was a record sum for a National Basketball Association team, and the team with the worst performance and attendance record for the 2013–2014 season at that.
But the Bucks could turn out to be an event-driven asset, headed for a big rise in value thanks in part to revenues from a new arena the NBA says the new owners must build — and the new owners have the perfect hedge in place in case the arena turns out to be too expensive. The NBA has agreed to buy the Bucks back from them for a reported $575 million if the arena is not under construction by fall 2017, in which case the league might turn around and sell the team to a new owner who moves it to another city. The biggest risk Lasry and Edens face is that as outsiders with personal fortunes, they’ll incur resentment from the citizens of Milwaukee if they insist on using taxpayer dollars for the facility or if they’re the cause of the Bucks leaving town.
Lasry and Edens are awaiting NBA approval and would not comment before the deal is official. But at a press conference in Milwaukee in April, they said they would soon be spending a great deal of time in town. “We’re committing substantial resources,” said Lasry. “We want to build a great team, and we want to build a great arena.”
The Bucks’ current home, the BMO Harris Bradley Center, is 26 years old. Marc Marotta, chairman of the center, has said that it suffers from a leaky roof, damaged seats and other signs of age. More to the point, a state-of-the-art arena could boost the value of the team.
“The Bucks play in old arena that doesn’t have the amenities that newer ones do,” says Jeff Phillips, a managing director at Stout Risius Ross in McLean, Virginia who analyzes valuations for professional sports teams. New arenas, notes Phillips, feature upscale restaurant, retail spaces, suites and club seats that can drive up revenues for the owners.
It isn’t that Lasry and Edens are not putting anything into the arena. Lasry and Edens have pledged to pay $100 million of the cost, while former owner Herb Kohl has said he will donate $100 million of his own. But estimates are that building the arena will cost about $420 million. Who will pay the rest has been a subject of much discussion in Milwaukee since the announcement of the purchase. At the press conference Kohl talked about how a new arena would contribute to downtown activity. “This presents a good choice to the citizens.....you can make a reasonable public investment if it comes to that versus the alternative, everything goes poof,” said Kohl.
However, residents of five counties in the area are already paying a 0.1 percent sales tax that has helped finance the Milwaukee Brewers’ baseball stadium. “There’s no stomach for more public financing,” says Steve Taylor, a Milwaukee County supervisor. “People here aren’t so concerned about a couple of billionaires buying a team, they just know that if they’re asked to pay for it in a referendum it will probably fail.”
The threat of the Bucks leaving town doesn’t worry Taylor, who says he prefers college basketball to the Bucks anyway, partly because of their poor performance record.“If you continually put out a poor product, it’s hard to get people to show up,” the county supervisor says. “If you tried to do all this right after an NBA championship, things would be different.”
It’s a lot easier to get money behind you when you’re winning. Now, there’s a caveat familiar to all hedge fund managers.
