Hard Times Ahead? The Thunder’s Precarious Revenue Outlook

As the NBA moves towards the restart of the season after a long hiatus, everybody’s focus has shifted to Orlando. The off court worries about the CBA and contracts have dissipated slightly. There is still concern about the league’s finances but the discussion around the league is about the game itself.

The league’s return is a sight for sore eyes. We have all missed basketball and the joy that the game brings. However, the financial position of many teams is still fraught. Teams have faced unique pressures in this season which will squeeze margins and wipe out profits.

Oklahoma City has a team which will feel the effects of the coronavirus in more ways than one. The Thunder rely heavily on game day income to make the operation financially sustainable. The lack of fans will drastically reduce the team’s revenue going forward.

The potential implications of the Thunder having to run in the red and rack up losses has left me worried about the long term future of the franchise. There is little known about the Thunder’s ownership group and their ability to withstand losses. It feels like the right time to look closely at the team’s ownership.

The first impression of the Thunder lies with Clay Bennett. When Bennett purchased the team and came to the fore as the owner of the Seattle Supersonics, many people jumped to conclusions about the Thunder. There was an overriding belief that the people behind Professional Basketball Club LLC were redneck oilmen. Bennett’s beefy build and appearance seemed to back up this misconception.

However, analysis of the Thunder’s ownership group suggests otherwise. The Thunder do have a few owners who come from a background in fossil fuels such as George B. Kaiser and Jay Scaramucci. Aubrey McClendon was involved in fracking before his passing in 2016. These three have direct links to the natural resources industry. But the other investors operate in different fields. Clay Bennett is an early investor in Oklahoman companies. Bennett is a venture capitalist who made his money in this field. In recent years, his role as Chief Executive Officer of the Thunder has taken greater precedence.

Financial records indicate there is little money in Dorchester Capital, Bennett’s fund. The large majority of his net worth comes from the Thunder and the wealth that his family controls.

Clay Bennett’s spouse, Louis Gaylord Bennett, comes from a famous family in Oklahoma. Her father, Edward L. Gaylord, was a media mogul who owned The Oklahoman and a string of television channels. The Gaylords were a wealthy family and Bennett benefitted from this wealth when he married into the family.

Bennett’s net worth has skyrocketed in recent years. The ESPN broadcast deal has meant that the Thunder’s value has increased dramatically. Per Forbes, the team is worth around $1.575 billion.

Other hands in the pot

Another principal partner in the Thunder’s ownership is the estate of Aubrey McClendon. McClendon was an industry leader in the fracking industry. McClendon built Chesapeake Energy into a hugely profitable firm while courting controversy along the way.

McClendon used the money generated by Chesapeake to purchase a 22% stake in Professional Basketball Club LLC. At present, McClendon’s estate has been looking to sell their stake in the team. The process started a year ago with Inner Circle Sports.

Inner Circle Sports are an investment bank based in New York that specializes in sports. Inner Circle has worked across a lot of different sports and are experienced when it comes to consulting on the sale of sports teams.

The asking price is unknown but it is likely that the situation with the coronavirus will have shrunk the price needed to purchase a stake in the Thunder. It is difficult to obtain a good price in a market where prospective buyers are losing money hand over fist in their other enterprises.

Professional Basketball Club LLC is fairly evenly divided between shareholders. Bennett is believed to have a controlling interest in the team but other stakeholders such as G. Jeffrey Records, Jr. and George B. Kaiser have significant stakes in the franchise.

Records owns MidFirst Bank and a significant interest in the Thunder. Records’ financial robustness is strong compared to Bennett and the McClendon Estate. The banking industry is fairly immune to risk and economic downturn. MidFirst had a net income of $60 million in the first quarter of 2020.

Kaiser owns 19.23% of Professional Basketball Club LLC. George Kaiser is arguably the wealthiest member of the Thunder ownership group. Kaiser is reported as having a net worth of $7.6 billion due to his interests in BOK and Kaiser-Francis Oil.

Kaiser is a low-profile individual; little is known about him outside of his philanthropy, but he brings financial muscle to the group. Kaiser can afford to stomach losses as he has other revenue streams away from basketball.

The few remaining shareholders in the Thunder have significantly smaller stakes in the team: Robert E. Howard, Everett R. Dobson, William Cameron and Jay Scaramucci. The balanced investor profile is a positive for the Oklahoma City Thunder. The Thunder will not be privy to volatility in industries such as natural resources alone.

Sharing the brand

The shareholders in Professional Basketball Club LLC have used the club as an advertising vehicle for the entities controlled by the owners. It is not uncommon to see MidFirst Bank or the Bank of Oklahoma feature on the Thunder television broadcast, and a large majority of companies owned by members of PBC LLC are advertised during Thunder games. I cannot count the number of times where Ford, Toyota and Chevrolet dealerships have been promoted by the broadcast team.

This is a common practice for a lot of NBA teams. The Cleveland Cavaliers play in an arena called the Rocket Mortgage Fieldhouse. Rocket Mortgage is an entity owned by Dan Gilbert who also owns the Cavaliers. However, this practice means that the Thunder do not get a lot of corporate revenue. The only noticeable corporate partner who is not a related party of the Professional Basketball Club LLC? Love’s Travel Stops.

Love’s paid $40 million to put a jersey patch on the Thunder jerseys in 2019. This is one of the largest corporate deals done to date and it is something that PBC LLC needs to look at further: the Thunder have the ability to build a strong core of corporate revenue. The team is well known, successful and has a history of playing on national television. It is one of the few teams that is capable of attracting sponsors on a national scale.

Corporate money has to feature into the Thunder’s future financially. The coronavirus will restrict the number of fans who can be in the arena at any one time. Less fans will mean less revenue from game day operations for Oklahoma City. There will need to be another revenue stream to make up this deficit.

Earlier this year, Chesapeake Energy–one of the chief partners of the Thunder–filed for bankruptcy and went under Chapter 11 protection. The company faced mounting debts and it became more difficult for the firm to continue as a going concern. Chesapeake has accumulated $9 billion in debt and it is impossible to pay this debt off when the price of natural gas is very low (as it is now).

The demise of Chesapeake Energy is a tragedy for Oklahoma as a whole; the business employed a lot of people within the state and Chesapeake’s bankruptcy may put livelihoods at risk. It is never nice to hear about people losing their jobs and incomes. It could also result in harder times for the Thunder as a healthy business.

Chesapeake Energy has enjoyed a close relationship with the Thunder due to McClendon owning a significant stake in both entities. However, the relationship goes deeper. Chesapeake Energy agreed a naming rights deal with the Thunder organization in 2011.The Ford Center became the ‘Peake’ and a booming natural resource company became intertwined with a booming basketball team. It was a natural fit that made a lot of sense at the time on a sentimental level. The strongest aspects of Oklahoma sports and business were represented together on every national broadcast.

The financials of the naming rights deal was relatively small. The contract stated that the fee for naming rights in 2011 was just $3 million. In the agreement, it was stipulated that the fee would rise by 3% every single year. By 2020, Chesapeake Energy was responsible for paying the Thunder $3.91 million for the right to name the arena. The business’s current financial state will likely mean that the contract is void.

Professional Basketball Club LLC will have to look at finding another sponsor to pick up the naming rights to the arena. Love’s is an obvious candidate but I do not think that a deal makes sense for either side. Love’s have already spent a significant amount of capital on the jersey patch and may not want to spend even more money. In contrast, PBC LLC will likely be looking to sign a lucrative deal.

The economy of the NBA has exploded over the last five years. The ESPN television contract was the spark that lit a boom period. During the boom, the price of sponsorship has gone up massively. In 2017, the Washington Wizards agreed a naming rights deal with Capital One. The deal meant the Verizon Center would be renamed and Capital One’s branding would be splashed all over the arena. The bargain struck totaled $100 million over a ten year period.

The Thunder have an identity and history which commands such a price. The Thunder have consistently been a winning team that plays entertaining basketball. Brands like to associate with winning organizations and will pay a premium to do so.

The Thunder face a lot of challenges in the micro economic environment but these challenges are manageable. However, the macro environment for the Thunder may be trickier to deal with.

Drying up?

The coronavirus has led to millions of dollars being lost in revenue by the NBA. The lack of home games will mean that teams such as the Thunder will have missed out on a significant amount of game day revenue.

In recent years, we have seen people such as Steve Ballmer and Joe Tsai purchase teams. These owners can tap into billions of dollars in resources. Money is no object for them.

But Oklahoma City’s ownership group is very different than others around the league. The franchise is a real business for the ownership group and the team has to be in a robust financial position. One of the Thunder’s principal owners, Clay Bennett, has his wealth tied up in the Thunder. He needs the team to be profitable or his personal finances will take a hit.

Bennett’s own situation could explain why he made such an impassioned plea for all 30 teams to be included in the restart of the league. 30 teams would have meant more games and more games will result in an increase in Basketball Related Income.

The Thunder would be able to survive this problem if this issue was in isolation. However, the China issue will have seriously affected the league’s finances.

Before the start of the season, Daryl Morey triggered a showdown between the NBA and its Chinese partners by tweeting his support for the people of Hong Kong, who had been protesting Beijing’s intrusions on their civil liberties.

Morey’s small action provoked Chinese TV companies such as Tencent to suspend games, threatening to tear up the broadcast contract. China contributes a lot to the league’s foreign revenue stream. In 2019, Tencent agreed a deal worth $1.5 billion to show NBA games. The suspension of broadcasts meant that the league lost a lot of money.

To recap:

1. The Thunder are reliant on Basketball Related Income to make their finances work.
2. The Thunder do not have a strong corporate revenue stream to keep the numbers in the black when BRI dips.
3. The past and ongoing losses from the China stand-off and coronavirus ensure a significant, if not severe dip in BRI for the years ahead.

All three issues will pose a serious issue for the Thunder. It is entirely possible that Oklahoma City will be a franchise that loses money heavily over the next two years.

There are some potential solutions for Oklahoma City.

The first solution is a heavy corporate drive. The Thunder can work hard to add corporate partners who bring a lot of cash to the table, which would stabilize the books. On the other hand, this could lead to disillusionment among the ownership group. Owners would have less scope to advertise their own companies. There would be less freedom for these governors, and nobody likes their freedom being curtailed.

Another solution would be for George B. Kaiser to purchase more shares in the Thunder. Kaiser has the capital to run the Thunder as a controlling interest and he has the reserves to withstand losses. He would be the ideal candidate for a cash injection.

However, the Kaiser solution would be tricky to pull off on an emotional level. Bennett, Records and others have been closely linked with the Thunder since Day 1. It would be hard to take a step back for them.

There are no easy answers for the Thunder. The ownership group is fairly strong financially, but the organization needs fans back in the stands soon. Game day operations is the Thunder’s bread and butter. Eventually, the team will need revenue from fans to survive.