The Somewhat Fuzzy Math of Howard Schultz

Gossip, Neumo's, April 5th: I feared that songs from Standing in the Way of Control wouldn't gel well with previous albums in a live setting. Control isn't quite as raw and bluesy as Movement, That's Not What I Heard, or Arkansas Heat. But it all fit together just fine. Sure, the older songs are shorter, and you can hear a slight difference if you know what you're looking for, but it's not a night-and-day contrast between the two styles.

The Sonics' ownership continues to rattle the saber with the state legislature, threating both a move to Bellevue and the sale of a team. This is getting silly; the Sonics are not about to go to the poor house tomorrow. But perhaps there's a reason the ownership group is getting antsy. I spent an hour or so today taking a closer look at the situation.

In 2001, the Howard Schultz-led investment group purchased the Sonics for a reported $200 million Since 2001, the Sonics claim to be losing $10-12 million a year. Because the Sonics are "losing" money, the investment group derives some tax advantage from their "unprofitable" investment. More on that later. In their quest for a sale, the Sonics are seeking a "competitive sales price", somewhere between $350 and $400 million.

Suppose the Sonics found a buyer at the low end of their price range today. At that point, they will have invested $200 million in the initial purchase, plus operating losses of $60 million. Their return on investment is now $350m/260m - 100% = 34.6%. By comparison, $260 million invested in the S&P 500 on January 11th, 2001 (the team's purchase date) would be worth $257 million today. It's a good thing they didn't put their money in the stock market! Overall, annual return on investment amounts to roughly 5.0%. A $400 million price tag nets the owners more than a 7% annual return—very good work, if you can get it. How long can the ownership group afford to keep "losing" $10 million a year on the Sonics? Suppose they hold the team until their Key Arena lease expires in 2010. At that point, their total net investment in the Sonics is $300 million. If they accept a purchase price of $350 million, they will have turned a $50 million profit over 10 years. That's not bad, but I see why they're getting antsy. A $50 million profit amounts to 16% growth, or a 1.5% annual return on investment, which may be lower than inflation. A $400 million price will mean only a 3% annual return. At that point, they'd be better off putting the money into Treasury bonds or something equally humdrum investment. The Sonics will make money; but the owners probably have other ways that they can make more money. That's the problem the team faces. The current owners need to sell the team in the next two years in order to turn a reasonable profit.

The unspoken assumption here is that ownership's claim of $60 million in losses is legitimate. If, in fact, the team has lost only $20 million over the past six years, Howard Schultz & co will walk away with a healthy return whenever they sell the club. Since the Sonics are owned by a private investment group, we have no way of validating their financial claims. But there are good reasons to be skeptical. There is a long history of sports teams ... how to say this politely ... using creative accounting techniques to help make the case for taxpayer subsidies. As former COO of Major League Baseball Paul Beeston once said, "I can turn a $4 million profit into a $2 million loss and I can get every national accounting firm to agree with me. " At a minimum, the Sonics' ownership should open their financial information to public scrutiny if they're going to keep getting public money.

The Somewhat Fuzzy Math of Howard Schultz Now Playing: Lil' Kim / Naked Truth / Lighters Up

The Somewhat Fuzzy Math of Howard Schultz
Now Playing: Lil' Kim / Naked Truth / Lighters Up