Tuesday, March 10, 2009

Lies, Damn Lies and Indiana Pacer Statistics

The losses have been terrible. During the last 25 years the Indiana Pacers as an NBA franchise have lost money 23 years. This year, the team has lost $30 million dollars. The Capital Improvement Board, apparently behind closed doors, decided it needed to pick up an additional $15 million dollars of operating costs at Conseco.

Of course, the Indiana Pacers refuse an independent audit of their books. The organization just wants you to take their word for the losses. And the CIB dutifully does exactly that.

Gary Welsh of Advance Indiana points out the likely phoniness behind the numbers. Quoting the blog written by Indianapolis Business Journal Anthony Schoettle, he notes that estimate that the Pacers are losing $30 million this year is triple any published estimate. Further, Welsh notes the 2008 estimates by Forbes magazine regarding the value of the Pacers franchise:

The Pacers' loss claims are completely at odds with the only publicly-available revenue analysis, which was prepared by Forbes magazine. Forbes 2008 analysis of the Pacers franchise suggests the team has made money or broken even in 7 of the past 10 years. If the Pacers disputed those estimates, they weren't saying so publicly. The Forbes analysis showed team revenues increased dramatically in the period following the construction of Conseco Fieldhouse, growing from $34 million in 1999 to $110 million in 2006. Revenues declined to $107 million in 2007 and to $101 million in 2008 following the infamous Detroit brawl involving several Pacer players and a string of players having serious run-ins with police in Indianapolis and a precipitous drop in attendance. During that same period, player expenses grew from $34 million a year to $70 million a year. The Pacers are currently paying $15 million to Jamaal Tinsley for the balance of his contract, even though he has been ordered to stay away from the team. That same analysis shows a decline in the number of wins per player payroll to the rest of the NBA from a high of 168 in 2004 to 79 in 2008.

Equally important as the team's profitability is its worth. Forbes pegs the team's worth at $303 million. That compares to the team's purchase price for the Simons in 1983 for $11 million. What that means is that the value of the team has averaged an increase in value during the past 25 years of $11.68 million, or a better than 100% return on investment in every single year that the Simons have owned the team. Taxpayers spent close to $200 million to build Conseco Fieldhouse for the Simons' Pacers in 1999. In 2000, Forbes' rated the Pacers as the eighth most-valuable NBA franchise, worth an estimated $232 million thanks to the construction of Conseco Fieldhouse. Prior to the construction of Conseco Fieldhouse, the team's value was pegged at less than $80 million. Herb Simon is individually worth $1.6 billion according to Forbes, while Mel Simon is estimated to be worth $2.8 billion.

Bottom line is this. The Pacers franchise was worth $11 million dollars when the Mel and Herb Simon bought it in 1983. By 2008, 25 years later, the franchise was worth $303 million dollars. If you were to invest that original $11 million in an account 25 years ago, in order to get to $303 million, you would have had to average interest of over 13% per year. Not a bad return.

One thing about investors is that they do not like to lose money. The above measurement of market value is a professional estimate of what the Simons paid for the Pacers in 1983 versus what a willing buyer would pay for the franchise in 2008. Doing an appraisal of a business is like doing an appraisal of a house. It's not an exact science, but you can certainly get the estimate in the general ballpark.

Would a business that fares so poorly that it has lost money 23 of 25 years, and is currently losing $30 million this year, have its market value increase from $11 million to $303 million in those 25 years? Of course not. What those figures say is that professional investors simply do not believe the Pacers' claim they lost money 23 of 25 years. If they did, the value of the franchise would be much lower. A business which consistently loses money isn't worth much and certainly wouldn't skyrocket in value as the Pacers' franchise has.

The Simons have a big incentive for the CIB to pick up $15 million more annually in operating costs. It's not just the annual bottom line for the Pacers. The additional $15 million dollars picked would make the Pacers worth much more than the $303 million the franchise was estimated in 2008. Welsh has been arguing all along that the reason the Simons want to renegotiate the Conseco deal is so that the value of the franchise goes up and they can make more money selling the team. I think he has a point.

One has to wonder why the CIB is so quick to accept the Pacers' claims the team is losing money without any proof and in the face of significant contrary evidence. Members of the Indianapolis City-County Council need to stand up and start asking hard questions about what the CIB is doing.


Citizen Kane said...

Members of the Indianapolis City-County Council need to stand up and start asking hard questions about what the CIB is doing.

If any of them could figure out what was going on, maybe that would happen. But since they either all drink the koolaid, bought and paid for by someone else, the chances of them raising is peep is next to nil because it is a given that Indianapolis's sports strategy has been a winner.

Patriot Paul said...

I look for the Pacers to be sold in teh next 12 months.

Downtown Indy said...

What other city would be stupid enough to want such a perennial money-loser in their town? I can't imagine anyplace seriously wanting to take on something so wildly unprofitable in the current state of our economy.

If the Simons want to fix the drain on their bank account, look to the player salaries. They should be negotiating with the NBA, not us. The NBA gives it all to the players instead of funding their operations.

I have NO sympathy at all for any of them.

Paul K. Ogden said...


I don't buy they are a "perennial money-loser." If the Pacers were a consistent money-loser, the value of the franchise wouldn't have gone from $11 million to $303 million.

Downtown Indy said...

Just taking them at their word, Paul. Just taking them at their own word.

But bear in mind - for some strange reason - the 'franchise value' increases along with the price tag of a new stadium. It's as if they are treated as having an equity stake in the building, somehow. So their advertiese worth is inflated, since that stadium value wouldn't transfer with them if the team moved.

Paul K. Ogden said...


Good point, though I think if the Colts decided to leave, they'd try to haul away the stadium. They think they own it.

Sean Shepard said...

Excellent post Paul. People do need to understand that at the end of the day, any losses the Simons have incurred might be completely offset or more by the increase in the underlying asset value.

Jon said...

Dear Herb and Mel, you lost 15 million on the Pacers last year (your figures) that's .0034 of your net worth of 4.4 billion dollars and my 401k lost 25-35% of it's value. Strangely I don't have any empathy for 'your' problem.