Why the Rockets will sell for an NBA record price

Les Alexander has decided to sell the Rockets, the first team in the NBA that will change hands since 2015 when the Atlanta Hawks, a team in turmoil with a small fanbase and no star power, sold for $850 million.

Three years ago, the Los Angeles Clippers sold to Steve Ballmer for $2 billion. Ballmer is one of the world’s richest men, and he had the cash. But he was buying a downtrodden franchise in a city that largely hates it, one that was destined to flounder entrusted in the hands of Glenn Rivers. Los Angeles is a massive, massive market, but the Clippers will never even own half of it.

The Rockets are one of the NBA’s premier franchises. They win lots of games, every year. They have consistently had Hall-of-Fame level players for all but a few windows in franchise history, they are one of 10 teams to have won a championship in the last 34 years, and they have two of them. They are China’s most popular team. Not long after Alexander sells the team, Houston will be the third most-populous city in America.

Forbes estimates the Rockets are worth $1.65 billion. If the franchise sold for sticker price, it would be the second-richest sale in NBA history, and Les would sell the team for more than 19 times what he paid for it in 1993. It would be a smashing success.

And it would be a bargain for the new owner.

Let’s consider that $1.65 billion number for a moment. That’s the eighth-most valuable franchise in the NBA, behind the Knicks ($3.3 billion), the Lakers ($3 billion), the Warriors ($2.6 billion), the Bulls ($2.5 billion), the Celtics ($2.2 billion), the Clippers ($2 billion, for obvious reasons) and the Brooklyn Nets (somehow valued at $1.8 billion).

The Rockets had $244 million in revenue in 2016, Forbes says, more than the Nets, Clippers, Celtics and Bulls last year. This year, they’re going to be even better, and there’s no reason to believe they will make less money. The team’s value grew by 10 percent over 2015, a number beaten only by the revenue growth of the Warriors, Lakers and Knicks, all of whom have far better TV and arena deals than the Rockets do.

Any smart investor like Les Alexander, who made his fortune on Wall Street, knows you don’t try to sell for what the franchise is worth now, you negotiate to sell for what it will be worth to the new owner. It has to be a profitable investment, no doubt, but all signs point to the Rockets increasing revenue year-over-year, and a long-term investor has huge upside potential in a couple of decades when the lease on the Toyota Center expires (2033) and the Root Sports TV deal runs out.

The Rockets lost a ton of money on the CSN Houston/Comcast/ATT/Root Sports fallout. Former writer and current brother Matt Rothstein covered it expertly at the time, if you don’t remember the case. I have no idea how long the deal goes for, but I do know the Rockets stand to make a ton more money in whatever form their next TV deal makes.

Forbes factored in the current, sub-par TV deal in its valuation. A new owner will as well, but the growth potential should at least somewhat factor into the sale price. With multiple bidders expected, Mr. Alexander can make sure it does.

But that’s long-term. Since Forbes released its valuation list in February, the Rockets have:

• Completed a 55-win season
• Made the second round of the playoffs
• Traded for Chris Paul, inarguably one of the five greatest point guards ever
• Signed James Harden to an extension that will keep him in Houston until 2023 at a contract that stays the same proportion, 35 percent, to the salary cap. If the league doesn’t grow as expected, it won’t reach the $40 million-plus number it’s projected to be close to the end of the contract. But there’s no reason to expect the league to stop growing.
• Signed Daryl Morey to a contract extension through 2022
• Signed P.J. Tucker, re-signed Nene, signed Luc Richard Mbah a Moute, signed Tarik Black
• Signed Zhou Qi to an NBA contract, reaffirming the Rockets’ dominant place in China, the NBA’s biggest and fastest-growing market
• Positioned themselves to potentially get Carmelo Anthony
• Planted their flag as the most likely challenger to the Golden State Warriors, and therefore likely to get more publicity than maybe ever before

That’s a lot of escalating factors. The Morey/Harden extensions might be the most important: this is a ready-made winner, and one with the infrastructure to sustain excellence. Daryl Morey teams don’t lose many games, even at their worst.

People can take that $1.65 billion and predict a sale number around there, but that figure is obsolete. By the time February 2018 rolls around, if the Rockets are humming, selling tickets and featured on ESPN and TNT every week, you can bet that number’s going to be much higher. The Warriors jumped 37 percent in value year-over-year in 2016. The Rockets don’t need to grow that much to easily warrant a $2.1 billion price tag.

There are more important factors than price to consider for Rockets fans when it comes to a change in ownership. But I’m calling it now: the Rockets are going to set a new NBA record for a franchise sale. The only question is how high the price will go.