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NBA Free Agency: How Much is a Superstar Really Worth?

By  +Follow July 1, 2014 1:29PM
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NBA free agency began Tuesday morning, and the superstar-rich class is juicy enough to make any NBA owner salivate.          

All-stars LeBron James, Carmelo Anthony, Dwyane Wade, Chris Bosh, Luol Deng, Pau Gasol, and others will shape the NBA’s power landscape for years to come. Their decisions will bless certain franchises with annual championship contention. They will also condemn others to bottom feed their respective conferences, praying for draft ping-pong balls to fall their way each June. 

Although the allure of a championship comes first for players and fans, the NBA is a business above all else. Owners not only want to sign these superstars to compete for a ring, but also to increase revenue and enhance the value of their franchise.

According to data, signing a superstar (or losing one) has a colossal impact on a team’s valuation. Although owners pay these players up to $25 million per year, their long-term value could potentially be in the hundreds of millions. Here’s how.

The NBA Boom

The NBA is in the midst of an incredible team valuation boom, a multi-year trend with no end in sight.

With the value of media content increasing annually and huge viewership growth overseas, the average NBA franchise is now worth $634 million – a 25% increase year-over-year and a 70% increase from pre-recession levels in 2007, according to Forbes. These growth numbers classify an NBA franchise as one of the fastest-growing financial assets in the world.

Many teams have outperformed this astronomical pace, while others have missed out on this boom with stagnant valuations. The trend behind this is clear—superstar players drive a team’s valuation to outperform the NBA’s pace, while losing a superstar could destroy hundreds of millions in value.

For instance, the Cleveland Cavaliers have underperformed the league’s valuation growth by 64% since they lost LeBron James. Meanwhile, trading for Chris Paul and developing Blake Griffin into superstars enabled the Clippers to outperform the league by 17%. Calculations methods are explained below.

The Numerical Impact of a Superstar 

The Superstar Value Added (SVA) is a concocted metric that represents the absolute effect of signing, trading for, or drafting superstar on the valuation of an NBA franchise. To calculate SVA, one calculates a franchise’s valuation growth during a superstar era minus the average NBA franchise growth rate during the same time frame.

SVA = (Franchise value growth during superstar era) – (Average NBA franchise growth during same time frame)                        

Thus, the SVA calculates the effect of the superstar(s) on a team’s valuation, discounting the league’s overall growth.

Of course, the metric isn’t perfect. Many external factors affect a team’s valuation—the local economy, media contracts, stadium renovations, relocation, etc.

However, the SVA tells an undeniable story: signing or losing a superstar not only correlates with winning, but also bolsters the overall valuation of a franchise by as much as 114% in absolute terms.

 

Los Angeles Clippers

NBA Free Agency, Blake Griffin, Chris Paul,  Clippers.

Who: Chris Paul/Blake Griffin (2011 to 2014)

Chris Paul, who was widely considered the NBA’s best point guard, was traded to the Clippers in December of 2011. Drafted in 2009, Griffin has developed into the league’s best PF, perhaps a top five overall player. The two make up the best big-small combination in the game and drove the Clippers to their best season ever in 2013-14.

2011 to 2014 Clippers Value: 89% ($305 million to $575 million)

2011 to 2014 Avg. Franchise Value: 72% ($369 million to $634 million)

SVA = 17% gain

(Note: Clippers SVA for 2010 to 2011 prior to Paul’s arrival was a 2.3% gain, much of which can be attributed to Griffin’s stardom. Their valuation is also the Forbes value, rather than their recent $2 billion selling price for the sake of establishing a valuation standard between teams.)

 

Miami Heat

Lebron James,  Dwyane Wade of the Heat, NBA Draft, NBA Free Agency

Who: LeBron James/Chris Bosh/Dwyane Wade (2010-14)

The Heat won free agency’s ultimate prize in 2010, not only signing the best player in the world in LeBron James, but also adding Chris Bosh via free agency and signing Dwyane Wade to an extension. The Heat have made four consecutive finals appearance and won two championships during the LeBron James era.

2010 to 2014 Heat Value: 112%($364 million to $770 million)

2010 to 2014 Avg. Franchise Value: 72% ($367 million to $634 million)

SVA = 40% gain

 

Cleveland Cavaliers 

Lebron James Cleveland Cavalier, SVA NBA Valuation

Who: Losing LeBron James (2010-14)

After drafting Akron’s own LeBron James, the Cavs front office failed to assemble a championship-caliber supporting cast during his seven seasons in Cleveland. The result was James’ decision to take his talents to South Beach in 2010 to play alongside Dwyane Wade and Chris Bosh. The Cavaliers have had five top four picks since LeBron’s departure, yet have failed to assemble a winning team. Dan Gilbert – our condolences.

2010 to 2014 Cavs Value: 8% ($476 million to $515 million)

2010 to 2014 Avg. Franchise Value: 72% ($367 million to $634 million)

SVA = 64% loss

 

Boston Celtics

Paul Pierce, Kevin Garnett, Ray Allen as Celtics, Boston Celtics

Who: Kevin Garnett/Ray Allen to join Paul Pierce (2007-12)

The Celtics executed two separate megadeals during the summer of 2007, acquiring Kevin Garnett and Ray Allen for a hodgepodge of players and draft picks to play alongside Paul Pierce. After signing all three players to extensions, the “Big 3” contended for championships annually from 2007 to 2012.   

2007 to 2012 Celtics Value: 23% ($391 million to $482 million)

2007 to 2012 Avg. Franchise Value: 6% ($372 million to $393 million)

SVA = 17% gain

 

Minnesota Timberwolves

Kevin LoveTimberwolves, NBA Draft

Who: Losing Kevin Garnett (2007-12)

Trading Kevin Garnett to Boston in a megadeal. Despite high draft picks on a regular basis and Kevin Love replacing Garnett at PF, the ‘Wolves have remained irrelevant for years. They stand to lose even more value if Love is traded to a big market this season. Golden State remains the frontrunner to trade for him, and Love has spoken fondly about playing for the Lakers.

2007 to 2012 Timberwolves Value: -12% ($308 million to $270 million)

2007 to 2012 Avg. Franchise Value: 6% ($372 million to $393 million)

SVA = 18% loss

 

Oklahoma City Thunder

Kevin Durant and Russell Westbrook of the OKC Thunder.

Who: Kevin Durant/Russell Westbrook (2011-2014)

Drafting Kevin Durant and Russell Westbrook in 2007 and 2008, respectively. 2011 marked the beginning of their stardom, with both players selected to the all-star game and scoring 23+ points per game. The Thunder earned the number two seed in 2011, their best season since 1997.

2011 to 2014 Thunder Value: 79% ($329 million to ($590 million)

2011 to 2014 Avg. Franchise Value: 72% ($369 million to 634 million)

SVA = 7% gain

 

Orlando Magic 

JJ Redick as a Magic.

Who: Losing Dwight Howard (2011-14)

Frustrated with his lack of on-court support and constant strife with coach Stan Van Gundy, Howard demanded a trade out of Orlando and wound up on the Lakers after the 2011-12 season. Orlando has been among the league’s worst teams since his departure and their franchise value growth has underperformed the rest of the league.

2011 to 2014 Magic Value: 69% ($385 million to $560 million)

2011 to 2014 Avg. Franchise Value: 72% ($369 million to $634 million)

SVA = 3% loss

 

Houston Rockets

Dwight Howard and James Harden as Houston Rockets.

Who: James Harden/Dwight Howard (2011-14)

The Rockets traded for James Harden and signed Dwight Howard in 2012 and 2013, respectively. The duo is integral to one of the league’s highest-octane offenses.

2011 to 2014 Rockets Value: 75% ($443 million to $775 million)

2011 to 2014 Avg. Franchise Value: 72% ($369 million to $634 million)

SVA = 3% gain

 

New York Knicks

Carmelo_Anthony on the New York Knicks.

Who: Carmelo Anthony (2011-14)

The Knicks traded for Carmelo Anthony in 2011, sending four middle-tier players and three draft picks to Denver. Anthony hasn’t brought a championship to New York, but brought the Knicks to the postseason three out of four years.                                                                                                          

2011 to 2014 Knicks Value: 114% ($655 million to $1.4 billion)

2011 to 2014 Avg. Franchise Value: 72% ($369 million to $634 million)

SVA = 114% gain

 

Denver Nuggets

Carmelo_Anthony as a Nugget.

Who: Losing Carmelo Anthony. (2011-14)

The Nuggets haven’t won a playoff series since trading their franchise player to the Knicks.

2011 to 2014 Nuggets Value: 57% ($315 million to $495 million)

2011 to 2014 Avg. Franchise Value: 72% $369 million to $634 million

SVA = 15% loss

Summary of Results

1) All six franchises with notable superstar additions outperformed the league’s average valuation growth rate, indicated by a positive SVA.

2) SVA turned negative all four times when a superstar departed from a franchise.

3) Losing LeBron James decimated Cleveland’s valuation growth rate. The team’s valuation has colossally underperformed the NBA’s valuation growth rate since his departure. Pat Riley, take note.

4) A superstar adds the most value to a big market franchise, while a superstar’s departure generates the most significant losses in smaller markets.

 
 
 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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By  +Follow July 1, 2014 1:29PM
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