Josh Harris’s $6.05 billion deal to purchase the Washington Commanders from Daniel Snyder includes an “earnout,” a structure that would provide Snyder with a deferred payment of an amount contingent on the franchise reaching specified financial benchmarks, according to five people with knowledge of the terms of the sale.
The earnout represents a relatively small but perhaps meaningful portion of the overall sale price. Its inclusion in the deal explains, in part, why people familiar with the deliberations of the NFL finance committee last week described the sale agreement between Harris and Snyder as unusually complex.
The finance committee raised issues during its 2½-hour meeting last week in New York and continues to have concerns about Harris’s deal. One person with knowledge of the committee’s conversations said this week that the amount of debt in the deal is, in the committee’s view, significantly above the NFL’s $1.1 billion limit for team acquisitions.
The committee plans to continue to work with Harris’s group to structure the deal, that person said. But the differing views between the Harris group and the finance committee about the deal’s current form — and its compliance with NFL rules — point to a potentially long and perhaps difficult process that is likely to extend well beyond the owners’ meeting scheduled for Monday and Tuesday in Minneapolis. The deal ultimately must be approved by the finance committee and ratified by a vote of at least 24 of the 32 owners.
“There’s a lot of work to do,” one person familiar with the NFL’s inner workings said in recent days.
The deliberations are playing out while the NFL may be making progress with Snyder on the issue of indemnification, one person with knowledge of the sale process said. The Harris deal represents the only option before the league and the owners for getting Snyder out of the NFL. The announcement Friday that the deal — previously sent to the league as an unsigned, nonexclusive agreement — had become signed and exclusive prompted a celebratory reaction by many Commanders fans.
“Everyone wants this to work,” one person with knowledge of the finance committee’s conversations said. “There’s no doubt about that. But it has to comply with the rules. It has to be under the debt limit.”
The earnout may have been used as a mechanism during the negotiations to push the sale price above Snyder’s $6 billion target after Harris’s group was unwilling to bid that much. One person with knowledge of the process said the payout could be as much as approximately $200 million, though the Harris group could end up paying much less. The exact business-related benchmarks on which the amount of the payment are based were not immediately clear. The inexact nature the payment amount also signals that the $6.05 billion sale price might not be fixed.
The Harris group declined to comment through a spokesman.
A member of the Rivkin Radler law firm, writing last year on the legal website JD Supra, described an earnout as “a form of contingent, deferred consideration that is often utilized to reconcile a difference of opinions between the buyer and the seller regarding the fair market value of the target business as of the date of the closing.”
Multiple sports financial advisers said such a structure would be common and well-accepted in most business settings in a deal of such magnitude but is extremely rare in sports-franchise sales. The NFL has a highly restrictive set of rules related to franchise sales, and the league generally prefers to deal with a lead owner in a prospective ownership group with overwhelming wealth and access to cash.
David Tepper and Rob Walton bought the two most recent NFL teams to sell. Tepper, a prominent hedge fund manager, has an estimated net worth of $18.5 billion, according to Forbes. He paid $2.275 billion for the Carolina Panthers in 2018. Walton, a Walmart heir, has an estimated net worth of $61.6 billion and bought the Denver Broncos last year for $4.65 billion.
Harris, a private equity and sports investor, has a net worth estimated by Forbes at $5.9 billion. He owns the NBA’s Philadelphia 76ers and the NHL’s New Jersey Devils.
NFL ownership rules require the lead investor of an ownership group to have at least a 30 percent equity stake in the purchase. No ownership group can exceed 25 people or borrow more than $1.1 billion to buy a team. And no private equity firms, public corporations or sovereign wealth funds can own any shares. Analysts have said those rules may have to change, given the soaring NFL franchise values, but they are not expected to be modified for this transaction.
The Harris group believes its deal is in compliance with NFL ownership rules, people connected to the process have said. They say the group also believes there should be no questions about the liquidity of Harris and his investors, given their combined net worth above $100 billion.
According to the person with knowledge of the finance committee’s deliberations, the committee’s view that the deal is far above the NFL’s debt limit is a far greater concern to the league and committee than anything related to the earnout. That person expressed the view that Harris and investor Mitchell Rales — the co-founder of the Danaher Corporation — have the financial wherewithal to structure a deal that would satisfy the committee but have yet to do so.
According to that person, Kansas City Chiefs owner Clark Hunt, the chairman of the eight-owner finance committee, has vowed the committee will continue to “work with” the structure of the deal. Hunt declined to comment last week in New York following the finance committee’s meeting.
It’s not clear exactly what about the deal’s structure produces differing views regarding its compliance with the debt limit. But such issues can be subjective. When Howard Milstein withdrew his bid for Washington’s franchise in 1999, the finance committee reportedly regarded a $150 million loan to Milstein and his brother from their father as a loan; Milstein’s backers had contended it was equity. That resulted in Snyder buying the team from the Jack Kent Cooke estate for $800 million.
The stakes are high for both Harris and the NFL. Harris’s group would have to pay a breakup fee if the deal falls through, according to a person familiar with the sale process. It’s not clear how long the Harris group has exclusivity to attempt to have the deal approved and close it. The NFL owners paused consideration of a vote to remove Snyder from ownership of the Commanders to allow the sale process to play out.
The league still must resolve issues with Snyder’s representatives related to legal indemnifications and the NFL’s second investigation of Snyder and the Commanders. One person with knowledge of the league’s inner workings expressed hope that the indemnification issue can be resolved, saying that Snyder “is starting to come around” to potentially agreeing to an approach acceptable to the NFL and other owners.
Owners are expected to be updated on the Commanders sale during next week’s two-day meeting in Minneapolis. Several people close to the process said they see little to no chance of the owners taking a ratification vote next week.