Lin Qi reopened the Europe acquisition assessment report and turned to the pages marked "Annual Operating Loss." The combined losses of the several teams amounted to approximately $34 million per year.
This amount was already factored into the acquisition cost in the first three years.
But what about three years from now?
If these teams fail to turn a profit, this loss will turn into new cash outflows in the fourth and fifth years, and the pressure will be directly reflected in the cash flow statement.
Lin Qi picked up a pen and added a line of small print next to it.
Assuming Europe teams continue to incur losses at current levels in 2004-2005, an additional $68 million will be needed to offset the losses. At the end of five years, remaining cash will decrease to $263 million.
He stared at the revised number, his brow furrowing slightly.
"Three years," Lin Qi said softly. "These teams must break even within three years. Otherwise, their safety net will be too thin."
He then wrote another sentence below.
During negotiations, a performance-based clause must be included: if the company fails to turn a profit within three years, the original management team will be ousted, and a professional manager will be appointed by our company.
Lin Qi took a deep drag of his cigarette and exhaled a cloud of smoke.
Next, it was time to execute the plan.
But just as he was about to close the notebook, a thought suddenly flashed through his mind.
He reopened his notebook and wrote a line in the blank space below "Anti-Monopoly Avoidance Plan".
"The club is losing money, the stadium is making money... why put them together?"
Lin Qi put down his pen and fell into thought.
Under the current plan, the EBA League will simultaneously hold equity in clubs and operating rights in arenas. However, the problem lies in the fact that the European Union Commission, when reviewing antitrust cases, will focus on the market blockade effect caused by "vertical integration"... If an entity controls both upstream resources and downstream operations, it can easily be deemed to have "abused its dominant market position."
But what if we separate these two business segments?
Lin Qi quickly scribbled a few lines on the paper.
EBA League Company is responsible for holding club equity, organizing events, and negotiating broadcasting contracts. This business will definitely be unprofitable in the early stages because it has to cover the club's operating costs and player salaries.
In addition, a Europe Sports Real Estate Group will be established to be responsible for the investment, construction, operation and commercial development of stadiums. This business is profitable, with stadium rentals, naming rights, venue advertising, concert and commercial event venue rentals, each of which generates real cash flow.
The two companies are completely independent in law, each with its own accounting, tax filing, and legal responsibilities.
Lin Qi became more and more excited as he thought about it.
The core logic of this separation plan is to separate business operations and isolate risks, but actual control remains in his hands.
The EBA League Company and its clubs pay market-based rent to Europe Sports Real Estate Group for using the stadiums. The rental contracts are long-term, such as 20 years, and include priority usage clauses, giving priority to EBA League game days over other commercial activities.
The key point is that, legally, the Europe Sports Real Estate Group is a "neutral venue provider," which can also rent out stadiums to other sporting events, concerts, exhibitions, and other activities. This avoids accusations of "market blockade"... It's difficult for the European Union Commission to argue that a real estate company willing to lease out its venues constitutes a monopoly.
The financial benefits are even more obvious. The EBA League Company may be unprofitable for the first five years, but these losses will not affect the profitability of the Europe Sports Real Estate Group. The profits of the real estate group can flow back to Lin Qi's personal account in the form of shareholder dividends, and then Lin Qi can increase the capital of the league company to make up for the losses.
The two companies are financially separate in their financial statements. The alliance company can continue to enjoy tax benefits for sports event companies, while the real estate group pays taxes at the normal real estate company tax rate.
More importantly, there's the anti-monopoly firewall. If the European Union Commission launches an investigation into the EBA League in the future, accusing it of "monopolizing the Europe basketball market," Lin Qi can argue that... the league is merely an event management company, it doesn't own the arenas, it only leases venues from real estate groups. If other basketball leagues also want to rent these arenas, the real estate groups can simply rent the venues to them outside of the league's game days.
Meanwhile, the Europe Sports Real Estate Group could argue that they are merely a real estate operating company whose clients include not only the EBA League but also concerts, exhibitions, and other sporting events. They do not interfere with the content of the events, but only provide venue services.
This makes it difficult for the European Union Commission to find direct evidence that "vertical integration leads to market blockade."
Lin Qi put down his pen and lit a new cigarette.
This dual-company structure also has a significant advantage: a clear exit strategy for capital.
Club and event operations are capital-intensive, low-return, and high-risk businesses, making it difficult to exit through IPOs or mergers and acquisitions. But real estate is different... stadiums are tangible fixed assets that appreciate over time. In the future, he could package the Europe Sports Real Estate Group into a REIT (Real Estate Investment Trust) for listing, achieving asset securitization and cashing out billions of dollars in one go.
EBA League Company can continue to focus on event operations without being burdened by heavy real estate assets, resulting in a lighter financial statement and a higher valuation.
Lin Qi exhaled a puff of smoke, picked up the intercom, and dialed Gherardini again.
"Tell the legal team to design another dual-company structure," Lin Qi said, his tone calm but with unwavering determination. " The EBA League Company will only hold club equity and event operation rights; all arena assets will be spun off and placed in an independent real estate company. Have the legal team come up with a plan as soon as possible, registering it in the Netherlands and Luxembourg, and utilizing European Union tax treaties for tax planning. Furthermore, the real estate company should reserve space for future REITs listings; the equity structure and articles of association need to be designed in advance."
"Understood, boss," Gherardini said. "I'll arrange it immediately."
After hanging up the phone, Lin Qi looked out the window again.
The night in Milan was still deep, but he knew that dawn was not far away.
A $170 million club acquisition, a $3.1 billion stadium construction project, a dual-company structure to circumvent antitrust regulations, and a meticulously designed business equity distribution mechanism...
The EBA League puzzle is finally complete.
Lin Qi took a deep drag of his cigarette, his eyes gleaming.
This is a restructuring of the entire Europe basketball business system.
And he will become the architect of this new system.
Everything is just beginning.