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Wednesday, September 9, 2009

Why Save the Phoenix Coyotes Hockey Club?

The sports world has an interesting controversy brewing, involving the intersection of bankruptcy law, creditors' rights and the corporate franchise rights of association. 

The Phoenix Coyotes hockey club (officially, Coyotes Hockey LLC) filed for bankruptcy protection this past May, and its principal owner has been trying to sell the Coyotes to the maker of the Blackberry (Jim Balsillie).   Balsille offered in excess of US$215 million to purchase the Coyotes out of bankruptcy, with one contingency -- he gets to move the Coyotes to Hamilton, Ontario.

The National Hockey League has objected to the Balsillie offer.   In fact, they have blocked him from purchasing several other teams in the past.   The acrimony must be so strong that the NHL has formally submitted a bid to the bankruptcy court for the Coyotes...for US$140 million.

Not surprisingly, current Coyotes ownership (which claims to also be a creditor/lender) prefers the Balsillie bid (which has now been raised to $245 million including $50 million to pay off Glendale, AZ for building a new arena and other improvements and lost future rent).  

If you were a creditor, you'd prefer the Balsillie bid too.   Excluding the payoff/go-away money to the small town in Arizona, there's a difference of more than $50 million.  

Why is the NHL so determined to keep the Coyotes in Arizona?   If the NHL bid is accepted by the bankruptcy court, there's the risk that the "comparable" value of all other hockey teams would be reduced by the smaller bid (although the NHL intends to then seek other permanent owners).    Why make every other franchise owner sustain -- at least in theory and on paper -- a reduction in the value of their franchise?   And, why stick all other owners with probably another $1.0 million expense (each team's pro rata share of the 2008-09 operating losses reported by the Coyotes last season in court filings as $27 million)?

On a business perspective, the Coyotes are not worth keeping in Phoenix.   Here's why:

(1)  The Coyotes only generated $13.3 million in ticket revenues, or about $330,000 per home game.   Add in suite and premium revenues and you have $21.7 million -- or $500,000 per home game.    That's an average of about $35 per capita for your reported average crowd of 14,000.    Subtract the suite and premium figure (for luxury boxes and similar high-end revenues) and the average revenue per fan might be in the $25 range.    At these numbers, it is not likely that the Phoenix market can generate more revenue, and at most attendance can go up four to five thousand per game.    Assuming $30 per head, that is a maximum of $5-6 million, barely a dent in a $27 million annual loss.

(2)  Before you ask, the Coyotes report revenues from concessions and merchandise to be less than $1.5 million.  That is a paltry figure when you have season attendance of about 600,000.

(3)  The Coyotes only generate $4.5 million from local market broadcast revenues, but the league rights get them an additional $8.4 million. 

(4)  Here's a whopper.   The Coyotes receive $13.5 million in revenue sharing as a small market club.   Subtract the subsidy, and the Coyotes are losing $40 million a year!

(5)  Total 2008-09 revenues for the Coyotes: $58.3 million with the subsidy; $42.8 million without it.

(6)  Total 2008-09 hockey-related expenses: $59.1 million.   Note that the Coyotes are near the league's salary floor (the minimum required by the NHL's collective bargaining agreement with its players' association) and their salaries for "cap purposes" were probably in the $40-41 million range.   That number cannot be reduced much more, unless league-wide revenues decline significantly.    Even a ten percent decline would yield potential savings of $4 million.

(7) Total reported 2008-09 expenses: $85.45 million. 

With these numbers, where is the road map to profitability for this franchise, in this market?

Answer:   There is none.   Perhaps the NHL believes it is a stronger league if it can maintain the right to approve its owners.   However, in this instance, rejecting Balsillie means every other owner is stuck with a smaller comparable value and an obligation to chip in pro rata on a clearly unsustainable franchise.   Moreover, the theoretical value of other franchises will decline if current owners/tomorrow's sellers are hampered in their choice of buyer.   (The same principle applies to owners of condos and co-ops dealing with an obstructionist board which won't approve a deal.)    There is a real significance to this dispute:  there are several other troubled franchises around the world of pro sports and the NHL in particular.   Just locally, it is likely that each of the Islanders, Devils, Nets and...yes, the Mets, have serious operating losses or debt service issues emanating from the franchise purchase or the construction of new facilities, or both.  

The NHL should act in the best interests of its fans, its other owners and the creditors of the Coyotes and let this team move to Hamilton, Ontario.

Eric Dixon is a New York lawyer and strategic consultant for businesses, political campaigns and individuals.  Mr. Dixon is available for comment or consultation at edixon@NYBusinessCounsel.com and 917-696-2442.

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