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Thursday, November 18, 2010

Islanders on Brink of Bankruptcy?

The New York Islanders hockey club may be on the brink of bankruptcy.  This is pure speculation, but a logical strategic analysis of certain facts points to this being a reasonable scenario. 

If this scenario comes true, it would mean Islanders owner Charles Wang might be following the moral hazard example set by former Phoenix Coyotes owner Jerry Moyes.  Follow the logic.

Moyes was reportedly losing $30-35 million per year on the Coyotes, had declining attendance and, in the depths of the 2008-09 credit crunch, probably saw even worse prospects.  Moyes allegedly encountered interference from the National Hockey League with his plans to sell the team to a willing buyer, Research in Motion's founder Jim Balsillie, who planned to move the Coyotes to Hamilton, Ontario.  (The league wanted the club to stay in Phoenix, for reasons that are not entirely justified, in my thinking, by a desire for United States television money.  Crime, Politics and Policy questioned the economic viability of the Phoenix Coyotes, and the league's efforts to keep the club in Arizona, in November 2009.)

Thwarted in his legitimate attempts to sell his deteriorating asset, and likely (and justifiably) sick and tired of losing oodles of money, Moyes threw the franchise into bankruptcy in May 2009 as a last-ditch attempt to sell the club and realize some return on his losing investment.  The league fought the bankruptcy and ultimately agreed to buy the club out of bankruptcy -- thereby rewarding Moyes with his cash-out exit strategy -- in order to prevent a privately-negotiated sale to Balsillie with the bankruptcy court's approval. 

The lesson:  Moyes played hardball, or what the Delaware chancery court has called "greenmail."  This is a nice way of saying, I want my price...or else.  Moyes used a "screw you" attitude -- hey, fellas, sports is business, after all -- and got his relief in the end. 

In the parlance of today's economy and regulatory climate, Moyes got his bailout.

Why wouldn't you think Islanders owner Charles Wang wasn't taking notes, and now planning to do the same?

After all, Wang already played the white knight, rescuing his hometown club in 2000 from previous owners (Howard Milstein, Steven Gluckstern) who saw -- but couldn't realize -- a real estate development opportunity and decided to basically strip the team and reduce its budget to the minimum in order to cut losses while putting it up for sale.  (From a business perspective, was that wrong?).   Wang and his co-owner Sanjay Kumar (now an admitted felon thanks to the thirty-five-day month and other accounting frauds at Computer Associates) bought the Islanders (including the team's cable television rights) for about $200 million in 2000.

Since that time, Wang had to buy out Kumar.  This may have been at a loss.  That's on top of Wang's likely loss on his initial investment.  And then factor in the reported annual losses of at least $10 million per year from the Islanders' ongoing operations.  (Thanks to the league-mandated salary floor, the Islanders are now required to spend a minimum of $39 million on player salaries -- about double what the salary expense was when the Islanders were rock-bottom under previous ownership -- and recent reports peg those annual losses at $20-25 million.) 

Take these figures, and you can easily extrapolate them and infer an aggregate operating loss of $100-200 million...or more...on top of a deteriorating franchise value.

But wait, there's more.  Wang saw a chance to build a Long Island destination, the Lighthouse Project.  (Sound familiar?  Milstein and Gluckstern were also developers, but they bailed when they could.)  This project also met considerable political opposition in 2009, after which Wang has publicly said that "all options" regarding the franchise's future on Long Island are on the table.

Maybe Wang has had enough.  Maybe he has lost enough money -- and he has lost plenty of money.  Maybe he now sees no end to the losses.

In business, owners and managers who want to "cash out" look for what's called an "exit strategy" to liquidate their investment.  Here, you have an illiquid investment, losing money every day with marginal prospects for improvement and perhaps no viable way to turn a profit at any reasonable price point for tickets (even if all games are sold out).  Therefore, Wang may have to sell the club to get anything back. 

This is where bankruptcy comes into play.  If there is no willing buyer -- that is, willing to buy the club at the price Wang wants -- why wouldn't Wang throw the Islanders into bankruptcy?  After all, he can use the Phoenix Coyotes as a roadmap for how to get his price, if not from a true buyer, then from the National Hockey League.

But even this scenario has its flaw.  Wang would have to assume that the NHL values the Islanders as a New York franchise, one of three in the market, more than it would value the Islanders in a different market like Portland, Oregon or even Winnipeg, Manitoba.  The Islanders were a stored, model franchise -- a quarter of a century ago.  

Twenty-five years ago, the model baseball team may have been the Kansas City Royals.  The same Royals who now can't avoid losing 90-100 games every year and drawing less than 20,000 fans a game.

Twenty-five years ago, one of the three model basketball franchises was the Philadelphia 76ers.  The 76ers are a nearly moribund franchise now, the fourth team in a four-team city.

Times change.  The Islanders of yesteryear are gone.  The team may not be economically viable on Long Island without a new arena.  And if there's no prospect of getting one, why wouldn't ownership look to move or, failing that, to cut costs as much as possible to attract a buyer -- or declare bankruptcy to force the league to cash Wang out?

Eric Dixon is a New York lawyer with substantial experience in business transactions and the securities laws.  He is president of Eric Dixon LLC, a privately-held concern which provides strategic analysis, crisis management and litigation stress management.  Mr. Dixon has been a lawyer since graduating from Yale Law School in 1994.  Mr. Dixon is available for consultation or comment at edixon@NYBusinessCounsel.com and by phone at 917-696-2442.

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