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Monday, December 6, 2010

Islanders Bankruptcy Watch On

Several developments in the last few days may bring hockey's New York Islanders to a tipping point where bankruptcy may be a viable option.

Islanders owner Charles Wang likely has lost over $200 million since buying the team in 2000. The value of the club, as estimated by Forbes magazine, may be down 20 percent from the purchase price of a reported $185 million. Wang has been rebuffed in efforts to replace or renovate the Islanders' arena, and has long asserted a new or renovated arena is necessary to be economically viable.

It appears there is no credible hope for a new arena, and hence no hope for the franchise to become profitable on an operating basis again. This leaves Wang with ownership of a money-losing enterprise (reportedly losing between $15-25 million per year) that will continue to bleed money indefinitely, facts which should continue to depress the franchise's value even further. 

Even on an operating basis, with salaries as low as permitted under hockey's collective bargaining agreement with its players' union, the Islanders are reportedly losing about $4.5 million annually, according to a recent Forbes report.  That's before counting the cost of servicing an estimated $100 million in debt; add that cost, plus the amortization cost (paying down the principal), to the operating losses to figure out the real-world loss. 

In what other industry would a business owner, facing continuing, indefinite and significant losses, continue to stay in business?

Under these circumstances, bankruptcy becomes viable, if only as a strategy to pressure the league to arrange a sale (exit strategy) so Wang can realize some return on a failed investment.

The tipping point may have come with shockingly low crowds for three recent home games that may indicate that the bottom may fall out on the Islanders' ability to generate any significant ticket sales revenue.

In the last 10 days the Islanders had three home games against rival teams the New Jersey Devils, New York Rangers and Philadelphia Flyers. The aggregate attendance was barely 32,000 announced, including barely drew 10,000 announced for a Black Friday matinee against the rival Devils (in past years this might have been a sellout), a crowd reported as 11,000 for the Rangers (customarily a sellout) and announced as over 13,000, and this Sunday afternoon, an announced crowd of 7,773 for the Flyers.

These numbers may understate fan protest over the state of the franchise. Each game featured opponents whose fans could be counted on to travel to see the game, boosting the attendance. The Islanders hosted a game the night before Thanksgiving and announced a crowd of under 10,000 (another customary sellout). For the season the Islanders now average barely 10,000.

Declining attendance will devalue sponsorships and trigger a drop in virtually every revenue stream the franchise has.

The Islanders' death spiral has not only begun; it has accelerated. I would be surprised if Wang has not already retained investment bankers, workout specialists and bankruptcy lawyers to plan an exit strategy.
Eric Dixon is a New York lawyer, litigation stress consultant and business management consultant.

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