Loading
How to get NHL teams for Québec City and … Hamilton

Posted on Saturday 2 July 2011

NHL rules that so frustrated Jim Balsillie’s efforts to secure a team for Hamilton saved the Sens in Ottawa. Instead of fighting the system, he might have worked with it for a brand new team. And, oh by the way, a second team in the Toronto area, could cost $400 million.
BY BRUCE FIRESTONE, FOR THE OTTAWA CITIZEN, ORIGINALLY PUBLISHED OCTOBER 2, 2009

As a member of the last group to successfully found a franchise in Canada*, I have watched Jim Balsillie’s attempts to land an NHL member club with great interest. His determined efforts have provoked rage in some quarters and admiration elsewhere, but with his third attempt to acquire and move an NHL franchise in ruins, one could question the effectiveness of his approach.

(* That is until True North Sports and Entertainment re-established the Winnipeg Jets in 2011, Ed.)

Litigation has been a big part of his overall strategy. However, when you are trying to join a private club, rarely do you want to litigate your way in. Whether it is a golf and country club, gym or professional sports club you are trying to become a member of, going to court is unlikely to win you many friends among the existing membership.

If Balsillie had been successful, I predict he would soon have found a sub-group of owners that would have allied themselves with him and NHL insiders would gradually have accommodated themselves to his presence. Money talks.

But still, if I had been asked by Balsillie’s group for any advice, litigation is one tool that should have been left in the toolkit. The NHL is led by two clever and formidable lawyers and they are not afraid of litigation.

So who actually owns a franchise? Certainly, lawyers for the NHL would argue that owners “own” their teams subject to the conditions of their franchise agreements and subject to the bylaws of the NHL (contained in the NHL’s constitution, known by its Latin name, lex scripta.)

So a franchise owner has certain rights and obligations. Bankrupt franchise owners have many fewer rights and, under certain circumstances, the NHL has the right to revoke a franchise and take control. But whatever lawyers may argue, ultimate control over the destiny of any sports league comes from the source of all revenues — the fans. Again, money talks.

So I would argue that fans actually ‘own’ major professional sports teams; that the owners and the leagues hold these franchises in trust for their stakeholders and, in particular, their fans; and that these franchises should not be moved unless all options have been exhausted and then exhausted again and, finally, once more.

In the event that a franchise is moved, the intellectual property (the name, logo, history, awards, banners, video vault, etc) should be held by the league in trust for a future franchise for that city. And clear guidelines should be established for the grant of an expansion franchise to the city so dispossessed, so that some future group will know exactly what it has to do to re-found the Jets, the Nordiques or, for that matter, the Coyotes, if they ever do move.

When my group was pursuing an NHL franchise, I was asked by one owner: “Do you want a new one or a used one?”

My preference, indeed the only option we looked at, was a new one — we wanted an expansion franchise rather than a relocated one. To me, renaming and re-locating an existing franchise seemed to tarnish the brand right from the start. The only way to buy and relocate a ‘used’ franchise is by disenfranchising fans somewhere else, hardly an auspicious way to begin. How do you think Baltimore fans feel to this day about the NFL’s Colts? Just go to a Ravens game and sit in the end zone with a Colts jersey on to find out for yourself.

Balsillie wanted to purchase an existing franchise and move it to Hamilton. If instead, he had sought an expansion franchise for Hamilton (the course of action more likely to succeed in my view), the fee he would have paid would have included an infringement payment to any club that is nearby (i.e., the Maple Leafs and the Sabres). There is plenty of precedent for this — when the Devils relocated to New Jersey, they paid infringement fees to the New York Islanders and Rangers, as well as the Philadelphia Flyers.

Plus, the expansion fee Balsillie would have paid would have been shared by all teams. Thus, league members would have had a financial incentive to bring somebody like Balsillie into the club. And the clubs being infringed upon, Toronto and Buffalo, would have been compensated for that, and they too would have had some type of financial incentive to make the whole thing work.

NHL deputy commissioner Bill Daly has argued that the relocation of any existing NHL club requires a simple majority vote by league members and that there is no veto by any individual club. This argument is central to the league’s view that the NHL constitution meets the test of U.S. anti-trust law and that there is no undue restraint of trade created by its lex scripta.

Some member clubs might feel that they do, in fact, have a veto. What they actually have is the right to compensation for infringement of their territory, but not the right to unilaterally reject such an infringement. This is an important distinction, a type of fine print that lawyers love.

When I sat on the NHL’s expansion committee, we heard from two applicants: Wayne Huizenga for what would become the Florida Panthers and Michael Eisner and the Disney Company for the Mighty Ducks.

For the Anaheim team, the $50 million expansion franchise fee was paid as follows: $25 million to the NHL and $25 million (at $5 million per year for five years) to Bruce McNall and the L.A. Kings, whose territory was infringed by the Ducks.

The NHL defines the franchise area for a member club from the boundary of, for example, the Corporation of the City of Ottawa (the old city not the new city) plus 50 miles. So if someone wanted to establish a franchise in Gatineau or Red Deer or Hamilton, they should first do a deal to determine the amount of compensation that the rights holders being infringed (the Sens, the Oilers and Flames, and the Leafs and Sabres) would receive.

Is that a tolerable restraint of trade? I don’t know but it seems reasonable to me. If you had just paid $50 million for a franchise in the 1990s (or $140 million or $212 million or whatever the going rate is today*), you probably would expect to be able to generate revenues without undue interference within your defined territory and, if such interference happened, then you would expect to be compensated.

(True North paid $170 million for the Atlanta Thrashers of which $60 million was a relocation fee shared equally by all member clubs, Ed.)

I know that when the modern-era Sens were re-established in the 1990-1992 period, we did a deal with the Canadiens to trade mid-week broadcast rights — Montreal could broadcast their games into Ottawa-Gatineau (where they had a lot of dedicated fans) and we could do the same in Montreal. Initially, this was a deal highly in favour of the Canadiens but the Sens have been seen in Montreal for 17 years and have a following there now. Plus there is the fact that Montreal is a bigger market than Ottawa so it probably balances out today. No money has ever changed hands.

The same deal was offered to T.O. but the offer was declined by the Leafs. In fact, the Maple Leafs threatened to broadcast their mid-week games into Ottawa without prior agreement with the Sens right up until the first day of their first season in 1992-1993. I told them that this was going to be the greatest day in the modern history of the Ottawa Senators up to that point in time because, if they infringed on the Sens territory without our permission, all their broadcast revenues could be forfeit under lex scripta to the Sens. The Leafs wisely did the right thing and did not broadcast into Sens’ territory without a prior agreement on compensation, which has never been reached.

And this comes to the crux of things. The Leafs are the wealthiest, most widely followed franchise in the NHL. There is no point in bellyaching about it if you are a fan of any other NHL team. Toronto fans are terrific — they love their team even if it hasn’t won a thing since 1967.

Their local broadcast rights are probably worth more than $40 million per year today and they don’t want to share this revenue stream with anyone else. So Balsillie, or some future bidder to locate a franchise in Hamilton, should, in my view, make a deal for compensation with both the Leafs and the Sabres. And they need to make that deal before they deal with the NHL — as the Mighty Ducks did. Leagues are very reluctant to impose a second, third or fourth franchise in a metropolitan area without prior agreement on the amount of compensation those teams being infringed on would receive.

For the Maple Leafs, it just comes down to money but for teams like Ottawa, the Sens would be hard pressed to survive if they did not have some type of control over their own territory.
Indeed there is no doubt that the Sens would not have survived to this day without the intervention of Gary Bettman during the run-up to and in the bankruptcy of the team here in Ottawa. He went to bat for the team many times during the era preceding the ownership of Eugene Melnyk.

Jets and Nordiques fans may ask where was Bettman during their last days? But Ottawa fans should recognize what he did for this team.

When the Sens were admitted to the league, the team’s NHL payroll (including its minor league affiliate) was around $6.5 million (Canadian) per year. John Ziegler, then president of the NHL (and soon to be replaced by commissioner Gary Bettman) told us to expect player salary increases of about 10 per cent per annum.

Instead, salaries in Ottawa soared to more than $42 million (U.S.) and the Canadian dollar shrank from around 90 cents when the franchise was granted to just 64 cents. Ottawa’s payroll growth during this period was an astounding 33.5 per cent per year; the enterprise was not sustainable. Nor were the Jets and the Nordiques — a major adjustment was inevitable.

The Commish had nothing to do with this realignment of currencies and, whatever else Bettman may have done to madden Canadian NHL fans, he cannot be blamed for this.

The NHL is probably an effective monopoly, as are most major professional sports leagues. Is that bad? Well, experience shows that rival leagues tend to cause player salaries to grow even faster, and that is not good for smaller-market teams like Ottawa.

The arguments made in Judge Redfield T. Baum’s courtroom in Phoenix included raising the spectre of pro sports being a monopoly and engaging in restraint of trade. In my view, Judge Baum wisely refused to allow Bankruptcy Court to write new anti-trust law which, in effect, would have freed pro sports teams from their local obligations (to their creditors, to their landlords, to their fans and sponsors) and made franchises much more mobile — just starve them of capital, bankrupt them and, whoosh, off you go.

This is not the right direction for any league or its fans.

Having said all of this, I am in favour of having more NHL teams in Canada — this would be good for hockey fans, for revenue-sharing with the players, and for the league itself. What I am not in favour of is relocating existing teams.

If the Carolina Hurricanes can be successful in Raleigh (by, in part, winning the Stanley Cup and icing competitive teams), the NHL can probably be successful pretty much anywhere.

I believe the league should set out clear criteria for the return of the Winnipeg Jets and the Quebec Nordiques regarding arena size and calibre (minimum of 18,500 seats); season tickets sold (minimum of 12,000); suites sold (minimum of 60 suites); and an expansion franchise payment.

This will allow new ownership groups to coalesce in those places and to build definitive plans for the return of the NHL.

With Hamilton, the matter is more complex. The above criteria are still required but there is the matter of infringement payments to the Leafs and Sabres. Certainly, the Leafs are not going to accept a McNall-like payment plan over time. But a deal featuring a large portion of television rights could work.

Whatever happens next, future bidders for NHL franchises should do it in concert with the league, and their future partners.

Prof Bruce

(Bruce Firestone is entrepreneur-in-residence at the Telfer School of Management, University of Ottawa, and a real estate and mortgage broker. He founded the modern-day Ottawa Senators and is Executive Director of Exploriem.org.)

Postscript:

I think a buyer could acquire a franchise in Hamilton for a net cash cost of just $2,700 (i.e., practically nothing) by capitalizing their revenue streams and putting a reasonable amount of debt in place while still leaving themselves with enough room to operate the franchise. Plus each NHL team would get $10 million while Buffalo would net $30m and TO, $90m.

Here’s how I would bootstrap a Hamilton expansion club that might cost $300 million PLUS another $100 million for an infringement fee:

Category Capital

Franchise Fee $300,000,000.00
Infringement Fee $100,000,000.00
Total $400,000,000.00

Naming Rights ($44,181,663.33)
Arena Management ($30,000,000.00)
F&B
Product Rights
Parking Rights
Pouring Rights ($12,272,684.26)
Local TV Rights ($114,543,907.64)
Suite Leases ($39,141,750.07)
Club Seat Licenses ($13,979,196.45)
Advertising, Signage and Sponsorship ($33,550,071.49)
Total ($287,669,273.25)
Debt ($112,328,000.00)
Net Franchise Cost (Cash) $2,726.75

To understand how I did this, you have to download the spreadsheet (in .xls format) from our server: http://www.eqjournal.org/HAMILTONFranchiseCost.xls.

Postscript 2:

In October of 2009, I built a NHL franchise fee calculator using historical data. You can also download this spreadsheet from: http://www.eqjournal.org/NHLExpansionFeesd.xls.

My model predicted NHL expansion fees of: $101 million for 2010, $114 million for 2015 and $127 million for 2020. This is a far cry from the $170 million actually paid by True North in 2011 but I feel a little better if you subtract a $60 million relocation fee to get a franchise fee of $110 million.

Still, I redid the model using the latest data from the Winnipeg acquisition. You can download that spreadsheet too: http://www.eqjournal.org/NHLExpansionFeesd-july-2011.xls. This gives us predictions for 2015 of $136 million and for 2020, $152 million which are obviously results biased by earlier years of ‘artificially’ low franchise pricing.

What it all comes down to is this: the NHL is a member’s only club and they can and do make up the ‘rules’ as they go along which means, you can’t really predict what they are going to do.

Entrepreneurs won’t be shocked by this because they already know that there are no rules… in a knife fight*.

(* I am paraphrasing Robert LeRoy Parker, aka Butch Cassidy from the film of the same name.)


2 Comments for 'How to get NHL teams for Québec City and … Hamilton'

  1.  
    November 24, 2011 | 7:28 am
     

    Thank you for writing valuable post regarding the subject. I am a fan of one’s site. Maintain the truly amazing work.

  2.  
    December 9, 2011 | 9:27 am
     

    [...] HERE to read the article at Bruce Firestone’s blog (www.eqjournal.org) Share [...]

Leave a comment

(required)

(required)


Information for comment users
Line and paragraph breaks are implemented automatically. Your e-mail address is never displayed. Please consider what you're posting.

Use the buttons below to customise your comment.


RSS feed for comments on this post | TrackBack URI