Monday, November 11, 2013

The Inevitable Demise of the Phoenix Coyotes

In the summer of 2013 the NHL sold the Phoenix Coyotes to Renaissance Sports and Entertainment for $170M, with most of that purchase price coming in borrowed money. Many people in the media (especially Coyotes cheerleaders like Greg Wyshinski at Puck Daddy) heralded this sale as saving the franchise, and putting ownership problems behind them. It's difficult to imagine anyone believing that things were going to be different this time, after all those other failed saviours of days past. Dammit, this time it's going to work!!! Meanwhile, John Spano might have had been on stronger financial ground when he bought the Islanders 1996 with no actual money. Renaissance might be in a more perilous position (financially, not legally) than Spano, albeit without the fraud.

So why are all these talking heads in the media celebrating the saviour of the Coyotes and declaring that they are now on stable ground? The new owners are standing on a house of cards, and the demise of the team in Phoenix is all but certain. The celebration may be a bit premature, symbolically similar to that that time when the Stanford marching band went out onto the field to celebrate before the game was over (I never get tired of watching this).

In September before the season started (and other pundits were praising the saviour of the franchise), I wrote on my blog regarding the Phoenix Coyotes:

Oh great, they saved the franchise! Yeah well, that was done mostly with borrowed money, and we'll see what happens once they have to start making payments with a franchise bleeding money. Ever hear of sub-prime mortgages? The Phoenix Coyotes new ownership group basically acquired the team with a pseudo sub prime mortgage. The price is cheap for the first couple years, then when they have to pay the Piper with no increase in income, the bottom falls out. We'll see how much they like paying Mike Ribeiro many millions of dollars the first time they draw only a thousand people on a Tuesday. To any pundit who says "they put their ownership issues behind them", the answer is no, they punted their issues 2-4 years in front of them. I say to Quebec City, Markham, or even Seattle, if you build it, they will come...
In October, a week into the NHL season David Shoals wrote a fantastic piece in the Globe and Mail titled NHL owners might still have to open wallets to cover Coyotes to Cover Coyotes in which he lays out the precarious terms of the deal and that this alleged new found stability is built on shaky ground. The NHL had been operating the team over the last 4 years, where they lost an average of $28M per year. The new owners have an out clause in the deal that allows them to sell the franchise if they hit $50M in operating loses. Do the math.

Here we are currently 6 weeks into the season and which franchise is dead last in attendance? Yes, you guessed it, the Phoenix Coyotes at an average of approximately 12,000 per game. These are not the numbers that they need to draw to turn a profit. Sadly there is no giant debt clock outside arena to inform the public how close they are to hitting that $50M number, but at this rate it will happen some time next season. As Shoals wrote:

Gosbee and LeBlanc raised $250-million to buy the Coyotes. But they have little skin in the game, as they say, since $205-million of that is borrowed money. Fortress Investment Group, which lends money to distressed businesses at healthy interest rates, provided $120-million with the NHL chipping in $85-million. Even better for Gosbee and LeBlanc, they do not have to make any payments on the principal of the NHL loan for five years. This just happens to be when their escape clause from Arena in suburban Glendale kicks in, if they can also show a total of $50-million in losses.

Based on their financing plan, Gosbee and LeBlanc have $50-million left from the purchase price to cover operating losses. Since the NHL averaged $28.1-million per year in losses, that would give the Coyotes less than two years for a major turnaround.Then again, in five years or even sooner if the magic number of $50-million is reached, LeBlanc and Gosbee could sell the Coyotes to someone in, say Seattle or Las Vegas, for a big whack of cash and everyone goes home happy. Well, everyone except some fans in Arizona.
The new owners don't have to pay back a penny of that borrowed money (interest notwithstanding) for 5 years. If the next 5 years are anything like the last 5 years, they'll probably lose about $150M in that time frame, if they are even able to survive that long in Phoenix. Honestly, how do you pay back $205M in borrowed money if your enterprise is bleeding money at the rate of nearly $30M a year? It is not sustainable, some would argue the terms of this sale were never going to have a happy ending for what few hockey fans there are in Phoenix.

Did Gary Bettman honestly expect anything to change? Did he really think he was pulling off a great deal that would keep the team in Arizona indefinitely? The NHL has lost an estimated $148M in Phoenix since they "cock-blocked" Jim Balsille from buying the team from Jerry Moise and moving it back to Canada. No matter which way you slice it, losing that much money is a bad investment. They aren't getting any of that money back anytime soon, which makes me wonder if Bettman knew the team was doomed and wanted to give them more time to build new arenas in Seattle and Quebec. They have yet to break ground on a new barn in Seattle, but there is a brand new hockey amphitheatre under construction in Quebec City that is expected to be done by 2015 (right around the time the Coyotes imaginary debt clock (or death clock) hits $50M).

Don't worry, I'm sure there has to be some clause in Shane Doan's contract that he must be released if the franchise is sold to Quebec City. No question that Bettman would rather move the team to Seattle, but they can't play for any sustained time in KeyArena. I wouldn't be shocked if the NHL tried to help finance the building of a new arena in Seattle. As it stands, they might need to get a basketball team before they ever break ground on construction.

1 comment:

  1. Ah, yes. Nothing like seeing John Elway's confidence get shattered into a million pieces like that. Very nice!

    Not to nitpick, but it's Moyes, not Moise. But that's okay.

    I do think the plug needs to be pulled on the Coyotes and all, but Balsillie didn't do himself any favors by taking season-ticket deposits in Hamilton while the Predators still had a lease AGAINST League rules. Anyway, with the way Blackberry fell shortly after that, I'd have to think Balsillie would have turned out to be another Charles Wang anyway and the Toronto/Hamilton/Markham media market deserves better.

    Take a look at this site below if you haven't already.

    The Coyotes finished in last place in attendance again with an average of 13,776! Yeah, those new owners are really "doing a good job"! (sinister laughter) And to make matters worse, the city of Glendale is getting very close to bankruptcy and we all know what happens when that day arrives! Hint: It ain't selling the team to Phoenix Suns owner Robert Sarver and moving them back to downtown Phoenix where the Coyotes get to play second fiddle to the Suns again in a HUGE way!

    As for Seattle, I'd say it's the opposite. The NBA stubbornly refuses to give Seattle an expansion team. Getting an NHL team first (let alone a new building) might make the NBA change their minds.

    Very good article Slatekeeper. Keep up the good work.