Thursday, May 7, 2009

Follow the Money

The initial hearing on the bankruptcy petition filed by the Phoenix Coyotes was held this afternoon in Judge Redingfield Baum's bankruptcy court in Phoenix, and some interesting details have emerged. First, let's set the stage. Jerry Moyes purchased the Coyote franchise in 2001 for $125MM and has invested a total (including the purchase price) of $301MM. I have looked at the bankruptcy petition, and Moyes is listed as the largest unsecured creditor at $103,857,561. Moyes' equity in the franchise is estimated to be approximately $206.5MM, which is negated by the bankruptcy filing. The petition lists assets in the range of $50-100MM and liabilities in the range of $100-500MM. As a point of reference, Forbes magazine estimates the value of the franchise to be $145MM. Moyes has stated that the franchise has lost $73MM over the past three years. Additionally, the arena management arm of his business has lost $20.1MM over the same period. These numbers are indicative of the dire financial straits that Moyes is in since he has taken over ownership of this franchise. Until the economic slump, he was able to cover these losses from income derived from his trucking business, Swift Transportation. That has not been the case for the last two years.

Another financial variable is the lease the Coyotes have with the City of Glendale for arena. Should Moyes break the lease, he is responsible for the payment of the annual rental expense for the term of the lease, which is 30 years. That payment is estimated at $750MM. The lease does provide an out for Moyes, and that is filing bankruptcy. Typically, a landlord is not awarded the value of the lease in a bankruptcy filing; rather, the courts have tended to award a year's lease payment to the landlord. Obviously, the City of Glendale does not want to see this occur, as taxpayers are on the hook for Arena with no anchor tenant and no consistent revenue stream.

This brings us to the Balsillie bid and what it does for Moyes. Depending on how one reads the numbers, Moyes stands to recover most of his unsecured loans to the franchise if the Balsillie bid is accepted by the bankruptcy court. I think it is a given that Moyes could not find another bidder that would buy the franchise at the price that Balsillie is offering. Moyes says that his equity in the franchise is $206.5MM; Balsillie's bid is $212.5MM. Moyes purchased the franchise in 2001 for $125MM and has advanced unsecured loans to the franchise totalling $103MM, totalling $228MM. Balsillie's bid, using these numbers allows Moyes to recover $87.5MM of the unsecured dollars that he has outstanding.

We don't know if Jerry Reinsdorf was (is) going to make a bid for the franchise. It is safe to assume the bid would be less than the $212.5MM bid that Balsillie has on the table. For the sake of argument, let's say that if he bid, it would be $180MM. A bid at that level allows Moyes to recover only $48MM of his unsecured loans. Obviously, Moyes would prefer that Balsillie's bid be the winning bid.

Why would Balsillie pay $212.5MM for a franchise that is bleeding red ink and estimated to be worth only $145MM, according to the Forbes estimate? To answer that, let's play "What If?" What if the NHL decides to expand AND agrees to put another team in southern Ontario. Forget for a moment the opposition from the Toronto Maple Leafs and Buffalo Sabres. What would the price be to purchase the franchise rights for this market? Recall what Craig Leipold paid to get the franchise rights for Nashville. It was $80MM to put a team in a non-traditional, unproven market. What do you suppose the franchise fee would be for a hockey mad market like southern Ontario? $300MM? $400MM? While not an apples to apples comparison, look at the Houston Texans. Bob McNair, the owner of the Texans, wrote a check to the NFL for $800MM for the RIGHTS to have a franchise in Houston. Yes, I know it is the NFL, and the comparison to the NHL doesn't hold, but the point is that the price of anything is what a willing buyer will pay. Everyone that follows hockey knows that Balsillie desperately wants a team in southern Ontario and specifically in Waterloo, home of his company Research in Motion. He is definitely a willing buyer. There is tremendous fan support for another NHL team in that market, and I believe the NHL will eventually put a team there. So, if you were a potential owner, would you rather pay $212.5MM for an existing franchise and relocate to your chosen market, or pay a larger sum to just have the RIGHT to put a franchise in your chosen market? I think the answer is obvious.

It goes without saying that the previous paragraph is just speculation on the part of the View. However, one is usually on the right track when following the money.

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