Wednesday, May 6, 2009

The Mess in Phoenix- And What it Means for the NHL

More details are starting to emerge today about the bankruptcy filing of the Phoenix Coyotes and the bid by Jim Balsillie for the purchase of this troubled franchise. Balsillie has provided $17MM in Debtor In Possession financing to the franchise, which in a bankruptcy proceeding would place him at the front of other creditors. Various sources have reported that this filing was a complete surprise to the management of the NHL, and that the league has removed Jerry Moyes, the current owner of the Coyotes, from management and operating responsibilities. The emergence of Balsillie into this situation occurred even as the NHL was courting Jerry Reinsdorf, owner of the Chicago White Sox and whose team has a spring training complex in the Glendale, less than one mile from Arena. Reinsdorf was ostensibly being courted because he had the financial wherewithal to run the team and was amenable to keeping the team in Glendale.

There are a number of interesting aspects to this case that will have to be resolved. Could Moyes actually file bankruptcy is a question that must be determined on the front end. Behind Moyes' $100MM, the NHL is the largest unsecured creditor of the franchise, having fronted $35MM to keep the team afloat. The NHL may argue that they have been "in control" of the franchise and that Moyes' actions were invalid. Many have speculated that the bankruptcy filing is designed to move the franchise out from under the 30 year lease that it has with the City of Glendale, which to my understanding is the only "out" the franchise has in the lease agreement. However, in a bankruptcy proceeding, a judge may deem a lesser offer to be a better offer IF it keeps the team in Glendale and the lease intact. Again, this was rumored to be part of the Reinsdorf bid. Balsillie's bid is contingent upon his ability to move the franchise to southern Ontario. Should the bankruptcy court rule in favor of Balsillie and his bid, and if there are no competing, superior bids, then the question becomes can the court tell the NHL how to operate one of its franchises? Specifically, will the court allow relocation of the franchise against the specific wishes of the league and its management? That is a question that will involve an enormous amount of legal wrangling to resolve, and I am certain that the NHL will appeal an adverse ruling. Finally, ownership of a franchise and any potential relocation of that franchise must be approved by the NHL Board of Governors. The tactic employed by Balsillie and Moyes is an attempt to circumvent that governance provision.

There is another aspect to this change of ownership that has started to emerge. Today, Paul Kelly, head of the NHL Players Association, has endorsed Balsillie's bid and relocation proposal. This is no surprise, because a team in southern Ontario will certainly generate more revenue for the league than has the franchise in Phoenix. Player salaries are tied to league revenue through the salary cap, and a team that bleeds red ink like the Coyotes is a detriment to the overall compensation of the players. Additionally, 22% of a players salary for this season goes into a league controlled escrow account to be paid back to the players when (and if) the league hits a pre-determined revenue target. Kelly and the players look at the revenue generated by a franchise in Phoenix and compare that to the potential revenue generated by another Canadian franchise and they see the potential for those escrow payments to come down. No one can fault the players for operating in their own economic self interest, and short term, this is decidedly in their best interest. However, if the precedent is established to potentially relocate a franchise by these maneuvers that are being attempted by Balsillie and Moyes, then growth of the fan base base and corporate sponsors, particularly in non-traditional markets, will be more difficult with this this option looming. And long term, this will have a detrimental affect on the total league revenue.

This situation could shape the future of the NHL and its relationship with all of its franchises. Balsillie is determined to own an NHL franchise, but seems to chafe under the strictures of ownership that are currently in place. His aggressiveness has alienated many on the Board of Governors. If the bankruptcy court awards him the Phoenix franchise, it will remain to be seen if the BOG will then have the ability to vote on his purchase. If they do, I would buy a ticket just to watch that meeting.

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