Wednesday, August 26, 2009

Reinsdorf Folds, NHL All In

Last evening a series of events unfolded in the Phoenix Coyotes bankruptcy that has completely changed the dynamic of that situation. Jerry Reinsdorf, owner of the Chicago Bulls and White Sox, withdrew his bid for the Phoenix franchise, citing a truculent seller (current owner Jerry Moyes) that had chilled the process and increased litigation costs, and although not stated, was unable to obtain certain lease concessions from the city of Glendale on the arena lease. Concurrent with this action, the NHL put in a bid to purchase the franchise. Terms of the bid were not disclosed, but this is obviously an effort by the league to keep Jim Balsillie and PSE from having the only bid before the court and an attempt to be awarded the franchise so that it may be eventually sold outside of the bankruptcy process. There is lots of excellent coverage about this from James Mirtle at; Greg Wyshynski at Puck Daddy at; and Tyler over at http://www.nhldigest/. I'm not going to rehash the great analysis that these guys have provided. I do want to look at what the NHL bid may do to the auction process.

As has been stated before in this blog, the bankruptcy court has the charge of attempting to maximize the value of the assets for the benefit of the creditors. On the surface, the Balsillie bid of $212.5MM is significantly superior to the bid that had been placed by Reinsdorf of $148MM or the Ice Edge bid that is estimated to be $150MM. The Balsillie bid would have paid the secured creditors and provided approximately $100MM to the unsecured creditors (read: Moyes) whereas the Reinsdorf bid would have left unsecured creditors in the lurch. We know what Balsillie's bid is- a stalking horse bid that is designed to be so high that other potential bidders are discouraged from the bid process. Although we don't know what the NHL's bid will be, it is safe to assume that it will have significantly more financial muscle that the Reinsdorf bid (in May of this year, the NHL secured a financial commitment for a line of credit for $200MM) and will most likely be greater. Will the entry of the NHL into the process lead to a frenzied bidding war between the NHL and Balsillie? Perhaps, but I sincerely doubt it. Instead, I think it solidifies the Coyotes in the Phoenix market. Here's why:

The City of Glendale

The City of Glendale has a valid lease with the Coyotes, and the City has indicated that if the franchise is moved, they will seek lease and penalty payments of $794MM to mitigate the financial damage resulting from the loss of the anchor tenant at arena. It is my belief that the relocation provision of the Balsillie bid will weigh heavily in the consideration of the court, especially if there is another bidder that can satisfy the majority of the creditors. I believe that the court will be inclined to consider a bid that is for a lesser amount than the Balsillie bid provided that it keeps the franchise in Glendale. That is the obvious intent of the NHL by entering the bidding process. Awarding the franchise to a bidder that will keep the team in Glendale avoids the financial hazard to the City and the potential for lengthy litigation should the franchise move.

The NHL as an operating entity

As stated before in other posts, the courts have typically shied away from interfering in the operations of professional sports leagues. The Balsillie bid and subsequent anti-trust filing has asked the court to set aside sections of the NHL's by-laws and constitution and allow the relocation of the franchise. Unless there is a substantive legal reason to do so, I believe the court will refuse this request.

Rejection of Balsillie as an owner

The leadership of the NHL, as represented by the Board of Governors, has unanimously rejected Balsillie as an owner. The NHL has asserted their right before the court to determine membership in the league. I believe they will prevail on this issue.

Because of these factors, I would believe that the NHL will make a bid higher than the Reinsdorf bid but significantly less than the Balsillie bid and rely on the court to take the factors I have cited into consideration. Judge Baum has to take into consideration the interests of all creditors: secured, unsecured, the NHL, and the City of Glendale. In that hierarchy, unsecured creditors are at the bottom, and if a bid from the NHL satisfies the court while leaving the unsecured creditors receiving virtually nothing, the franchise will remain in Phoenix.

This game of high stakes poker has just gotten a lot more interesting. The NHL has anted up while Reinsdorf has folded. Across the table is Blackjack Jim. And the dealer is Judge Baum. Will the NHL draw four aces or will Blackjack Jim's full house stand? The flop is September 2nd.

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