Saturday, October 07, 2006

The Death of the Pittsburgh Penguins

There is a 75 percent probability the Pittsburgh Penguins are playing their last years in the Steel City. Jim Balsillie, a Canadian businessman purchased the team Thursday evening from Mario Lemieux, the second time in six weeks the Penguins have been sold. For the uninitiated Toronto native Sam Fingold signed a “letter of intent” to purchase the Penguins on July 28, 2006. Somehow, within the space of 70 days Fingold is out and Balsillie is in. The Penguins current lease with the Mellon Arena ends when the current NHL season finishes. The franchise could move as early as next year.

Who exactly is managing the sale of the Pittsburgh Penguins? Is it Bozo the Clown? Why did the Pittsburgh Penguins hold a major press conference 70 days ago to announce the sale of the franchise, only to see the sale blow up in their collective faces? Who exactly did the due diligence to determine Mr. Fingold’s real interest in the Pittsburgh Penguins? And why should anyone believe Jim Balsillie is going to able to complete a sale that another billionaire Sam Fingold couldn’t take over the finish line?

Giving Balsillie the benefit of the doubt (that anyone deserves), the Penguins future in Pittsburgh is more uncertain then it’s ever been before. Balsillie is the chief executive officer of Waterloo, Ont.-based Research in Motion Ltd.; the company that makes the wireless blackberry tool. The sale was announced Thursday evening between periods of the Penguins season opening game at the 45-year old Mellon Arena. Balsillie it clear, the Mellon Arena isn’t a suitable NHL facility.

"It's overdue,” Balsillie of getting firm plans for a new facility to replace 45-year-old Mellon Arena in a Pittsburgh Post Gazette report. "It should have been done a long time ago, from my perspective. I don't think anyone can wait, or it's just going to cause another delay in the arena. Gosh, you can't see spring before this is done. Is there anyone in this world who thinks there's merit to waiting another year? I don't."

As a condition of sale, Balsillie accepted a clause that keeps the Penguins in Pittsburgh if the Isle of Capri wins the single gaming license (gambling) the State of Pennsylvania will award to one of four applicants who applied for the right to build a casino in Pittsburgh. Each bidder has offered a generous package to the community for a variety of civic related projects. Isle of Capri has aligned itself with the Penguins and is the only group who has guaranteed they’ll build a new arena in Pittsburgh. The Isle of Capri has a 25 percent chance of succeeding, a 75 percent chance of failing.

Pennsylvania Governor Ed Rendell melding sports and politics continues to float a plan “B”; a plan that anyone with common sense knows has absolutely no chance of succeeding. That includes: The company (one of the two other companies – the successful bidder) to contribute $7.5 million a year for 30 years, the Penguins $8.5 million up front and $4.1 million per year, and the state $7 million a year through a slots-backed fund, all toward the new facility. There also is $26.5 million in state funds for land acquisition and site preparation in Uptown, adjacent to Mellon Arena.

As much as it has been discussed, it makes no sense when you closely examine the plan. The other two bidders have each made definitive economic commitments to community groups in Pittsburgh, groups that are backing the other two bids based on the promises made. Is it realistic to expect either group to make a $225 million contribution above and beyond what they’ve already committed to? It’s been clear from the beginning, the only casino bidding group committed to building a new arena is Isle of Capri.

How ill-conceived idea is Plan “B” – anyone with common sense understands its never going to work and why.

City Councilwoman Tonya Payne, whose district includes Mellon Arena, told The Pittsburgh Post Gazette the Penguins are a key part of the Hill District's revitalization, and that the Isle of Capri proposal is the only way to ensure that they stay, especially given the sale to an out-of-town buyer.

"I think Plan B is absolutely ridiculous," she said in the Post Gazette report. "Why should [taxpayers] pay for an arena when somebody else will do it for free? ... I don't believe [Plan B] will be strong enough" to keep the team here.

Councilman William Peduto, expected to be the next Pittsburgh Mayor, is also an Isle of Capri supporter, and questioned whether Plan B could win legislative approval, if that is needed. "My bottom line on Plan B is, show me the money," he said.

Rendell for his part made it clear he doesn’t really believe in Plan B and Balsillie suggested he’ll only consider the deal he’s agreed to with Isle of Capri.

"Never say never," Rendell said. "The one thing I am adamant about is that we're not going to use taxpayers' dollars, but things like naming rights, sure, we'd be willing to talk about that."

Balsillie said Isle of Capri has offered "an amazing plan" for arena funding. However, Balsillie downplayed Plan B.

"I haven't really seen details of Plan B; they're kind of a moving target," Balsillie said. "I just can't comment, because it's all just so darn fluid on a bunch of stuff. Clearly, the focus now is the Isle of Capri plan."

If the Penguins have a 75 percent chance of leaving Pittsburgh, where are the Penguins going. Kansas City will open the Sprint Center next fall, a new state-of-the art arena without a major tenant. Balsillie knows the NHL has failed once in Kansas City. He’s worth $1.4 billion, selected Canada’s CEO of the Year. Smart business people make the right choices. Moving an NHL franchise to a non-NHL market (Kansas City) would be a stupid decision, one Balsillie is too smart to make.

Dismiss Houston since Houston Rockets owner Les Alexander wants to own and operate an NHL franchise in the Texas town. Balsillie didn’t buy the Penguins to sell the Penguins. Houston isn’t a viable destination for anyone who wants to own and operate an NHL franchise for anyone other then Alexander. The Great Pacific Northwest – Seattle and Portland, not worth considering. Paul Allen wants to sell the NBA Trailblazers and the future of the Seattle Sonics is up in the air.

That leaves the Great White North, Balsillie’s country, the home of hockey, Canada. There are only three locations Balsillie is going go seriously consider in Canada, Hamilton, Toronto and Kitchener/Waterloo. The Waterloo Regional Record in an OP-Ed piece in Friday’s paper suggested it was Balsillie’s civic duty to bring an NHL franchise to his hometown. No where does it offer Balsillie any advice as too how he’s supposed to pay for a $250 million arena in his hometown. Balsillie may want to be a “local hero” but he’s no idiot.

Hamilton Councillor Terry Whitehead told Sports Business News Friday, Balsillie has agreed to a lease for Hamilton’s Copps Coliseum that includes Balsillie paying any of the costs to renovate the 20-year old facility. Whitehead told SBN Copps Coliseum engineering design includes the ability to raise the roof of the facility, add a complete upper deck of seats. The arena can also be renovated to accommodate up to 200 luxury boxes and club seating according to Whitehead. Taxpayer money would not be used, however Whitehead still indicated to SBN that a private members bill might create some tax incentives for Balsillie, enough to make the arena work financially for Balsillie.

There are many who don’t believe Hamilton has a reasonable chance of ever securing a National Hockey League franchise.

"Hamilton's had trouble supporting American Hockey League or even major junior teams," Toronto-based sports marketer Bob Stellick told The Toronto Star. "The average ticket in the NHL is now $80 or $90, so for two adults to make a night out of it, that's about $225. I just don't think Hamilton can support that and sell 16,000 tickets to every game, especially corporate box seats and luxury seats."

NHL commissioner spinning the sale of the Penguins as one would expect, told The Canadian Press the Penguins are not moving anywhere – just yet. "We have not and are not looking at anything at this point in time other than getting a new building in Pittsburgh and having the team stay there." Again there is no better than a 25 percent chance the Isle of Capri are going to be able to deliver that arena and Plan “ B” is a plan without merit.

If Isle of Capri fails to obtain the gaming license and the NHL approves the sale of the Penguins to Balsillie (in all likelihood) the NHL has no legal recourse preventing Balsillie from moving the Penguins to wherever he wishes to move the team. Al Davis successfully sued the National Football League in 1982 when the NFL tried to prevent Davis from moving the Raiders from Oakland to Los Angeles. On May 8, 1982 a jury in United States District Court decided that the National Football League had violated the Sherman Antitrust Act in forbidding one of its 28 teams, the Oakland Raiders, to move to Los Angeles.

Each NHL franchise had exclusive rights within a 50-mile territorial limit. Hamilton is less than 45 miles from Toronto and around 60 miles from Buffalo. If Balsillie is interested in Hamilton, it will be in his best interests to negotiate an agreement with both the Buffalo Sabres and Toronto Maple Leafs allowing Balsillie to relocate the Penguins to Hamilton. Balsillie could try and fight the Sabres and Leafs in the courts citing Canada’s Competition Act. That could be a lengthy legal process costing tens of millions of dollars in legal fees. If Balsillie is interested in being a good NHL owner (a partner with the leagues’ other 29 owners), it’s in his best interest to reach an agreement with Buffalo and Toronto.

Toronto remains a very real possibility for Balsillie. Sooner rather than later Toronto will be home to a second National Hockey League franchise. A team in Hamilton might prevent that, but it’s a certainty the Greater Toronto market is too big and important a hockey market for the GTA to have only one NHL franchise.

Balsillie could offer Maple Leaf Sports and Entertainment (MLSE) $100 million in territorial rights to move the franchise into the Air Canada Centre, the current home of the Maple Leafs and the Raptors. Can an arena be home to three sports franchises that compete in the same season(s)? The Staples Center is home to the Los Angeles Lakers, Kings and Clippers.

One key could be Balsillie approaching Michael Cohl about joining his ownership group. Cohl was a member of Fingold’s failed group, and Cohl could open more doors for Balsillie then he ever imagined.

Cohl is one of North America’s premier concert promoters. Currently Cohl is producing the Rolling Stones and The Who’s world tours. The ability to work with Michael Cohl along with the $100 million in territorial fees will be very enticing to MLSE. Cohl could make it clear to MLSE, if MLSE agrees to accept Balsillie’s bid to move a second NHL franchise into the ACC, he’ll use his ‘influence’ to ensure the ACC becomes the premier North American entertainment venue.

Two NHL teams and an NBA franchise make for very busy nights from October through May. During the summer months the busiest concert venue in Toronto isn’t the ACC; it’s the outdoor Molson Amphitheatre. With Michael Cohl having an interest in the ACC, it would be easy to imagine a minimum of 25 additional concert dates in the ACC. Those 25 dates could easily represent more then $10 million additional dollars in revenue to MLSE on an annual basis. MLSE is a business.

The Ontario Teachers Pension Fund owns 57 percent of the company. Larry Tennenbaum manages MLSE, like every other corporate CEO has the fiduciary responsibility to ensure his stakeholders receive the highest return they can on their investment. A proposal along these lines offers just that and a great deal more to everyone involved.

The bottom line and remember spending $175 million to buy an NHL franchise is all about the dollars and the sense of the deal. If Jim Balsillie gets the keys to a new arena in Pittsburgh he’d be a fool to not stay in Pittsburgh. He’d be an even bigger fool if he accepted Plan “B”, and spent more than $120 million on an arena. And if he does move the Penguins – it will be Hamilton or Toronto, no other location makes any real economic sense.

For Sports Business News this is Howard Bloom. Sources cited in this Insider Report: The Pittsburgh Tribune Review, Pittsburgh Post Gazette, Toronto Star, Globe and Mail and the Canadian Press