Tuesday, January 02, 2007

Two Steps Back and maybe one big step forward for the NHL

The most interesting year-long 2006 business story for the National Hockey League was and is the ongoing saga of the Pittsburgh Penguins. The failed concept that tied the future of the once great NHL franchise to a bid by the Isle of Capri for the sole gaming license issue by the Pennsylvania Gaming Control Board blew up in the faces of Mario Lemieux’s Penguins on December 20, but the net affect may be a blessing in disguise for the National Hockey League.

The story began early in 2006 when Penguins owner Mario Lemieux announced the future of the Penguins would be directly linked to the Isle of Capri’s casino license bid. It should come as no surprise that Lemieux intends to sell the Penguins. Owed more then $32 million by former Penguins owner Howard Baldwin, Mario took control of the bankrupt National Hockey League franchise on September 3, 1999, as his only means of recouping the tens of millions of dollars he was owed. Mario’s interest in owning an NHL franchise was always lukewarm at best.

The Pittsburgh Penguins future remains tied directly into the team getting a new arena to replace the aging Mellon Arena. Built in 1961, the Mellon Arena is the oldest facility in the NHL and lacks most of the revenue generating amenities most current NHL buildings feature. It is well worth remembering one of the biggest mistakes Howard Baldwin made when he owned the Penguins was his decision to accept $18 million in taxpayer money for renovations to the Mellon Arena in 1992.

When Baldwin made his choice, the Steelers and the Pirates where fighting for new taxpayer driven stadiums, they weren’t interested in renovations to Three Rivers Stadium, their home at the time. Baldwin was told by city officials if he accepted the offer to renovate the Mellon Arena the door to any taxpayer built arena would be closed to him. That short sighted decision has led to the Penguins uncertain future in Pittsburgh.

The Penguins/Isle of Capri where originally one of four groups bidding for the one casino – slots license the State of Pennsylvania awarded to one Pittsburgh based group. The team and gambling partner Isle of Capri Casinos Inc. had proposed replacing aging Mellon Arena and redeveloping the Pittsburgh’s lower Hill District without government help if they receive the slots license. If the Isle Capri bid had won, the new owner would have been locked into that arrangement.

There were three other groups interested in the chance to build a casino in Pittsburgh. One is backed by Detroit casino operator Don Barden, the only African American casino operator in the United States; the other two groups had strong local ties and interesting partners. Both would partner with Las Vegas based casino operators, one with Mandalay Bay and the other with Harrah's. Mandalay Bay eventually pulled their bid well before the decision was announced on December 20.

“It's not a tactic," Ken Sawyer, the team's new chief executive officer Friday’s, said of the potential Penguins potential sale on January 20. 2006 in The Pittsburgh Post Gazette. "It may be a consequence of our action, but it's not a tactic."

"We put on the table a no-brainer opportunity here. The community needs to get behind us. Many already have. ... We've done what we need to do. We've put this forward. We're very encouraged by the support we've had so far and look forward to [our project being approved]."

For his part, NHL commissioner Gary Bettman made it clear when Mario announced the Penguins future would be linked to a casino bid and the importance of the team securing a new arena in Pittsburgh.

“I wasn’t surprised,” said Bettman. “Mario has been a terrific owner. He saved the Penguins in Pittsburgh and he knows that there are some difficult issues ahead that are going to have to be dealt with by the franchise. I think he wants to ensure that the franchise is in the strongest possible hands from a financial standpoint.”

“What’s clear is that the Penguins desperately need a new facility,” said Bettman in the interview with SportsTravel. “In the absence of a new arena in Pittsburgh, I don’t think anyone sees how this franchise can be viable there. That’s a function of the fact that the Penguins have the oldest arena in the National Hockey League. And in the Pittsburgh market itself, the Penguins have to compete with a football and baseball team for suite revenue and marketing, sponsorship and signage dollars against teams that have had—at taxpayers’ expense—new stadiums built for them,” continued Bettman. “So the Penguins are even at a competitive disadvantage from a business standpoint within the Pittsburgh market.”

The end of the beginning for the Pittsburgh Penguins began on Friday, July 28 when the Penguins announced Toronto businessman Sam Fingold had signed a letter of intent to purchase the franchise. Fingold may be based in Hartford, but he grew up in Toronto. His father and brother are based in Toronto. And the fourth member of the group, Michael Cohl, is also based in Toronto. In Cohl, Fingold has a partner who is recognized as one of the world’s leading concert/entertainment promoters. This past year Cohl managed the Rolling Stones world tour and the Who’s world tour.

Politicos in Pittsburgh began floating a so called Plan-B to keep the Penguins in Pittsburgh in mid July. That plan included (to be only discussed when and if the Isle of Capri casino bid failed): The company (one of the two other companies – the successful bidder) contributing $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.

Barely six weeks later on October 5 the proposed sale to Fingold collapsed. Jim Balsillie, a Canadian businessman, then purchased the team for a reported $175 million. Worth a reported $7 billion, the founder of the Blackberry wireless communications device surprised many by offering as much as he did for the Penguins. Again if anyone was surprised by the dollar amount Balsillie offered for the Penguins, the $175 million offer came days before Forbes Magazine pegged the average financial valuation for an NHL franchise at $180 million. And it was well worth noting, Balsillie’s offer to buy the Penguins was tied directly into the Isle of Capri casino bid. If the Isle of Capri’s bid was successful the Penguins would be getting the keys to a proposed $290 million arena.

Two and a half months before the December 20 Pennsylvania Gaming Control Board announcement the Penguins and NHL officials continued to focus all of their attention on the Isle of Capri bid. Plan “B” was on the table, but it was clear no one was interested in even considering anything other than the Isle of Capri bid.

How ill-conceived idea was Plan “B” to everyone connected to the bid in early October – anyone with common sense understood it was never going to work and why.

City Councilwoman Tonya Payne, whose district includes Mellon Arena, told The Pittsburgh Post Gazette on October 6 the Penguins are a key part of the Hill District's revitalization, and that the Isle of Capri proposal was 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, was 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.

History repeated itself on December 15, days before the December 20 Pennsylvania Gaming Control Board announcement, Jim Balsillie announced that he had decided he was no longer interested in buying the Penguins. According to The Globe and Mail, Canada’s TSN reported that the complete breakdown of the proposed sale to Balsillie was from the NHL’s insistence regardless of the decision announced by the Pennsylvania Gaming Control Board, the National Hockey League as a condition of sale was going to force Balsillie to keep the team in Pittsburgh.

In a classic case of putting all of one’s eggs into one basket, the NHL and the Penguins remained steadfast in their faith in the imminent announcement from the Pennsylvania Gaming Control Board, Plan B was still on the table but it was really all or nothing for the NHL and their future in Pittsburgh. The Isle of Capri’s bid wins or the Penguins future in Pittsburgh would be directly linked to a concept no one believed in.

History will record the end of days arrived for the Pittsburgh Penguins at 11:30 AM, Wednesday December 20, 2006. The Penguins died when the Pennsylvania gaming control board awarded Pittsburgh's sole stand-alone casino license to Don Barden's PITG Gaming. The Penguins and the National Hockey League had put all of their cards (pardon the gaming related pun) in the failed Isle of Capri bid. Close to two-years of planning went down the drain, along with plans to build a $290 million arena. The so-called “Plan B” remains an option, but it’s as likely to occur as the return of the Montreal Expos to Montreal’s Olympic Stadium.

NHL Commissioner Gary Bettman released the following statement after the Pennsylvania Gaming Control Board announced its decision regarding the awarding of a slots license in Pittsburgh: “The decision by the Gaming Commission was terrible news for the Penguins, their fans and the NHL. The future of this franchise in Pittsburgh is uncertain and the Penguins now will have to explore all other options, including possible relocation. The NHL will support the Penguins in their endeavors.”

A day later on December 21, Mario Lemieux released the following chilling statement on the Penguins long-term future in Pittsburgh: “Recent developments, including Wednesday’s decision by the PGCB, and the recent termination of the purchase agreement by Jim Balsillie have convinced us that it is time to take control of our own destiny. Accordingly, starting Thursday, the team is off the market, and we will begin to explore relocation options in cities outside Pennsylvania. After seven years of trying to work out a new arena deal exclusively in Pittsburgh, we need to take into consideration the long-term viability of the team and begin discussions with other cities that may be interested in NHL teams.”

“As soon as we are no longer restricted by our agreement with Isle of Capri from negotiating an arena deal here, in the next few weeks, we will also begin discussions with local leaders about a viable Pittsburgh arena plan.”

Lemieux and Pennsylvania Governor Ed Rendell announced Thursday he would meet with Mario in Pittsburgh next week – the first steps in seeing if Pigs can really fly or Plan B is viable. Rendell has set a March 31 deadline for Plan B to be negotiated. Allegheny County Chief Executive Dan Onorato has a much more ambitious February do or die deadline for Plan B. Regardless Pigs don’t fly and Plan B will never work, unless and until local and state politicians in Pittsburgh and Pennsylvania commit to the Isle of Capri bid – build an arena in Pittsburgh and give the Penguins the keys.

However, because Mario has announced the team will look at all of his options, Mario will succeed in pushing the price he sells the Penguins from the proposed $175 million Jim Balsillie had offered for the franchise to somewhere between $225 and $250 million.

The future of the Pittsburgh Penguins is in the hands of two cities, and two people – Les Alexander and the Houston market, and William “Boots” Del Biaggio and the Kansas City market. There are no serious bidders emerging interested in keeping the Penguins in Pittsburgh but that could change if Mario strikes a deal to get a taxpayer built arena.

Del Biaggio made a serious bid to buy the Penguins in 2005. Penguins’ owner Mario Lemieux took the team off the market soon after the franchise drafted Crosby. Del Biaggio, a minority-partner in the San Jose Sharks, has signed an agreement with AEG to own and operate an NHL franchise when one becomes available. AEG have built The Sprint Center, a new arena without a major tenant set to open in time for the start of the 2007-08 season.

The National Hockey League expanded to Kansas City before the start of the 1974-75 season. Two years later the franchise moved to Denver, where the team became the Colorado Rockies. The Rockies moved to New Jersey before the start of the 1982-83 season. The NHL has failed once in Kansas City, where an NBA franchise also failed. With a new arena and Sid the Kid, and if William “Boots” Del Biaggio is ready to write a check for at least $175 million, the Penguins could be on their way to Kansas City.

Les Alexander the owner of the NBA’s Houston Rockets visited NHL commissioner Gary Bettman 19 months ago (May 2005) with the expressed purpose of making clear to the National Hockey League he was very interested in bringing an NHL franchise to America’s fourth biggest market. Alexander told The Houston Chronicle on November 3, 2005 he was ready to move forward with his plans to bring an NHL franchise to Houston’s Toyota Center.

"I am trying to get a team. I am trying," Alexander said. "I went to see the commissioner. I told him about my interest. I can't disclose teams, but I've been talking to people (in the NHL) and to investment bankers."

"I had conversations a month ago with an investment banking firm. I'm looking to buy a team. So people know my interest. You hear from time to time that teams might be for sale, then it changes or something else happens. But my interest is out there."

Other cities that will be mentioned as potentially new homes for the Penguins include Oklahoma City, Las Vegas, Seattle and Portland. None will play a serious role, and none offer what either Les Alexander or William “Boots” Del Biaggio businessmen with arenas, in cities the NHL wants to be in, likely ready to write Mario Lemieux a check for at least $225 million.

The NHL with either Alexander or Del Biaggio will have an opportunity to buy into an NHL with a salary cap and financial restraint. What creates ‘the perfect storm’ for Mario Lemieux and Gary Bettman isn’t the sale of an NHL franchise, but with Penguins nothing more than a technicality away from becoming the death of the Quebec Nordiques repeated in Pittsburgh.

The Quebec Nordiques were the NHL’s best young team in 1993, the team of the future. The owners of the Nordiques sold their team to Denver interests at the end of the 1994-95 season and won their first of two Stanley Cups their first year in Denver. The Penguins aren’t just an NHL franchise that is moveable, the Penguins represent the NHL team of the future with at least four franchise players on their current roster: sports next true superstars Sidney Crosby, Evgeni Malkin, Jordan Staal (each under the age of 20) and goaltender Marc-Andre Fleury who recently turned 22.

Forbes Magazine recent subjective financial valuation for NHL franchises determined the average hockey team is now worth $180 million and makes an operating profit (in the sense of earnings before interest, taxes, depreciation and amortization) of $4.2 million. During the 2003-2004 season, the last before the lockout, the average hockey team was worth $163 million and lost $3.2 million. Recent sale prices for NHL teams (the St. Louis Blues) have been around $150 million. It’s reasonable to assume if Alexander and Del Biaggio are serious (and there’s nothing to indicate they are nothing but serious) its possible Mario Lemieux might be able to sell the Penguins for at least $225 million.

Therein lies why the failure of the Isle of Capri plan is destined to be the most important business news the National Hockey League enjoyed in 2006. There are several other NHL franchises, more like dogs with flees (Florida Panthers, Phoenix Coyotes, New York Islanders) who have serous long-term issues with their franchises. Their sale value might be in the range of $175 million. If however, Lemieux and Gary Bettman through nothing more than dumb luck sell the Penguins in the coming months for at least $225 million that will increase the financial valuation of every NHL franchise by at least 10 percent, and that will be very good for the business of the National Hockey League.

For Sports Business News this is Howard Bloom

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