Tuesday, May 15, 2007

First the Bankruptcy Bowl, then the Stanley Cup

The Ottawa Senators and the Buffalo Sabres met Monday night in game three of the National Hockey League’s Eastern Conference final. The Senators beat the Sabres 1-0 to take a conmanding 3-0 lead in their best of seven series. The winner of the best of seven series advances to the Stanley Cup Final, a far cry from four years ago when both teams were at death’s door in bankruptcy protection. If not for the dogged determination of NHL commissioner Gary Bettman (often criticized in the pages of Sports Business News) both the Sabres and the Senators would either be playing in another city or might have even folded. But giving Bettman all the credit he richly earned four years ago, hockey fans in Ottawa or Buffalo wouldn’t be getting ready to enjoy the Stanley Cup finals later this month.

In the space of a few days in early January 2003, first the Ottawa Senators and then the Buffalo Sabres declared bankruptcy, some of the darkest days in the business history of the National Hockey League.

The NHL took control of the Sabres after owner John Rigas and his Adelphia Communications Corp., fell under bankruptcy protection. In what was a remarkable achievement at the time, NHL commissioner Gary Bettman managed to not only save both franchises but keep both teams in their markets. Many believed the prudent business decision would have been to let both teams’ fold, hold a dispersal draft and send an unforgettable message to the National Hockey League Players Association. The chance to contract two franchises would have scared the NHLPA straight, when it came to understanding how broken the NHL’s economic system was at the time. Bettman instead used the two failed businesses as his bully pulpit to drive home how terribly broken the NHL’s economic system was in 2003.

"We need to change our economic system because no matter how quickly our revenues have grown, no matter how strong our following is, the economics of this game -- because of the escalation of player salaries -- doesn't work for a number of our clubs.''

“It is not surprising that the league and its commissioner would try to convince the public that the bankruptcy filings are directly related to the collective bargaining agreement and thereby attempt to cover up the real cause of the problems -- the bad business decisions and personal situations of the clubs' owners,” Bettman told ESPN at the time.

Two months later, in March 2003, Rochester , New York businessman Thomas Golisano purchased the Sabres for a little more than $92 million. The deal also included Buffalo ’s HSBC Arena. The Sabres debt load at the time of their bankruptcy was near $150 million, the organization projected loses in excess of $25 million for the 2002-03 season and the franchise still owed $22 million on their arena.

According to a New York Times report: Golisano’s agreement to purchase the Sabres included $45 million to assume liabilities, $25 million for the Sabres' projected debt by the end of this season and the $22 million debt remaining on the arena. The deal includes payments for the team's unsecured creditors of about $2.5 million.

The Sabres to a man told The New York Times in January, Golisano made the ultimate franchise save.

''It's a great hockey city,'' said Buffalo Coach Lindy Ruff, who is in now in his ninth season, the longest tenure among current N.H.L. coaches. ''To go from where we were at, from being without ownership to getting ownership and out of bankruptcy, we've really turned the corner.''

''I remember thinking, This team might be moving -- we might have to pack up and get out of here,'' defenseman Jay McKee told The New York Times, who has been with the Sabres since 1996 (McKee signed with the St. Louis Blues during the off-season). ''That was really disappointing, because I'd been through the '99 run through the playoffs and the Stanley Cup and seen the energy and the passion the city had for the team. The uncertainty was pretty tough to accept.''

''I think they felt really betrayed by the Rigase’s -- there were a lot of promises made,'' said Rob Ray, a forward who served as the team's enforcer from 1989 to 2003 and now works on the team's game telecasts in The New York Times report. ''And it never really happened. So I think people were very, very down about that part of it, the ownership side.''

''Tom came in and walked through the locker room and said, 'That was such an exciting game and I'm so proud of you guys,' '' Martin Biron recalled in The New York Times report. ''Nobody really expected that upbeat atmosphere to be part of the locker room. He brought that, and it's been that way ever since.''

The Sabres cut off season ticket sales at 14,815 this past season, had virtually 100 percent of their fans renew their tickets for next year already, and now have a waiting list of close to 2,000. Three years ago when Golisano saved the team the franchise sold fewer than 5,800 season tickets, one of the worst season ticket totals in the National Hockey League. All this after the Sabres last year made the playoffs for the first time in four years. The difference between the Sabres of the Rigase era and the Golisano era – stability in the front office and a sense the franchise is in Buffalo to stay.

According to Forbes Magazine’s 2006 NHL financial valuation the Sabres are worth $149 million an increase in value of 45 percent in two years, the highest increase of value for any NHL franchise on Forbes subjective list.

The Ottawa Senators were a financial disaster almost from the day the NHL awarded expansion franchises to Ottawa and Tampa Bay in December 1990, with the both teams scheduled to begin playing in the NHL at the start of the 1992-93 season.

The Senators' bid had been considered something of a long-shot, particularly in the face of a financially much stronger bid from Hamilton , Ontario , and ran into financial trouble almost at once, as Bruce Firestone (the teams’ founder) had trouble borrowing money to meet the $50-million expansion fee. Firestone had to entire costs associated with the arena and all related infrastructure costs. In 1995-96, the Senators moved from the Ottawa Civic Centre to the Palladium (later renamed the Corel Centre and now
Scotiabank Place), on January 15, 1996.

For several years management (the Firestone led group) had trouble securing financing for the construction of an arena. The team received no financial help from government, neither provincial nor federal, including a refusal by the Ontario government to pay for a new $40-million highway interchange. On August 17, 1993, Bruce Firestone resigned after missing mortgage and development payments and was replaced by Rod Bryden, a founder of SHL Systemhouse. A year later he managed to borrow enough to pay for a $188-million arena called the Palladium. Soon after Firestone secured an expansion franchise Bryden became one of the teams’ minority partners gaining complete control soon after the teams first season

Although widely acknowledged as a well-designed arena (modeled after the Palace at Auburn Hills), in the years since construction the arena has been criticized for being remote. It is located in the far west end of Ottawa , and is a long trip from many other areas, especially in the east or the Outaouais, which is the area around Hull , Quebec . Difficulties are compounded by frequent traffic jams before and after games. With no financial help from the government to improve the existing interchange, the team was forced to build interchanges and a new bridge that goes over the highway out of its own pocket.

Over the years, the arena has become one of the driving forces for development in Kanata . What was once an arena surrounded by farmland is a growing commercial and residential area.

The Senators (now owned by Rod Bryden) filed for bankruptcy on January 9, 2003, after a long history of debt. They continued regular season play after getting some emergency financing from the NHL. Despite the off-ice problems, Ottawa won the Presidents' Trophy in 2002-03, finishing with a league-best 113 points, making them the first Canadian team to have won it since 1989, when the Calgary Flames won it.

Bryden said he hopes the team will be able to stay in the city. But he warned that one of the deciding factors will be whether fans buy tickets. If the seats can't be filled now, while the Senators are in or near first place in the league, investors will be scared away.

"This isn't the big bad banks chasing us out of town," Bryden told a news conference. Investors simply want a fair return, and are quite willing to keep the team where it is as long as they can make a profit, he said.

“We need to decide whether or not we are going to have a team in the city and whether we're prepared to pay for it. There is a marvelous opportunity to have this asset here at today's values, soundly funded.”

After a decade in Canada 's capital city, "there is more than a chance" the Senators will be sold and moved to another location, he said.

"The challenge for Ottawa is, will it benefit from those 10 years of effort and that investment?" Bryden said. "Or, will it build a marvelous asset to watch the Stanley Cup final on television?"

How bad was the Senators financial situation when Bryden finally declared bankruptcy? Soon after filing for bankruptcy protection Bryden lost control of the teams’ arena having failed too pay little of any of the $210 million he owed to Covanta Energy Corp. who lent Bryden the $210 million to build the Corel Centre.

Bryden tried several schemes between missing the teams’ payroll on January 1, 2003 and the end of February 2003 to maintain control of the franchise, finally admitting he had no option but to walk away from his investment on February 25, 2003 (he made the announcement between the second and third period of a home game against the Dallas Stars).

On August 26, 2003, Eugene Melnyk purchased the Ottawa Senators hockey club of the NHL. He is an alumnus of St. Michael's College School and the current owner of the Toronto St. Michael's Majors and the Mississauga IceDogs hockey teams of the OHL. Melynk paid an estimated $27.5 million for the arena (a facility that cost more than $200 million to build) and $75 million for the balance of the franchises assets (primarily the Ottawa Senators team and its players). Forbes financial valuation had the Senators at a value of $117 million in 2003 when Melnyk again paid just a shade over $100 million for the arena and the team (a combined conservative paper value of about $340 million).

Nonetheless it was Melnyk and Melnyk alone who stood up and made an offer to buy the Senators and keep the team in Ottawa . Others expressed interest but the only serious offer came from Melnyk. Did Eugene Melnyk get a great deal, yes but that’s one of the reasons he’s billionaire he seizes great business opportunities.

But it was Gary Bettman who established from the outset he wanted both franchises to stay where they are, in Ottawa and Buffalo .

''We may well decide to explore what other options we have with respect to ownership,'' Bettman said at the 2003 NHL All-Star Game in early February 2003 when asked about the Sabres ownership issues and what would end up being a failed bid by Buffalo businessman Mark Hamister. ''I am increasingly concerned that their bid, as well as any other bid we've received, relied at least initially on public-sector support which may not be there.''

When asked if the team could be moved from Ottawa by a new owner, Bettman said: ''We want it to stay put where it is. We don't have complete, unfettered control, but we have a fair amount of influence, all of which we intend to use.''

One issue Bettman made clear at the leagues’ 2003 All-Star festivities – the league wasn’t going to contract, and at the time that would have been the prudent business decision. The NHL was in the midst of what would turn into the NHL losing the entire 2004-05 season to a protracted lockout with the NHL Players Association. The league lost an estimated $1.8 billion in the ten year period leading to the lockout. Earlier in Bettman’s tenure the Pittsburgh Penguins and the Los Angeles Kings declared bankruptcy. However as was the case with the Sabres and the Senators it was Gary Bettman and Gary Bettman alone who managed to not only save the franchises from having to consider moving to another city, but contraction.

In terms of the Sabres and Senators imagine the message Bettman and company would have been able to deliver to then NHLPA executive director Bob Goodenow if two teams had folded and the union would have lost 50 jobs. If Bettman hadn’t been so determined to save the Senators and the Sabres it’s likely there would have never been an NHL lockout. NHL owners would have had their salary cap, everything they managed to achieve as the result of their year long lockout of the players – without losing a game to their quest to break the NHLPA.

The four NHL franchise bankruptcies had nothing to do with Bettman’s leadership and everything to do with the wrong people owning the four franchises when they each filed for bankruptcy protection. There are plenty of issues Gary Bettman should be held accountable for that have taken place in the 15 years he has served as NHL commissioner but without Gary Bettman fans in Ottawa or Buffalo wouldn’t be getting ready to enjoy experiencing the Stanley Cup Finals.

For Sports Business News this is Howard Bloom

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