Wednesday, June 03, 2009

NHL to Hamilton conference call, part II: Vagaries of the application

One of the interesting things that came out of yesterday's media conference call on the filing of the official application to move the Phoenix Coyotes to Hamilton was the information about the NHL's application process. The application covers the territory required by NHL By-Law 36.5, and there are some curious inclusions and omissions there.

First, the application includes substantial information about the Coyotes' financial picture in Phoenix. Here are four of the key points made in the application, excerpted word-for-word from the media backgrounder I received:

"- Since inception the Club has recorded cumulative EBITDA losses in excess of $316 million.

- The Club has been unable to generate a significant fan base in Glendale demonstrated by a lack of interest in attending a game live, with the Club ranking 5th in attendance interest in that market behind the NFL, MLB, NBA, and NCAA Football. Historic support is weak, attendance is low, ticket sales continue to decline and broadcast ratings are low.

- Management of the Club has attempted to restructure its operations in an effort to increase revenues and decrease costs to reduce operating losses, and bring a greater probability of financial sustainability. Even with the most optimistic of planning assumptions the five-year horizon in Glendale projects further losses of over $40 million.

- In an effort to secure additional investors or a buyer to help meet responsibilities towards all creditors, current owner Jerry Moyes engaged an experienced adviser and retained Citibank’s Private Banking Group. There was not one expression of interest or an offer of any magnitude that would pay most of the creditors and keep the Club in Phoenix/Glendale."

There's enough material in those four points for a whole series, and some of it will be discussed in greater detail in my upcoming posts on the matter. However, the key thing to notice for the moment is the specific numbers included: cumulative EBITDA (earnings before interest, taxation, depreciation and amortization) losses of $316 million and projected future losses of $40 million under "the most optimistic of planning assumptions."

What are "the most optimistic of planning assumptions"? Application author Tom Wright (whose role I explored in more detail here) had some interesting comments on the Coyotes' past and future financial prospects on the conference call, including those details.

"We had access to all the financial details of Mr. Moyes," Wright said. "In its 13 seasons [in Phoenix], the club has never approached a profit. ... The club is not financially viable and the prospect for it to become financially viable is not there either."

Wright stated that "the most optimistic of planning assumptions" case considered almost doubled ticket prices and an attendance increase of 20 per cent, both of which would be highly unlikely to succeed on their own but appear ludicrously unbelievable in combination. "Even then, the club is projected to lose $40 million dollars," he said. If anyone still believed that the Coyotes were viable in Phoenix in the long run, those details probably crushed that idea.

What's interesting is that the application goes into nowhere near as much financial detail about the new market. Here's some excerpts from the part concerned with Hamilton:

"Research clearly demonstrates Hamilton is a vibrant and viable hockey market. Based upon population, demographics, and the result of quantitative research conducted in May 2009, the support for an NHL team in Hamilton will be strong and substantial.

- Hamilton and the surrounding area have 1.4 million people and favourable demographics to support a team. While by itself, Hamilton and surrounding area is a large enough hockey market to viably sustain an NHL franchise, this specific market area is situated in Southwestern Ontario, a market area of more than 7 million where hockey is deeply entrenched and widely supported.

- The median after-tax income of Hamilton Area Residents is 14% above the Ontario average and is a key indicator of residents’ ability to spend for sports events and merchandise.

- The Club will play its home games in Copps Coliseum. A complete renovation plan has been prepared by Stadium Consultants International (SCI), of Toronto, a subsidiary of BBB Architects. The fully renovated arena will comply with the design requirements set out in the NHL’s Facility Standards.

- The owner of PSE is Jim Balsillie. Mr. Balsillie is the Co-CEO of Research In Motion (RIM.) He is a businessman, philanthropist, community leader, and passionate hockey fan. He has been recognized throughout North America and internationally as a visionary entrepreneur, influential CEO, and an extremely competent business leader. His roots in Southwestern Ontario are deep and his community contributions exemplary.

- Under Mr. Balsillie’s direction, PSE has represented, to the extent that it would even be required, its willingness and ability to sustain losses during the initial years of operation."

It's curious that the application involves so much detail about the financial history and prospects of the team in Phoenix, but only includes data about the Hamilton market and arena without any concrete estimates of the team's profitability. The last point about "a willingness and ability to sustain losses" is also interesting. Wright and Balsillie spokesman Bill Walker made some good points on that subject, and indicated that the last commitment there was mostly a pro forma one expected by the league rather than a prediction that the team could lose money initially.

"Mr. Balsillie thinks the team would be profitable immediately," Walker said. "Mr. Balsillie's view is that the team in Hamilton would be an immediate success, a sellout or close to sellout."

"We know it's a large market, we know hockey is the number-one sport in that market," Wright said. "There's every indication the team will be profitable right from the get-go."

That's what I'd certainly imagine too. Even Bettman's NHL recognizes the value of the Southern Ontario market, something I've written about a lot. It is interesting that their application doesn't appear to require specific financial estimates, though. Obviously, those would be difficult to make before ticket prices are set, broadcast deals are made and arena renovations are complete, but I would still have expected to see a few more details.

This series will continue tomorrow with more information gleaned from the conference call.


  1. Not only is there not a lot of information about Hamilton, some of the "facts" are way off.

    A median after-tax income that's 14% above the Ontario average? Sure. StatCan has it at $25.4K for Hamilton/Burlington, $24.6K for the province. They also have more low-income earners than the Ontario average. Those people won't be shelling out for an NHL team, regardless of how pretty they make Copps.

    The "7 million people in Southwestern Ontario" part bugs me for two reasons: one, Hamilton's in Southern Ontario (there's a difference!); two, there's no way it's 7 million: Ontario minus Greater Toronto and Ottawa is only 6.2 million. I guess we're supposed to believe that Thunder Bay, Kingston, Barrie, Burlington, Oakville, and Sudbury are part of Southwestern Ontario?

    I know it's all spin and whatnot, but this doesn't convince me that Hamilton can support a team. (Where's the corporate base? Who's paying off the Leafs and Sabres?)

  2. I agree with Rob. Doesn't seem to be a lot of numbers there that we need to know. And I've been to Ontario in my travels. 7 million people in SW Ontario... Not entirely. You'd have to add in the aforementioned cities to try to get close to 7 million.

    I don't see how the spin is going to work. And Balsillie will have to try to make this sell stick after the Nashville attempt. Considering his whole attempt at selling tickets to a new city snafu.

    Hopefully things get ironed out with the new team, or he's going to fail at his third team bid.

  3. Good points, guys. Interesting stuff on the numbers, Rob; don't you think that they're counting the GTA in those numbers, though? That would make more sense than including Kingston and Thunder Bay, and some GTA fans would certainly travel to Hamilton for games (seeing as Leafs tickets are nigh impossible to find). I think the corporate base could be found as well; it's not just Hamilton, but also perhaps some Toronto companies that can't afford Leafs' deals. The two cities really aren't that far apart, which is one of the big reasons why I think this could work. Also, re: Leafs and Sabres; Basillie has the money to pay them off if needed, but he may not have to. A lot depends on the courts there.

    @James: You're quite right that the Nashville situation significantly hurt Balsillie's credibility with the league, and there's certainly a good chance this bid will fail. I don't think it necessarily needs to, though; the problems are due more to personal animosity than good logic in my mind. Despite the lack of official estimates, I'm quite convinced a Hamilton team would make a profit right from the get-go. It isn't the best site in the GTA (I'd take Vaughan over it for sure, and maybe Kitchener-Waterloo), but it's not a bad one, and there's a huge demand for hockey in that market. Compared to Phoenix, where the team is expected to lose $40 million a year under an unrealistically good scenario, it's a huge step forward, and that benefits the whole league in my mind (one less team taking revenue-sharing money, one more team providing it). There are still certainly tons of issues with this bid, but I don't think the bid is flawed in principle.

  4. I was being sarcastic about the other cities. Southwestern Ontario is a very specific animal: Hamilton's not part of it, nor is anything north or east of Hamilton. If they want to say "Southern Ontario is a good hockey market" then, well, duh. Doesn't mean Copps or an improved Copps is the best place to move the Coyotes.

    Have I mentioned that downtown Hamilton is really, really disgusting, even by mid-sized city downtown standards?

    Anyway, they probably did include the GTA in the numbers. My overall point was that you shouldn't take any of these statements at face value, distorted as they are to "prove" Hamilton's viability as an NHL market.