It’s A Trap, Pt. 3

27 Jul

There has been plenty of coverage of last week’s meeting between City Council and the Katz Group (the Edmontonian has a great roundup of all the stories), but I want  to share my notes from the meeting, as well as some additional thoughts. Parts 1 and 2 of these notes are here and here.

  • I’m going to save most of the CBA, profitability and relocation stuff for another post, but I will make a few comments here. It’s really no surprise, but what became even clearer in the meeting between the Katz Group and City Council is that this issue isn’t really about the size and age of Rexall Place, or the revitalization of the downtown core. What we finally saw in the Katz Group’s presentation and in their responses to City Council is that this whole issue is about money, specifically taking away the revenue streams from Northlands and placing it in the pockets of Daryl Katz. Why? Because Daryl Katz isn’t making enough money off of his investment. Bob Black admitted to Councillor Iveson that building stadiums is bad economics, but they still want the taxpayer to take on that risk so that Katz can get more revenue for himself out of luxury seats, concert tickets and other non-Hockey Related Revenue (non-HRR). Paul Marcaccio complained that the long-term sustainability of the Oilers is threatened because they aren’t getting enough non-HRR. This is nonsensical, as non-HRR can’t be used to run the Oilers. Only Hockey Related Revenue (HRR) is counted towards the salary cap, the signature piece of the Collective Bargaining Agreement (CBA). So while Daryl Katz may be losing money because he overpaid to buy the Oilers and isn’t getting enough non-HRR to keep him happy, the Oilers aren’t. The Oilers may be losing money because the CBA they so badly wanted isn’t providing them the “cost certainty” they thought it would, because they have been forced to share their revenues with weaker NHL franchises south of the border, or because they’ve continued to spend to the utmost limit of the salary cap while icing a horrible team that doesn’t bring in any extra revenue through playoff appearances. They may even be losing money because of some fancy accounting and the way they’ve set up their financing structure. But the idea that they can’t compete because they aren’t getting enough non-HRR is simply incorrect. Any and all of those reasons for not being able to compete are not the business of Edmonton taxpayers. They are the business of NHL owners, players and the Office of the Commissioner. If the Oilers are having a hard time making ends meet, I suggest they take it up with their fellow owners, the NHLPA, and Gary Bettman.
  • Bettman’s silence in all this has been very puzzling, actually. One of his owners had one of his henchman basically say the NHL’s current CBA sucks, and had another one imply that his team will relocate if they don’t get a publicly-funded arena and all it’s revenues, and Bettman didn’t say a word. He didn’t say a word when that same owner went to Hamilton and said he’d pay that city a million clams if it didn’t get an NHL franchise in four years, either. Does that sound like Gary Bettman to any of us? The guy who goes off anytime anyone attempts to question the viability of the NHL and its franchises? The guy who has already stopped Jim Balsillie from moving three franchises to southern Ontario? I don’t think even an implied threat to move to Hamilton is credible. Nor do I believe the Oilers when they say this is a small hockey market and that they need more non-HRR to remain competitive. But I definitely find Bettman’s silence…interesting.
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8 Responses to “It’s A Trap, Pt. 3”

  1. Andy Grabia July 28, 2010 at 5:40 pm #

    It just doesn’t count in the salary cap or revenue sharing calculations. We agree on that, no?

    Right. That’s exactly what I meant. I phrased it better in the actual post. HRR is what goes towards the product on the ice, not non-HRR.

    It should be noted that Councillor Krushell asked several questions about the Forbes numbers, including the debt financing, and Maraccio said the Forbes numbers come from nowhere, and aren’t true. Of course he then refused to open the books to prove any of that. So that’s where we are. They say they are losing money, but won’t offer any evidence to prove it.

  2. kcromwell July 28, 2010 at 11:20 am #

    So the EAD made a typo in their original release. MSM get their facts from there. To say that the Katz group is lying about whether or not they are at an economic disadvantage is like releasing a criminal caught red handed because there was a spelling mistake on the report.

    I find it difficult to swallow all the rhetoric about balance sheets, revenue guarantees, and secure investments. It’s frustrating to endure the sceptics hiding behind the shroud of protecting tax payers investments and completely ignoring or discrediting the intangibles. Why else would the city rally up a billion dollar Expo bid?

    It’s a shame in this debate that the minority, those opposed, are the most vocal. In my opinion, they could be robbing the majority of this city of an amazing opportunity.

    • Andy Grabia July 28, 2010 at 12:55 pm #

      To say that the Katz group is lying about whether or not they are at an economic disadvantage is like releasing a criminal caught red handed because there was a spelling mistake on the report.

      It’s not a technicality. I sat in the room and heard them say the Oilers were losing money because of non-HRR. That’s simply incorrect, as non-HRR doesn’t count towards the Oilers revenue. That’s why it’s called non-Hockey Related Revenue. You might want to read the CBA for a primer.

    • Scott Hennig July 29, 2010 at 11:30 am #

      Good question on the Expo. Don’t even get me started (http://www.taxpayer.com/alberta/expo-nential-waste-money).

      The intangibles are not being discredited. They are there. People feel slightly better about their city when new arenas are built. But how much are they willing to pay to build a new arena, when new arenas have and should be paid for privately. Dan Mason at the U of A and others have looked into how much people are willing to pay for new arenas based on those intangibles (http://www.questia.com/googleScholar.qst;jsessionid=MR5CRlTj0tpRLnptLJkW1hPhnRTDpFp5mKQ83brVz822KMnpqWGw!-771937571!-2125728430?docId=96390365)

      As for your claim that the minority is opposed, I ask you opposed to what? Opposed to the idea of a shiny new downtown arena? You are probably correct, a minority would be opposed to the concept. But the majority is opposed to corporate welfare and taxpayers paying for said arena (http://www.ipsos-na.com/news-polls/pressrelease.aspx?id=4495).

    • Kelly July 30, 2010 at 10:21 am #

      Excellent references Scott, thanks for the reply although they did raise more questions. It’s one thing to look at the impact a newly constructed arena has on a City and say “it doesn’t generate enough revenue to pay for itself”. It’s another to do a comparison from a “can’t afford NOT to” perspective.

      I’ll admit, I’ve been a passionate oiler fan for upwards of 25 years … so I won’t pretend I’m not. Nor do I want to admit that the team would ever leave this city… however what if? I often wonder what THAT economic impact would look like on the city, and if we’d ever recover.

      And honestly, I still don’t buy the whole balance sheet thing. I’m sure the Art Gallery of Alberta will have no problem generating enough revenue to pay for itself … *sigh*.

      I guess my bottom line is, in this city, it seems as though in the past 10 years (even longer?) our taxes have gone up at an alarming rate. I’m still dumbfounded at the announcement every year of double digit increases, followed by the relief of the .. “guess what, they are ONLY going up by 10% this year, aren’t you lucky?” announcements. The city complains that it has no money for necessities like snow removal, police and other emergency services, yet they always seem to find a surplus at the end of the year (http://www.cbc.ca/canada/edmonton/story/2010/03/04/edmonton-city-budget-surplus.html) that they infuse programs that will .. frankly make people happy, or help gain approval but will RARELY pay for themselves.

      I guess I’m of the position now, that tax increases are an inevitability, and I want those tax dollars may as well go towards something I will actually benefit from. Although I have no empirical evidence to back this claim up, I’d bet my house on the fact that I’m positively not sitting in this rowboat alone….and if I am, at least I’m relieved of the burden of taxes ;).

  3. Vic Ferrari July 28, 2010 at 10:02 am #

    Andy

    For the wealthier teams in the league non-HRR is far preferable to HRR. This because revenue sharing does not apply to non-HRR. For the league as a whole, the idea of squeezing non-HRR out of local governments has a strong appeal, as this money is not shared with the NHLPA (i.e. a leaguewide increase in non-HRR by $100 million would have no effect on the salary cap).

    • Andy Grabia July 28, 2010 at 12:56 pm #

      Well aware, Vic. That’s my next post. 🙂

      • Vic Ferrari July 28, 2010 at 3:26 pm #

        Sorry Andy. This phrase has me confused a bit:

        non-HRR doesn’t count towards the Oilers revenue

        It most certainly does. It just doesn’t count in the salary cap or revenue sharing calculations. We agree on that, no?

        The net revenue is the figure I am interested in here. How Katz chooses to repay borrowed money, and the accrued interest … that’s his business, I don’t care.

        Forbes estimates> that the Oiler’s net revenue (operating income in US) was USD 9.4 million in ’09. Looks like it has been steady for a few years around that marker.

        They estimated that the Oilers were carrying $100 million in debt. So if their repayment schedule calls for paying about $10 million per annum towards the principal over the previous coupleof years, I suppose they could have lost about 3 or 4 mill per year after financial items.

        Personally I don’t care about the amount of debt Katz left to be carried by the team at time of purchase. It’s not my business. It only becomes an issue when the Oilers refuse to declare their net revenue, and instead choose to mislead with claims of financial hardship. It would take moments for the Oilers to have Iveson and a city accountant sign a confidentiality agreement and send them a copy of recent UROs. They aren’t going to do that though, they’d make themselves look like fibbers (technically they haven’t lied, just mislead).

        If the Oilers were a better hockey team, net revenues would be much higher. Mostly from playoff revenue, but likely also from increased concession, TV, parking, in-rink advertising, etc revenues.

        I’m not qualified to perform a valuation fo the Oilers, but this looks to me to be a sraight revenue business. The only asset of real value is the place in the NHL cartel. They may have a few significant assets … do they own the building on Kingsway?

        And of course selling an NHL team isn’t like selling a bakery or bowling alley, it’s not so easy. Still, the valuations for the teams should clock in at somewhere around the current NHL expansion fee + 2 x net revenue. Very ‘back of a cigarette pack’ I know. But the Forbes evaluations seem to ring in around there.

        What would the Oilers sell for? What would be the expansion fee if the NHL decided to add a team tomorrow? $120 million? More?

        So, with competent hockey operations management, annaul net revenues of 15 million should be a wholly realistic budget figure. There is cost certainty in the league as a whole, wrt it’s most significant expense, that has value too. That’s pretty unique though, I won’t guess at the value of that. Uncertainty with the USD/CAD exchange rate and revenue sharing expenses (it looks like the Oilers have been one of the leagues most profitable franchise for many years, and will continue to be so for the foreseeable future.

        So somewhere around 150 million CAD is a fair price I think. That’s very conservative. Forbes estimatedthe value of the Oilers at 166 million USD last fall, I won’t quibble with that.

        I wouldn’t say that Katz paid too much for the team, the price was surely based on an expectation of receiving many millions from taxpayers in the near future.

        I don’t doubt that for this business model to be viable, non-HRR revenue is required long term, and better hockey related building revenue as well. Otherwise the ROI is too low. Having a better on-ice product would certainly help as well.

        The thing is, Katz was fully aware of this on the day he bought the team. So, on the day he bought the team, he was fully expecting to receive taxpayer money, in one form or another, in the near future.

        It’s looking like that number would have to be the future worth of about 50 million CAD, 2007. So maybe $75 million in diverted taxpayer dollars to justify the original purchase price.

        I think that Katz has a terrific chance to cover that bet. A spectacular chance. Never say never, but he looks set to do extremely well with this Oiler purchase.

        Again, very rough guesstimates, I welcome correction or criticism of my rough sums here. We’re in this ballpark, though.

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