Phoenix Coyotes: What Exactly Is Going on in Glendale?

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Phoenix Coyotes: What Exactly Is Going on in Glendale?
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What exactly is going on in Glendale?  Is it really about the survival of one NHL team, or is it about a bigger picture issue that many NHL Hockey fans are familiar with.  If you are new to the NHL, then read on, and learn a bit about its recent history and its future.

Let’s start with the Phoenix Coyotes.  Here’s a brief recap of recent events surrounding the Phoenix Coyotes.  Jerry Moyes, CEO of Phoenix-based Swift Transportation, was originally only a minority owner of the Phoenix Coyotes.  However, in September 2006, he was compelled to buy-out majority owner, and former business partner, Steve Ellman.  Jerry Moyes never wanted to own the team outright and continuously sought a buyer for the Coyotes, which are reported to have lost as much as $300 million dollars since 1996. 

In 2008, Moyes informed the NHL that he was unwilling to fund the team’s losses, which were as much as $40 million dollars a season, any further.  The NHL agreed to fund the team’s losses in exchange for Moyes voting control of the team.  The NHL came close to a deal to sell the team to Jerry Reinsdorf, owner of the Chicago Bulls and Chicago White Sox.  However, Moyes would have received almost no money in the deal.  So, he put the team into chapter 11 bankruptcy protection and hatched a plan to sell the team to Research in Motion co-CEO Jim Balsillie, who wanted to move the team to Hamilton, Ontario.  The NHL fought this move in court and eventually won ownership of the team.

With a temporary lease of the Jobing.com Arena (home of the Phoenix Coyotes) up in the summer of 2010, the NHL continued to seek a new owner for the team.  However, the prospects of the team making a profit or at least losing money at a slower rate in the near future are close to nil.  The team is reported to have lost $25 million dollars during the 2009-10 season.  As a result, no prospective buyer of the Coyotes is eager to take ownership of the team without some sort of guarantee, that they will be protected from excessive losses.  In fact, the NHL does not want to fund the team’s losses any longer either.  Thus, any deal to sell the team would require favourable conditions provided by the city, such as a no fee lease agreement etc.

As of late April, it had appeared that once again Jerry Reinsdorf was to be the next owner of the Phoenix Coyotes.  A memorandum of understanding between Reinsdorf and the city of Glendale had been approved.  The city would pay $65 million dollars towards the purchase price ($165 million) of the team.  Additionally, Glendale agreed to guarantee to cover up to $100 million dollars in losses over the next five years, after which Reinsdorf would have an out-clause allowing him to move the team.

Essentially, this deal would allow Reinsdorf to buy the team for $100 million dollars of his own money, and maybe only lose another $25 million or so over five years.  Then he would be free to move the team somewhere, anywhere, where it would be more profitable.  Where might the team go?  Well, here’s a short list of locations: Las Vegas, NV; Kansas City, MO; Hamilton, ON; Portland, OR; Quebec, QC; and yes, Winnipeg, MB.  For those of you who don’t know, the Coyotes were originally the Winnipeg Jets, and moved to Phoenix in 1996.  In any of the aforementioned cities, the team would stand a reasonable chance of turning a profit, or at least, losing less money.

The city of Glendale must have realized that the MOU signed with Reinsdorf, gave the prospective new owner little or no motivation to try to make the team work in Arizona and would eventually result in the team leaving in five years, and would cost the tax-payers of Glendale $165 million dollars over that time.  So, that deal was taken off the table.  The NHL, realizing that a deal between a prospective owner and the city that satisfied both parties would be hard to make, sensed that there was a real danger that no deal would be made before plans for the 2010-11 season (such as creating a schedule) needed to get underway.  Thus, the NHL gave the city an ultimatum: agree to cover the team’s losses in 2010-11 if no one buys the team, or the NHL would consider moving the team immediately.

As a result of this pressure, the city of Glendale voted 7-0 in favour of a plan that allowed city manager Ed Beasley to negotiate a deal with the NHL that would see the city pick up the tab for financial losses incurred by the NHL, up to $25 million dollars, if the Coyotes are not sold and remain owned by the league next season.  This decision has been widely criticized as merely delaying the inevitable and costing tax-payers in the process.  As such, it is highly probable that the Goldwater Institute, a conservative think tank, will file a lawsuit against the city for violating the state’s ‘gift clause’ which limits public payments to private parties (such as the NHL). 

However, the Goldwater Institute may not be able to formally file such a suit until such a payment is actually made.  Regardless of the details of any possible legal challenge, what matters now is whether the possibility that the city will not be able to honour its commitment to reimburse the NHL for losses is enough to affect the NHL’s strategy going forward.

If it looks like a deal to sell the team to an owner willing to keep the team in Glendale is not imminent, and the Goldwater Institutes case becomes stronger in the next short while, the NHL may pull the plug and hand the team over to an investor willing to pay a fair price for the team now, but without any conditions, such as keeping the team in Glendale.  Now, moving the team is the last thing the NHL wants to do.  Sorry, check that; it’s the second last thing it wants to do next to losing $25 million dollars keeping the team afloat in Arizona.

But, why is the NHL working so hard to keep the Coyotes in the Phoenix area?  The reason is simple.  Establishing sufficient fan coverage in the United States has been part Gary Bettman’s grand plan since he took over as commissioner of the league in 1993.  The demographics of the league started to change in the 1990’s with the movement of the Winnipeg Jets to Phoenix, the Quebec Nordiques to Colorado, the Hartford Whalers to North Carolina, the Minnesota North Stars to Dallas, and the granting of franchises to San Jose, Tampa Bay, Miami, and Anaheim

The plan continued with teams added in Nashville, Atlanta, Columbus, and a slight correction in the replacement of a team in Minnesota.  The lone exception to this trend was the addition of a team in Ottawa, Ontario, which does not serve Bettman’s mandate.

Phoenix is the fifth largest city in the United States, and a key market for the league.  Of the 13 largest cities in the USA, the NHL has either a team in that city (New York, Los Angeles, Chicago, Phoenix, Philadelphia, Dallas, San Jose, Detroit), or a team in the same state as that city (Houston, San Antonio, San Diego, San Francisco, Jacksonville).  Additionally, the same is true of 24 of the 27 largest cities in the USA.  The exceptions are Indianapolis, Baltimore and Milwaukee. 

The importance of this fact is that any large gaps in fan coverage by the league could derail the chances of the NHL negotiating a lucrative national television deal with a major network or cable sports station.  Why would ESPN, for example, pay for national rights to broadcast NHL games when large portions of the country would not be tuning in because they have no local team to support.  Hypothetically, if the Phoenix Coyotes, Dallas Stars, Tampa Bay Lightning, Florida Panthers, Atlanta Thrashers, and Carolina Hurricanes moved to more traditional northern hockey markets, the league would go from teams in all 11 of the most populous states in the union to only six of the top 10, and two of the top four.  Now, it is not likely that all six of the teams listed above will move.  However, at least three of those teams, the Coyotes, Panthers, and Thrashers, are not selling enough tickets to make ends meet financially, and are at risk of either folding or moving in the near future.

It seems that the NHL is entering a crisis.  In addition to the troubles in the non-traditional markets just cited, well established teams such as the Dallas Stars, St. Louis Blues and the New York Islanders are having issues, such as with ownership or municipal support, as well.  In today’s financial climate the NHL is not looking like a source of good investment opportunities. 

The reality of the situation is that the only people interested in buying NHL teams these days are those who are willing to risk taking a loss.  For example, Canadian billionaire Eugene Melnyk, former CEO of Biovail Corporation, bought the Ottawa Senators out of bankruptcy for reasons of national pride as much as any financial considerations.  Similarly, it is rumoured that True North, an organization backed by Canadian billionaire David Thomson, is willing to buy the Coyotes and move the team back to Winnipeg; this despite the fact that the city and its arena (the MTS Centre) are somewhat undersized for supporting an NHL team.  It is also well documented that Pierre Karl Péladeau, president and CEO of Quebecor Inc., is interested in bringing a team back to the city of Quebec, another undersized city.

Now, it is not necessarily the case that moving teams to Winnipeg and Quebec is a bad idea.  Although both teams would not be top revenue generators in the league, there are favourable conditions for both that should allow the teams to break even, if not turn a small profit.  The bigger issue is whether the hope for a national television deal in the United States can be realized or not. 

If no deal is forthcoming then the existence of teams in a handful of cities in the south is without purpose.  The teams are not adequately supported by local businesses and individual fans, and cannot succeed under current conditions. However, if a big deal does come through, then the financial windfall would make generous revenue sharing payments possible and effectively make these teams viable; a viability that would give each team time to develop adequate local fan bases.  It is my personal opinion that a big television deal will not come soon enough to save several troubled teams in the league.  And, once these teams are gone a deal will be nearly impossible for the reasons discussed above.

What the league needs now more than anything else is stability.  The first step is for it to get its financial house in order by eliminating teams in cities that have no reasonable prospects for operating profitably, either by relocation or league contraction.  Next, the league needs to change its marketing strategy.  It should work towards making every team in the league individually successful by doing a better job at supporting local television deals and relationships with local businesses etc. 

League-wide revenue should be found by pursuing new markets such as increasing the number of NHL games broadcast in Europe and Asia.  Believe me, your average European hockey fan does not care whether there is a team in Phoenix or not; and a hockey enthusiast in Japan will pay to watch the two best NHL teams play one another regardless of whether they are the Winnipeg Jets and the Minnesota Wild, or the New York Rangers and the Los Angeles Kings.  Once every team in the league is strong, the NHL can experiment with teams in riskier markets, but according to a less ambitious expansion schedule.

Maybe there will be a day when a financially stable team can exist in Phoenix (or, Glendale).  But, the NHL’s dream of a bountiful television deal is really a nightmare that Gary Bettman would be best to wake up from.

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