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10 Issues to Focus on in Phoenix Coyotes Case PDF Print E-mail
Articles and Opinions
Written by Maury Brown   
Friday, 11 September 2009 08:53
Coyotes
NHL
Balsillie

Thursday brought yet more twists and turns to the saga that is the bankruptcy and sales auction of the Phoenix Coyotes. Friday will complete the two days of hearings and will pull the sales process closer to its end, but most likely, not to conclusion.

The hearing Thursday  in Phoenix, AZ with Judge Redfield T. Baum, presiding started by asking if there were any other bids beyond the NHL’s and Jim Balsillie, the co-CEO of Research in Motion, the creators of the Blackberry mobile device line. As reported earlier in the week, Ice Edge LLC dropped out of the bidding leaving just the league and it’s antagonist in Balsillie left to battle over the club’s rights. By the end of the hearing at 9pm ET, several issues stood out that could keep the Coyotes playing at Glendale’s Jobing.com Arena, or be forcibly relocated by Balsillie to Hamilton, Ontario, Canada, against the NHL’s current wishes. As you’ll see at the end of this list, “nothing” might be a precedent setting “something”.

1) Is Moyes a Creditor, or an Owner that has Lost Equity?

One of the main issues in that separates the bids of the NHL and Balsillie is monies that would be directed to Coyotes owner Jerry Moyes. Moyes, who slowly moved into a majority ownership position as the club slid further and further into red ink, was the one that filed for Chapter 11 bankruptcy protection, and Balsillie’s bid was submitted as a way to satisfy the creditors, including Moyes.

Balsillie’s bid includes up to $104 million that would go to Moyes as a creditor. The $104 million represents the amount that Moyes has reportedly loaned the Coyotes. The NHL’s bid has no monies outlined for Moyes, as the league is contending that the $104 million is lost equity, and therefore, would not need to be repaid. Judge Baum challenged the league’s contention in Thursday’s hearing.

2) Can the League Block Balsillie Based Upon Character?

An issue that could stop Ballsilie’s bid dead in its tracks, would be if Baum were to uphold the league’s Board of Governor’s 26-0 vote, with abstentions from the Buffalo Sabres, Pittsburgh Penguins and Toronto Maple Leafs, rejecting Balsillie as a potential owner in the NHL saying he lacks “good character and integrity".

Lawyers for Balsillie have argued that owners don’t need to “love each other”, and cite that the BOG’s vote was in reaction to any possible lawsuit that the Maple Leafs might file over relocation to Hamilton, which the Leafs see as their territory.

3) Relocation and Exiting the Jobing.com Arena Lease Agreement

Jim Balsillie raised his offer for the Coyotes by $30 million on Tuesday to $242.5 million, with $50 million set aside for the City of Glendale to offset losses incurred by the Coyotes leaving Arizona and relocating to Hamilton.  Lawyers for Glendale reject the $50 million saying Thursday that damages would be between $565 million and $685 million – a massive gap. The issue of the lease would seem very difficult to exit without compensation. As one of the lawyers characterized it in Thurs. hearing, “It’s ironclad.”

4) What Should the Relocation Fee Be?

Both Balsillie and the NHL commissioned reports to determine how much indemnification should be paid to offset losses to the Toronto Maple Leafs, and to a lesser extent, the Buffalo Sabres should Balsillie place the Coyotes in the Hamilton market, which is in proximity to both franchises. The placement of a third club will dilute the sponsorship base, television and radio territories, and available fan base, but then based upon ticket prices and current attendance figures for the Maple Leafs (both, the highest in the league), a case can be made that the market could bear another franchise. Both the Coyotes and then Balsillie commissioned sports economist and author Andrew Zimbalist (see the Business of Sports Network interviews with Zimbalist from 2004 and 2006 on The Biz of Baseball) to analyze the possible relocation of a club to Hamilton, and render a relocation figure. Zimbalist initially reported that the NHL would be entitled to between $11 million and $13 million (figures are blacked out of associated document), but testified on Thursday that the fee could be as high as $18 million. He based his figures on past relocations within the NHL to make the determination, most notably the Quebec Nordiques to Denver and the Hartford Whalers to Raleigh. Zimbalist also said on cross examination on Thurs. that his methodology had not gone through a peer review process.

The NHL countered by having two separate independent studies done that did not consult with each other having Dr. Franklin Fisher and Barrett Sports Group, LLC  and Sports Value Consulting, LLC  project a relocation fee. In a separate court filing, the NHL responded to Zimbalist’s initial figures by saying, “[T]he notion that a team in Hamilton would be worth only $11.2 million to $12.9 million more than a team in Phoenix is patently absurd.”

The NHL filing then goes on to challenge Zimbalist’s methodology in bullet point fashion. It begins by looking at a core issue: What are the Coyotes worth in Glendale and in Hamilton:

  • Prof. Zimbalist understates the value of the Hamilton franchise option taken from the League by basing his estimate of that option on simple historical averages for NHL franchise expansions. This approach is inconsistent with his own view that Hamilton is an above-average site in terms of local interest in NHL Hockey.
  • Prof. Zimbalist overstates the value of the Phoenix franchise option returned to the League by overlooking the fact that relocation by the Club would substantially impair the value of that option on a going-forward basis.

The filing also adds this bullet point:

  • In particular, Prof. Zimbalist considers only one factor (namely, Hamilton's economic viability to support an NHL franchise) among the numerous economically relevant factors that NHL rules require the Board of Governors to consider when evaluating proposed franchise relocations. Prof. Zimbalist fails to analyze whether or how relocation of the Coyotes (absent NHL approval) would impair the League and consumers by, inter alia, (a) eroding the value of the option to locate a new NHL Club in Phoenix at some future date; (b) reducing the League's geographic diversity; (c) damaging the NHL's ability to foster community commitment to its Clubs on a League-wide basis; and (d) imposing significant operational costs on the League and its other Member Clubs.

Needless to say, the NHL’s relocation figures are in stark difference to Zimbalist’s. BSG calculated that an appropriate relocation fee would be approximately $101 million. SVC calculated that an appropriate relocation fee would approximately $195 million.

During the hearing on Thursday, the NHL lawyer Shepard Goldfein said, the relocation fee should be 60 percent of Balsillie's initial offer of $212.5 million which comes to a $127 million fee.

All of the relocation fee issues from either side may be moot in the eyes of the bankruptcy court, however.

"A big number," Baum said in reference to Goldfein’s figure. "But the relocation fee is not the most important legal issue that is going to be submitted to the court."

5) What Are the Coyotes Worth in Hamilton?

As a continued part of the NHL’s response to Zimbalist’s relocation fee amounts for indemnification to the Leafs and Sabres, the consulting firms used valuations of the Coyotes in both markets to make their determinations. This key element points to the value of the Hamilton market, as compared to Phoenix. It also outlines the league’s contention that due to the value of the market, it becomes a loss to both the Maple Leafs and Sabres, should that market be cannibalized by a Coyotes relocation to Hamilton:

BSG estimated the value of a team in Hamilton as between $261.8 million and $279.8 million. SVC estimated the value of a team in Hamilton as approximately $315 million. Aided by the actual results that the Coyotes have achieved in Glendale, the experts employed the same methodology to calculate the likely revenues for a team in Glendale and the ultimate value of a team in Glendale. BSG estimated the value of a team in Glendale as between $163.4 million and $176 million. SVC estimated the value of a team in Glendale as approximately $120 million.

It’s important to note that the valuation is a face value rendering. Any ownership that assumes the franchise in Glendale assumes the lease agreement, which, in part, has had a cobbling effect on the Coyotes. The club reported losses of approx. $60 million last season, alone.

6) The Issue of Copps Coliseum

Balsillie has worked out an agreement to have the Coyotes play at Copps Coliseum, should the club be relocated to Hamilton. The agreement between the City of Hamilton and Balsillie has two issues, one being the clock: the city is sticking to an Oct. 31 lease pact with Balsillie, whether the issue of the Coyotes is fully resolved by then. Secondly, the 24-year-old facility is hardly up to NHL standards, and therefore Balsillie has proposed a sweeping renovation to Copps that could total as much as $200 million to complete (see details of the renovation plans along with renderings of the design).

The problem is, Balsillie is not willing to fund the renovations, and there is currently no firm commitment to fund it at the government level.

The Mayor of Hamilton, Fred Eisenberger, wrote in a letter referenced in Thursday’s hearing, “I would like to assure the National Hockey League that the planning process for the renovation of Copps Coliseum is currently in progress and we are confident that a financing commitment for the project will be made by the appropriate levels of government in Canada in partnership with the City of Hamilton,” adding, “We believe the Copps renovation plan is …  well within the scope of available government funding programs.”

7) Friday Hearing to Outline Conflict of Interest in NHL Bid

On Friday, NHL Commissioner Bettman will take the stand, and will face Jeffrey Kessler and Tom Salerno, the lawyers for Balsillie and Jerry Moyes of the Coyotes. Jim Balsillie, originally scheduled for Friday, has removed himself from testifying. Bettman will surely feel the heat from Kessler, a powerful and noted anti-trust lawyer. At the heart of the questioning will be the NHL’s rejection of Balsillie by the league’s Board of Governors as a potential owner, while being engaged in the bidding process for the Coyotes. Kessler will no doubt claim that there is a conflict of interest in those two issues.

8) Complexities Could Render “No Sale” Ruling By Judge

The hearings on Thursday and Friday were designed as an auction process that would render who would ultimately gain control of the Coyotes: the NHL or Jim Balsillie. But, on Thursday, another, and more likely result was mentioned.

Judge Baum said at one point, "There is a third possibility here — no sale," which caused a stir amongst the courtroom. "It is more than theoretical. You all ought to keep that in mind."

While Baum did not specify why, as outlined above there are several reasons:

  • The Balsillie bid is the highest, and therefore would satisfy the majority of the creditors, but his offer does not fully address the damages associated with exiting the Jobing.com Arena lease agreement.
  • The NHL’s bid lacks details on its payment schedule for creditors, something Judge Baum was critical of at Thursday’s hearing. He informed the league to provide him with a schedule by Friday.
  • The NHL’s claim that to Hamilton would be damaging seems to be tied only to how much indemnification Balsillie is willing to pay, regardless of how he has attempted to elbow his way into owning a franchise. A sizeable sum would seem address the issue, but at the end of the day, the court is not as concerned about the relocation fees as the issues of satisfying the creditors and dealing with the Glendale lease.

Not rendering a sales ruling prevents setting a precedent that would place league constitutions in the crosshairs. A ruling in favor of the NHL, and Balsillie has said he would file anti-trust charges. A ruling in favor of Balsillie, and the NHL has said they would appeal. By not ruling, based on the weak offers, Baum prevents Balsillie-like actions from occurring in the NBA, NFL, and MLB, all of which have filed briefs in support of the NHL.

Finally, by not ruling, the status quo is retained. The league will continue to look for an owner that wishes to keep the club in Glendale, while the lease agreement is addressed. Moyes and Balsillie will be left to consider other options, depending on the desires of Balsillie.

9) Addressing Other Hypothetical Scenarios

There have been other scenarios mentioned by those watching the proceedings, such as the Coyotes being liquidated under Chapter 7. That action would ostensibly be forced contraction, and in reality, impossible.

The Chapter 11 filing and Balsillie bid are designed to gain access to the Coyotes and relocate them. Selling them off would not satisfy the creditors, nor deal with the Glendale lease. It would force the NHL to hold a dispersal draft, which would mean some players would lose their jobs, and therefore, the NHLPA would look to stop the move citing interest in other markets for a sale, rather than liquidation, so players cannot be "sold" to gain money to pay back the creditors. The Coyotes are leasing Jobing.com Arena, so they can't sell the building... as mentioned, impossible to pay back creditors through liquidation.

10) Predictions

As Baum mentioned, no sale “is more than theoretical”, and therefore, seems a very real outcome of the auction process. It’s possible that with the proceedings completed, Jerry Reinsdorf and Ice Edge could come back into the mix as adjustments to the Glendale lease are explored, and the salary of Wayne Gretsky is addressed (Goldfein, the attorney for the NHL, revealed that in the Ice Edge bid that has now been withdrawn that Gretzky agreed to have his yearly salary from decreased  from approx. $8 million to $2 million).

The wild card is Balsillie. He left the courtroom on Thursday without comment, and said he would address the media on Friday. Whether Baum rules then is uncertain, but unlikely. He has said he would inform the parties involved, at the latest, before the puck drops on the 2009-10 season for the Coyotes. Their first preseason game is Sept. 15. The Coyotes open the regular season Oct. 3 at Los Angeles.


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Maury BrownMaury Brown is the Founder and President of the Business of Sports Network, which includes The Biz of Baseball, The Biz of Football, The Biz of Basketball and The Biz of Hockey. He is available as a freelance writer. Brown's full bio is here. He looks forward to your comments via email and can be contacted through the Business of Sports Network (select his name in the dropdown provided).

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Comments (3)Add Comment
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written by Tom Swift, September 11, 2009
Great stuff, Maury
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written by Steve Dittmore, September 11, 2009
Nice summary, Maury. When do you sleep?
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written by MauryB, September 11, 2009
This was one of those, "Need to get published" pieces, Steve. The case is incredibly important to how sports leagues can control their clubs. Oh...

Look for more late Friday.
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Sat., 3/26 - ESPN 910, Rochester (10:45am ET) - Maury Brown on Donald Fehr and the NHLPA, possible club relocation, more






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