Lockout will test depth of owners' pockets

Originally Published: February 10, 2005
By Darren Rovell | ESPN.com

Even before the National Hockey League lockout began on Sept. 16, commissioner Gary Bettman and many team executives have maintained they will lose less money if they don't play at all in 2004-05 than they would playing under the old collective bargaining agreement.

But they'd still lose money.

Pile on the effects of the lockout -- a decline in season-ticket sales, the loss of advertising, not to mention fan apathy and potential attrition -- and the next question becomes: If the NHL doesn't play at all in 2004-05, and possibly into 2005-06, what will happen to those teams?

Ask sports industry bankers, economists and lawyers, and the answers can range greatly: From team bankruptcies to league-imposed contraction to perhaps nothing at all.

Many team owners will be forced to reconsider exactly how much financial hemorrhaging they can endure in order to reach their overall goal of a salary-cap system.

Before the lockout began, all 30 NHL teams contributed $10 million to a league-held war chest. Those funds are expected to carry teams through a prolonged work stoppage, but are they enough to help teams endure a potentially long recovery period once play resumes?

"For some of these teams, it's not necessarily what their financial situation is now, it's what it is when they return," said Michael Leeds, a sports economics professor at Temple University. "The big danger for hockey in [non-traditional] markets is that, since it is a casual fan instead of a die-hard fan, there is greater risk that these people in hockey's absence have decided that there's a better way to spend their money."

Sports banking sources told ESPN.com that at least 10 teams stand to lose money when their local revenues (ticket sales and broadcast deals) and their share of meager league-wide national revenues are stacked up against payrolls above $30 million, especially in a lockout-depressed environment. Those teams include the Atlanta Thrashers, Carolina Hurricanes, Florida Panthers, Nashville Predators, Phoenix Coyotes and the New York Islanders.

If play resumes next season under a salary cap without significant revenue sharing, small revenue teams may still struggle, said Stephen Ross, a University of Illinois professor who specializes in sports law.

"The lower revenue teams are going to suffer from the absence of hockey, and they might be in a position where if the cap is also the floor, they might not even be able to reach it," he added.

On Thursday, Ted Saskin, senior director of the NHL Players' Association, said that revenue sharing under the league's most recent proposal was so nominal that at least 11 teams would be losing money at a $34 million salary cap.

The league disagreed, though spokesperson Bernadette Mansur, declined to site specifics.

"Ted Saskin's statement, and it is not the first time, is inaccurate and intentionally misleading," Mansur said.

The average cost to operate an NHL team during an idle season is approximately $7 million to $10 million, sports banking sources say. Though many teams have whittled their budgets to bare-bones operations and some reportedly have made arrangements with their lenders to account for lack of revenues, debts still must be paid.

Teams in need of financial help may tap into their war chest, but must obtain approval from the league to access those funds and may only draw on the allotment it contributed. Only a handful of teams have used part of their reserves, according to a report in the Globe & Mail.

Teams also can cover operating costs with money accumulated from season-ticket holders, a more substantial sum than what would be expected thanks to creative marketing initiatives that lured fans into putting down deposits last summer despite the league's pending lockout. The Thrashers and the San Jose Sharks, for example, offer two plans for season-ticket holders -- a full refund of the value of the canceled games with 2 percent interest or a credit with 5 percent interest.

At this point, banking sources maintain that no team is in such dire financial straits that it will file for bankruptcy. But should a market fail to rebound quickly after the lockout is settled, bankruptcy remains a long-term possibility.

Even if teams do file for bankruptcy and are sold through bankruptcy court, interested bidders would be lining up to buy, banking sources said. One attorney told ESPN.com that one of his clients already is prepared to purchase a distressed team out of bankruptcy, something he thinks has a good chance of happening.

NHL owners would be expected to bid, as well, and at a higher price in order to prevent a bargain basement sale from lowering the value of all their teams. A source told the Los Angeles Times recently that the league has a plan in place to bid for the Anaheim Mighty Ducks if league executives feel it will fall below what they consider market value. A source familiar with the Ducks' sale told ESPN.com that the NHL is keenly aware of the situation, as well as its options, but it isn't an interested party.

In September 2003, the Thrashers were all but a throw-in to a sale that included the Atlanta Hawks and the operating rights to Phillips Arena, a deal that reportedly cost $250 million. Two NBA teams in smaller markets than Atlanta recently sold for much more than the Hawks/Thrashers/Phillips package -- the Cleveland Cavaliers sold for $375 million, and the Phoenix Suns changed hands for $400 million. Both deals included operational control of arenas.

Some experts suggest that if the NHL were to buy a team in distress, it would be in its best interest to fold it.

The NHL's expansion from 21 teams in 1990-91 to 30 teams in 2000-01 severely reduced the cities available for relocating struggling teams. That, as well as the lack of success in many of those markets, has contributed to the drag on franchise values, one sports banker said.

Industry experts even have questioned the league's role in resuscitating the Ottawa Senators and Buffalo Sabres following their filings for bankruptcy protection in January 2003. Soon after, the Sabres were sold for $93 million, and Ottawa sold for $100 million. However, both deals included the arenas. Though Forbes reports the values of both franchises have increased, some experts suggest the best way to increase franchise values across the league would have been to contract them.

Aside from buying teams through bankruptcies, NHL owners could offer to buy and fold teams in flawed markets. One banker suggested the league could afford to reduce the number of teams to as few as 22 using this strategy, and that many owners, realizing their teams would never make money, would be willing to accept $50 million to $80 million for their franchise.

Said the banker: "Since it will make the NHL a more financially stable league, I'm confident that those banks that lend to the NHL will give the league the money, at least $500 million, to do this in a heartbeat."

Talking about dissolving teams is one thing; actually doing it is quite another.

The last contraction in major professional sports was the elimination of the WNBA's Miami Sol and the Portland Fire after the 2002 season. Before that, the most recent contraction of teams has come as a result of mergers.

In 1978, the Cleveland Barons disappeared from the NHL by merging with the Minnesota North Stars. The Spirits of St. Louis and the Kentucky Colonels, which were casualties of the ABA-NBA merger in 1976, left their markets, but those teams were purchased by the NBA and then voluntarily eliminated.

Should the NHL engage in any form of contraction, the NHL Players' Association could claim the act is subject to collective bargaining and file a grievance, like the Major League Baseball Players Association did in 2002 when its league attempted to contract two teams. Before the grievance was heard, the MLBPA agreed to a new CBA, which included a league option of unilaterally contracting two teams of its choice beginning in 2007. Sources from both sides of the NHL lockout say that contraction has never been part of the current negotiations.

Other experts stress that team bankruptcies and voluntary contraction are long shots.

"The contraction of many teams assumes that the elimination of the teams would allow the remaining teams to make more money in the short term because they would share revenues among less teams," said Chuck Greenberg, a partner of Pepper Hamilton, a law firm represents several NHL teams. "But the fact is that because of the lack of national television money, the money in the central fund is not enough to make it worth it for the owners to buy teams in order to contract them. That didn't seem to be the case with baseball."

Greenberg said he believes that, thanks in part to the war chest, no teams will file for bankruptcy or be contracted before an agreement is worked out.

What happens once play resumes remains to be seen.

Darren Rovell, who covers sports business for ESPN.com, can be reached at darren.rovell@espn3.com

Darren Rovell | email

ESPN.com Sports Business reporter

ALSO SEE