Monday, May 23, 2005

The NHL Must Quickly Skate to a New Business Model

As a result of a labor dispute between players and National Hockey League owners, the entire 2004-2005 season was cancelled. As the new season approaches, an agreement has still not been reached. With so much play cancelled, revenue is lost and advertisers are abandoning their sponsorship of the NHL.

A couple months ago Bain Capital Partners LLC and Game Plan International made a $3.5 billion offer to purchase the NHL and all its teams, and on May 22, 2005 upped its bid to $4 billion. Currently the NHL is like all major professional leagues, where all teams are owned by individual owners, so the recent offer radically changes the hockey landscape. Most analyzing the situation view the offer as too low, since the price of $133 mil. per team is well below the generally accepted price of $163 mil. as calculated by Forbes. For example, Sal Galatioto of Lehman Brothers said that it would be “highly unlikely” that the deal would proceed. Additionally, Boston Bruins Owner Jeremy Jacobs said “The Bruins aren’t for sale. I talked to a lot of my contemporaries. They didn’t take it terribly seriously.”

The heart of the labor issue results from the inability of the owners to impose a salary cap on the league. A recent proposal from the owners would impose a yearly total salary cap of $42 million to $52 million per team. Salary caps would make the league more competitive, and thereby increase excitement for the sport and grow its fan base.

Other sports that compete against hockey such as professional football, baseball, and basketball, have been attracting fans and gaining an increased fan base. Furthermore, consumers have a larger variety of entertainment opportunities available to them such as DVD’s and video games. There is also the threat of new and existing hockey leagues which are trying to capture the advertising and consumer dollars: the World Hockey League, the European Hockey League, NCAA hockey college league, and minor league hockey.

First, if the owners sold their teams they could increase their bargaining power with the NHL players. It would be a lot easier for the league to negotiate for one interest than the interest of all the individual owners and be able to pass the salary cap. In the U.S., the National Basketball Association and National Football League both have caps. In addition to being more competitive leagues and having an increased fan base, these leagues have not suffered lost revenue from prolonged labor issues. On the other hand, Major League Baseball which does not have a salary cap has had major labor issues including a missed World Series in 1994 which negatively impacted revenue.

Leagues like MLS (men’s soccer) and WNBA (women’s basketball) are currently functioning under a single owner format, so there is precedent and hence it might be difficult to stop this plan from taking effect under the premise of anti-trust issues. Similarly, private equity firms have done such deals before. The Boston Celtics, a basketball team, was partially owned by a private equity firm at one time. In 2002, Boston Basketball Partners LLC took the team private by buying the NBA franchise for $360 million from its then-owners, the publicly traded company Boston Celtics Limited Partnership. Although NHL owners are somewhat indifferent to the league starting up in the short term since most teams are loosing money, owners need play to resume or the NHL’s fan base might take a serious long-term hit.

Also, with a cohesive management structure, the NHL will be able to close unprofitable teams. As it stands under the current situation, NHL cannot close these teams. Since the teams are in poor financial standings, they lack the ability to field good hockey teams and manage their organization properly. Such poorly-managed teams just hurt the competitiveness of the league, ultimately reducing the revenue for the league as a whole. On the flip side, there would be a lack of politicization amongst the owners in establishing new teams and perhaps profitable teams could be started.

With the team under a single ownership, advertising could be more effective. As it currently stands, each team is just trying to maximize profit for their specific team. With a single owner, the NHL would have more bargaining power in advertising. Also, advertising would be able to increase profits for the league through synergies in advertising, rather than simply just for individual teams.

Most importantly, a single owner would make management consistent across the league. Many owners currently do not have any incentive to win the Stanley Cup. They simply hope to make a small return on their investment and believe that committing the resources to a hockey team (not just salary, but also facilities, publicity, and coaches) would not be profitable. However, a single owner would have the incentive to make the league more competitive, which would increase fan interest and generate increased revenue for the entire league and significantly reduce the league’s operating costs.

For Bain Capital, who has led multiple turnaround private-equity deals before, this is an attempt to reinvigorate an organization which has been destroyed by the ineptitude of current owners and a power struggle between the union and the owners. By collaborating with sports experts - Game Plan International, they hope to fix the management, quickly negotiate with the union, and help turnaround this loss-making franchise. Bain Capital plans on running the NHL like a large corporation, and each team would begin the year with a set budget and be able to make autonomous decisions.

Although the owners have not accepted the offer, there are signs that some owners may find the deal appealing. Recently, the Walt Disney Co. sold the Anaheim Mighty Ducks for a 27% discount of $75 million and Molson Coors is banking on selling their hockey team as well. These owners realized that it is in their best interest to sell the team; let’s hope the other owners realize that as well for the sake of all hockey fans.

Authors: Anand Kamannavar, Alex Viergutz, and Matt Koch


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