Monday, January 13, 2003
Does labor war start at Chapter 11?
By Darren Rovell
In a week's time, the Ottawa Senators and the Buffalo Sabres have filed for bankruptcy protection. But while both teams could be rescued from financial insolvency under new ownership, it is unclear what role the teams' shaky economic state will play in labor negotiations between the NHL and the league's players union.
The Collective Bargaining Agreement between the NHL and the NHL Players Association expires in September 2004 and the primary battleground over a new agreement surely will be containment of player salaries. Some say the problems in Ottawa and Buffalo are a reflection of the out-of-whack financial state on the league. Others argue that the situation in both small-market cities have little to do with payroll vs. revenue and more to do with individual circumstances that don't necessarily paint an accurate picture of the league's overall stability.
"Not only could the plight of the Senators and the Sabres be used as a way to get a salary cap, it should be used," said Marc Ganis, president of SportsCorp Ltd. and a sports finance analyst. "The problems with many teams out there is that there is no connection between salaries and revenues and teams are losing 15 to 20 percent of their asset value in operating losses each year. If you do that for more than a couple years, you have to file for bankruptcy."
The Senators filed for bankruptcy protection on Jan. 9. Under the Companies' Creditors Arrangement Act of Canada, the team will be protected from more than $160 million it owes to creditors, including the Canadian Imperial Bank of Commerce, FleetBoston Financial Corp. and the National Hockey League. Former majority owner Rod Bryden has until Tuesday to submit a bid to buy the team, which would be subject to approval by a majority of the team's creditors. If he does not, other potential buyers may bid for the team.
The Sabres have been in financial limbo ever since the league took control of the team in June, after the parent company, Adelphia Communications, filed for bankruptcy. The team's owner, John Rigas, was subsequently charged with financial fraud by the Securities and Exchange Commission related to the collapse of Adelphia. Though Buffalo businessman Mark Hamister remains interested in obtaining financing to purchase the Sabres, the team, saddled with more than $206 million in debt, filed for Chapter 11 on Monday.
"For the last five years in a row, we've had record attendance, an unprecedented amount of exposure and growth in revenues from $400 million to over $2 billion," NHL commissioner Gary Bettman said Monday. "The business side has never been stronger. But no matter how quickly revenues have grown, salaries have grown faster."
According to Bettman, NHL player salaries rose to more than $1.3 billion in 2002-03.
Bob Goodenow, the executive director for the NHLPA, says the situation in both cities have little to do with the parameters of the current agreement.
"The unique events that triggered a bankruptcy filing last week by the Ottawa Senators and today by the Buffalo Sabres have led the owners' commissioner to attempt to draw a connection between these events and the Collective Bargaining Agreement," Goodenow said, in a statement. "The reality is that neither club's bankruptcy filing is attributable to the operation of the collective agreement. Instead, the circumstances leading to each club's bankruptcy have been created by the business decisions and personal actions of their owners."
Four major professional sports teams have successfully reorganized after filing for bankruptcy protection since 1969, including the Pittsburgh Penguins twice, in 1975 and '98, and the Los Angeles Kings in 1995. Even though both franchises need to be reorganized in order to continue operating, their plight won't necessarily make it easier for the league's owners to achieve a salary cap of sorts in the new CBA.
"Ottawa had a poor business model from the beginning and accumulated a lot of debt," said Don Meehan, an NHL superagent who represents award winners Nicklas Lidstrom, Jarome Iginla, Michael Peca and Jose Theodore. "From a business standpoint, the way they've been playing with their payroll actually makes them the model franchise.
"In Buffalo, the ownership group fell apart and there was a complete loss of trust between the fans and the team." Meehan added. "So it's pretty hard to equate the activities by the owners of the Sabres, who were charged by the Securities and Exchange Commission, with the issues associated with the business of hockey in general."
"If you separate the hockey operation from everything else, Ottawa would likely be profitable," said agent Todd Diamond of International Sports Advisors, which represents Alexei Yashin, who played with the Senators for seven seasons and is still owed $2.6 million by the team. "Both Ottawa and Buffalo have been pretty competitive over the years, so their recent problems have very little to do with their ability to compete."
Jeffrey Citron, who served as associate counsel for the NHLPA from 1995-2000, acknowledges that Ottawa and Buffalo are unique situations, but added "if the salaries were lower, the team would have more money to pay off their debt."
"If the Senators had a payroll of $15 million instead of $30 million, they could use that money to get $150 million in financing at 10 percent interest," said Citron, a Toronto-based corporate finance lawyer.
While it remains to be seen what impact the teams' plight will have on labor negotiations, Citron added that a possible work stoppage will have a direct impact on the sale of the teams.
"The teams might be able to play in Houston or Portland, but who is going to buy them with a labor war on the horizon?" Citron said. "Someone would have to have a lot of ego to spend $100 million on a property that might generate no revenue in 18 months. The franchises in Ottawa and Buffalo might be able to get back on their feet now, but what will happen if there is a work stoppage and revenues go down to zero?"
Ganis said that without enough shared revenue, many teams are struggling to break even on an annual basis.
"If the players and the player agents don't realize that and they continue to believe that teams can spend what they have been spending, there will be a lot less teams in the NHL under the next CBA," Ganis said.
Darren Rovell covers sports business and can be reached at firstname.lastname@example.org