Will it be Mr. Wonderful or Mr. Balsillie for the Phoenix Coyotes?

Hockey in the desert. A beautiful building in an inconvenient location. An owner/coach. One playoff series since 2000. A disadvantaged lease and poor attendance.  In this economy, is it any wonder that the Phoenix Coyotes have ended up in Chapter 11?  Quite unexpected, is the guerilla bid by Blackberry magnate Jim Balsillie and attempt to circumvent league rules on ownership and relocation and a distraction from an otherwise great spring for hockey.

The Court Hearing Issues

The hearing May 19 revealed several fundamental issues:

1. Who has control of the franchise?
2.  What is the nature of the franchise? Is it a franchise only in Arizona, one with unlimited relocation rights, or one with relocation rights pending Board of Governors approval?
3.  Can a league enforce territorial rights and dictate ownership, or can a court overrule these rights?

The judge’s decision to order Moyes and the NHL into mediation was a shrewd one and allows both parties to save face- something the NHL was doing for Jerry Moyes until his sudden Chapter 11 filing May 5. The court-ordered mediation is to determine whether Moyes or the league have control of the team and is a step to avoid a contentious court battle that would require the major players (Moyes, Bettman, Daly, et al) to answer questions under oath and answer to accusations of each side being a liar in court documents.

NHL Prepares for Bankruptcy Court

The NHL made a significant shift during the trial, conceding that the Coyotes are heading for an auction and bankruptcy court may be a suitable venue, even if Moyes lacked the authority to actually place the Coyotes in bankruptcy. This also removes the ability of Moyes or the league to set a reserve price on the franchise.

One interesting non-participant during the proceedings was the NHLPA, who have strongly supported a seventh Canadian franchise. Section 2018 (d) of the Federal Bankruptcy Code specifically gives labor unions the right to be a part of proceedings regarding any reorganization plans and how the plans impact their constituents. Since Mr. Balsillie attended the hearing without true standing before the and a litigator for the NFL addressed the judge, this is a surprising quiet position from the NHLPA.

The Relocation Issue

As expected, the city of Glendale asserted its rights as leaseholder before the judge and asked to be added to the list of nonsecured creditors if he rules that the franchise is a mobile asset. In that case, the lease could be broken and the $500 million penalty imposed. Like the Pittsburgh Penguins fighting the SEA during their 1999 bankruptcy for the right to relocate, Glendale does have both precedent and experience on their side.  The major risks to their claim are the discretionary powers of a bankruptcy judge to nullify contracts and a Congressional cap on punitive damages at one year’s rent ($500,000)- which has been untested in a case like this.

The determination of whether the franchise itself is mobile also has far-reaching implications in the quantity and type of bids received in the auction. If the franchise is a mobile asset, total liabilities jump to $610 million from the current $108,401,367.79 million (to the top 40 unsecured creditors per the filing) due to Glendale’s claim.  Under any scenario, secured creditors of $95 million will be paid first.  

• Under Balsillie’s plan, Gretzky will also receive a payout of $22.5 million If Glendale’s claim is upheld, Balsillie’s plan will pay $95,000,000 among $610,000,000 of claims, or 15.61%. 
• Reinsdorf’s reported bid of $130 million does not breach the lease or include a payment to Gretzky.  This plan leaves $35 million to be paid among the $108 million held by unsecured creditors, or 32.29%. It’s also likely that another ownership group eyeing a different location outside of Phoenix will step forward and outbid Balsillie. 

 So even if the judge rules against the NHL in the relocation arguments and opens the door for the Hamilton Coyotes, remember that the judge has the sole responsibility of making as many creditors whole as possible.

NHL Raises The Stakes!

The NHL raised its line of credit from $70 million to $200 million Monday, citing low interest rates and the need to be prepared for the future. These reasons seem hollow and the timing suspect at best.  A US bank holds the credit, whose rates are directly impacted by the Federal Reserve. The next scheduled Fed meeting regarding rates is June 23-24, or well after the Cup finals. If interest rates were the true motive, they will likely still be there after the Cup is awarded and the deal did not have to be executed the day before the first major hearing. 

Could the NHL potentially be a bidder to stabilize a market they obviously believe in? Could they be ready to run the team and bankroll its operations throughout a prolonged legal battle? Or is the financial health of other franchises far worse than anyone knows, with this being the first of many dominos to fall during the recession?

Balsillie’s Calculated Bet

Balsillie has taken a calculated risk with this strategy. The Board of Governors requires a three quarters vote (23 of 30) to approve a new owner, and they won’t quickly forget that Phoenix is #5 on the hit list. It’s unlikely that the previous four franchises would affirm his ownership. MLSE and Buffalo are wildcards, with true claims to territorial infringement. MLSE has made statements implying that there could be a satisfactory financial arrangement.

It’s doubtful that Buffalo would feel similarly, with recent estimates attributing 15-20% of revenues to southern Ontario. For a smaller market recently out of bankruptcy, this could spell long-term ruin. While other owners may see the revenue southern Ontario can bring, questions of trust regarding Balsillie and his methodology will remain.

Balsillie’s strategy is based upon a PR campaign to tap into nationalistic pride. He neglects to mention his play for the Ottawa Senators with hopes of moving them to Hamilton and instead reinforces the common stereotype of “Canada v Bettman.” He is banking that a league still in damage-control from the ultimate PR disaster of the cancelled 2004-05 season will eventually capitulate to quiet the media storm and save face.   What he didn’t certainly expect was the entry of NFL, MLB, and NBA into the fray with their combined influence, deep pockets, and army of litigators. 

Can one man rock the boat in all of mainstream professional sports?

It looks to be a tall task and one that would challenge anti-trust law more than bankruptcy law.  While the Canadian Competition Committee has sided with the NHL’s practices, the NHL lacks an anti-trust exemption in the US like MLB owns.  Balsillie may lose this battle, but his war is more appropriate for a different court of law.  Furthermore, precedent is based on older case law and now might be the time to challenge it before a progressive judge.  Balsillie may have led Moyes down the wrong path as a cohort, as Moyes stands to lose far more than he can gain.

What Is Moyes’ Angle?

Moyes’ gamble is also a tricky one. He certainly is tied personally and professionally to a sinking ship. Even if he didn’t have control May 5, the team was bankrupt without the tag.  The NHL strategy of keeping things quiet during the season was to protect the Coyotes and NHL brands and keep sponsorship and fan money flowing into Phoenix. If their true woes had been disclosed, corporate sponsorships would’ve likely dried up, and fans would have been less likely to support a lame duck team with their lean entertainment dollars.  By taking this to bankruptcy court, Moyes may lose nearly everything he’s invested in the team- unless a Mr. Wonderful appears.

Rumors have surfaced that minority owner John Breslow may be preparing a bid for the team to keep it in Phoenix.  When Mario Lemieux bought the Pittsburgh Penguins out of bankruptcy in 1999, he turned his $31million in deferred salary into ownership of the team, worth an estimated $100 million at the time.  Where did the rest of the money come from? Mr. Wonderful, a majority owner with deep pockets and a love for hockey, as Lemieux referred to him prior to presenting the bid to open court.  A quick look at the four teams still playing this spring shows that things worked out wonderfully for the Pittsburgh Penguins. Does Phoenix have a Mr. Wonderful ready to ride in on a white horse to keep the team in place, or will the players be packing their bags for Hamilton with Mr. Balsillie to become the seventh NHL franchise?

This article has been contributed to NHL Digest exclusively by a legal source well versed in diplomacy, international relations and mitigation. Because of confidentiality agreements and security clearances, the source must remain annonymous. 

Please feel free to direct any questions via the website comments section.

A New Economic Reality Faces The NHL

This article has been contributed by author Kyle Roussel.  Feel free to catch up with Kyle on Twitter!

TSN’s Bob McKenzie is about as good as it gets when it comes to insiders in their respective sports. To me, he’s in the same class as guys like the NFL’s Chris Mortensen, and baseball’s Jonah Keri.

So when McKenzie speaks, I’m paying attention. Recenty he published a column on TSN.ca about a new economic reality about to hit the NHL. He went in to some detail about how the cap is on the verge of shrinking…big time, and teams like the Flyers and Red Wings will have no other option than to let some excellent players go for virtually nothing, just so they stay under the cap. There is no option to pay a luxury tax or other kind of penalty so that you can play over the cap. Teams MUST be under the cap.

The Flyers will have to move some well paid, and well liked cornerstone players…and not Daniel Brière. No one will want his mammoth albatross contract, especially now that he’s suddenly become injury prone in to his early 30’s. So then will it be Mike Richards or Jeff Carter? Losing either one is an arguably devastating blow. They’ve drafted, invested in, and made stars out of both, and they may be forced to trade “a battleship for a rowboat”.

Things are even worse for the Red Wings, who will not be able to retain Marian Hossa, Johan Franzen, Mikael Samuelsson and Jiri Hudler. They know that some of those guys are gone, and for not much in return, except valuable cap space. Where will these guys end up? To teams with lots of cap space of course!

How will the Habs Cope?

I turn my attention now to my Habs. At season’s end, General Manager Bob Gainey will have a plethora of unrestricted free agents to deal with (Koivu, Kovalev, Tanguay, Komisarek, Dandenault, Bouillon, Brisebois, Schneider, Kostopoulos, Lang). That’s the core of the team and then some.

Some say (and recently fired coach Guy Carbonneau hinted at this) it’s a great opportunity to cleanse the dressing room of bad apples. It’s also a time when the shrinkage of the cap will coincide with the Canadiens’ payroll shrinkage. A perfect storm right? Most fans are relieved by this. “Excellent, get rid of the dead weight and bring in a new core with all of your newfound cap space”.

This is Flawed Logic

and it probably applies to other teams as well:

1. You are making the assumption that premier free agents WANT to play here. In the past couple years we’ve seen Bob Gainey make ultra-aggressive pitches to Ryan Smyth, Daniel Brière, and most recently Marian Hossa. All 3 took less money to play elsewhere. Their reasons why are their own, but the fact is having cap space is not a guarantee that you’ll be able to spend it on all-star talent, especially here in the ultimate hockey fishbowl of Montreal.
2. You just can’t flush out half of your roster and replace with new guys and hope they’ll instantly gel, even if they are all-stars. For years the New York Rangers brought in star after star and didn’t have much to show for it. It takes time for guys to get used to one another and build chemistry. This could be a total rebuild.
3. You probably need to resign some of of those UFAs. They are probably an integral part of your team…like Mike Komisarek. Here’s the obvious rub: agents love money. They’ll say that with all of this freed up cap space, a GM could easily afford to give their player the dollars and term they’re asking.
4. You still have to meet a “salary floor”. This means that teams with lots of cap room and not many players will have to overpay some free agents just to meet that salary floor. Traditionally, the Canadiens have had trouble signing marquee free agents. So this summer Gainey will have 2 issues – the need to fill out a roster, one that will meet Montreal fans’ rabid expectations and the need to meet the salary floor. That’s when guys like Roman Hamrlik get 4 year deals worth 22 million dollars! I can see this trend continuing in to the summer and Gainey having to settle for second-tier guys.

Someone Stop the Merry-Go-Round!

This desperate behavior will probably replicate across the league, ensuring that no real market correction will take place. I think we’ll eventually see teams all have a couple high priced guys, followed by a lot of cheap grinders and even cheaper kids. I guess that will do lots to ensure the parity that Bettman so desperately wants.

So What’s the Solution?

It’s all well and good to think that flushing out cap space is a great thing, and it is, but it’s how you manage it that’s even more important.

As fans, we can only hope that the NHL’s General Managers control themselves this time around exercise a little restraint. The day of the 6+ year contract worth 7 million dollars or more per season should come to a merciful end. A foolish hope? Probably. Very few GMs know how to pick their spots with so much success. Lou Lamoriello and Ken Holland instantly come to mind as guys who draft well enough that they can easily manage their free agent situations, though I think Holland is in for a bit of a rough ride.

How do you see the consequences of the falling cap and the recession affecting how contracts are given out? How do you want your team’s GM to approach this upcoming storm?

Gary Bettman’s Fortune Revealed

I find it rather interesting that on the week of a Stanley Cup final series that promises to be an instant classic, this image of Gary Bettman finishing his meal at a New York area Chinese restaurant has surfaced.
Do you think Mr. Bettman’s fortune will come true? Or, has it already?

In related Bettman news, I will point you to review Mr. Bettman’s logical reasoning skills as identified by Mr. Golbez at Hockey Rants in 2005.

*Note the satire.