• “Why are we having this gathering today? I’m not sure…”

    by  • January 3, 2008 • Uncategorized • 12 Comments

    I’d rather watch an entertaining hockey team than an entertaining airing of local rivalries and grievances, but in the absence of the former since June of 2006, I’ll settle for the latter. Today’s chain of events was thoroughly entertaining and, in my mind, utterly ill advised on the part of the EIG. I mean, for one, Terry Jones was in Buffalo yesterday at the Winter Classic. That game ended at about 4:45 EST. I’ve got serious doubts that he would have been able to get back to Edmonton last night but, assuming that he did, he probably flew a red eye back to Edmonton. I’m not even sure that there are red eyes going that distance from east to west in Canada – if he left Toronto at 10:00 p.m., which isn’t unreasonable assuming an easy time at the Canadian border, he’d be landing in Edmonton at what, 1 a.m. or so? I suspect that Edmonton International isn’t even open at that time. I wouldn’t usually care about that sort of thing but when a guy describes me and my business partners as the greatest guys in the history of a given city, I’ll schedule press conferences when he’s damn well available. Hell, I’ll have the press conference in Buffalo if neccesary. Instead, it was the Dan Barnes, Robin Brownlee, Bob Stauffer, Bryan Hall and Bryn Griffiths show and those guys weren’t going particularly easy on the poor guy, although they did let him wriggle off the hook a couple of times.

    Anyway, for all I know Jones was there, but I don’t recall hearing him ask any questions at Bill Butler’s press conference today. The new crew seems to lack Cal’s touch. Some highlights from the presser, although I encourage anyone interested enough in the Oilers to read this site to go and check it out at their website – it’s well worth listening to:

    If you happen to be the tenant and the landlord, does that create conflicts? So, from our perspective, perhaps the view from the Investors Group would be if the Oilers maintained a relationship very much like they have today, where we are exclusively a tenant in the Rexall building, does that then potentially allow us to pay rent, which arguably, whoever the owner of the building is, could go out and leverage that rent for a hundred or two hundred million dollars on a twenty year mortgage and clearly…is that any different than writing a cheque? I mean, the whole issue of the hundred million dollars or whatever anyone commits to are what are the revenue streams that come out of the non-hockey related events in terms of entertainment?…The casino option that was played in Pittsburgh…is there some way that a casino can be incorporated into this new facility? When you think about naming rights and seat licensing and ancillary real estate…I can see where if you took six acres adjacent to this entertainment draw that in, in and of itself, creates a wealth because that land value immediately escalates because everyone wants to put an office building or a restaurant or other products near it. So then you get this wealth creation: who’s wearing that hat? And then the last item, of course, is the City of Edmonton and their tax base. If we create something that is in line with what Edmonton needs and wants, and gets it downtown, what’s the new tax base for the city? Is there a new arrangement that might be struck with the provincial government on property taxes that might give the city a leg up on their current tax model where half their taxes go to something other than the city. I think that there’s so many ways this might be played…

    This was my favourite answer, in terms of sheer inanity. I didn’t quote it, but there was a third reference to wealth creation immediately preceding this answer. It was like watching one of those infomercials about how you can accumulate property with no money down. Oh, wait…

    In fairness to Butler, it seems fairly clear to me that there is a group that wants to keep the team, wants to get a new rink and isn’t particularly sure how in the hell they can go about doing that. I would, however, liked to have heard this potential conflict explained in greater detail. Are the Vancouver Canucks, Toronto Maple Leafs, Ottawa Senators and Montreal Canadiens all caught in some awful conflict of which we’re all unaware?

    What’s more, I can’t be the only guy who wonders a little bit when a land developer says something along the lines of “This is a great deal. I’m not going to invest but you totally should! Think of the casino (ed. I’m generally libertarian but not a big gambling fan) and personal seat license money!” I’d like to know about the lease that they propose to sign as well – how good is it going to be? How airtight? Will it be better than a location agreement?

    If we sign a lease, we don’t have to write a cheque. Perhaps we would write a cheque in concert with…For example, I understand in New Jersey that they pledged all of their suite revenues with respect to a new arena and were given $130MM for pledging the suite revenue. So tell me, writing a cheque, pledging rents, collecting money, it’s all about income streams and its all based on revenues and basically leveraged debt. If you sit down and go through the math of a new facility with casino, naming rights, entertainment functions and various ancillary items…how much revenue do you need to support a building of four to five hundred million dollars? You might only need thirty million dollars. Is the hockey team going to pay seven, eight and then could the casino pick up ten or fifteen…you start to do the math and then you go backwards from the math and then you say “You know what? This thing flies by itself and that doesn’t even deal with all the real estate around it, where obviously there’s going to be huge opportunities.”

    I rip on the Edmonton media an awful lot but it’s time like this that make it clear to me just how deserved it is. Guys like Terry Jones have talked an awful lot about Peter Pocklington, doing their damndest to tie his sins to Darryl Katz. Peter Puck was, of course, all about debt financing which ultimately cost him his fortune, cost Edmonton a dynasty and almost cost Edmonton the Oilers themselves. Which potential owner: the EIG Faction or Katz, is the one spinning dreams based on leveraged debt?

    I know very little about finance – I’m happy if I remember to pay my rent on time – although I know enough to know that I can’t comment on the wisdom of doing things like this by way of leveraged debt – there was some guy who was a business school heavy who commented here a few years back, maybe he’s got some insight here. In any event, it seems clear to me though, that the EIG Faction doesn’t have Katz’ bucks. If this whole thing is being done, at least in part, to ensure that Edmonton continues to have a hockey team, doesn’t it make more sense to have the guy with more money running the show? The guy who isn’t talking about leveraged debt? Applying the test that at least some local media factions are applying: “the one most like Pocklington is bad”, you’d think that “They want to finance with lots of debt, JUST LIKE POCKLINGTON!” is a more troubling similarity than “There’s only one of him, JUST LIKE POCKLINGTON!”

    Question: Why would you not wait for him to give you the answers before you went public?
    Answer: When did we go to him? We went to him on December 31 because our undertaking to our shareholders was to report back to them by December 31 and in the full transparency we’re talking to you about we said that clearly if we’re going to ask the advice we got was we should be recommending that nobody should sign that agreement until items within the agreement get clarified in terms of legal matters and so I’ll leave it at that. We’re having another meeting on the 21st. Why are we having this gathering today? I’m not sure. I guess other than introduce me and to tell you about the process that we’re going through in trying to come up with what we think goes back to our core values of what’s best for Edmonton and how are we going to bring that about…

    This was the “If Kitty Dukakis was raped and murdered…” moment of the press conference I think, although Michael Dukakis would have been shaking his head at the answer. Bonus points for mentioning “full transparency”, failing to answer the question and then just talking for a while. The correct answer was, I think, “We’re spinning this to try and reduce the sense of inevitability associated with the Katz bid…”

    Call me cynical, but I don’t think that the assorted millionaires who make up the EIG Board are so naive as to think that Butler was going to get questions about his background today – it was going to be all about the media release and potential sale – not the process, so much as what specifically is happening. My cynicism is deepened by the way that Alan Watt (I think it was Alan Watt) opened the press conference:

    Edmonton Investors Group has asked to have this media conference today for a number of reasons and you’ve got the media release in front of you, which is good. It’s from EIG…

    In fairness to Watt, he also acknowledged that the purpose of the media conference was to introduce Butler. The media release reads, in part:

    The Board of the Edmonton Investors Group has met and formally responded to Rexall Sports with these questions about the offer:

    • The willingness of Rexall Sports to execute a location agreement for the Oilers to remain in Edmonton, and under what conditions Rexall Sports would make such an agreement.

    • If Rexall Sports Corp. is prepared to contribute $100 million to the construction of a new facility in Edmonton, as reported in the media, what conditions might apply – for example, will Rexall Sports expect an ownership interest in the new facility, or any additional control beyond the existing Licence agreement with Northlands? Will Rexall Sports require development on a site of its choice?

    So really, the question is still there: why release these questions to the media before Katz has had the opportunity to respond? Butler didn’t answer it. When the question is posed directly, the guy doesn’t answer it and the Oilers have just handed out a media release raising the spectre of the location agreement and all the abandonment angst that that gives rise to in guys like Terry Jones, it would appear to me that the meeting was perhaps about more than just process and introductions.

    The issue was raised [a face to face meeting between shareholders and Katz] and is under consideration, but probably at this time, the answer is, we think by getting all of the answers that we can specifically to this offer that he sent us, so it’s clarification…I think we should put one thing very clear: this is not about a personality issue. This is about a group ownership and their vision of the city, with a broad base of owners, Edmonton based, as compared to a single owner. The essence of, when you look at the last ten years, that’s what got us to where we are today…

    This becomes all the more glaring with Katz’ press release later today, wherein he states that he’s expressed a willingness to meet with the shareholders. The mind boggles as to how these highly successful people end up getting pulled into this press conference, with Butler getting questions like this, when they’ve got to know that at some point, Katz is going to point out that he’s offered to meet. It’s crazy. It’s a shame that the Katz statement wasn’t out by the time that he went on Stauffer’s show today so that Stauffer could quiz him on it.

    We’ve put questions to Mr. Katz as to all of the details that we’ve talked about today as to the contribution. There was reference in the letter as to the new building but there’s no condition in the purchase agreement as to the new building nor is there any reference as to a location agreement, which you all remember, without which, perhps ths team would be playing in Houston today. It’s a very complex deal, both from the perspective that I’m not particularly comfortable in a public forum, secondly that we are doing everything in our power, within the board and the executive to be fully transparent and to avoid those issues that we’re not acting in the best interests of shareholders and the corporation.

    A couple of things come to mind on this. First of all, it’s not clear to me why the purchase agreement would even be the document containing the promise to kick in $100MM for the rink or a location agreement. It’s been reported that this is a share sale. Presumably, as this is a share sale, the purchase agreements are between Katz and the various share owners. Are the share owners the ones who would be expected to sue on their guarantees? Even assuming that both of these were enforceable, would former EIG members sue on the purchase agreement in the event that Katz ultimately didn’t follow through on guarantees to the EIG? What would their damages be? What incentive would they have to get involved in litigating with Katz if he moves the team? Wouldn’t the appropriate time and place for those guarantees to be when negotiating with governments for funding for the arena?
    Personally, I think that this is a red herring. It’s a shame that nobody had the presence of mind to ask the obvious follow-up: “Cal Nchols has said that he supports this offer and he’s got a pretty good track record of looking out for Edmonton’s interest in retaining the Oilers. Why do you think that he didn’t think that a location agreement and clause relating to arena funding were necessary? Was he wrong? Has he made a grave error? Do you think that he’s no longer the civic leader that he once was? Has he sold out Edmonton?”

    There’s no real way to answer those questions without either a) acknowledging that your previous statement doesn’t make much sense or b) throwing Nichols under the bus. If one of the media types who reads this talks to Butler or Nichols in the next few weeks, I’d be interested in an answer to that question.

    Another angle on the location agreement thing – EIG has been without one since 2004. The topic was raised when they went, cap in hand, to city council in 1998:

    Mason tried to extend the Location Agreement to 2008 in return for the city’s support but his pleas were rejected. “I was appalled,” he says. “I thought it was inappropriate for the city to provide operating subsidies for the team while it’s here and not have some way to recoup our investment.” He also wanted the investors to use their best efforts to see if they could raise some of the money themselves so that, if the team began making a profit, the subsidy would stop. “That’s the problem. We are dumping in tax money and cutting programs in order to pay for this,” he says.

    Now in fairness, this doesn’t say who rejected the extension of the Location Agreement – EIG or his fellow councillors – but at the very least, it seems a bit tacky to come after the guy publicly on this, after you sent him a letter with the question only two days before, when you aren’t subject to a location agreement yourself.

    All in all, this was not a shining moment for the EIG – I know that I said it already, but this really needs to be listened to in its entirety to be properly appreciated. Was it weak enough that the media will start to smell blood and rouse itself from its general indifference to silliness put out by the EIG? I kind of suspect that it might. I listened to Stauffer’s show today and the reviews from the various media types involved were not all that positive. It was almost as if the small band of EIG cynics gained some new members.

    Katz’ response was apparently delivered live while Stauffer was on the air – I was reminded of a winter night in 2005, watching TSN, as the NHL and NHLPA sent out competing press releases, essentially engaging in a public pissing contest through the media. Good times. Anyway, here’s what Katz had to say:

    In its press release, the EIG Board posed several questions to Mr. Katz about his offer to acquire the shares of the Edmonton Investors Group Holdings Ltd.

    The questions were taken from a much longer list of detailed and technical questions conveyed by the EIG Board’s legal counsel in a 6-page letter delivered to Rexall Sports Corp. late in the afternoon on December 31, 2007.

    “The Board’s conduct in recent days is confusing and I fail to see how it serves the best interests of EIG shareholders,” said Mr. Katz. “I have offered repeatedly to meet with the EIG Board of Directors, EIG shareholders – either individually or as a group – and with the professional advisors to any of the above to discuss my interest in acquiring the team and answer their questions.

    “Neither the Board nor its advisors have accepted my offers to meet. Indeed the first communication we have received from the Board came in the letter sent by their lawyer on New Year’s Eve.

    “That letter was followed by today’s press conference in which Mr. Butler, without having the benefit of my response, is reported to have said the Board is recommending shareholders vote against my offer.

    “I intend to respond to whatever valid questions the Board has about my offer for the team, but I think they owe an equal duty to come clean about any involvement members of the Board may have in fashioning an alternative bid, how much debt they plan to assume to retain ownership, and what commitments they are prepared to make to help secure a new arena for the Oilers and a training facility at the University of Alberta, which remains very much a part of my plans if my offer is accepted.”

    Now whenever I see someone adverse in interest to another party release a statement saying that he doesn’t understand how someone is serving the interests of the party to whom he is adverse in interest, I always roll my eyes a little. With that said, I think that this was a pretty sweet press release. He’s effectively put the role of “Guardians of the Best Interests of Edmonton” at stake by calling on them to “come clean” about how much debt they plan to assume to retain ownership and what community commitments they’re willing to make. Considering that this has always been the EIG’s strongest point and that Katz is richer than astronauts, I think that he’s got them into a pretty awkward position.

    Just to show that I’m finding entertainment in all aspects of this, the Journal published a profile on Katz today that had this fantastic excerpt:

    Though it’s clear Katz travels in high-profile circles — a list of contacts provided by his communications firm included the names Wayne Gretzky and Mark Messier — it’s also obvious he has taken pains to ensure his personal life stays private.

    Presumably that’s the same Wayne Gretzky who thought “Bruce McNall?  This is the kind of guy I want to be involved with” and was later surprised to learn that his wife was placing bets with his assistant coach.  I don’t mean to pick on Gretz and I don’t even think that this is a particularly fair criticism but I don’t know how you can read that sentence without thinking about McNall.  It should go without saying that I’m not comparing Katz to McNall, only saying that given Gretzky’s high profile association with McNall, he might not be my choice of reference if I was a reclusive bilionaire.
    Sadly, I doubt that we’re going to get many more spectacles like today. Whatever you may think about Gary Bettman, he has no problem wading into disputes like this. He recently settled a dispute over the ownership of the Tampa Bay Lightning and he’s attempted to resolve the Bertuzzi thing. I don’t think that the league likes these sorts of public spectacles and it wouldn’t surprise me if the EIG is told to avoid negotiating in public, while Katz is reminded that he still has to be approved as owner. I hope that I’m wrong, because stuff like this is thoroughly entertaining, but given that Bettman has governed over the elimination of a large number of entertaining teams, I have no doubt that he’ll be equally effective at squelching the airing of grievances and petty local rivalries. Pity, that.


    12 Responses to “Why are we having this gathering today? I’m not sure…”

    1. twain
      January 3, 2008 at

      Good stuff, Tyler. I really think the EIG misplayed their hand here; they really set Katz up for the public rebuke.

    2. January 3, 2008 at

      Oh, Jones has his column up. I never would have guessed that he and Butler would talk on the phone. Never.

      If the reason Daryl Katz wants to get his hands on the Oilers isn’t about owning the hockey team for the greater glory of Edmonton but about “owning” the new arena and the business opportunities around it for the greater wealth of Daryl Katz, a significant number of Oiler owners obviously aren’t going to give the game away.

      So, Katz is greedy for wanting to own an arena he pays for, while acknowledged real estate whiz Butler wouldn’t be interested in things like money? The EIG would just give those profits to the homeless, obviously? How kind of them.

      This is my favourite:

      This is a guy who won’t come out of his hole and appear in public demanding answers from the citizens who saved the team without his help and without making a dime to answer to him because why? Because he’s Daryl Katz and is worth two billion bucks?

      If you can translate that into English, you’ll learn that, according to non-hole dweller Terry Jones, the members of the EIG haven’t made a dime off the Oilers. Team is still valued at $70 million, in fact, and the goodwill created by their ownership of the team hasn’t led to greater success in their other business ventures.

    3. lowetide
      January 3, 2008 at

      I think it’s a combination of rage over losing “the toy”, jealousy (an empire builder in our town has the money, swagger and I assume the women) and possibly a period of waiting in line with a promised elevated role being denied.

      Either way, I can’t imagine a scenario where Katz doesn’t get the team UNLESS he loses interest.

    4. The Human Torch
      January 3, 2008 at

      Terry Jones is clearly a shill for the EIG. How he gets away with providing such baseless, ill-written, idiotic rambling arguments is beyond me.

    5. sketchy
      January 3, 2008 at

      Most of Butlers’ answers seemed evasive and at times ethereal. Answering questions with questions, positing complex hypotheticals, and raising objections on behalf of (to this point) uninvolved third parties.

      According to Forbes the Oilers Franchise has exploded in value since the lockout ($104M in 04 to $146M in 06 and $157M in 07) but showing reduced revenues and operating income and growing player expenses – I would say that now would be the time to sell, given that the current offer is pretty generous, based on the Forbes valuation. Is the EIG waiting for a better offer or just making sure that when they do sell the team they can wash their hands of any future mess and say ‘we told you so’?

    6. David S
      January 3, 2008 at

      Butler claimed that the Oilers are pretty much debt free now. So he looks at the deal from a developer’s perspective, which is to debt finance based on future returns and “present value” of the core asset (now established at $188 million). Developers use very little of their own money up front, that’s the way they roll. Versus Katz, who would combine his own considerable resources and the financial weight of Rexall to stand as collateral versus the team itself.

      And I don’t give a shit if he has “developed a billion dollars worth of property” (what’s that, three projects in Edmonton these days?). He’s still an apprentice compared to Katz, no matter how Jones tries to spin it.

      I’d bet that Butler and his buddies are putting a deal together right now (which Katz has alluded to), thus the pathetic and overly public stall tactics. Problem is, its patently unfair to Katz as he doesn’t have the inside information – again which he’s hinted at.

      Whatever. Its a business deal. I get that. But PLEASE don’t try to convince me this is about any community other than the community of 30 or so involved. And don’t give me yet another condescending line that this is in my best interests when its so obviously not.

      And – how Jones gets away with slamming Katz over and over again is beyond me. Its borderline slander.

    7. Oilman
      January 3, 2008 at

      In one of his earlier articles, I’m pretty sure it was Jones, called Katz a “drug lord”…now I know his fortune is from pharmacueticals, but I’m surprised that Katz lawyers didn’t give Jones a ring over that.

    8. January 3, 2008 at

      I’d like to believe my fellow Edmonton taxpayers would demand that, if a rink must be built (I’d argue it shouldn’t be) the Oilers owner(s) should either pay for all of it and own all of it, or pay rent on an unbreakable long-term lease in a building we pay for. You know. Like the real world for the rest of us.
      Butler and pals are more likely from the George II Bush school of pro team ownership, where you put little or no money down, get taxpayers to build your team a home, then sell the team AND the playpen for millions in undeserved profit.
      I never thought it possible, but these guys are starting to make the Pocklington era seem like the “good old days.”

    9. David S
      January 3, 2008 at

      Uhhhh…these guys ARE from the Pocklington era. Where do you think half of them learned their business skills?

    10. 420ilerBuzz
      January 4, 2008 at

      Great read. Thanks. The only point that I’d like to make is that Katz was friends with Gretz and Mess while there were still playing here in the 80′s. Long before McNall came into the picture.

      Once again, this was an excellent piece.

    11. January 4, 2008 at

      Now whenever I see someone adverse in interest to another party release a statement saying that he doesn’t understand how someone is serving the interests of the party to whom he is adverse in interest, I always roll my eyes a little.

      Agreed, but note that there is a Web-ready, non-legalese way to express this.

      Good recent example (via Jim Henley):

      Larry Csonka, the ’72 Dolphins’ fullback and primary offensive weapon, went on record two weeks ago saying Belichick was risking a Super Bowl title by playing his starters too long, particularly quarterback Tom Brady.

      “He isn’t pulling his people out,” Csonka said before ceremonies Dec. 16 honoring the ’72 team at Dolphin Stadium. “He’s got a Super Bowl to worry about. Why would you even play Brady the next two games? Why would you even take a chance?”

    12. macndub
      January 14, 2008 at

      there was some guy who was a business school heavy who commented here a few years back, maybe he’s got some insight here

      If it’s me you’re talking about, I’m flattered. If not, I guess I just proved my nerd credentials.

      So I have little value to add on a stadium deal. At one level, these are simple: it’s just a real estate transaction. On another level, they are incredibly complex, primarily to obfuscate the flow of money to make taxpayers believe that they are not being hosed too badly.

      The most important thing to remember is that no financial transaction can possibly add value. Financial engineering can only shift risk. It can’t make risk disappear. Now, to the extent that you slice risk so that one party achieves a desired risk tolerance, you’re adding some value, but it’s dwarfed by the value-enhancing ability of a profitable business. For example, some people can’t stand floating interest rates and lock in for five years. They shift interest rate volatility risk to the bank, who charges a premium for it (it’s buried in the rate). But the real value from owning a house comes from appreciation and hedging one’s rent increases, and a few points on a five year vs floating rate isn’t going to change that balance much.

      Okay, so on to this specific deal. I didn’t view the press conference, because from these few paragraphs I have no idea what Butler is talking about and I don’t think he really knows either. These thing can work in a number of ways. One example is that an affiliated entity builds the arena, the city buys it, and the sports team then leases it from the city at some long term rate with guarantees. The city’s purchase price is fixed in a good deal: regardless of the actual construction cost, the city’s price for the facility won’t change.

      The idea is to shift construction completion risk to the developer. Note that this risk shifting is legal, not economic. The developer is poorly capitalized, and in the event of cost overruns, even if the developer is responsible for it by contract, the city will often step in to prevent a decades-long hole in the ground from blighting tax revenues.

      Now, idiots often talk about pledging certain revenue streams to backstop particular debt issues as if this is some sort of value add. It’s not. A pledged revenue stream is value adding for the team, it’s value destroying for the city. That’s because if the team pledged its entire asset (all revenue streams), the city would have more recourse if, say, luxury box revenue was lower than expected.

      But the important thing is that, in most cases, creative financing is intended to obfuscate rather than truly shed risk. The city keeps the capital cost risk (no small issue in Alberta today). The number one thing that the city can do to manage this is deal with a well-capitalized counterparty, ideally Katz himself who has posted some sort of bond. But that’s a little much to expect from a team owner to actually put his money where his mouth is.

      What I can’t figure out is why the Butler group is so averse to selling the team. It’s not because of ego, because nobody knows who the fuck they are. Jessica Simpson ain’t showing up at any Rexall skyboxes. Perhaps their egos really are so small that it matters; I have no idea.

      According to a post in one of the Edmonton Journal blogs, maybe by Dan Barnes?, the Journal basically doubled its money in 10 years of ownership. That’s a 7.5% annualized rate of return folks, pretax, and it’s completely garbage compared to the risk of operating a franchise in the entertainment industry. I doubt that they’ve pulled any cash out as dividends, though I may be wrong and it would alter the return profile significantly (instead, I recall cash calls in the early years, which would have the opposite effect).

      Time for these successful men and women to cash out and stick the proceeds in their own businesses, I suspect. The only issue should be price. But people are idiots, none more so than people who made their money by being lucky, so who knows?

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