• Stephen Mandel is going to make it rain

    by Tyler Dellow • July 23, 2010 • Uncategorized • 19 Comments

    If I was an Edmonton taxpayer, this would send chills down my spine:

    The owner of the Edmonton Oilers wasn’t blackmailing the city when he told councillors that the team won’t play at Rexall Place past 2014, Mayor Stephen Mandel said Thursday.

    Billionaire businessman Daryl Katz was just expressing a financial reality, Mandel said, amid heated discussions about whether to build a new downtown arena for the National Hockey League franchise.

    “I didn’t take it as a threat. I took it as a reality check of the problems NHL owners face in small markets,” Mandel said.

    Small markets? Small markets?!?!? Here’s Pat LaForge 21 months ago:

    “Revenue sharing, at the time you write the cheque, is painful — and we’ve written some big ones in the last two, three years,” said Oilers president Pat LaForge. “I see it as a compliment to our business. We’ve come from the red to being in the black and we need to look at it as a point of pride. The CBA has been good for us, the [Canadian] dollar has been good to us, the fans have been good to us. Some sharing is required.”

    I’ve read, although I can’t immediately find the link, that the Oilers paid another $3MM into revenue sharing this year. I really don’t want to care about the arena story but, as Matt Fenwick pointed out, I can see only two reasons that the Oilers might be losing money: 1) incompetent management (see the previous four years of posts) and 2) Darryl Katz paid too much for the team and is now faced with huge interest payments that the team doesn’t generate enough revenue to justify.

    As far as the first point goes, if Katz wants to continue to rub shoulders with incompetent Old Boys, that doesn’t seem to me to be something that the City of Edmonton should have to subsidize. As far as the second point goes, I’m not exactly sure what he can do. Is there a city out there where he can make more revenue than he does in Edmonton? He’s not going to move to Hamilton without a hell of a fight and I’m not convinced Hamilton’s a better hockey market than Edmonton in any event. I don’t see that he’s got a better alternative to Edmonton in terms of generating revenue. If he can’t handle the costs of his mistake, let the Oilers go bankrupt. Is there reallly a more attractive hockey market available?

    As for Stephen Mandel…anyone in the position to help transfer hundreds of millions of dollars to a private enterprise who offers up such an ignorant justification doesn’t deserve to have his job. If I lived in Edmonton, I’d consider violating my no voting policy in order to vote against him.

    About Tyler Dellow

    19 Responses to Stephen Mandel is going to make it rain

    1. David S
      July 23, 2010 at

      It looks like a ploy to strengthen their position. I’ve seen other blogs mention the point that making the playoffs is imperative if you’re on the profit bubble. From what I’ve read, the post season revenue is almost pure gravy, at upwards of $1M per game.

      In other words, if the Oilers make the playoffs, they’ll probably be profitable.

    2. Chris C
      July 23, 2010 at

      I agree that the “small market” canard is, well, a canard.

      Yes, Edmonton is a small *overall* media market relative to other NHL cities. But it’s more or less a medium-sized market in hockey terms. Team Katz is eager to keep the small market canard strong in order to generate sympathy for his cause.

      Forbes ranks the Oilers in the top 10 in terms of profitability. Much of that owes to the $1-a-year lease the Oilers currently enjoy. This is a point that Katz and his mouthpieces like Stauffer tend to, of course, sidestep in all their arguments about the “need” for a new arena.

      I support the construction of a new arena, but this notion that it should be mostly taxpayer-funded is ludicrous, imo.

    3. Deano
      July 23, 2010 at

      David S:

      they’ll probably be even more profitable.

      Fixed it for you.

    4. Pete.
      July 23, 2010 at

      Heh, “no voting policy”. I understand that position, but can’t bring myself to do the same: somewhere deep inside my otherwise black heart, under the many calcified layers of cynicism, there’s a little naive idealistic child-like part of me that says “gosh, your vote might really make a difference this time!” So every election, off I march to my local polling station, usually located in a school gymnasium, and I make a mark next to the candidate/party who repels me the least that day. Then I go home, have a shower and/or get drunk, and try not to think about what I’ve just done. All the while, an old, only semi-relevant punk song runs through my head on an endless loop: “you can cast your vote and elect a joke, but you better not fuck, think, drink, or smoke.” Repeat at every election until death.

      Anyway, I’ve avoided commenting on any of this arena bullshit, because it’s straying into territory I really know and care about (urban “planning”/design issues, or whatever you want to call it), and I could make myself very tiresome ranting on and on about this stuff. I’d rather just shut up, watch my beloved/loathed hometown fuck up yet again, and move to Toronto in a couple years. I certainly agree with you about Mandel, though. I think he’s been a decent mayor, by recent Edmonton standards (that’s a relative term of course, like “tall midget”), but I’ll now certainly be thinking hard about who I unhappily vote for this fall.

      The municipal government, Katz, et al have an opportunity to do something really great here, but as far as I know, nobody with any real power has even thought of how with a few tweaks, this asinine and probably inevitable project could be of permanent benefit to the city. It’s just the same old Edmonton bullshit: half-assed, small town, and 20 years behind the times. It’s absolutely infuriating.

    5. dawgbone
      July 23, 2010 at

      I’ve tried to avoid the arena issue, mostly due to the shear amount of noise involved (and the fact that it doesn’t impact me at all considering I’m in Ontario).

      From what I have heard though, I thought that it wasn’t going to be built outright with public money, but instead more of a loan. That’s where the ticket surcharge and everything else comes into play.

    6. Smytty777
      July 23, 2010 at

      Perfectly valid to criticize the Katz Group painting the minimal losses as the fault of Rexall, it is just posturing but that is what a negotiation is. If the Oilers wanted to make a profit they could have by cutting costs. That being said there is no way Katz invests in the Oilers without looking for a way to significantly increase revenues.

      The Oilers have sold out the last two years, they have likely maximized their advertising and TV revenue and have benefited from a strong USD. I don’t think you can assume sellouts or the USD parity long term and rely on it to be financially viable. There will be years where attendance dips and the dollar doesn’t cooperate, so naturally the Oilers will be looking to increase revenue.

      A new rink is one of the few options available to them to increase revenue. Now who funds and carries the debt on the stadium is an open question and so is the allocation of revenue streams from the new facility. But I would be interested to hear thoughts on how the Oilers can increase revenue alternatively?

      I’m not sure if your position is simply, let the Oilers go bankrupt because a loss of any single business does not affect the overall employment rate and average salary in a city Edmonton’s size? While I agree, a business the size of the Oilers would have zero effect on those two macroeconomic factors, it seems looking only at those factors ignores the reality that the team is a part of city and many people enjoy and put value on the Oilers existence in the city.

      Would the Oilers leaving drop the employment rate? No. Would it decrease average salaries? No.

      Would some (perhaps even a large number) of people get less enjoyment from living in Edmonton? Yes.

      Enjoy your perspective, but I don’t necessarily agree with the conclusion that bankruptcy is an acceptable solution. There is likely a way to structure the financing and revenue streams to increase the Oilers revenue streams while not having the City on the hook for a huge loss.

      Off the top of my head, a corporate guarantee from the Katz Group is a possibility with the City fronting the money and recouping costs through increased tax revenue and a ticket surcharge. The City would be able to access capital fairly cheaply and would be able to rely on the corporate guarantee in the event of heavy losses.

      The Katz Group would get access to the increased revenue streams and would benefit from the city’s access to capital, but would ultimately take on the risk of the project in the event the venture is unsuccessful.

    7. Woodguy
      July 23, 2010 at

      First of all, LaForge can never be believed.

      Ever since he stated that the Edmonton Captials lost money in their first year because they didn’t cover their entire purchases cost, I take his statements about his Rexall financial statements with a grain of salt.

      Secondly, the whole way Rexall has gone about proposing their new arena has been ham fisted and somewhat bullying.

      They could have done much better to get more people on side.

      I disagree that Mandel is just giving away tax dollars. If the model is correct, their should be sufficient revenues to pay the mortgage. Katz should guarantee the revenues if they are not sufficient.

      Mark Rosentraub writes about correct models in Public/Private development of sporting facilities with specific direction for Edmonton and the Oilers here:

      http://www.edmonton.ca/city_government/documents/CityGov/RosentraubReport.pdf

      Let’s hope that when this gets done, it follows what Rosentraub prescribes.

    8. Tyler Dellow
      July 23, 2010 at

      Do you actually have to live in Edmonton to be on City Council? I’d like to run solely on this issue so that whenever the Oilers cried poor, I could scream about Khabibulin.

      As far as the bankruptcy goes – a bankruptcy doesn’t mean that the Oilers leave Edmonton. It means that Katz’s equity gets wiped out and maybe his lenders take a hit. The team likely stays in Edmonton and, in fact, Edmonton would then be in a position where they could have some idea of the subsidy required to make the Oilers viable and, if it was deemed prudent, provide it.

      Woodguy – I have some issues with that report. You’re going to make me write about them.

    9. July 23, 2010 at

      If the business plan for the city loaning Katz money for a rink is so bulletproof, he should GO TO THE BANK LIKE THE REST OF US.

    10. Woodguy
      July 23, 2010 at

      Tyler,

      Would welcome that.

    11. Deano
      July 23, 2010 at

      Imagine that city council decided to spend $300MM on upgrades to roads that access Safeway’s stores to increase their revenue.

      Safeway has much broader customer base and employs more Edmontonians than the Oilers.

      Silly right?

      Government funds are not for the benefit of a single private corporation.

      The current building is adequate to house a profitable NHL franchise.

      If Katz wants a better building, let him subsidize it with money from Rexall customer’s pockets that he currently keeps for himself.

    12. Smytty777
      July 23, 2010 at

      Tyler, I’m not sure how you assume that a bankruptcy would likely not result in a move. It depends on what triggered the bankruptcy. If revenues are insufficient to support profitability long term then no one is buying the team to keep them in Edmonton.

      If the plan is to simply subsidize a new owner because revenues can’t support long term viability, why go to the tremendously wasteful and expensive process of bankruptcy?

    13. Deano
      July 23, 2010 at

      Smytty – the Oilers are a revenue provider to the rest of the league. Edmonton is one of the top 10 revenue generating cities for NHL hockey in North America. If the Oilers are in financial trouble (which I doubt), its on the expenditure side of the business.

      After bankruptcy, the new buyer gets a more reasonable price, and Katz’s original investors get a haircut. This corrects for any interest payments that are currently too high because of too large an initial purchase price paid by Katz. (In the business newspapers, this process is termed as ‘restructuring the debt’ – creditors get hosed.)

      Because of the revenue, if the Oilers move, another team is headed to Edmonton pronto

      For comparison’s sake, Boots del Baggio’s 26% share in the Preds was just bought by the other Preds partners for $15MM – even though it was supposedly worth $25MM. Ouch.

    14. mclea
      July 23, 2010 at

      A new rink is one of the few options available to them to increase revenue. Now who funds and carries the debt on the stadium is an open question and so is the allocation of revenue streams from the new facility. But I would be interested to hear thoughts on how the Oilers can increase revenue alternatively?

      Other than making the playoffs, I can’t think of any. Edmonton might not be a small hockey market, but it’s a saturated one. There are little to no growth opportunities for the franchise outside of building a new barn.

      I think the situation everyone is trying to avoid is one where the Katz Group is making money hand over fist from the new arena while the city is starving to service the new debt. The whole public money, private profit argument. Whether it be through guarantees or a greater contribution of up front capital, the Katz Group has to do a better job of squaring the risk reward trade off. It would be nice if we could get some independently reviewed income statement/cash flow projections for the new arena so we could make a reasonable assessment of how much capital the Katz Group should contribute to the project.

    15. July 23, 2010 at

      The new rink isn’t expected to have much more for seating than the old one did: as much as people wish it were otherwise, Edmonton isn’t getting a 21,000 seat arena like Montreal did.

      The only way for increased revenue is by heavy reliance on new skyboxes: a dangerous game as corporate spending on “entertaining clients” at sporting events falls out of fashion under new ethnics regulation. It’s also going to make the new arena a harder sell when the population realizes that they will get next to no benefit from the new arena.

    16. OilerDroid
      July 23, 2010 at

      I don’t think there’s one argument that you’ve made on your blog (since I started reading about 4 months ago) that I didn’t agree with. Just thought I’d mention that since I’m not the agreeable type generally speaking. Completely useless comment adding nothing to the conversation ended now.

    17. July 23, 2010 at

      Out or curiosity, why the no voting policy?

    18. Art Vandelay
      July 24, 2010 at

      The better question is: At what point do we stop allowing 13 bought-and-paid-for parasites who sit around a raised semi-circle in a glass faux pyramid steal from those who work and give it to corporate welfare bums?
      Voting doesn’t change anything. It just rearranges the name tags.

    19. bill needle
      July 24, 2010 at

      Giving Katz all this money is odious but city councils all over will give this money away sooner or later, so they might as well get a facility I might enjoy visiting instead of something like a giant interchange for an IKEA, for instance.

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