• Things That Are Irrelevant: The Worst Arena Deal In The League

    by Tyler Dellow • September 25, 2012 • Hockey • 32 Comments

    Elliotte Friedman got to talking about about the Oilers’ lease on Twitter tonight. I’ve pulled together some tweets into paragraph form:

    Here’s the thing I wonder about Daryl Katz and Seattle: In Edmonton, problem is he does not own or run the arena. So what is better option? Being a second tenant behind future NBA team in Seattle (ask @TedLeonsis about that) or making a deal to own/run in Edmonton? Obviously, Oilers are not going anywhere…but the threat just doesn’t make sense.

    If I was advising Katz (and I’m not, obviously), I wouldn’t have gone to Seattle. But, if deadline passed without new Edmonton arena, I would’ve put up team for sale. His arena deal is one of worst in the NHL and walking away is a better threat than relocation.

    A few of you are asking, but yes, by NHL standards, Katz’s deal is one of worst because he does not own/operate arena. Market excellent but there are plenty of worse markets with better arena control, especially on non-NHL events.

    You hear this line from a lot of Oiler employees masquerading as journalists (it’s sort of appalling how many people who present themselves as journalists are taking Daryl Katz’ shilling in one form or another, but that’s another issue). Friedman’s better than that though. With that being said, he errs in presenting this information without two critical pieces of context. First, Katz got what he bargained for when he bought the Oilers. Second, there’s no reason to think that, even if the Oilers do have one of the worst arena deals in the league, it’s at all relevant.

    Let’s take the first point. In 2008, Katz bought the Oilers from the Edmonton Investors Group. He paid something like $200MM for the team. How do people arrive at these prices? With the caveat that I am not a corporate lawyer and don’t do these transaction, I understand that, generally, people arrive at a price on the basis of the profitability of the entity. Some number times future earnings. In the normal world, people demand some return on their money. If there’s an industry in which 50% returns on equity are available, capital will flood the market until the ROI decreases. If there’s an industry that’s only returning 1% on equity, capital will leave that industry and go into more profitable places.

    Katz presumably entered his negotiations with EIG thinking that he wanted an X% return on his investment. The difficulty with investing in sports teams is that owning a sports team is kind of awesome. Malcolm Gladwell wrote a really good piece about this on Grantland. He compared owning a team to owning a nice piece of art, in that the benefits that you derive from doing so are not entirely economic. You feel good about it. The EIG probably derived psychic benefits from owning the team, in the sense that it is really cool to own the Oilers if you’re a northern Alberta boy. Former EIG member Neal Allen put it this way when reflecting on the internal debate about selling the team:

    “We lived through all this stuff. We just finally got our finances in place and things are going along good. Why do we want to sell? I was perfectly happy to carry on. I didn’t really need the money.”

    Let’s take Allen at face value and assume that things were going well for the EIG and they were in the black. Let’s also take Katz at face value and accept that he’s suffering big losses now. I’m not entirely sure I believe that but, for the purposes of this piece, I’ll accept it. How did Katz end up getting the team? I’d guess that he ended up making an offer so good that it exceeded the financial and psychic benefits that the EIG got from owning the team. Which created a problem for him in terms of getting the same return on his investment as he might expect in an industry without psychic benefits.

    It’s easy to understand how you might buy a team anyway if you imagine yourself as a billionaire. Money doesn’t really matter to you. If you read this site, you’d probably love to own an NHL team. If you were set for life, what kind of a return would you require from the hockey team you own? Would 0% be fine? -5%? If you’re worth $1B and you’re turning 8% on your investments a year, that’s $80MM. What’s spending $10MM on a hobby then, especially if you can write it off?

    There’s lots of reason to think that the EIG guys thought this way – Allen says as much. And it took Katz a lot to pull the Oilers loose from them – basically a months long PR campaign to poison the waters against them, promises of new arenas and rinks for the University of Alberta and a massive pile of money. It worked though. Katz was able to buy the revenue streams that the Oilers generate. He undoubtedly paid more than you’d pay for the same revenues if they flowed from a meat packing company, but he got them.

    The revenue streams that the Oilers get from the arena are directly tied to how much cash the team will kick out though and it would be reflected in the price that Katz paid for the team. Imagine an alternate world in which the Oilers had the best arena deal in the NHL in 2008. Say, just for kicks, that the City was in the business of writing the Oilers a $50MM cheque annually to play in Rexall. How does that change what happens when Katz decides he wants to buy the team?

    The price for the team would have exploded. Katz would have had to still pay the EIG enough to cover the psychic and cash benefit that they drew from the team and that price would have been way higher to take into account the $50MM a year the City was throwing in. However you figure it though, the arena deal is a big part of the function of the price. Katz might have the worst arena deal in the league but, and this is what matters, he didn’t have to pay the price for the Edmonton Oilers + an awesome arena deal.

    If you accept that the only way in which the EIG was going to sell the Oilers was if they were handed so much money that it’d be impossible to turn a profit on the team, then whether there was a great arena deal or a poor one, Katz was going to end up making losses once his cost of capital was taken into account, taking him at his word that he is making such losses. The arena deal was irrelevant – the problem was that the cost of buying the team included buying a non-economic component from the EIG. If it takes $50MM extra to get them to give up owning the Oilers, that’s money you’re earning nothing on. The issue isn’t the arena deal – it’s the non-economic component of the EIG’s price, the psychic benefits.

    So that’s point one: Katz paid a price for a team that included this arena deal. If it was better, the team would have cost him more. If it was worse, it would have cost him less. Either way, I’m not sure how you end up with Katz buying this team at a price that lets him turn a profit in Rexall (assuming, of course, that he’s being truthful), given that the EIG was happy owning the team in 2007. Meeting their price meant guaranteed losses because he had to pay that non-economic component.

    Which leads to my second point. I might have some sympathy for Katz’ complaints if things had changed drastically in the NHL since he bought the team. Say there were fifteen new arenas, or the Canadian dollar crashed or a bunch of other teams had opened up revenue streams that weren’t available to the Oilers. In those circumstances, I could see how he might have screwed up his projections or had things outside of his control which had driven up his losses beyond what he was willing to carry. None of that’s happened, as far as I can tell. This isn’t a case in which everyone else got more money unexpectedly, which screwed up Katz’s economic model. The world is about the same as it was when he was doing his math and buying the team.

    A brief diversion: owners can’t really pull these stunts in European leagues. The teams aren’t franchises and the league has little control on a team’s presence in the league, something that really should be written into law in Canada and the United States. As such, there’s no artificial scarcity, something that has been exacerbated by the eagerness of stupid municipal governments to make tax giveaways to teams. Oh, and there’s no collective bargaining like here, so fans don’t suffer these asinine extended lockouts or strikes. Teams are worth way, way less money as there are many more teams available to own and, outside of a select few, no profits to be made. It’s a much healthier environment in which to be a taxpayer.

    Back to my main point: I alluded to this state of affairs in a comment on a post last summer when I wrote:

    (The EIG) could have told Katz that part of the deal was signing a new 30 year lease with the City on the same terms. That would have driven their price down. They took the inflated price and now Katz wants your tax money or the team is gone.

    That’s still correct, as far as I can tell. I don’t blame EIG for taking the money. What I (and everyone else) screwed up in thinking at the time is that Katz wasn’t going to look to the taxpayers in Edmonton and Alberta to make him whole when 2014 came. We swapped the EIG for a guy with much bigger incentive to play hardball and put a gun to Edmonton’s head because (if we take him at his word), there’s money flowing out of his pocket every season and it’s too much to expect him to get management that doesn’t pay guys NHL money to play in the AHL or make the playoffs on occasion.

    But that’s all secondary: if you take nothing else from this piece, take this: Daryl Katz got the arena deal he paid for. The EIG could make money running the Oilers without screwing the Edmonton and Alberta taxpayer to the degree Katz would like to because they didn’t pay a massive premium to buy the team. Katz paid a huge premium and now everyone who pays taxes in Edmonton and Alberta is be expected to pay for it. The arena deal is just a convenient thing to complain about to draw attention away from the non-economic premium he paid. In a lot of ways, the North American version of early 21st century capitalism sucks.

    Email Tyler Dellow at mc79hockey@gmail.com

    About Tyler Dellow

    32 Responses to Things That Are Irrelevant: The Worst Arena Deal In The League

    1. RiversQ
      September 25, 2012 at

      I think the notion that Katz paid a premium for the opportunity to benefit from a publicly funded arena was postulated as early as the day he secured the team. I’m not a finance guy – is it possible to do a back of the envelope calculation given what we think we might know about Oiler profits and the assumption that he financed $160-180M of the original purchase price? Does that look like a “non-economic premium” over ten years or not?

      • dawgbone
        September 25, 2012 at

        He was looking for public money when he made his sales pitch and promised to put up $100 million for a new arena (it was going to cost more than that, so it would have to come from somewhere).

    2. RiversQ
      September 25, 2012 at

      Let’s put it another way. The payback for Katz right now is about 15 years without considering time value. Does $200M over 15 years cover the cost of $160M capital?

      • Gerald
        September 26, 2012 at

        No. No, it wouldn’t.

        Even assuming a 15 year payback (a questionable assumption of a cash flow with lots of risk that would need to be subject to a significant discount rate), it would not.

    3. Elliotte Friedman
      September 25, 2012 at

      Hey Tyler,

      Just finished a blog about all of this. Should go up in the am. Saw your link on twitter and figured I’d post here since I don’t address what you mentioned in the blog. Here’s what I would say: yes, he made a deal when he did…and he should live up to it. You shake hands, you live with the consequences good or bad. In my career, I’ve never renegotiated a contract before it was up…not the way I do business. (Although I should point out I’m eternally grateful for The Score letting me out to go to HNIC while I still had term remaining.)

      But, Katz’s deal is up, and he’s negotiating a new one. As the capitalist I am, what’s wrong with him going for a much better deal? Especially when his isn’t that great? (I do confess in the blog that I didn’t put things so well on twitter.) It’s a new game now, a new deal. If the city wants to say no and holds firm, fine with me too. I think Katz butchered his handling of this, but that doesn’t mean he doesn’t have the right to see what he can negotiate a much better no matter what Malcolm Gladwell says.

      Always enjoy the blog.

      EF

      • Tyler Dellow
        September 25, 2012 at

        Elliotte –

        I don’t really disagree with you and have much less of a problem with this being talked about in terms of the Oilers being a free agent in 2014, which is Bob Stauffer’s current line.

        That being said, when Katz was using the media to pressure the EIG out – and guys like me played a small role in arguing for him – part of his pitch was that he had the resources to secure the Oilers here for a generation. Statements and promises were made. Then he gets the team and all of the sudden it’s “The arena deal is terrible and maybe I’ll go to Seattle.” At the very least, what he and his guys like Laforge have done is scummy as hell. The Oilers were secure in Edmonton, turning a profit, until he decided he had to have them and loaded them up with $100MM+ in debt.

        As well, the brand of capitalism that he and the NHL practice isn’t real capitalism. I’m as big a believer in free markets in anyone – I think elite North American hockey should be an absolute free market, with people free to start teams anywhere and, if they’re good enough, play at the highest level. If that means four teams in Toronto, so be it. The leverage that the robber baron owners have now would absolutely disappear because what the NHL is isn’t real capitalism – it’s a government created monopoly.

        • Craig Burley
          September 25, 2012 at

          Great exchange, gentlemen. Fits in nicely with the Jack Mintz column (of anodyne but always important ideas) that Tyler tweeted around this morning.

      • Saj
        September 25, 2012 at

        That’s not capitalism, Elliot; it’s corporate welfare. That said he has every right to try, I suppose, but knowing the benefits of capitalism vs government involvement (in this case, corporate welfare), governments should slam the door.

        • ART v
          September 26, 2012 at

          Negotiating?
          “Rent-seeking” is the term you’re searching for.

    4. Steven
      September 25, 2012 at

      I’m not sure why it should matter what he paid, unless there’s some reason the city of Edmonton should subsidize his losses, assuming they exist.

      But your analysis applies not only to the last sale, but also to the next one. In evaluating the credibility of the threat to sell vs. to relocate, the question is what he could get. If there’s a compelling reason to believe the next owner is more likely to get a subsidy elsewhere than Katz is, maybe a threat to sell makes sense, but I’m not sure why we should believe that.

      I assume the reason selling the team would be considered a “threat” is that the next owner might relocate. If threatening to move the team is a weak threat because moving the team is unattractive, why is threatening to sell the team to a different owner who might move the team if he doesn’t get a good stadium deal a more credible threat? Again, if the next owner could have better relocation options than Katz for some reason, that would be a reasonable threat. But threatening to put the city in the same situation it is in now (just with a new name on the counterparty) doesn’t seem like the sort of threat that puts terror in a man’s heart.

    5. September 25, 2012 at

      While I accept and agree that the current arena deal is the one Katz paid for, he also paid the price he did with the expectation that a new downtown arena would be built. It’s entirely possible (probable, in fact) that he paid more up front to get this deal done with the expectation that profits from that new arena would offset the premium he paid for the team. In the face of obstacles to getting that new arena done, it’s entirely possible that he’s now deciding to cut-and-run since he can’t make the profits he’d previously banked on.

      That’s not to say that Katz has been reasonable in this nor that a municipality should be in the business of subsidizing pro sports arenas, but that’s not what you’re arguing here. You’re arguing that the (apparently) terrible arena deal he’s under at Rexall Place is irrelevant, which isn’t the case at all.

      • Tyler Dellow
        September 25, 2012 at

        Peter –

        My old man taught me that when you assume, you make an ass of u and me. He loves cliches.

        If Katz bought the team assuming that Edmonton would give him whatever he wanted, he may have screwed up. If he bought it under the guise of local boy protecting the community and intended to have Edmonton/Alberta make up the difference in price and lose the team, well shame on him. If there was no economic deal to be had that he could live with, he shouldn’t have bought the team.

        • JMC88
          September 25, 2012 at

          I agree. In hindsight, if Katz had secured the option to purchase the proposed lands before he had the deal in place to buy the Oilers, then he should have gone forward with buying the land on his own and pitched his proposal to build an arena in partnership with the City. They could have negotiated the terms of the construction and operation of the arena. He could have then bought the Oilers and had them ready to move in to a new arena by the time the current lease expires with Northlands.

          Instead, there is no arena deal in place and Katz and Northlands aren’t talking about a new lease following 2013/2014. Katz now has less than two years to either negotiate a new lease with Northlands or figure out his other options.

          As I always thought and said, from Day 1 Katz brought the cart before the horse.

        • Dad
          September 26, 2012 at

          Tyler, I may have loved cliches in the past but, in this day and age, I avoid them like the plague. Going forward, hell will freeze over before I use them. I hope this comment proves that I have reformed and no longer use cliches. If not, it is what it is.

    6. Jim
      September 25, 2012 at

      This is an excellent discussion Tyler. Perhaps I am late and uninformed and I am no kind of financier but I can’t help but wonder if the money the Oilers are supposedly losing is in fact through the repayment of the purchase price Katz or Katz Group originally paid for the team. That would mean that the purchase cost is recouped through revenue and not profits from the Oiler’s daily business. I also wonder if Katz’s billions are in fact all leveraged or otherwise tied up, and he in fact does not have the coin to pay the share he originally proposed of the arena plan. I could live with cutting a sweetheart deal regarding arena revenue as a means of obtaining a signature on a 35 year guarantee that the team remains. However, that doesn’t mean a lot if he can’t make his own personal investment in the facility.

      Of some interest here is one of Katz’s early announcements leading to the purchase of the Oilers:

      Daryl Katz comments on offer to purchase the Edmonton Oilers

      EDMONTON, July 24 /CNW/ – Daryl Katz, Chairman of The Katz Group, today
      issued the following statement:

      “There has been a lot of discussion in recent weeks about my interest in
      acquiring the Edmonton Oilers. While it’s not appropriate for me to discuss
      the details of my offer publicly, I do want to share my reasons for wanting to
      buy the team and try to address at least some of the questions Oilers’ fans
      and Edmontonians are asking.”
      “The first point I want to make is that I have a lot of respect for Cal
      Nichols and the Edmonton Investor Group. They did a great thing when they came
      together to buy the team and keep it in Edmonton. They have maintained a real
      community feeling ever since, and just over one year ago they came agonizingly
      close to bringing the Cup back to Edmonton. As an Edmontonian and as a fan,
      I’m grateful for everything they’ve done. As an owner, should that come to
      pass, I intend to ensure their contribution is recognized and remembered.”
      “At the same time, I know there are a number of people within the
      ownership group who would like to exit their investment and pass the torch to
      a new generation of leadership. I want to provide that leadership while
      preserving the great Oiler traditions and maintaining a strong sense of
      community.”
      “I was born in Edmonton, I live in Edmonton and I grew up here with the
      Oilers during the glory days. I want to own the Oilers because they are
      Edmonton’s hockey team, because I want to build a winning team, and because I
      think there is an opportunity, through the Oilers, to do great things for the
      City.”
      “From a business perspective, the Katz Group and especially our Rexall
      brand have benefited from our association with the Oilers and Rexall Place,
      and I think there’s a real opportunity to build on that success.”
      “To be clear, I am committed to building a winning team here in Edmonton,
      and I would play to the salary cap every year to help make sure that happens.
      I am also prepared to make a significant additional investment of time and
      money towards the development of a new downtown arena facility for the team
      and the City if that’s what the people of Edmonton want.”
      “Likewise, I have initiated preliminary discussions with representatives
      of the University of Alberta about building a world-class hockey training
      facility on campus for the benefit of the Edmonton Oilers, the U of A and
      hockey in Western Canada.”
      “Finally, I appreciate the many expressions of support I have received
      from within the ownership group, across the city and around the NHL. If I’m
      successful in acquiring the team I will be more than happy to make myself
      available to the media to answer your questions directly. There is no great
      mystery in any of this, other than the sound business practice of trying not
      to negotiate a transaction in public. To that end I have offered to meet with
      all of the owners privately to further explain my offer and answer their
      questions. I’ve had several productive discussions already and look forward to
      others in the weeks ahead.”

      Daryl Katz is the Founder and Chairman of The Katz Group. Founded in 1990
      and headquartered in Edmonton, The Katz Group is one of North America’s
      leading drug store operators with over 1,800 drug stores in Canada and the
      United States. Mr. Katz is a graduate of the University of Alberta, having
      earned a BA and LLB in 1985.

      For further information: Media Contact: Josh Pekarsky, Longview
      Communications, (604) 694-6030

    7. September 25, 2012 at

      With team owners, I usually assume their eye isn’t as much on the annual bottom line as it is on the value of the franchise. As such, I expect Katz is trying to set up his own sale of the team years down the road by turning “the worst arena deal in the NHL” into one of the best, with the help of Edmonton taxpayers of course.

      As you say, arena considerations are built into the sale price, so a fancy new ice palace with more seats, more luxury suites and built in subsidies should plump up his asking price. Of course, Katz is also double dipping here with the ancillary benefits of owning property around the rink development like a casino and office buildings…

      • PopsTwitTar
        September 26, 2012 at

        Kent’s dead on here. This is all about franchise value. Teams (and corporations) pull all sorts of accounting and corporate law tricks (legal mind you) to ensure that franchise value is preserved and enhanced, while minimizing tax liabilities. The team itself is just the means to get connected to the ancillary revenues from the arena, concessions, sponsorships.

    8. rubbertrout
      September 25, 2012 at

      it’s too much to expect him to get management that doesn’t pay guys NHL money to play in the AHL or make the playoffs on occasion.

      That’s gold right there.

    9. Tach
      September 25, 2012 at

      I think Steven has it right above. Your analysis based on the purchase price suffers from a kind of sunk cost fallacy. What he paid for the revenue stream then is not what a prudent businessman would frame his inquiry on. It is what value can be extracted from the asset right now. And if he has a way of deploying that capital to make more money (better arena deal, new market) classical firm theory directs they probably will. That doesn’t make Katz any less of a cretin or shill, it just makes him greedy like all capitalists.

      It seems the city’s play ought to be to dig up the old EIG boys or some other billionaire to say “that deal with the City was awesome and I will buy the Oilers for $200 MM and do that deal with the City tomorrow.” Two can play this game Katz is at.

    10. godot10
      September 25, 2012 at

      Note: I support the arena deal negotiated in New York. I oppose fundamentally changing it, which is what Katz is trying to do.

      As you say, Katz was only able to buy the Oilers because he promised $100 million towards a new arena, a new arena for the Golden Bears, and a hefty premium to the EIG.

      Now there is no arena for the Golden Bears. No $100 million dollars. And Katz wants an ongoing operating subsidy.

      I think the difference between the New York deal and now is the amount of development interest around the arena district, so Katz is trying to get out of any monetary commitment to the arena whatsoever, now that the city has sunk money into buying the land. The deal that Katz wants now is a free arena and an operating subsidy. Quite a change from what he promised when he bought the team. And the economics of the NHL and the economics of hockey in Canada is far better than when he bought the team.

      At this point, it makes more sense for Edmonton to just build the arena by itself, rather than make any new deal with Katz. And if Katz leaves Edmonton, the mayor can go market the new arena to struggling American franchises. And with a new arena Edmonton built by itself, if Katz chooses to stay, Edmonton can then negotiate a much more favorable deal for the city than under the blackmail threat they are receiving now.

      It is time for city council to call the bluff. If the NHl wants to throw away one of its 10 best revenue producing markets, it is now their problem.

    11. James Mirtle
      September 25, 2012 at

      Here’s a question: How can some owners justify building a rink privately and others need this much assistance to get it done? Elliotte pointed out what a building in as remote a location as Sunrise pulls in; wouldn’t being the sole owner of the main arena in Edmonton have similar benefits?

      Surely Katz doesn’t need an agreement this favourable to get more than enough out of a new building.

      • PopsTwitTar
        September 26, 2012 at

        Why take the financial risk himself when he can pass that buck to the taxpayer?

        • Subversive
          September 26, 2012 at

          Yeah, I think the main answer is “because he can”. I’m encouraged to see public support dwindling for this kind of thing, but I still worry that we’re going to get screwed here in Alberta due to the rabid fan base. As soon as Edmonton gets their deal, you know the Flames are next to the public funding trough.

    12. Mr DeBakey
      September 26, 2012 at

      “I think the difference between the New York deal and now is the amount of development interest around the arena district, so Katz is trying to get out of any monetary commitment to the arena whatsoever”

      I agree with Godot10.
      A sign of the apocalypse? You decide.
      At least, I agree in part.
      I wasn’t all that crazy about the New York deal.

      But for me the request/suggestion/demand that the city move all its employees to a new Katz-built tower in his arena district to “kick-start the CRL” was telling.

      I think there is little interest so far in the arena district. Other than a Condo tower, has anything been announced? Discussed? Postulated? Katz’ sokesdudes and media types were throwing around the phrase Billion$ in reference to the CRL this week. I lack confidence in those projections.

      Side Bar Bit – If the city moved all its employees to Katz Tower, what would happen to the office space they left behind?

    13. Mr DeBakey
      September 26, 2012 at

      Spokesdudes

      • September 26, 2012 at

        It would be no different than most of the new office projects downtown. It’s shifting existing companies around more often than not, instead of bringing new ones in to fill the additional space.

        On the request for the City to move staff in, I’ve been doing some research, and it wouldn’t be unprecedented. Having the City of Edmonton rent space was a key part of the agreement to build the CN Tower in the late ’60s. The developers of Eaton Centre in the ’80s also requested it, but I haven’t been able to find out if that was arranged in the end or not. I suspect not, since I believe there were office towers that were proposed and never built as part of the project.

        That’s not to say the City should agree to the request, just that we shouldn’t treat it as unprecedented as far as Edmonton goes.

        • September 26, 2012 at

          It would be no different than most of the new office projects downtown. It’s shifting existing companies around more often than not, instead of bringing new ones in to fill the additional space.

          And of course this idea extends to the CRL in general. Even if it does generate a billion dollars in increased property value downtown, unless it somehow brings in enertainment dollars that aren’t already being spent in the city today, it will all come at the cost of decreased commercial property value in other parts of town, and the city won’t end up seeing any actual benefit overall.

          • godot10
            September 27, 2012 at

            Not really. Edmonton is more likely to be appropriating commercial property revenue back from the recalcitrant suburban communities (St. Albert, Sherwood Park, Leduc, etc) who are blocking Edmonton’s growth.

            Edmonton is reaching critical mass where a vibrant URBAN core can be a major revenue driver as it is in other big cities, where one can trigger an iversion of property values, including residential property values.

    14. Doogie2K
      September 27, 2012 at

      He undoubtedly paid more than you’d pay for the same revenues if they flowed from a meat packing company, but he got them.

      Subtle.

    15. Newalgier
      September 30, 2012 at

      I bet that Katz is no more a billionaire than I am. Recall that when he bought the team, his core drugstore business was making a fortune in kickbacks professional allowances. Check the tape on SC if you think that matters. And there was some sort of financial crisis as well, I hear.

      Plus, I have no idea how someone makes a billion rolling up drugstores. This is a 5% margin business… you’re telling me that Katz’s business acumen can raise the margin to 8%? I’m telling you that’s impossible. This isn’t the oil business, where a few nice wells set you up for life. Here’s a news flash on rollup strategies: they make money by levering up, taking risk, and rolling the macro dice. The macro dice have been nothing but snake-eyes the last few years. The leverage is still there.

      So, long story short, the Oilers are performing better than expected, I bet, but the rest of Katz’s portfolio I bet is not. So from being a hobby, I suspect that his required return on the Oilers has increased substantially.

      In Seattle, the new arena owner has disclosed his financials to the city and the city has an escrow agreement to protect itself in the event of the owner’s financial difficulty. In Edmonton, no financials have been disclosed whatsoever.

      I was unbothered about the original negotiated deal with Katz because it depended on a $100 million magic asterisk of provincial funding, funding which will never appear. I still give a deal a low probability of proceeding. There is just too much ask.

    16. Newalgier
      September 30, 2012 at

      I bet that Katz is no more a billionaire than I am. Recall that when he bought the team, his core drugstore business was making a fortune in, uh, “professional allowances.” That corrupt revenue stream is gone. Check the tape on SC if you don’t think that matters. And there was some sort of financial crisis as well, I hear.

      Plus, I have no idea how someone makes a billion rolling up drugstores. This is a 5% margin business… you’re telling me that Katz’s business acumen can raise the margin to 8%? I’m telling you that’s impossible. This isn’t the oil business, where a few nice wells set you up for life. Here’s a news flash on rollup strategies: they make money by levering up, taking risk, and rolling the macro dice. The macro dice have been nothing but snake-eyes the last few years. The leverage is still there.

      So, long story short, the Oilers are performing better than expected, I bet, but the rest of Katz’s portfolio I bet is not. So from being a hobby, I suspect that his required return on the Oilers has increased substantially.

      In Seattle, the new arena owner has disclosed his financials to the city and the city has an escrow agreement to protect itself in the event of the owner’s financial difficulty. In Edmonton, no financials have been disclosed whatsoever.

      I was unbothered about the original negotiated deal with Katz because it depended on a $100 million magic asterisk of provincial funding, funding which will never appear. I still give a deal a low probability of proceeding. There is just too much ask.

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