OUR TAKE
Pro Hockey's in Trouble

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By Bill Mann (TMF Otter)
April 7, 2003

Every year, the price of peanuts and beer goes up at sporting events. The last time I was at the MCI Center for a Washington Capitals game, I swear I saw a special line for people to get financing for their nachos. Even the cheap seats cost $40.

And every few years, the players' union and the owners have to re-agree on how to spend all that money. They rarely agree, of course. Owners declare poverty; players call the owners greedy; and occasionally, there's a strike.

The current bargaining agreement between hockey players and owners expires next year. Already, lines are being drawn for a potential work stoppage. And once again, owners claim they're losing buckets of money by running hockey clubs. Normally, one wouldn't be cynical to assume this is little more than bargaining histrionics. This year, though, a financial crisis has hit the frozen pond.

Two teams, the Ottawa Senators and the Buffalo Sabres, declared bankruptcy. A third, the Pittsburgh Penguins, have such a bad financial position that the owner came out of retirement last year to play. Fortunately for Pittsburgh, the owner happens to be Mario Lemieux, one of the greatest players in a generation.

The Los Angeles hockey franchise, the Kings, claimed in a report that since the current owners bought the club in 1996, cash losses have exceeded $100 million, and they will reach $12 million this year alone. This for a generally competitive team averaging 15,000 paying fans per game.

Many fans were skeptical since a team's owners could simply lard up the company's financials with expenses, stick earnings into other entities, and "produce" paper losses. Doesn't matter -- team financials aren't a matter of public record, and the losses would give the team more bargaining power against the union or an excuse to get rid of some high-priced players.

When the Kings made this claim, one ardent fan -- who happened to know a thing or two about financial analysis -- asked to see the books. Philip Propper, equity analyst for Trust Company of the West, sent a note to Tim Leiweke, president of the Kings, saying he's a fan, and he's skeptical of the claim of losses. To his (and the Kings') credit, Leiweke accepted the offer, seeing it as an opportunity to show an outsider that the economic situation is as bad as advertised.

In February, Propper spent 10 hours with the team's financial statements and had unfettered access to Dan Beckerman, the team's CFO. His conclusion? The Kings really have lost that much money on a cash-flow basis, money that's been floated by owner Phil Anschutz (who's also the largest shareholder in Qwest Communications (NYSE: Q)). Propper further stated that he found any transfer payments between other elements of the Anschutz empire to be conservative and proper. In other words, the team wasn't lying.

Of course, the argument has long been that owning a major league sports franchises isn't about cash generation -- that most owners can lose money each year and still make out huge, as the franchises appreciate. Witness Al Davis' 1966 purchase of the Oakland Raiders for $20,000 -- a franchise estimated to be worth $400 million-plus today. This is a dubious argument in today's hockey environment, with the two clubs in bankruptcy changing hands at fire sale prices.

Propper's report is fascinating, and it's also the first time a team has let an unaffiliated fan have such unfettered access to its financials. Propper discovered that the cost of player salaries increased 17% per year, while combined revenue failed to keep pace. He places substantial blame on the National Hockey League head office and its aggressive expansion. And he believes the NHL's best (or only) course of action is to contract the six weakest teams in order to survive.

If you're a sports fan and ever wondered where all that money goes, Propper just lived your dream. He's seen it, and his report isn't pretty.

Bill Mann does not own a sports franchise.

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