It's no secret in the sports business community that Computer Associates co-founder Charles Wang regrets purchasing the New York Islanders. Last year, the Long Island club was 26th in attendance, which translated to $61 million in revenue, the league low. With 113,000 followers on Twitter, the Islanders are at the league's bottom in the social media category as well.
The club is historically plagued with a lack of buzz. In fact, since purchasing the NHL franchise in 2000, Wang has been spending an average $20 million per season just to keep the Islanders operational. The struggles were mostly due to poor attendance, underperformance on the ice, the aging Nassau Coliseum, and Wang's ambitious Lighthouse project. Now, the New York Islanders are officially up for sale. Wang has valued the franchise at $370 million. Forbes has it at $195 million. It is reported that an investing group led by Philadelphia lawyer/hedge fund manager Andrew Barroway is interested at the $300 million mark. The background is a little complicated.
The back story
When Charles Wang purchased the Islanders he had a vision to renovate the Nassau Veterans Memorial Coliseum (the NHL's second oldest arena) and to transform the undeveloped surrounding land into a thriving suburban area.
The proposed development included restaurants, hotels, housing, athletic facilities, a new minor league baseball stadium, and a 60-story building designed to look like a lighthouse, which gave the project its unofficial name. In 2011, after years of public debate on funding and long-term economic impact, Long Island residents voted against the project.
This of course meant that the Islanders would not get their renovated arena, which Wang felt was the only way to save the franchise from its financial woes. In 2012, Wang announced that the Islanders will be moving from Long Island to Brooklyn effective 2015. The move to Brookyln's state-of-the-art Barclays Center is expected to give the Islanders a chance to be profitable. Nevertheless, Wang is still selling the team.
Ironically, the push for Nassau Veterans Memorial Coliseum development was reinvigorated. But this time, it was real estate developer Bruce Ratner leading the charge. Ratner owns the Barclays Center and put forth a similar area development plan when he built that arena. The 2013 proposal by his firm, Forest City Ratner, was approved by the Nassau legislature.
Below, we outline the Brooklyn move, the revamped Coliseum development plan, and the sale of the Islanders franchise. We end by grading all the major players involved.
The Lighthouse Project, including construction of a new Nassau stadium, was voted down by the public. As a result the Islanders struck a deal with the Barclays Center for the Brooklyn arena to be the club's home base. The move will be complete by the 2015-16 season.
- The Bruce Ratner-owned venue will provide the Islanders with $50 million in annual revenue;
- Eventual revenue streams that naturally come along with a more favorable DMA;
- Potential for new fan base;
- State-of-the-art $1 billion building;
- Barclays is accessible by many public transportation options;
- 25-year lease provides location security;
- New York area has retained hockey team and Brooklyn borough adds second pro team.
- The arena's hockey configuration yields 14,500 seats, making it the smallest NHL arena;
- A large commute for the Long Island fan base;
- Potential fallout or pushback from Nassau loyalists;
- Multi-use facility challenges – branding, corporate sponsorship, etc.;
- Tied to a lengthy lease should move or new ownership prove ineffective;
- Opportunity cost in foregoing other markets that were in the mix (i.e., a move to Kansas City, Quebec City, Seattle)
The revamped redevelopment plan
Forest City Ratner beat out competitor Madison Square Garden Company (NYSE:MSG) for the contract to renovate the Coliseum and build the surrounding infrastructure. Forest City is independently covering the $230 million bill for the megaproject. The proposal includes restoration of the 43-year old Coliseum as well as the surrounding area (very similar to the Atlantic Yards/Barclays project that Ratner also masterminded).
The renovated Nassau Coliseum will double as a home for for lacrosse, boxing, AFL games, NCAA conference tournaments, and UFC fights (should the state sanction mixed martial arts). Forest City is entering in a 34-year lease with Nassau County as the building is public property. The county will earn 8% gross revenue, 12.75% parking revenue, and a minimum term payment of $195 million from Forest City. This comes from the minimum $4 million guarantee that escalates 10% based on various benchmarks and escalators.
Nassau County executive, Edward Mangano, announced more deal details in a release: "with options exercised, the minimum lease payment grows to $334 million. Similarly, the...area will be transformed and will generate the greater of $400,000 a year in rent or 8% of the gross revenue." It is predicted that the project will yield $9.6 billion in county economic activity over 30 years and more than 2,700 jobs.
The development surrounding the arena is where Charles Wang can recoup some of his money. Even post Islanders sale, Wang will still own the 77 acres bordering the arena. Forest City plans on a building an amphitheater for outdoor events, a movie theater, a performing arts theater, an ice-skating rink, and more all on the 77 acres that Wang owns. Wang holds the leverage in any potential property deal. If Wang gets the right price, he could be exiting Long Island with a decent bit of money even after hemorrhaging cash for so many years.
Franchise for sale
Regardless of securing the vibrant Barclays Center, Wang still is selling his majority shares of the Islanders. It is unclear if he will remain a minority owner or not. According to the NY Post, the Islanders are asking for a base of $225 million plus another $75 million if the Islanders hit certain revenue targets for a total of $300 million. All signs indicate that the Barroway investment ownership group will bite at this price point.
Currently, Barroway has raised $175 million and still needs an additional $50 million in capital. The Sports Business Journal reports that as a result, the Barroway group may purchase 30%-49% of the team in the coming months, with the option to acquire more equity stake in the next season. If this would occur, Wang would remain majority shareholder for at least one more season.
Barroway is no stranger to this process. He went after the NBA's Philadelphia 76ers a few years ago, but could not come up with the capital. Last year, he targeted the NHL's New Jersey Devils, which also recently went up for sale. Barroway claims that he eventually backed out after inspecting dubious team financials. Still, he loaned the Devils $30 million, which was badly needed at the time, leaving him in good standing with the league and fellow owners. The most likely scenario is that the Barroway group will purchase Islanders majority ownership at 75% equity and Wang will retain the remaining 25% stake.
- The NY Islanders: C+
- Comments: Barclays hockey configuration makes it the smallest NHL arena, weakened branding in multi-use venue. Many entertainment alternatives for Brooklyn/NYC residents. Lacks concrete fan support in Brooklyn. Team played in outdated Coliseum for so long, then ironically, as soon as they move renovation is approved. The C grade can quickly be upgraded to B if the Islanders turn a profit, something that was never done in the Wang era.
- Nassau County: B-
- Comments: Area loses NHL franchise; many fans still reminisce about the dynasty 80's era. Long commute to Brooklyn for games. Nassau adds the renovated Coliseum and the promise of new sporting events through the Forest City plan.
- Brooklyn: A
- Comments: Second pro sports team in as many years. No public construction necessary. Enhanced economic impact.
- Andrew Barroway: B-
- Comments: Could redeem previous failed ownership attempts. Islanders have increasingly deflated brand equity. Comparably moderate ask for downtown pro sports team. Needs deep pockets to rebuild Islanders to the New York DMA expectations (all assuming the Barroway purchase attempt is finalized)
- Ratner: A+
- Comments: Adds another professional sports team to the Barclays Center. Wins Nassau County contract to renovate Coliseum and area.
- Charles Wang
- Comments: A/B depending if he can profit off of sale of 77 acres Coliseum area to Forest City Ratner. Relieved to finally unload team after subsidizing franchise (~$20 million/year) for 15 years.
Updates to come as the sale advances.
Tanner Simkins has no position in any stocks mentioned. The Motley Fool owns shares of Madison Square Garden. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.