After the Nashville Predators ended their best regular NHL season on the ice with 110 points, absentee owner Craig Liepold (Racine, Wis.) soon sold the proud Preds to Canadian Jim Balsillie (BlackBerry techno-preneur from Hamilton, Ontario) for a cool $220 million.
In the hearts and minds of Predators fans there was a rush to judgment that Nashville’s ten-year NHL marriage was on the rocks. Local and national media were sticking forks in yet another over-done Southern NHL hockey expansion experiment. Not so fast my friends – this team is not going anywhere anytime soon.
According to Balsillie’s deal, this “troubled” Preds franchise is worth 25 percent more than the average NHL club at $180 million (according to Forbes). Indeed, this deal places the Preds as the eighth most valuable franchise.
There are four possible reasons why the Preds are so valuable to Balsillie. First, the value of a club could be enhanced by the certainty of cash flow from corporate support. Not the Preds – this is their major weakness. The rule of thumb in the luxury seat driven NHL is a 2:1 corporate/individual season ticket base. The Preds have exactly the opposite “problem.” Most of the Preds cash flow actually depends on real fans and the Preds ability to win on the ice.
The second reason is cost certainty from the payroll cap after 2005. This is the positive outcome of the strike of 2004-05 for all NHL clubs. The Preds payroll last year was $43 million, just beneath the cap number of $44 million and more than the average NHL payroll of $40.3 million.
The third reason was possible bidding from another interested suitor. Anschutz Entertainment Group controls the Staples Center in Los Angeles and the Sprint Center in Kansas City. As a front-man for AEG, “Boots” Del Biaggio was a possible factor in the Preds bidding mix. Del Biaggio has a side deal (similar to the one between Balsillie and Hamilton) with AEG to move any “orphaned” NHL franchise to the empty $276 million Sprint Center in Kansas City.
Finally, the value of the Preds reflects the option value of franchise relocation to Hamilton or Kansas City for either Balsillie or AEG. But the value of these moves depends on the arena deal in each city and the sweetest arena deal in the NHL still lies right here in Music City. After all of the poor-mouthing, there are no superior alternatives. This is probably why Balsillie is paying $50 million more for the Preds than he offered for the Penguins late last year.
Nashville paid for the entire $144 million arena and absorbs all operating losses for the Predators, which have amounted to about $70 million. Last December, AEG offered the Penguins only one-half of Sprint Center revenues. No NHL club can survive on a fifty-fifty cash flow split. Here in Nash-Vegas the Preds get everything.
Pity-not the former Preds owner Liepold. Music City coughed up $25 million of the $80 million NHL expansion fee so his initial capital outlay was $55 million. If the Preds sell for $220 million, then Liepold skates away with a quadruple superfecta after ten years. By any way of reckoning, a 15 percent rate of return is easy money for such a “financially strapped” club.
The relocation of the Preds is not a done deal for three very strong reasons. First, this is the sweetest lease in the league. More importantly, this 30-year marriage can only be escaped if paid attendance drops below 14K for two consecutive seasons. Last season paid attendance for the Preds was 13,815 even without significant corporate support. Even a wealthy techno-preneur cannot unilaterally pack up and blow this town without significant penalty ($27 million in “liquidated damages”). Balsillie would be legally bound by the lease, and the NHL will not allow any lease to be broken by any owner.
Second, the financial condition of the Preds is probably not as bad as we are told. The franchise price tells us more about the value of the Preds cash flow than its poor-mouthing owner. Balsillie may be an avid hockey fan, but at the core he is also a shrewd businessman. The value of the Predators is maximized with this lease in this town, and he knows it.
Third, the NHL is unlikely to approve the relocation of any team to crowd the local monopoly territories of the Toronto Maple Leafs, Buffalo Sabres and Detroit Red Wings (even if the relocating owner paid out major damages to the three existing clubs). Balsillie withdrew his $175 million offer in December for the Penguins because the NHL rejected a similar move of the Pens from Pittsburgh to Hamilton.
Canadians may be nuts about hockey, but the League will always protect the local territories of its monopoly clubs. This league is run for profit, not for fan welfare. Four monopolies (Leafs, Sabres, Wings and Preds) are always worth more than one four-team market, even if one of the monopolies lies in the mid-South.
If the Nashville business community and Preds fans bow up and back the Preds, they are not going anywhere. This deal ain’t over ‘til it’s over, and that’s a natural born fact.
John Vrooman, senior lecturer in economics, is an expert on sports economics. Vrooman has published extensive research on the economics of intercollegiate and professional sports, player labor markets and owner capital markets, sports venue finance, franchise relocation, and European football. Vrooman is also a former college athlete. This op-ed originally ran in The Tennessean on June 17, 2007.
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