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Big Boys’ Toys, Casinos, And Equity

By George Malik: If you've ever wondered why billionaire businessmen purchase sports teams despite the fact that the vast majority of sports teams sustain operating losses, the CBC provides a few answers:
[E]ven though many teams themselves may lose money on an annual basis — and the financial state of sports teams is something that owners and player unions seldom agree on — most clubs do tend to grow in value over time. For instance, Forbes magazine now values the New York Yankees at just over $1-billion US, with George Steinbrenner and his family owning 80 per cent of the franchise. Not a bad return on investment when you consider he bought the team for $10-million US in 1973. Annual operating losses just don't seem as important in those circumstances. Sometimes, the owners have other business interests that invite tie-ins. The Mavericks' Cuban also founded HDNet, which calls itself the first television network to broadcast exclusively in high definition. It will come as no surprise that it also carries Mavericks games. And some owners have built sports conglomerates that begin with the team but grow to include the stadium (often subsidized or with some kind of a tax deal), extensive retail operations and broadcast stations that together, build value.

Do you want to know why the Isle of Capri casinos are willing to build a $290 million rink for the Penguins, solely from their own revenues?

Isle of Capri Casinos Inc. has offered to kick in $290-million (all figures U.S.) toward a new arena for the Penguins, provided it wins a licence to build a slot machine emporium next door.
That’s regarded as the minimum amount needed for a low-frills professional sports facility these days. An arena under construction in Newark, N.J., to house the New Jersey Devils carries a price tag in excess of $300-million.
It was a smart strategic move by Isle of Capri, which faces two competing bids for Pittsburgh’s first and only casino licence. State regulators are expected to name the victor by the end of December. Since getting the Penguins on board as a partner and announcing plans for extensive redevelopment, Isle of Capri has been winning strong public support, including an endorsement from the new mayor, Luke Ravenstahl, and the Pittsburgh Post-Gazette. But if the state hands the licence to one of the competing groups, the Penguins will have to turn to what local politicians have dubbed Plan B.

Pittsburgh is not the only target in Isle of Capri’s efforts to link gambling and sports as an entertainment package. The company is also talking to the Florida Marlins about locating a new baseball stadium in Pompano Beach, Fla.

Al Strachan explains why Gary Bettman is secretly both ecstatic and worried in New York:

The pre-lockout Penguins were valued at $75 million. Even at that price, no one wanted them. Now they’re selling for $175 million.
In percentage terms, the Penguins’ value rose 133%. If that figure is extrapolated league-wide, the NHL franchises may be worth $7 billion or $8 billion more than they used to be.
But even on a flat scale, a $100-million increase per franchise spread across 30 franchises is $3 billion.
So Bettman, to whom hockey is an economic opportunity encumbered by a bunch of athletes, isn’t about to pass up Balsillie’s involvement in the league.
But the arrival of Balsillie may not be the godsend that it seems. What Balsillie really wants is increased NHL involvement in Canada, and to further that end, he’s strongly leaning toward moving the Penguins to Hamilton.
Bettman is appalled by such a concept. For one thing, he’s dead set against increasing Canadian involvement. For another, he covets stability and doesn’t like to see franchises move anywhere, even within the United States.
So the reason he’s in duck mode is that he has to present a calm unruffled front and make sure that anyone willing to listen is made aware of the economic resurgence of the NHL as illustrated by the sale of the Penguins.
But below the surface, he has to bar every escape hatch to make sure that the league gets Balsillie for Pittsburgh, not for Hamilton.

There are two threads that unite these three stories. 

The first one is simple: professional sports teams are no longer money-producing entities in themselves.  Whether you’re talking about the NHL, NBA, MLB, or any other non-NFL sport (the NFL is an exception as their TV deal subsidizes their salaries), most teams’ ticket sales don’t offset the salaries of their players and the operating costs of staffing their rinks, paying their taxes and utility bills, equipment, travel, insurance, coaches, GM’s, scouts, etc.  Most teams sustain operating losses during regular season play, and require significant playoff runs to break even. 

Then why would you own financial albatrosses in the first place?  Because earning at least a percentage of the rink concessions, parking, TV deals—if not establishing your own TV network, and advertising to make sure your fans know about your other business interests equals profit, profit, profit.

As Strachan notes, the other issue is franchise equity.  A higher perceived value for your franchise means that you can charge more to do business with those who’re interested in your team, and it also means you can cash in on that equity to start those valuable side business interests or media conglomerates. 

If owning a professional sports team didn’t make business sense, business tycoons wouldn’t get involved with them.

Filed in: NHL Talk, George James Malik, | KK Hockey | Permalink
 

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Paul Kukla founded Kukla’s Korner in 2005 and the site has since become the must-read site on the ‘net for all the latest happenings around the NHL.

From breaking news to in-depth stories around the league, KK Hockey is updated with fresh stories all day long and will bring you the latest news as quickly as possible.

Email Paul anytime at pk@kuklaskorner.com

 

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