Forbes Valuations

There’s been plenty of NHL business news today. This morning, Forbes released its annual valuation of the league’s franchises, and of note, the Senators climbed from the 16th spot in 2012 to 15th.

Speculation over Eugene Melnyk’s own financial stability has been pretty rampant over the past number of months, fuelled in part by the organization’s strict adherence to an internal budget, so it prompted me to look at Forbes’ relevant data to make sense of Ottawa’s current situation.

The Senators’ franchise value jumped 73-percent from $220 million to $380 million over the course of year. It’s quite the increase from when Eugene bought the Senators in 2003 for a cool $92 million.

Relative to other NHL franchises, the Senators are moderately leveraged franchise. Although Forbes reports the organization reduced its debt/value ratio from 59% to 39% (the 9th highest value in hockey), the Senators’ debt apparently rose from approximately $130 million to $150 million.

The accuracy of Forbes’ numbers have been questioned time and time again, and memorably exposed and laid bare last fall.

But let's take a look at their reporting anyway and see if we can learn anything.

Year Value M$ Debt M$ Debt/Value Revenue M$ Op. Income M$
2013 380 148.2 39% 83 6.8
2012 220 129.8 59% 113 14.5
2011 201 130.7 65% 100 3.2
2010 196 129.4 66% 96 -3.8
2009 197 130.0 66% 90 -3.8
2008 207 130.4 63% 96 4.7
2007 186 109.7 59% 93 10.4
2006 159 23.9 15% 76 4.2
2004 125     70 -5.0
2003 117 23.4 20% 59 -2.0
2002 95 89.3 94% 50 -4.5

Here we can see that when Melnyk bought the team in 2003, the debt/value went from 94% to a scant 20% – the reason for this as Forbes explained in their 2003 write up:

"In August the Ottawa Senators emerged from bankruptcy protection under new owner Eugene Melnyk, the co-founder and CEO of drug maker Biovail. With over $100 million of the previous owner’s debt forgiven or paid off, the team no longer has to worry about meeting payroll. But in order to generate the cash necessary to keep their roster intact and their Cup hopes alive, the Senators must get better support from both fans and corporate sponsors."

Looking at the team’s operating income over the first few years of Melnyk’s rein, it’s safe to assume that the Senators weren’t operating at a profit. Keep in mind, operating income doesn’t take into account other expenses such as interest or taxes, so the Senators were probably losing more money than what Forbes reported at the time.

However, what we can clearly see from the numbers is that the team’s revenue has continued to grow on a seemingly annual basis. Forbes is also alleging that the team’s operating costs have seen an improvement under Melnyk. Even in 2009 and 2010 the team had losses of $3.8 million, which backs up Melnyk’s infamous quote about no longer having to reach the playoffs for the team to turn a profit.

But, what’s really interesting is the movement of the team’s outstanding debt value over time. Normally, you would see a team’s debt/value ratio spike, like Ottawa’s did between the 2006 and 2007, when a franchise is building or recently built a new arena, or if a franchise is put up for sale and subsequently purchased. If you look at the 2007 Forbes debt/value rankings, the following teams had a higher percentage of debt/value than the Ottawa Senators.

- New Jersey Devils (128%) – they opened the Prudential Center in Newark
- Los Angeles Kings (91%): Considering how many entities and properties the Anschutz Entertainment Group owns, your guess is as good as mine on what created the debt
- Montreal Canadiens (85%): along with Tom Hicks, owner George Gillett purchased Liverpool FC
- St. Louis Blues (83%): Dave Checketts bought the Blues in 2005
- Dallas Stars (79%): along with George Gillett, owner Tom Hicks purchased Liverpool FC
- Minnesota Wild: (71%): had a relatively new arena open a few years earlier
- New York Islanders (67%): Charles Wang bought out business partner’s shares to become the majority owner in 2004
- Pittsburgh Penguins (65%): funded construction of Consol Energy Center
- Phoenix Coyotes (61%): built the Glendale Arena in 2003

So how did the Senators accumulate approximately $110 million of debt by 2007?

It’s difficult to say, and as a private company it’s not like they’re going to willingly open their books either. Well, unless you’re appealing to the City of Ottawa to get a casino built adjacent to the arena that you own.

The organization to its credit has made a number of upgrades to the stadium over the years that could help explain how the organization financed some projects, but maybe this this graph and accompanying excerpt from James Bagnall’s investigative piece for the Ottawa Citizen can help better explain:

“Things were supposed to be different with Melnyk, who rescued the Senators from bankruptcy on Aug. 26, 2003. Melnyk at the time was CEO and largest shareholder of Biovail — the Toronto-based drug maker he founded in 1989. The value of his shares in the firm was $1.5 billion. In addition, he had exercised share options in 2000 and 2002 for gross proceeds of nearly $68 million US.

Yet Melnyk chose to finance nearly half his $127-million purchase of the Senators and the arena with debt.”

Okay, so with some other projects financed by the Senators over the years, this could explain the size of Ottawa’s debt. Of course, as Forbes noted in its 2006 evaluationTeam owner Eugene Melnyk, "who saved the debt-laden franchise from bankruptcy three years ago and is chairman of drugmaker Biovail Corp, is facing Ontario Securities Commission allegations over share transactions during the past decade through trusts in the Cayman Islands."

Fair or not, critics of the outspoken owner will point to the timing of Ottawa’s dept accumulation and the coincidence of the allegations, his well-publicized divorce, and resignation from Biovail and insinuate that the Senators wouldn’t be the first or the last sports team to play with their revenues and theatrically underreport their take.

These fans have already drawn their own conclusions. One of their common supporting refrains is that the Senators aren’t technically the owners of Senators Sports & Entertainment, the Canadian Tire Centre or Capital Tickets. In consequence, they won’t report revenues off of these entities but they’re all interrelated and blah, blah, blah.

Personally, I don’t know what to believe. I have a proportionate amount of skepticism over the validity of Forbes’ numbers and Melnyk’s numbers. Although, I have to admit, part that has me concerned is Forbes affirmation that the Senators obtained $150 million of financing prior to the 2013-14 NHL season. Of that amount, about $130 million was for the purposes of refinancing a previous loan.

Wherever the truth lies, all we really know is that the Ottawa Senators are losing money. And why that may be, it’s sad to see an owner who came in with so much bravado and pomp essentially return this organization back to its Bryden era ways and crying poor in the public eye to turn political favour in its way.

I’ve realized that the days when Melnyk would brag that the days of penny pinching were over are long gone. And now that the Sens have been reduced to team with tightened purse strings and strict financial constraints on the team’s payroll, it’s disheartening. Especially now that the organization is allegedly generating some significant revenue that continues to rise on a seemingly annual basis and should currently be in a position to take on salary and augment a young core of players who should continue to develop over the course of the next few seasons.

National Television Deals

Furthermore, Chris Botta penned a story updating the status of the negotiations between the NHL and the five Canadian television networks (CBC, TSN, Sportsnet, RDS and TVA) concerning broadcast rights.

The biggest news out of the piece is that the NHL is expected to almost double its average annual rights from its current $190 million to a figure in the vicinity $350 million.

It’s worth mentioning that the CBC is expected to retain its Hockey Night in Canada franchise, but it will likely come at a cost of losing its rights to a number of playoff series and events such as the NHL All-Star Game.

While there is nothing specifically mentioning the Ottawa Senators, Botta did mention that the NHL is interested in creating a Sunday night telecast franchise for the league.

According to Botta:

"Rogers Communications-owned Sportsnet is in the bidding for available playoff games but is also seen as the front-runner to purchase a new regular-season offering of a weekly Sunday night telecast. A featured Sunday night game would join CBC’s Saturday franchise, TSN’s weekly Wednesdaybroadcast of a game featuring at least one Canadian team, and NBCSN’s “Wednesday Night Rivalry” as tentpole weekly events."

Much has been made over the lack of regional Senators games on Hockey Night in Canada this season and with an influx of Friday and Sunday games on their schedule this season, one has to wonder whether the Senators wanted to do this to as an additional revenue stream and potentially an opportunity to entrench themselves as a frontrunner or flagship team for Sportsnet’s Sunday night broadcasts.

Television Rights Update: 8:00 am

Breaking late last night was news that the NHL had agreed to a deal with Rogers Communication and the CBC for exclusive NHL rights in Canada worth $5.2 billion. 

I'll have more on this later.

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