Friday, May 29, 2009

The Sky Is Not Falling . . .

With the revelation that the Blue Jackets have lost in the neighborhood of $80 million since 2002, and that discussions were afoot to transfer ownership of Nationwide Arena to Franklin County, utilizing a "sin tax" increase, the full range of doomsayers, conspiracy theorists and panic-mongers are emerging and forecasting imminent Armageddon at the hands of black helicopter-flying team owners and NHL executives.  Enough already!!  

First, while the amount of losses seems staggering to many, they are well within the bounds of "reason" for modern sports ownership.  Keep in mind that only about half the teams in the league make an operating profit.  Consider that most estimates place Phoenix as losing $30+ million per year.  Coming into the 2008-2009 season, the Jackets were in the bottom third in operating revenue.  Also consider, however, that they lost out on revenue sharing the last time around, and that number alone makes some clubs profitable.  From all indications, that contribution will return this year.  In 2007-2008, we lost out on 25% of our contribution -- accounting for about $2.5 million in lost revenue by itself.  

The other side of the coin is debt.  According to Forbes, the Blue Jackets have a debt-to-value ratio of only 29%, placing them 10th best in the league in that category.  Debt is important, as the lack of debt provides flexibility.  I would submit that the New Jersey Devils, with a debt-to-value ratio of 119% and an annual operating profit of only $1.9 million, are in a substantially worse economic posture than the Blue Jackets.

There is actually good news in the information provided thus far.  First, apparently the NHL finds that the Jackets are in good shape in general, with the Arena situation being the one flaw in the business model.  That alone should be seen as encouraging.  Remember that we are not a Detroit, Toronto, or Montreal.  We are a young expansion franchise, with a season-long strike falling in the middle of our historical track.  

Blue Jackets management, despite their goofiness in the handling of the broadcaster situation, is acting as any responsible management team should act.  They are assessing where they are, getting input from experts, and exploring rational solutions.  The only mention of moving came in response to a question -- neither Priest nor McConnell have even mentioned moving the team as a primary strategy.  

Nobody should be surprised that the Jackets are exploring a way to remedy the one primary flaw in their financial picture, the Arena.  They aren't making threats or issuing dire projections. Instead, they are exploring a proven method that was used with success in Cleveland for pro sports facilities there.  Those types of steps take time, so the fact that they are starting the process is a sign of prudent management, not subversive intent.  

Nationwide had all of the leverage when the original deal was done, and now the climate is switching.  The Blue Jackets have a credible on-ice product, momentum is growing, and the Arena District is blossoming.  From a business perspective, the timing is perfect to get the wheels rolling to shore up the financial position.

The owners of professional sports franchises are not in the game for operating profits.  Ownership is about ego, tax benefits and increased franchise value over time.  Of $254.6 million in operating profits earned by NHL teams in 2007-2008,  $136.7 million was earned by just three teams (Toronto, Montreal, N.Y. Rangers), and  another 5 teams (Vancouver, Dallas, Detroit, Edmonton, Calgary) account for another $66 million.

Could McConnell turn around and sell the team out from under us?  Sure, he could.  Is that probable, or even likely?  No.  First of all, the "sin tax" plan calls for Nationwide to take a minority interest in the Blue Jackets franchise, further bolstering the uniquely local character of the ownership group.   Secondly, it would be a foolhardy move to sell a franchise in this economy, just as the team is poised to take some substantial leaps forward.  The appreciation in franchise value lies ahead.  Finally, with the Phoenix fiasco and the fact that other franchises are in far worse shape than the Blue Jackets, the NHL would be unlikely to approve a sale involving a move anytime soon.  

So, boys and girls, let's not panic.  Let's look at facts, get ready to congratulate Mason on the Calder Trophy, look forward to the draft and free agency, and stop worrying about the sky falling.  

Keep in mind, I am originally from the SF Bay Area.  There, the Raiders have moved to Los Angeles and back again, the California Golden Seals came and went, the Golden State Warriors changed names and moved across the Bay from S.F. to Oakland, the Giants have been on the verge of sale 2 or three times, and the A's similarly have been poised to de-camp on numerous occasions.  Even the beloved SF 49ers have not been immune to the relocation saber rattling.  

No business can take crushing losses forever.  However, the CBJ do not even come close to the definition of a desperate franchise.  Indeed, everything they are doing is to insure that they do not get to that point.  Interest is high, as is the upside in town.  Don't worry, be happy, mon . . . 


Rick said...

Excellent! A level headed response. Everyone seems to be forgetting that the Dispatch (Portzline, Reed, etc.) are in the business of selling news. What better way than to prey on the fears of fans of "selling/moving the team".

You're absolutely correct in stating that the NHL (Bettman) would NOT allow this to happen, especially in this economic climate.

Loach said...

Nice, thoughtful post JAL. I hope you're right, I don't feel I know enough about what's going on to make sense of it yet.

roadman said...

Thank you! A voice of reason at last. To read some you would think that the sky was indeed falling. So glad to have you back amongst us. One of the questions I have is how did the parking revenues get left out of the original revenue stream? That from what I can read is a good piece of most arena plans.

Interesting piece this am about the Schott. Suppose the concerts were all at the NAT.... hmmm oh well. When you live with an elephant.....

jemhuff said...

Very nice perspective! Thanks for the interjection of some logic and reasoning. :-)

I just hope this story doesn't overshadow the hockey side of things this summer (i.e., the draft, possible FA signings, trades, etc.)