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Old
08-19-2004, 02:42 PM
  #26
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Has anyone read Jon Spoelstra's book called "Marketing Outrageously?" Probably not, unless you are in the advertising/marketing field. Anyway, Jon is regarded as the foremost sports marketing mind in North America. He is currently president of the Professional Sports Division of Mandalay Entertainment (sounds like a cool job), and he was GM of the Portland Trailblazers, and President of the NJ Nets. Anyway, chapter 5 in his book describes how in 1995 (I believe) Peter Pocklington hired Jon's company to pull the Oilers out of their financial tailspin and increase season ticket sales to the level at which they'd obtain the NHL subsidy.

Here are a few interesting excerpts:

"The team was in awful financial shape. Season ticket sales were down to 5,500 from their peak of 14,000. There was red ink all over the place."

"... But as soon as they had won the first one (Stanley Cup), they began to sell fewer season tickets. This was a warning sign - and a sign of opportunity - but nobody saw it. The opportunity was lost; disaster was inevitable."

"In fact, after each year the Oilers won another Stanley Cup, the number of season tickets went down!"

Spoelstra's team increased the sales staff from two to 15, injected them with enthusiasm, improved their training, came up with all the mini-packs, made more sales calls on new prospects, and in the end increased season tickets to 13,000.

"... if the Oilers had built and trained a sales staff the way we did, they could have kept themselves economically strong. Perhaps Peter Pocklington could have afforded to keep Wayne Gretzky. Perhaps they would still be winning championships."

Pocklington asked if he could hire Spoelstra or one of his partners, Doug Piper or Dave Cohen, full time.

"... Doug Piper became the one who trekked up to Edmonton. He became the executive vice president of the Edmonton Oilers in charge of business. While the team still struggled on the ice, Doug made the Oilers the best marketed team in the NHL."

I find it really interesting how easy it is to blame poor attendence on a bad on-ice product, but here is a case where it apprears bad management had as much to do with poor attendance as anything else. So much goes on that the fan doesn't know about. Anyway, I just thought a few of you might find that stuff interesting.

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Old
08-19-2004, 02:44 PM
  #27
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Nope

Quote:
Originally Posted by copperandblue
I am curious as too what the argument was about? Who was cynical of whom and in what regard?



I don't know if I read that the same way (I may very well be wrong). Aren't they just saying that by the Oilers only having to pay 1 dollar a year in rent, the city eats 2.4 mil in losses? So the subsidy isn't like the city is cutting a cheque directly to the Oilers although the effect is the same.
Every time a ticket is bought you pay a portion of it. It is also added to the season ticket price.

Fans pay it.

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Old
08-19-2004, 02:49 PM
  #28
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Quote:
Originally Posted by Wolfpack
...I find it really interesting how easy it is to blame poor attendence on a bad on-ice product, but here is a case where it apprears bad management had as much to do with poor attendance as anything else. So much goes on that the fan doesn't know about. Anyway, I just thought a few of you might find that stuff interesting.
Good stuff, WP. Kinda makes you wonder about Sather in his capacity as Team President as well.

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08-19-2004, 02:51 PM
  #29
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Quote:
Originally Posted by Big T
I'm not sure on this either, but didn't the Oilers just renew the lease on Rexall for another 10 years?


T
Yes and at that time it was mentioned that the Oilers and Northlands share the expenses of running it. There were also agreements on some upgrades tied in with that lease.

I believe the Oilers also get revenues from other events as well because Northlands benefits from some of the improvements that the Oilers have paid for. Example the new score clock.

Northlands has also talked about building a rink in the next 10 years because of the demand for a bigger facility, I am sure the Oilers would be a huge part of that.

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Old
08-19-2004, 02:56 PM
  #30
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Quote:
Originally Posted by YKOil
Lots actually. If:

- I knew I could finance the remaining purchase of the asset out of existing cash flows
- I knew that existing cash flows could be increased with a modicum of improved marketing (just getting of Pocklington was a huge boon to the team's marketing efforts)
- I knew I could get deals that left the vast majority of ALL generated revenues in my hands WITHOUT an associated cost (i.e. getting subsidy)
- I knew that I had VERY favorable accounting rules that allowed me to build losses, independent of cash flows, that I could then use to reduce gains elsewhere and thus save me bucketloads in tax
- I knew that NO MATTER WHAT I would not lose money on the investment as I was buying it for a multi-million dollar discount right off the top (the guaranteed price of 70 vs. allowable market of 84+)

etc, etc.

You sound like you are as conversant with financial info as I am victor so please don't try to simplify and snow me. The fact is that EIG had a business that would succeed even if the team failed.

The cash call itself, btw, was:

- required by the bank because of Slat's going overbudget, and
- went directly against the debt (as the bank had provision for requiring a cash call if certain budget covenants/ratios weren't met)

WHICH WAS NOT A BAD THING as the money was not used for operations. i.e. IF the dollars had been used for operations then the arguement could be made that they (EIG) had reason to worry as they may have faced a situation where they were pouring money into a sinkhole BUT that was not the case - all they did really was reduce their loan term via early payment.

I had actually tried to stay out of this thread but the comment above required me to make answer.

As for the guaranteed bonds thing:

That MAY have been true during some of the years between when they bought the team and now, however the value of bonds is about to hit a wall (the money has already been pulled out of the bond market as interest rates have stopped falling) which means they are better off now then aren't they? That essentially means that all things are equal over time.

You are also not factoring in the capital appreciation of the team over time in terms of conventional return vs bond return. I suspect it would mean quite a bit.

A more pertinent point is this - a great deal of the cash flow of the Oilers is currently tied up in debt repayment (original dollars less the cash call). Get that out of the way (I forget the original term of that loan but I am thinking that 10 years is probably a fair estimation) and the team will be well positioned to pay an excellent dividend rate.


YKOil
Not surprising I remember Sather being interviewed in the Mid 90's or maybe earlier and they asked him what kind of marketing he plans to do to sell tickets (Sather was also team president)

And he said that he didn't believe in that. The product was enough, I remember thinking that this was not a great answer and I knew the Oilers were in trouble.

Sather didn't believe in marketing and with the not very popular Pocklington as owner that was a disaster.

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Old
08-19-2004, 03:17 PM
  #31
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Quote:
Originally Posted by spaz44
Not surprising I remember Sather being interviewed in the Mid 90's or maybe earlier and they asked him what kind of marketing he plans to do to sell tickets (Sather was also team president)

And he said that he didn't believe in that. The product was enough, I remember thinking that this was not a great answer and I knew the Oilers were in trouble.

Sather didn't believe in marketing and with the not very popular Pocklington as owner that was a disaster.
As fun as it was fun to witness first hand your favourite team dominate a decade of hockey as the Oilers did in the '80's however, I wouldn't hesitate to say that Edmonton is more of a hockey town today, then it was back then.

I think some hard lessons were learned and it almost cost the city this team but assuming the league manages to create an environment where all cities can have viable NHL teams, then this franchise is going to be stronger long term for it.

I have never hidden my feelings on thinking that Lowe has been doing a good job BUT as a result of Sather leaving, I would have to say that Laforge is the true genius at turning this team around and that ties directly into all of this marketing stuff. In 4 years this team went from unloading talent on an overbudget team to actually positioning themselves to suppliment their talent with 3 mil in spending money. Would anyone have ever pictured that 4 years ago?

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Old
08-20-2004, 07:59 AM
  #32
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Quote:
Originally Posted by igor
And though the tax advantages are not perfectly clear to me ... this doesn't seem to be a bad investment, so long as one has other business ventures that are profitable. And so long as the value of the franchise rises ... which in turn is contingent on the willingness of other non-NHL cities to build stadiums and provide incentives to lure a team.
As far as tax advantages, they exist when a team has operating losses in one entity and it can carry the loss forward or back to apply it against any earnings an individual may have or had. That being said, there are many factors to be considered.

This is a classic example of what teams like Dallas does. The hockey never makes money but losses are funnelled through and are applied to other companies under the Tom Hicks empire. Many entrepreneurs actually go out looking for "loss" companies so that they can apply these losses against future gains.

Anyways, EIG probably wanted to save the Oilers. I don't think their intensions were strictly for the benefit of the members of the group. That is pretty much evidenced by the couple of cash calls they had to pay. It's one thing to absorb "accounting" losses but when you get into cash outflows and negative cashflows, that's when you start looking at your investment.

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Old
08-20-2004, 11:32 AM
  #33
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Quote:
Originally Posted by victor
Put simply, the opportunity cost of this venture is not justified by it's return.

Simply moving the team to the US would require a large cash infusion, as it equates to the disposition of the asset, which will require the owners (new or current) to pay the capital gain on the asset at it's current fair market value. So, if as I've seen asserted above, the team is appreciating, the difference between the purchase price (which I'm sure you'll agree is low) will have to be paid in a capital gain, provided that the team has used up it's investment loss provisions. Is the expected value of the disposition of the team, less the purchase price plus interest, less taxes on disposition, worth more than could be made on another investment?
Probably. Give me the numbers and I can crunch with the best of them. Other investments may have been better - but others may have also been worse.

Quote:
Originally Posted by victor
Where did you get this information? The cash call was used to service the debt. The reason for it, and the bank's provsions, have not been publically disclosed. Perhaps you know someone I don't?
It was reported in the local papers at the time. No details were released - just the gist of it: large reported loss and bank decided to enforce a provision which required a cash call.

[QUOTE=victor]If the organization was making money, wouldn't they have used that money to service the debt, which wouldn't require the bank covenant (as you asserted above) to be called?[QUOTE=victor]

Doesn't matter. If certain debt/equity ratio's (just one of a whole host of ratio's often used in loan agreements) aren't met then covenants are often triggered that require that those ratio's come back into the targeted range. Thus you get a cash call. Standard stuff.

Quote:
Originally Posted by victor
????? You must know something about the markets that I (and all other investors) do not.
Ummm - interest rates are going up again and inflation is going up - historically neither trend has been friendly to the bond market and the combination of the two in tandem doesn't bode well. This is fairly common knowledge. Can someone still make money on the bond market - sure they can - just don't look for miracles.

Quote:
Originally Posted by victor
Capital appreciation is valued upon disposition of an asset. If they sell the team (or move it to the US, for that matter) they will find that our Federal government will be the first in line.
Of course they will. Lots of ways for a sharp accountant to avoid paying that tax though and a look at the EIG's group of investors reveals a whack of sharp accountants ready and willing to avoid as much tax as possible.

While I fully believe that some tax will be paid I don't see it as a debilitating impairment of the value of the investment as you do.

Quote:
Originally Posted by victor
Given that the owner's hold the debt positon (secured with their own capital assets), and not the team, shouldn't this mean that the team is profitable now?
Not entirely sure where you are coming from here. The bank holds the debt. I would imagine that the bank holds security against the team and, possibly, the owners directly. The owners incurred the debt to buy the team, that is not in dispute, but to assume that the owners are the ones servicing the debt is just plain wrong. The team is making the payments.

To throw some numbers out there I am going to say that debt servicing takes $5 million per year and that interest is 400k of that. Once paid off the team is up 400k in income and $5 million in cash flow. Are you trying to say that the owners couldn't find ways to pull that money out of there? I find that hard to believe.

I will say though that I do not believe that they will do that. My impression is that their goal is to field as competitive a team as they can in a fiscally responsible way - which means that any profits they make from it will probably be in the form of capital appreciation.

Don't think for a moment though that this team couldn't be incredibly profitable if they wanted it to be.

Since the EIG group took over they have had to:

- overcome one of the largest Canadian dollar vs US dollar differences in the modern history of Canada
- deal with one of the worst CBA agreements/stupid owners combos in sports
- put $10 million away for a lock-out that will finally happen this year
- deal with a $60 million dollar debt load
- deal with overhauling one of the worst marketing departments known to modern sports

If the team can make through a period of time like that and only be recording a minimal loss (at worst) then this is a team that can make loads and loads and loads of money when all cylinders are firing.

I will be the first to laud them for being willing to take on the challange but this was not just a charitable exercise. I would be a fool to think it was.

What you really have here, imo, is a case study in what happens when talented businessmen (EIG) take over a business formerly run by incredibly UN-talented businessmen (Pocklington).

Kudos to the EIG.


YKOil

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Old
08-20-2004, 03:11 PM
  #34
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All I have to say is Thank You to the EIG... I know the pain of losing the team you grew up with, and I'm really happy that I have the Oilers to enjoy now.

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Old
08-20-2004, 05:36 PM
  #35
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Quote:
Originally Posted by YKOil
Not entirely sure where you are coming from here. The bank holds the debt. I would imagine that the bank holds security against the team and, possibly, the owners directly. The owners incurred the debt to buy the team, that is not in dispute, but to assume that the owners are the ones servicing the debt is just plain wrong. The team is making the payments.
EIG is really servicing the debt, not the team directly. This (I believe, not know) is due to the limited asset base that the team had at acquisition. The debt is secured collateral with the owner's fronting the equity.

Quote:
Originally Posted by YKOil
To throw some numbers out there I am going to say that debt servicing takes $5 million per year and that interest is 400k of that. Once paid off the team is up 400k in income and $5 million in cash flow. Are you trying to say that the owners couldn't find ways to pull that money out of there? I find that hard to believe.
I don't know, but it's probably a moot point, I don't believe that there is any money there ;-)

Quote:
Originally Posted by YKOil
I will say though that I do not believe that they will do that. My impression is that their goal is to field as competitive a team as they can in a fiscally responsible way - which means that any profits they make from it will probably be in the form of capital appreciation.
I agree.

Quote:
Originally Posted by YKOil
Don't think for a moment though that this team couldn't be incredibly profitable if they wanted it to be.
If the new CBA falls in their favor, I'm hoping they will be ;-)

Quote:
Originally Posted by YKOil
Since the EIG group took over they have had to:

- overcome one of the largest Canadian dollar vs US dollar differences in the modern history of Canada
- deal with one of the worst CBA agreements/stupid owners combos in sports
- put $10 million away for a lock-out that will finally happen this year
- deal with a $60 million dollar debt load
- deal with overhauling one of the worst marketing departments known to modern sports

If the team can make through a period of time like that and only be recording a minimal loss (at worst) then this is a team that can make loads and loads and loads of money when all cylinders are firing.

I will be the first to laud them for being willing to take on the challange but this was not just a charitable exercise. I would be a fool to think it was.

What you really have here, imo, is a case study in what happens when talented businessmen (EIG) take over a business formerly run by incredibly UN-talented businessmen (Pocklington).

Kudos to the EIG.
YKOil
Someday, after we're all gone, I hope that someone writes a book about this. This story is one of the great ones in sports history, and I hope that the real story behind this gets told.

Thanks YKOil -
v.

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Old
08-20-2004, 05:52 PM
  #36
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Quote:
Originally Posted by victor
EIG is really servicing the debt, not the team directly. This (I believe, not know) is due to the limited asset base that the team had at acquisition. The debt is secured collateral with the owner's fronting the equity.
Interesting. I would still believe that they are funding the debt repayment through the team (only thing that makes sense) but this development means that they are probably flowing it all through as an operating expense (i.e. team pays EIG and EIG pays debt).

I can see where EIG would have it (the debt) due to the teams asset base - which is where this was a risky investment as it means it was personally secured by assets of the individual EIG members and not by the team. Interesting way to do it really.

Thanks for the insights victor - greatly appreciated.

I now recuse myself from this thread. Good read.


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Old
08-20-2004, 05:55 PM
  #37
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victor and YKoil

Thanks guys, you people are gold.

If this were a school dance ...

The City of Edmonton is the fat girl who landed the prettiest guy at the ball. They did it in the teacher's lounge ... in a way that would never get her pregnant. And her friends are impressed. And she's not going to tell them the whole story.

And this boy is damn pretty!

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Old
08-20-2004, 10:09 PM
  #38
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Quote:
Originally Posted by igor
And how on earth could Northlands lose $4.8M by not having the Oilers here? I struggle to understand this. In St. John's (granted a smaller facility) the additional cost associated with running the facility without a major tennant is $0.075M. What am I missing?
Without addressing the rest of it... looked at property values for Alberta (particularly Edmonton and Calgary) vice values out east (particularly Newfoundland) lately?

If not, I suggest you do. Not sure what SJ's itself is like, but generally values out east are fractions of what they are west of New Brunswick.

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Old
08-21-2004, 12:13 AM
  #39
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Agree 100% copper

Quote:
Originally Posted by copperandblue
As fun as it was fun to witness first hand your favourite team dominate a decade of hockey as the Oilers did in the '80's however, I wouldn't hesitate to say that Edmonton is more of a hockey town today, then it was back then.

I think some hard lessons were learned and it almost cost the city this team but assuming the league manages to create an environment where all cities can have viable NHL teams, then this franchise is going to be stronger long term for it.

I have never hidden my feelings on thinking that Lowe has been doing a good job BUT as a result of Sather leaving, I would have to say that Laforge is the true genius at turning this team around and that ties directly into all of this marketing stuff. In 4 years this team went from unloading talent on an overbudget team to actually positioning themselves to suppliment their talent with 3 mil in spending money. Would anyone have ever pictured that 4 years ago?
Gotta be the best decision the new ownership group ever made. This guy knows marketing cold and even the Calgary Flames met with Laforge to learn about his marketing plan.

The guy is a genuis and the Oilers have reaped from his efforts.

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Old
08-21-2004, 09:41 AM
  #40
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Quote:
Originally Posted by YKOil
Lots actually. If:

- I knew I could finance the remaining purchase of the asset out of existing cash flows
- I knew that existing cash flows could be increased with a modicum of improved marketing (just getting of Pocklington was a huge boon to the team's marketing efforts)
- I knew I could get deals that left the vast majority of ALL generated revenues in my hands WITHOUT an associated cost (i.e. getting subsidy)
- I knew that I had VERY favorable accounting rules that allowed me to build losses, independent of cash flows, that I could then use to reduce gains elsewhere and thus save me bucketloads in tax
- I knew that NO MATTER WHAT I would not lose money on the investment as I was buying it for a multi-million dollar discount right off the top (the guaranteed price of 70 vs. allowable market of 84+)

etc, etc.

You sound like you are as conversant with financial info as I am victor so please don't try to simplify and snow me. The fact is that EIG had a business that would succeed even if the team failed.

The cash call itself, btw, was:

- required by the bank because of Slat's going overbudget, and
- went directly against the debt (as the bank had provision for requiring a cash call if certain budget covenants/ratios weren't met)

WHICH WAS NOT A BAD THING as the money was not used for operations. i.e. IF the dollars had been used for operations then the arguement could be made that they (EIG) had reason to worry as they may have faced a situation where they were pouring money into a sinkhole BUT that was not the case - all they did really was reduce their loan term via early payment.

I had actually tried to stay out of this thread but the comment above required me to make answer.

As for the guaranteed bonds thing:

That MAY have been true during some of the years between when they bought the team and now, however the value of bonds is about to hit a wall (the money has already been pulled out of the bond market as interest rates have stopped falling) which means they are better off now then aren't they? That essentially means that all things are equal over time.

You are also not factoring in the capital appreciation of the team over time in terms of conventional return vs bond return. I suspect it would mean quite a bit.

A more pertinent point is this - a great deal of the cash flow of the Oilers is currently tied up in debt repayment (original dollars less the cash call). Get that out of the way (I forget the original term of that loan but I am thinking that 10 years is probably a fair estimation) and the team will be well positioned to pay an excellent dividend rate.


YKOil

Just getting caught up on some of the detailed yet interesting points of this thead.

The fact the cash calls didn't go for operational needs in this case is key. If a business consistently needs a cash infusion, whether it's through financing or investing, there is a problem. A business should be able to finance its own operational needs. One would hope that cash calls would be used to finance capital purchases such as renovating the facility or paying down the debt.

As far as the quote of investing in guaranteed bonds, I do not think that is a relevent comparison since guaranteed bonds do have the same level of risk associated to them than owning a hockey team. They could invest in guaranteed bonds but would stand to make less money in doing so because of virtually no risk. The idea is to take an investment opportunity with similar risk and then make the comparison as far as rate of return. If you can make more money with, for arguement sake, a bond that has the same level of risk than owning the Edmonton Oilers, then you would purchase the bonds.

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