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Another Example of Hosing Creditors in Bankruptcy?

June 10, 2009, 9:31 am

I am not at all a bankruptcy expert, but I have watched the Administration's efforts to evade bankruptcy law in favor of the UAW and at the expense of secured creditors with great interest.

I am wondering now whether something similar might be going on in the Phoenix Coyote's hockey team bankruptcy.  The Coyotes are in bankruptcy, and the former owner (there is actually an interesting question as to whether he still is the owner) has solicited an offer of $212.5 million for the team from Jim Balsillie, contingent on Jim moving the team to Canada.   This amount would pay off some but not all the creditors and would not leave the stadium authority whole on their lease (though I have limited sympathy there, as I begged and pleaded for our local governments not to subsidize hockey in Arizona).

Now, the league is demanding an extra $100+ million to be paid to the other team owners by Balsillie as a relocation fee for the team as an adjunct to the sale.  There is some sense that this is a poison pill to kill the deal, because the league is mad that a) this sale is happening without its involvement and b) they sense the team has not done enough to keep the team in Arizona.

Nevertheless, if Balsillie were to agree to pay the extra $100 million, isn't this a total ripoff of creditors?  In effect, he will be paying $312.5 for the team, but structuring the transaction so NHL team owners, rather than Coyote's creditors, get $100 million of the transaction.  Am I missing something?

Disclosure:  Jim Balsillie and I were section-mates at HBS.

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Category: Sports
  • Tim

    Yes. You are missing out on how the league is structured. An NHL; or any sports team, for that matter; is a franchise. And the league itself has the last word in where teams are sited, when they play, and how they play. So, Jim Balsillie has the right to purchase the Coyotes and can move them to Hamilton; but he doesn't get the name and logo, owned by both the current partership and the NHL; the use of the NHL shield; or the right to play in the league. Right now, he's essentially bidding on a very expensive pile of used hockey equipment.

    This is no different than any other franchise agreement -- just because I own a McDonald's franchise, I can't just move the restaurant where I want.

    By the way, the big problem with Hamilton is that it would cannibalize the market of two other teams -- Toronto and Buffalo. A lesser problem would be that it would require the league to realign their conference/divisional structure. It wouldn't make sense for the Hamilton Coyotes to play in the Pacific Division of the Western Conference.

  • Tim

    Oh, another thing you're missing. Since the league provided operational capital, which is at the heart of the control issue, they're one of the bigger creditors.

    So, don't think of that extra $100m as the cost of purchase, think of it as a franchise relocation fee; that would give him the right to have league membership.

  • Fred from Canuckistan . . .

    Cool . . . hanging with the Crackberry inventor . . . you have some neat friends.

  • Vangel

    The argument about franchise rights is a very good one that will be hard for Balsile to overcome. (The NFL and NBA will oppose him as well because there is no way that they want to see a judge redistribute valuable property rights without league control.)

    The argument about cannibalizing the Toronto market is clearly wrong because the Leafs have had waiting lists forever and have no incentive to improve their product. There is room for at least one more team in Southern Ontario so that is not an issue. The conference issue is an interesting one. Frankly, I don't see why Hamilton being in the West is an issue given the fact that Detroit is a member of that conference. In fact, it might help those fans looking for more variety because the unbalanced schedule means that fans may not see a particular team for three years.

    My sympathy is with the Phoenix taxpayers but they will lose out no matter what happens because the subsidy was a bad idea.

  • DrTorch

    Thanks Tim.

    I agree w/ you, the franchise relocation fee is a legit one, protecting the other owners w/in the league.

    Vangel- I have no sympathy for the Phx taxpayers, they've been content to watch their gov't officials pull these stunts for decades. Certainly w/ the building of their baseball stadium, perhaps even earlier. It's pleasant to see places get their just rewards.