Leafs Ownership Change & Why It Makes Sense

This article is in response to another article "Why Rogers, Bell Buying MLSE is Completely Bizarre." I have a theory on how the recent sale may make sense in the long run, given the hypothetical motivations of the NHL and the ownership players involved.

It may interest Leafs fans initially, but all hockey fans can look at the tea leaves on this deal and what it may indicate for the future of the NHL. This is going to be the richest deal in Canadian sports history.

If you break down the details, it may mean the emergence of a 2nd NHL team in Toronto through relocation; which will benefit the entire NHL.

The change in ownership of Maple Leaf Sports Entertainment (MLSE) from the Ontario Teacher's Pension Plan (OTPP) (79.53%) to a trifecta between Rogers Communications (37.5%), Bell Canada Enterprises Inc (37.5%) and Larry Tanenbaum (25%) appears confusing at first. Two competitors in telecommunications with a shared ownership interest in one hockey team? But why assume that this would be the long-term ownership position of the Leafs.

Especially given the fact they are in the most lucrative hockey market in the world.

No one appears to be willing to step back and unravel motivational factors here between not just the potential buyers and sellers but also the NHL. It is mysterious only if you can not look forward in time a bit and keep in mind both the NHL's agenda and the ownership agendas here from all parties.

Lets break it down with a collection of facts, some of which may appear unrelated at first but then tie them all together and put a bow on top.

What exactly is MLSE?

It is a private company that owns the Maple Leafs, the Raptors of the NBA, the Air Canada Center (ACC) (important), the soccer team - the Toronto FC and the AHL's Toronto Marlies.

Why would the OTPP sell such a profitable investment or even put it on the market?

This is an excellent question and one SB Nation's Pension Plan Puppets put as.

" I have always been a skeptic about the OTPP selling their share of MLSE. It's an asset that generates a lot of cash for them and the report that they were looking to develop a regional television network seemed to confirm my initial thought that the OTPP was more interested in getting a sense of the market value of their share before focusing on maximizing their return. While the OTPP has an underfunded pension obligation and a few high-profile investment write-offs recently, I didn't think that the Golden Goose would ever be sold. Then again, it still might not be ~ PPP - SBNation "

Answer: It will be sold and this is why. One of the paralyzing features of a pension plan holding ownership control, which Leafs fans are well aware of, is their one and only priority is protecting their investment and profit, not winning a Cup.

So why did OTPP put MLSE on the market?

Buy low - sell high. If the NHL is thinking about finding a way to introduce a 2nd NHL team in Toronto than it is a good time to sell. As a OTPP investment manager on this asset they will conclude that the investment has peaked if another NHL team in Toronto is on the horizon, which means it is time to sell. The OTPP has likely been on the same page as the NHL, with its previous entrenched southern expansion, prior to the relocation of the Jets, but the NHL has turned the page now. The OTPP can see the higher likelihood of relocations in the future.

The Southern Experiment is Done - NHL teams will move now to where the profit margins are.

With the movement of the Atlanta Thrashers to Winnipeg the first flare has gone up that the NHL's mentality of defend a franchise at all costs in its location, like it was the Alamo, is gone. Teams will relocate now.

NHL history also shows that when the League is in a relocation period it happens in a tight timeline and then stabilizes for several years which makes perfect sense. It is best to have a stable league. Better for fans and better for business. The Thrashers move to Winnipeg is only the first of more to come, that much is certain.

1976-82 (6 year relocation period in which the Seals -> Cleveland Barons who merged with the North Stars / KC Scouts --> Colorado Rockies --> New Jersey / Atlanta --> Calgary )\

1993-97 (4 year relocation period in which Minnesota --> Dallas / Quebec City --> Colorado / Winnipeg --> Phoenix / Hartford --> Carolina)

2011 - 20?? (Atlanta --> Winnipeg… x --> y etc)

The Jets Season Ticket Success

This likely took everyone in hockey aback except for people in Winnipeg of course.

Gary Bettman, when he announced the relocation to Winnipeg, must have felt a little silly in retrospect about encouraging fans to buy season tickets and to get out and support the team in his speech that day.

Only someone who had no idea what was coming would even say such a thing. Bettman's comment was completely unnecessary. If he had any idea of what was about to happen he certainly would have phrased it differently. No one needs to encourage anyone in Winnipeg to support the Jets.

It isn't just that the Thrashers moved to Winnipeg, that alone is signal enough, but the fact that expensive Jets season tickets, with 3-5 year commitments to boot, all sold out within 17 min? The phone lines had to be closed on the first day after putting 8,000 people on a waiting list. That should be a pretty clear message about what is waiting north of the border as far as product demand goes.

It must have been a splash of cold water into the face of the NHL and ownership groups. How many millions in potential revenue has the league wasted by resisting market forces for so many years?.

Winnipeg has always been misunderstood by many analysts, especially south of the border. Quick and snappy dismissive remarks about its small population of 750,000 people, not being able to support a NHL team in comparison to American cities with millions has always missed the essence of the issue.

It isn't the size of your boat, it is the motion of your hockey fans. A large population with a small % of hockey fans will whither in the face of a small population where everyone is a hockey fan.

The pent-up demand for NHL hockey in Canada is high, very high.

The New Economics of the NHL

This report is a little dated at April 2011, it was written and researched prior to the NHL announcing its new T.V. deal. It is a little heady suggesting that Canada can support 12 NHL teams but its' theme is spot on. Canada can certainly support more NHL teams, that must be obvious even to a blind man at this point, unless they need to be run over in another stampede for Jets season tickets.

Read the full report here - University of Toronto - School of Public Policy and Governance - Mowat Centre for Policy Innovation "The New Economics of the NHL"

What city is at the very top from a financial perspective, scoring a A to A+? Yes, you guessed it, Toronto is #1. Montreal is 3rd with an A- ranking and guess who ranked 7th? A paltry appearance and surely one of the weaker Canadian candidates right? Well that would be Winnipeg with a grade of B-.

I recommend reading the report in its entirety but in particular the sections on Toronto and Montreal, which from a business perspective are literally eye-popping and jaw dropping for those who are thinking about investing.

There is gold in the ice, in the Greater Toronto area. Surely it must be obvious to everyone and no where is the gold more plentiful than the Golden Horseshoe, also known as the Greater Toronto Area.

The only thing lacking for a second team in Toronto, and Montreal for that matter, is they lack a second rink for the 2nd team to play in. The solution? As highlighted in the Mowat Report, share the existing ACC in Toronto and the existing Bell Centre in Montreal. Both brand new state of the art hockey arenas.

Is it becoming clear why these recent moves by these particular owners on MLSE may make more sense now?

Great Recession what Great Recession ?

In the middle of the greatest economic down turn since the Great Depression, the Canadian economy has been steaming along like the little engine that could. NHL team values have hit an all-time high and this is despite escalating player salaries that are starting to present a two-tier NHL and a lot of hand wringing south of the border.

Yet there are challenges currently, 18 of 30 teams are losing money ESPN

The ranking isn't just about current value, it is also about operating income and the debt / value ratio. Refer to this handy sortable list from Forbes for a clear picture on who is and isn't on top - money wise.

Why is NHL hockey prospering in a climate where disposable income in the United States for the sports consumer is declining? Probably several reasons but the widening gap between successful and struggling teams is increasing and it is a problem that needs to be addressed.

One quick solution will be relocation of the struggling teams.

Tweet from Bell CEO about working with the NHL

Working with the NHL to accommodate their needs? Do tell, and what are the NHL's needs? Successful relocations to better markets? A healthy NHL with more profitable teams in locations where demand for the product is higher? A NHL that maximizes profit is a better NHL for everyone.

Bell Canada has a minority stake in the Canadiens.

While the Habs are primarily owned by the Molson family, they did overpay heavily on the team. Bell owns a minority stake of 18% on the Habs. More on that later.

The NHL has just accepted a radical realignment structure for next year

One of the key elements of the new alignment structure is much greater flexibility. It is now much easier to move teams around the 4 new mini-conferences. The old East is also underrepresented and it is likely we are about to see more teams move. An expansion will hardly be popular with many fans BUT if additional teams are added this alignment structure will allow for it without much issue.

Conclusion

What we may be seeing shaking out in Toronto is what in Blackjack is called a split.

In this case the pocket aces are the Toronto Market and the spilt allows two NHL teams to emerge, the Leafs and one relocated franchise. Two hands to be played simultaneously all while navigating thorny issues of conflict of interest in majority ownership and divided market share.

Based on what we know so far the ownership of MLSE is broken out as 25% for Larry Tanenbaum, Bell (37.5%) and Rogers (37.5%).

The new co-ownership of the ACC is key and it would likely be divided 50/50 between the Leafs final majority ownership and Team Two in Toronto. Lets call them the Toronto St. Pats for discussion purposes.

Assets in MLSE will be valued and shuffled around but the most important thing to fall out of this deal is an ownership group of MLSE that collectively agrees to add another NHL team to the Toronto market. That is the key first step.

They will share the ACC for all games, that much is pretty certain and where the other assets end up doesn't really matter too much outside of deciding who will be the single majority owner of the Leafs and St. Pats.

(1) Larry Tanenbaum is the likely candidate to acquire majority ownership on the Leafs and 50% of the ACC. With the Leafs valued at ~500 million and with him selling his remaining stake in the Raptors and Toronto FC it will get him into at the very least a majority ownership position on the Leafs and their AHL affiliate Marlies.

Tanenbaum will likely get a sweet-heart deal here for finally opening up the Toronto market to a 2nd team. Something that is long over-due, at least from a financial perspective. Tanenbaum has maintained the Chair position on MLSE which is key in him having control going forward.

(2) Rogers will likely be the ownership player to drive a relocation deal and to get majority control of the new relocated Coyotes St.Pats. They will work with Bell temporarily, with Bell as the minority owner of the St.Pats. The remaining assets Raptors etc will probably go to Bell to grease the deal. In this manner we can see how the assets of MLSE will be broken up to serve the long term goals of the players.

Now enter stage 2. A few years down the road IF this even happens at all, Bell will sit as minority owner and watch the split market carefully in Toronto. It will have the inside track on all financial details and if it likes what it sees, well, remember that other team and other 'A' list Canadian market, yes that would be Montreal.

Whatever Toronto has and is working well Montreal will want to. It is a Canada thing.

Few notes on how this will work

(1) The Molson family overpaid for the Montreal Canadiens in 2009. Here is where part 2 of this saga will make sense for those who can not wrap their mind around Bell being involved.

The Molson family has owned and sold the Canadiens several times in history and they took a real bath the last time around.

" In a town with lots of old money, the Molsons’ is perhaps the oldest: John Molson founded the family business in 1786. (His descendants’ net worth has been estimated at $500 million.) But in spending roughly $575 million to acquire the hockey club, its arena and a concert promotion business last year—more than twice what Molson Inc. got in 2001 for 80.1% of the team—Geoff Molson and his two brothers seemingly engaged in a very un-old money thing: Sell low, buy high. ~ Globe and Mail

After having a couple years to watch the Toronto experiment and assuming it is a financial success Bell and Molson will start talking about two general options.

(1) Bell will buy Molson completely out or at least up is stake to majority owner.

OR

(2) Bell will repeat the Blackjack split in the Montreal Market with another relocated team, a Montreal Maroons.

In both cases Bell will carefully shuffle its stake in MLSE to create revenue when required to bolster its existing 18% stake in the Montreal Canadiens. Selling off to Tanenbaum and Rogers as required.

If the financial statements on a Toronto market with two teams is not ideal and by ideal the expectation would be the Toronto St.Pats would emerge as a top 5 NHL team valuation wise immediately. The Thrashers after moving to Winnipeg increased in value 21% - Refer to Forbes valuation link above.

Bell may prefer caution if a similar kind of valuation increase doesn't occur on the St.Pats and may merely increase its stake in the Montreal Canadiens. If the Financials turn out to be the gold many expect them to be, they may split the Montreal market and accept another relocated team with the NHL's blessing and sell their remaining stake in the Habs to the Molson family.

This is how in the long run thorny issues of conflict of interest in majority ownership and market share may be avoided and how everyone can benefit.

Those pesky T.V. and broadcast rights that everyone is in tizzy over now? (So many links I can't possibly post all the Toronto media jabber on this topic) Those will mainly be grease to smooth the internal transactions in the coming years with the final picture coming out with Rogers getting broadcast rights for Ontario and the Senators, Leafs and St.Pats. Coinciding nicely with the end of CBC HNIC contract in 2014.

And with Bell getting broadcast rights on the Habs, the Montreal Maroons possibly and soon to be returned Nordiques in Quebec. Quebecers are already full of Jets envy and are banging their picks and shovels into frozen dirt already with a state of the art modern arena in Quebec City on the horizion.

Quebec City unlike Winnipeg is not ready today and will not be until Fall of 2015 at the earliest but we will see teams move sooner than that.

The T.V. rights etc will fall nicely along the divide bettween Quebec and Ontario just as they always have for centuries. The language issue is always there and it simply is a strucuture that both sides can find to be mutually benefical. The NHL will be only too happy to cheerlead from the side lines.

Bell and Rogers fighting over T.V. rights for the Leafs is as silly as talking about a Canadian civil war. This ownership plan would never have been put into motion without at least an agreement in principle of the direction and goals of it in the coming years.