After yesterday’s discussion of how private equity firms use leveraged buyouts to turn businesses around, and whether or not that’s something the National Hockey League should take seriously as a path to avoiding future superficial debates with the NHLPA about turning a profit on what amounts to a hobby for many owners, I wanted to share a few more thoughts. Greg Wyshynski also blogged yesterday about the Bloomberg Businessweek article we examined here, if you’re looking for more coverage. But basically I decided that concluding by writing “the devil would be, as they say, in the details” is kind of a cheap way to say “someone else should figure out how to make this work,” so follow after the jump for some more thoughts….
One of the chief concerns I received via email, and which Wyshynski notes in his piece, was that in 2005, Bain Capital (with a partner) tried to buy the entire NHL:
One of the strangest stories from the 2004-05 NHL lockout was when a private equity firm decided it wanted to get into the hockey business.
By buying and then transforming a struggling franchise into a profitable one?
No. By buying the National Hockey League.
This would indeed pose a number of problems, chiefly among them:
- If a private equity firm bought the entire NHL, then it would probably downsize the league by immediately shuttering those franchises which underperform the most and/or yield the smallest dividends; and
- As my friend and fellow Belmont University alumnus Joseph Mosby noted, “A [private equity] firm with cash to blow,” cash they have on hand because they’ve collateralized future cash flows of the target company — in this case an NHL franchise — and borrowed that cash from an investment bank, “and time to wait,” meaning they’re dispassionate about the game itself, lacking interest in the emotional returns current owners get from being owners, and focusing solely on improving the margins, “is a big nasty problem for the players union to deal with.”
Regarding the first point, it’s really important to remember that, as recently as the 2009-2010 season, the Nashville Predators would fall in the “underperforming” category. The then-new owners were committed to the idea of staying in Nashville, but were still having trouble cobbling together some long-term financial commitments from investors. Even if they weren’t eschewed by a private equity firm in the short run, one wrong turn with the portfolio of corporate sponsors, or another Boots Del Biaggio-like fiasco (I’m not sure what that would be at this point, I’m just speaking in a vacuum here), and the Preds would become as extinct as the sabertooth cats for which they were named under a private equity regime.
Regarding the second point, if you think the threat of a lockout is likely now, just wait until the day when a single firm with tons of money speaks on behalf of all the franchises when negotiating with the players on how best to divide up the annual take, how much the salary cap should be, etc. (Note: Because of the marketing value of superstar players and because a league contraction would be likely under a private equity regime, the salary cap may not be an issue in the world of NHLPE vs. NHLPA negotiations; NHLPE would want the cap to be as high as possible, or non-existent, to be able to spend what they want on certain players, which they would more easily be able to do in the absence of franchises currently receiving revenue sharing. The average market cap hit would probably plummet, too, as fewer jobs became available in a contraction. So issues like roster size, contract terms, and how cap hits are determined would likely be more interesting to players than whether or not a cap itself existed.).
It occurred to me that probably the easiest way to mitigate both of these issues, should the league decide to undertake a private equity transition, would be for the current NHL Board of Governors (owners) to structure the arrangement such that the transition occurred in a staggered or tiered way. That is, they would unanimously agree to undergo the transition, provided that either (a) a private equity group could never acquire and own more than 14 franchises concurrently, or (b) that no single private equity firm could be involved in the restructuring by itself. The goal of structuring the transition this way would be to prevent a group like Bain Capital from gaining a majority of votes on the Board of Governors. This way, it becomes less likely — incredibly unlikely, if I may be so bold — that the league would contract by shuttering underperforming franchises. Labor disputes may still occur, but there would still be a nice mix of people who get an emotional return from showing up at the rink 41 nights a year to hear the roar of the home crowd to help stress the importance of averting a work stoppage.
The possibilities for a transition like this are pretty endless. You could do it division by division, time zone by time zone, etc. until everyone was making money again. And as I mentioned yesterday, the potential rewards of this seem to outweigh the risks involved. After all, things can’t get any worse than they are now. Right?
If we didn’t hear from you yesterday, now is your chance to sound off in the comments — how would you make sure a private equity firm didn’t dismantle the league or rush toward a lockout to wear down the NHLPA?