Potential Penguins sale could be delayed for several reasons
Penguins co-owners Mario Lemieux and Ron Burkle dismissed a report a week ago that a sale of the franchise and their business relationship were on the rocks, arguing they still were talking with potential buyers.
But as the pursuit of a buyer approaches the eight-month mark, observers say several factors could have an impact on a would-be deal:
• Proposed NHL expansion.
• The Carolina Hurricanes also being on the market.
• Changing politics in Washington and Ottawa.
• The plunging value of the Canadian dollar.
Don Waddell knows all about entanglements that can make the sale of a team drag on for months or even years. He was president of the NHL's Atlanta Thrashers when the team was sold and moved to Winnipeg in 2011 and now serves as Hurricanes president.
The Hurricanes have been on the market since September 2014, when owner Peter Karmanos, then 71, said he wanted a succession plan that would allow him to retain managerial control for several years.
The announcement rattled some Hurricanes employees. Waddell assured them a deal wouldn't be made overnight.
Waddell said he told staffers, “First of all, there's nobody identified yet. That will take at least six to nine months. ... Once we identify a live buyer, (it could take another) six to nine months” to close a deal.
That was 16 months ago.
In Atlanta, Waddell said, “We had a simple transaction once we knew the franchise was going to be bought by Winnipeg, and that still was a six-month (process), and that was a deal that was sitting there on the table.”
Waddell said the most laborious, time-consuming work involves determining “what liabilities are going to stay with the current ownership and what's going to get passed through to the new ownership.”
In Pittsburgh, that includes determining whether a sale would include the Penguins' development rights for the former Civic Arena site in the Lower Hill District, where more than $500 million in housing, office and retail development is planned.
Lemieux and Burkle said in a joint statement that they “continue to explore all of our strategic options.” As they have since announcing their exploration of a sale in June, they declined to comment further.
A 2007 deal to keep the Penguins in Pittsburgh gave the franchise exclusive rights to develop the publicly owned land. The Penguins are required to develop the 28-acre site over 10 years, with a deadline to start construction this spring. The team lost its anchor office tenant in November when U.S. Steel scrapped plans to move there. The Penguins now plan to start with housing.
Vanderbilt University sports economist John Vrooman estimates the development rights add about $100 million to the team's value. Vrooman said the team alone is worth about $600 million, or four times the team's revenues of $151 million during the 2014-15 season, based on a Forbes analysis.
It remains unknown whether the city would receive any proceeds should a sale include the development rights or whether it would try to buy back development rights.
The Penguins' reported asking price of $750 million nearly doubles the record sale price for a U.S.-based hockey franchise: $485 million for the New York Islanders in 2014. In their joint statement, Lemieux and Burkle said “there is not, and has never been, an established price for the team.”
It's also unknown how the NHL's proposed two-team expansion and the Hurricanes being on the market are impacting the would-be sale price.
The league is considering expansion bids by ownership groups in Las Vegas and Quebec City. The fee for an expansion team is expected to be in the range of $500 million. Karmanos has said he thinks his Raleigh, N.C.-based team, which had the NHL's second-worst attendance a season ago, is worth $400 million.
“The actual auction price for an NHL franchise is usually biased upward, so the price (for the Penguins) in a seller's market could go as high or even higher than the reported asking price of $750 million,” Vrooman said. “But rumors of NHL expansion have probably flipped the advantage to the buyers.”
NHL Deputy Commissioner Bill Daly told the Tribune-Review the league has no mechanism to influence the purchase price of one of its teams.
“That's really a decision for the Penguins organization and their ownership,” Daly wrote in an email. “The league is here to assist in any way ownership wants us to, but outside standard obligations that new owners are required to make in connection with their ownership in the league, the details of individual club transactions are negotiated by the participants to the transaction.”
The league's Board of Governors — composed of team owners and VIPs — must sign off on deals. Big paydays help drive up the value of other teams. The average value of an NHL franchise is $505.1 million, up from about $200 million in 2010, Vrooman said.
Waddell, who worked as a Penguins scout for three years before taking the Hurricanes job, said he thinks the $500 million franchise fee could help drive up the Hurricanes' value.
“If you've got people that are willing to pay that price for a new franchise and you have an existing franchise that already has assets ... you could argue ours is worth more than that,” Waddell said, noting the Hurricanes operate their arena and collect revenue from events.
John Clark, a sport management professor at Robert Morris University, said, “Do you try to buy into a franchise that has an avid fan base and two to three superstars under contract, or start new and move to the desert? I'd take the existing franchise. I think you can make Quebec work, but I'm a little more skeptical about Las Vegas, where there's already so much else to do.”
Waddell is bullish on the business prospects of NHL ownership.
“You go back five or six years ago when I was in Atlanta, we were getting $4 (million) to $5 million from league revenues. Now we're getting close to $20 million,” he said. “Revenue sharing continues to escalate, and the big thing is we have a hard salary cap, which continues to be the best mechanism for our league.”
Waddell said the plunging value of the Canadian dollar had no impact on a potential Hurricanes sale because the franchise does all of its business in U.S. currency. There is the possibility, of course, that uber-rich Canadians in the market for a franchise might be inclined to wait until economic conditions improve. Vrooman said the state of the Canadian dollar “is currently a financial advantage for the American clubs.”
And then there is the political landscape.
Since the Penguins went on the market, Canada elected a prime minister and the U.S. presidential campaign has picked up steam.
“I wouldn't discount the fact that we're in an election cycle right now. You could have vastly different economic policies depending on who becomes president,” Clark said.
A Downtown attorney says he expects the Penguins to continue proceeding quietly.
“The Penguins have been historically incredibly thoughtful about the way information related to the team is disseminated. It wouldn't be surprising to me if that's the case here,” said Jonathan Altman, an attorney with Sherrard, German & Kelly.
Altman represented billionaire Terry Pegula when he bought the NHL's Buffalo Sabres and the NFL's Buffalo Bills — two vastly different deals from a public relations standpoint.
With the Sabres, Tom Golisano sold to Pegula for $165 million in a tidy, three-month process. With the Bills, before Pegula's bid of about $1.2 billion was accepted, a media circus followed offers from Donald Trump and Jon Bon Jovi that didn't reflect particularly well on the parties involved.
Altman said he can't imagine the Penguins presiding over a circus.
“I could totally see them, regardless of how it's going, saying, ‘We don't like spotlight news, so we're going to do everything we possibly can to stay out of the spotlight as long as possible,' so as not to bring focus to the non-hockey aspects of the team,” Altman said.
Jonathan Bombulie and Tom Fontaine are Tribune-Review staff writers.