Looking into the numbers behind the Tampa Bay sale

I’ve been researching the Tampa Bay sale a bit. Some bloggers (and some newspaper reporters) have been looking at the sale price ($206 million is the reported number) and using it to justify all sorts of statements, from the “owners get rich when they sell a team” to “hockey has failed in the US” (popular in Winnipeg, but it’s really unclear to me how they made this leap of logic).

But is it really true? The numbers, when you look at them in more detail, aren’t quite so rosy…

The numbers as I’ve been able to find: Absolute Hockey is a new partnership led by Doug MacLean and backed by Jeff Sherin, a real estate developer, Oren Koules, a hollywood type best known for the “Saw” series of films.

They’re buying the Tampa Bay Lightning and other properties for $206 million, from Palace Sports and Entertainment. Palace Sports bought the team for $115 million eight years ago, and have reported about $70million in losses since. (throw enough zeroes at it, and it starts looking like real money).

So if you just take those numbers at their base value, Palace has put in $185 million to reap $206m, a net profit of $21 million. Seems like a not-bad investment.

Life’s never that simple, and raw numbers don’t tell the real story. Just on these numbers, starting with $115m and adding in about $8.5m per year for every year, your rate of return is a lousy 2.3%. That’s worse than investing in money markets, S&P 500, or even 12 month CDs over that term (right now, I can get 5.35% from ING on a 12 month CD). They seem to be selling this off having made money — but they could have made more money with less (or zero) risk by simply parking the money somewhere.

There are complications here, of course.

The first one is that losses generated by the team can be used to shield profits by the owners elsewhere. Part of that $70m/ loss will get recovered by keeping money elsewhere from going to Uncle Sam. Let’s assume (since there are no real numbers available) that half that loss is a “paper” loss, that it’s recaptured away from the team. In other words, every year the owners were writing a check for $8.5m to cover operating losses, but writing a tax check that was, say, $4m less to the government because the losses shielded profits elsewhere. If you roll that tax gain back into the the franchise as an asset, you see a rate of return around 5%.

That’s actually a decent rate of return for that time period. Maybe not great; at least it’s not insanely bad.

On the other hand, let’s look at that $206 million number. It’s not for the hockey team.

It’s for a set of properties including the team. The three key components:

The hockey team.

The lease at the arena and the right to operate it

Two pieces of property near the arena totalling 5.5 acres.

The property is on the books and assessed at $17.5 million. They are evidently (from researching them through the tampa papers and local real estate info I could find) properties that have high potential for condos or mixed condo/retail development, except that the market is down right now. But in a longer-term look, these properties have a huge upside to someone experienced in Florida real estate. Oh, gee, one of the partners is a Florida real estate developer. What a coincidence.

So, what are these properties worth? well, they’re assessed at $17.5m, so I’ll go with that, but their value to someone who can develop them is a lot more; This is, if you ask me, the investment upside of the deal.

The arena operations? Tampa’s arena is one of the more profitable in the country; it grossed $18m last year, and is on pace to match that this year. Half of its light dates are non-hockey, but it’s also a business much like a movie house: much of the “profit” goes back to the act, not the house.

But the ticket take isn’t the only story; there’s signage, naming rights, sponsors — and every team/arena deal differs in how these are split between the sports team and the arena, but some of those dollars end up with the hockey team (and factor into the $70m loss above), and some end up as part of the arena management agreement.

All told, it’s not unreasonable to assume around a 10% profit off the arena management — say, $2m a year or so. It’s value? A good round number would be 6x or 7x that profit number, or $12-15m.

So now we can get at least into the ballpark of the value of the hockey team.

$206m for the sale, minus $17.5m minus, say, $12m, or about $175m.

The franchise was awarded in 1991 for $50m. If you just look at that price and the $175m, you get a rate of return of 7.2%. That’s pretty good over 15+ years. But that ignores that the owners were continuing to “invest” by covering operating losses every year. Even at $3m a year, that drops the rate of return to well under 4%, and given the numbers the current owners have announced and taking into consideration both tax advantages and the probably profit on the arena side, your rate of return drops under 4%.

That’s a lousy investment over that time period, even trying to make it as rosy as I can. It wasn’t bad for Palace, but the earlier owners — they didn’t do well.

How does this make things look for the new owenrship?

I’m encouraged. here’s why

Doug MacLean — as a hockey guy, he understands the core of the franchise. By the way, while it looks like all of the money is to be made away from the team — and that’s actually true! — if you don’t own the team, none of the other opportunities exist. you can’t do the arena without the team, and you can’t develop the property without the arena. So to some degree, the Lightning need to do what the Sharks do, which is manage expenses and limit the “losses” in such a way that the arena income and tax offsets make up for the losses.

In other words, you don’t need to be profitable to be profitable. But that doesn’t mean you should assume that any loss is acceptable… By my guesses and assumption, a team like the Sharks or Lightning can “lose” about $5m a year in “team losses” and do okay because of the other aspects of the situation. That’s roughly where I’d put the “break even” point on the entire financial picture, as opposed to just looking at team numbers, if the team manages the arena and the partnership can take advantage of the losses in the taxes.

If MacLean can keep the team competitive on a decent budget and help the organization succceed, they ought to do fine. I’m especially happy to hear they’re planning on moving in and being local owners. that’ll help engage the business community and it’ll also keep someone with motivation to make it work close at hand and watching.

Second, they have a guy from the entertainment industry; increase the entertainment factor, and you can improve your attendance and ticket revenues.

Third, they have those plots of land, and a good person to figure out what to do with them. If they can make that work, they can turn this into a great investment. As it is, it’s a good investment, from what I can see.

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