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CBA: The rising red ink
Tuesday, August 05, 2003
As NHL players and owners try to hammer out a new Collective Bargaining Agreement, there will be a lot of talk about the financial state of the teams. Several NHL teams say they are losing big money. Players, for the most part, aren't so sure about those financial claims.
Although the financial woes and bankruptcy filings of the Buffalo Sabres and Ottawa Senators got a lot of attention this past season, some would argue they are not good examples of what the rest of the league is facing financially.
Buffalo was plagued by problems with the ownership of the Rigas family and its Adelphia Communications company. The Rigas family raided its company to cover the losses of the Sabres. Adelphia went bankrupt and the Rigas family was indicted. Ottawa's problem stemmed from a bad business model that weighed the team with way too much debt. Of course, there are also the well documented financial problems with the franchise in Pittsburgh.
It's what is going on with several other teams that concerns a lot of people. The St. Louis Blues say they lost $43.1 million in 2001-02 and expect similar losses for this past season. The New York Islanders say they lost $22.5 million. Tampa Bay says its losses are $50 million over the past three years, including about $10 million this past season. Phoenix expects its losses to top $25 million for 2002-03. The Los Angeles Kings estimate they will lose between $12 million and $13 million for 2002-03. The Stars estimate their red ink at $3 million for last season. And the list goes on.
Those in management say the problem is that the league and teams can't generate enough revenue to keep up with the rising cost of player salaries.
"It's not complicated business, really," said Neil Smith, former general manager of the New York Rangers and now a consultant with the Pittsburgh Penguins. "If you get a product for 10 cents you are supposed to sell it for 12. That's the way business should work. You don't buy a product for 10 cents and sell it for eight.
"But that's what we're doing in the NHL. We're buying the players' services and we can't make our money back. You do that for long enough and you're out of business."
And Florida coach Mike Keenan says if teams suffer so will the players.
"The reality is going to hit hard, and there's going to be lost jobs," Keenan said. "Then maybe the players will understand. There could be some casualties here. I've been in this game long enough to know that the owners are not hiding finances."
But despite the dire warnings, players aren't sold on the proclaimed financial struggles of the teams.
"Everyone knows a good accountant can turn an $8 million profit into an $8 million loss, especially when owners have more than one business," Calgary defenseman Bob Boughner said during last season. "They own a cable company and the hockey team - the money's going in one pocket and out the other."
Or this from NHL forward Peter Worrell: "I definitely don't believe them. But one way they can prove it is to just open up the books. Plain and simple. If you're really losing that much money, prove it."
And one team -- Los Angeles -- did open its books. The Kings agreed to let season ticket holder Philip Propper, who also happens to be a portfolio manager and media stock analyst, examine their finances.
Propper's idea to look at the Kings' books came after there was a dispute over whether the Kings were making money or losing money. Forbes Magazine said the team made a profit of $7 million in 2001-02.
The Kings denied it, saying they were losing more than $10 million a year and amassed morre than $100 million in red ink since Denver billionaire Philip Anschutz bought the team back in 1995.
Propper presented his professional credentials and asked the Kings for permission to look at their financial situation. The Kings, to the surprise of many, agreed to let him do it. Propper went over the books and then posted his findings on the LetsGoKings.com web site.
And what did Propper find? That the Kings were indeed losing money.
Propper said the Kings lost $6.5 in operating cash in 2001-02 and then when you throw in items such as interest payments and deferred compensation the loss mounted to $11.3 million.
He estimated the Kings would lose somewhere around $12.5 million in 2003.
He said the Kings cash operating losses for the team are $108 million since the Anschutz Entertainment Group bought the Kings in 1995. The biggest loss came in 1998-99, when the team lost $31.7 million. The best year in the AEG era was 1999-00, when the team lost $8.2 million.
Here are some other interesting tidbits Propper's financial analysis revealed about revenues.
Revenues have grown 15.3 percent compounded annualy in the seven years AEG has owned the Kings. Gate receipts are up 18.2 percent thanks to the move to the Staples Center.
Gate receipts, broadcasting and sponsorships make up 95 percent of the Kings' revenue, which is approaching $67 million. Gate receipts make up 64 percent of the revenue, and were expected to hit about $42 million for 2002-03.
Other sources of revenue are things like parking fees, merchandise, concessions and an $800,000 payment from their minor league team, the Manchester Monarchs.
The Kings share in the NHL's television deals with the cable and broadcast networks. The Kings also have an agreement with Fox Sportsnet to broadcast 65 games per season. That deal pays the Kings in the high seven figures annually, according to Propper's analysis. The Kings must buy air time to broadcast the games on radio because no one has purchased audio broadcast rights.
Propper found that the Kings make about $1.3 million per season on concessions. The average Kings fan purchases only $6.50 in concessions per game, an indication that many people don't buy any concessions at all. The Kings take in $800,000 in parking fees.
And here is a look at some of his findings about expenses.
Operating expenses, including non-player salary costs, have grown at a 6.4 percent rate compounded annually since AEG bought the team. Right now those expenses have reached about $25.5 million. That's a growth rate of 8.9 percent slower than revenues.
Expenses for player salaries have grown 18.9 percent compounded in the AEG era and reached $45.4 million in 2001-02. It was expected to be higher (possibly $48 million) for 2002-03 because of several injuries that forced the team to pay higher salaries to players with two-way contracts.
The franchise has $54 million in debt and the annual cash payment on that is $2.9 million.
AEG pays $2.5 million per year to cover deferred compensation left over from the previous ownership.
So if you break it down in very simplistic form all this adds up to something like this. We'll say, for argument's sake, that the Kings player payroll was $48 million for 2002-03. Add in the $25.5 million for non-player expenses and $5.5 million for debt payment and deferred compensation and you get total expenses of around $79 million. Bring in revenues of between $66 and $67 million and you get a loss of about $12 to $13 million.
That's basically the bottom line, according to Propper's financial analysis of the Los Angeles Kings. The Kings, like many NHL teams, say they can't generate enough revenue to cover expenses.
But while owners may argue that rising salaries are the big reason for the rising red ink, others argue that there is a lot more to it than just that. There are some other issues, including a big one in the revenue area. A look at that in our next report.