04 06 nhl review

NATIONAL HOCKEY LEAGUE

REVIEW & OUTLOOK

June 8, 2004

To Our Clients and Friends:

Twelve years after the National Hockey League (“NHL”) awarded an expansionfranchise to a Florida city better known for its popularity as a retirement destination, the TampaBay Lightning won its first Stanley Cup. Alas, television ratings would have you believe that thisaccomplishment went largely unnoticed. Perhaps more disconcerting than the dismal televisionratings of the Tampa Bay-Calgary series was the grim reality that there could be no Stanley Cupplayoffs in 2005. With dramatically different broadcast agreements with ESPN and NBC and thelapse of the current Collective Bargaining Agreement in September, the NHL faces majorchallenges that could very well change professional hockey as we know it.

By any objective measure, NHL Commissioner Gary Bettman has brought hockey intothe ether of professional sports. In the last 10 years, revenues have quadrupled from $500 millionto around $2 billion, the league has experienced four consecutive seasons of attendancesurpassing 20 million fans, and annual television income has grown from $17 million to $120million on average.

Yet the sport is faced with some potentially dire consequences of its growth. Expansionof the league may have occurred too quickly and some new NHL franchises have yet to establisha solid, dependable fan base. Television ratings remain shaky at best and the NHL faces adiminution of national television revenue given the expiration of the league’s current contracts.

But most important, there is one factor that dominates the future viability or demise of theNHL: the labor situation. While revenues in the NHL have risen 300%, labor costs have risen500%. No business can survive such an income/expense disparity. NHL players earned anaverage of $275,000 in the 1990-91 season, while today’s NHL skaters—many from EasternEurope who are undoubtedly pleasantly shocked at their market value—earn an averageapproximating $1.8 million.

Our conversations with NHL owners on the labor situation never focus on the “if” of awork stoppage, but the “when”, the “how long”, and the “outcome” of such a stoppage. UnlikeMajor League Baseball in 2002, the NHL is not only financially prepared for a shutdown of oneor two seasons, but the league views a shutdown as a given and a condition-precedent to bringingfiscal responsibility and sense to its economic architecture.

Commissioner Bettman seems hell-bent on bringing financial sanity to a league that iscurrently losing hundreds of millions of dollars annually. He appears also to be genuinelycommitted to the old-fashioned capitalistic concept that NHL owners deserve a return on theirinvestment. Yet he probably also knows that his owners face some diminishment in the averagevalue of NHL franchises even if he succeeds in getting a substantial hard cap-based reduction insalaries.

National Hockey League Players Association (NHLPA) President Bob Goodenow cannottake issue with the diminishing value of NHL franchises; valuations appear to be dropping rapidlyfrom 2+ revenue multiples to 1x revenue multiples. He also cannot fail to notice that franchisessit on the market—or are taken off the market—because they cannot attract buyers even athistorically low valuations.

So will the NHL implode? Will the athletes go home to find other work in the States, orCanada, or return to Europe to play in their home countries? Will owners wait for thereemergence of a totally new league? Maybe, but we do not think so. Bettman needs a hard capand Goodenow has no rational defense to the imperative of substantial salary reductions. Theissue, really, is how far down the cap can be driven. The issue, also, is whether theCommissioner can live with a “no-cut” policy.

We believe that Bettman and Goodenow—two of the very brightest and committedhockey fans—will ultimately prevent a demise of the league as a result of the mistakes of its rapidgrowth and payroll insensibility.

On the issue of revenue growth, allow us a couple thoughts on television. There is nodoubt that hockey is a sport that is enjoyed more in person than it is on the television. Much hasbeen said about the upside the NHL will reap from High Definition Television (HDTV) as aresult of the clarity and the ability to see the puck that such broadcasts will provide. Maybe, butthe networks need to do more to improve the delivery of the product. Why can’t we enjoy thesound of the skates, the roar of the crowds, and the crashes into the boards? If the networkswould devote the resources to better mimic the in-venue experience, we believe ratings wouldimprove.

Finally, the old axiom “buy low and sell high” has never been more appropriate in thesports industry as it applies to the NHL today. There are tremendous values in the NHL if youbelieve that the league’s fan base will continue to grow, if you believe that the television productcan be enhanced, and if you believe that Messrs. Bettman and Goodenow can produce a rationallabor agreement. We believe all three propositions to be the case.

With kindest regards, I am,

Sincerely yours,

John A. Moag, Jr.Chairman & [email protected]

* * *

This newsletter discusses: Page

• NHL Franchise Valuations.................................................................................................1

• NHL Economics .................................................................................................................6

• NHL Issues .......................................................................................................................16

• Moag & Company Outlook..............................................................................................20

1

PART I: NHL FRANCHISE VALUATIONS

In 2002, on the verge of negotiating a new Collective Bargaining Agreement (“CBA”), weexamined Major League Baseball’s economic issues and franchise valuations. In particular, welooked at how baseball’s fortunes had ‘gone south’ relative to the NFL. Now, we turn ourattention to the National Hockey League. This time, for comparative purposes, we will look athow the NHL has fared relative to its frequent co-tenant, the NBA. Two years ago, gray cloudsloomed on baseball’s horizon as the sport stared a potential work stoppage square in the face, andour analysis indicated to us that baseball had little to gain and much to lose from a lock-out orstrike. Today, black clouds loom on hockey’s horizon as that sport now contemplates theexpiration of its CBA in September. However, it is not so clear to us that the seeds of hockey’sgrowth couldn’t use a little rain.

Expansion FeesSince 1967, and particularly since 1991, the NHL has expanded rapidly to the South and West,adding 25 expansion teams. Over the same period, the NBA has experienced more controlledgrowth, adding only 17 teams. Through 1994, new franchises in each league paid verycomparable expansion fees, as can be seen in the left-hand graph of Exhibit 1. In 1995 and againlast year, however, dramatic divergences have occurred, such that the $300 million fee recentlypaid for the NBA expansion team in Charlotte is close to four times the amount paid ($80million) for the most recent NHL expansion teams in Nashville, Atlanta, Columbus andMinnesota.

Exhibit 1NHL and NBA Expansion Fees Since 1967

1967-1995

Anaheim and Florida, 1993, $32.5MM

Toronto and Vancouver, 1995,

$125MM

$-

$20

$40

$60

$80

$100

$120

$140

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

($ in

Mill

ions

)

NHL NBA

1995-Present

Columbus and Minnesota 2000,

$80MM

Atlanta andNashville 1999,

$80MM

Charlotte, 2003, $300MM

$-

$50

$100

$150

$200

$250

$300

1995

1996

1997

1998

1999

2000

2001

2002

2003

($ in

Mill

ions

)

NHL NBA

Source: Moag & Company Research.

Transaction ValuesLikewise, recent franchise sale transactions clearly demonstrate that a divergence in NHL andNBA franchise values has occurred. From 1998 to 2004, NHL teams were sold at values rangingfrom $70 million to $190 million, with an average value of $114 million. During the sameperiod, NBA teams were sold at values ranging from $150 million to $401 million, with anaverage value of $233 million.

2

Exhibit 2 details the NHL and NBA franchise transaction values since 1998. Exhibit 3 displaysthe discrepancy in the range of values for franchise sales transactions for the two leagues.

Exhibit 2NHL and NBA Transaction Values Since 1998

($ in millions)

Transaction Value

Transaction Value

Team ($ in M) ($ in M) Team ($ in M) ($ in M)

1998 Edmonton Oilers 70.0$ 33.6$ 2.1x 1998 New Jersey Nets 150.0$ 49.8$ 3.0x1998 Tampa Bay Lightning 117.0 41.9 2.8 1999 Washington Wizards 175.0 53.2 3.3 1999 Pittsburgh Penguins 70.0 41.5 1.7 1999 Charlotte Hornets 160.0 56.8 2.8 1999 St. Louis Blues 96.0 (1) 62.2 1.5 2000 Vancouver Grizzlies 160.0 38.8 4.1 1999 Tampa Bay Lightning 115.0 34.1 3.4 2000 Dallas Mavericks 255.0 53.8 4.7 1999 Washington Capitals 85.0 55.8 1.5 2001 Seattle SuperSonics 200.0 66.1 3.0 2000 New Jersey Devils 175.0 62.5 2.8 2002 Boston Celtics 360.0 91.3 3.9 2000 NY Islanders 190.0 40.7 4.7 2003 Charlotte Bobcats 300.0 91.6 3.3 2001 Florida Panthers 101.0 64.0 1.6 2004 Atlanta Hawks 170.0 78.0 2.2 2001 Montreal Canadiens 182.0 70.0 2.6 2004 Phoenix Suns 401.0 (1) 105.0 3.8 2001 Washington Capitals 114.0 50.0 2.3 2001 Phoenix Coyotes 125.0 39.0 3.2 Average 233.1$ 68.4$ 3.4$ 2002 San Jose Sharks 147.0 71.0 2.1 2003 Buffalo Sabres 75.0 (2) 46.0 1.6 Notes:2003 Ottawa Senators 73.6 (3) 64.8 1.1 (1) Transaction included the AFL Arizona Rattlers, WNBA Phoenix Mercury2004 Atlanta Thrashers 80.0 57.0 1.4 and a sports and entertainment services company.

Average 113.5$ 52.1$ 2.3x

Notes:(1) Transaction included Arena; revenues do not include Arena.(2) Purchase price includes $45MM in assumed liabilities and $25MM in projected team debt.(3)

Revenue Multiple

Total purchase price was C$127.5MM - C$100MM for the Team and C$27.5MM for the arena.

Revenue Multiple

Sale Date

Sale Date

Estimated Team

Revenues

Estimated Team

Revenues

Source: Moag & Company Research.

Exhibit 3NHL and NBA Transaction Value Ranges Since 1998

3

NHL

NBA

$0 $100 $200 $300 $400 $500

As is shown in Exhibit 2, NHL teams have also traded at a lower multiple of revenues, 2.3x onaverage, than have NBA teams (3.4x). Applying the 3.4x multiple to average NBA teamrevenues (the average in 2002-03 was approximately $81 million) yields an average franchisevaluation of about $275 million. Applying the 2.3x multiple to average NHL team revenues (theaverage in 2002-03 was estimated to be $70 million) yields an average franchise valuation of only$161 million. In other words, based on this measure, the average NBA franchise is now worthabout $114 million, or 71% more than the average NHL franchise.Going one step further, absolute transaction values would suggest that the disparity is evengreater. Whereas three of the past four NBA franchise transactions have occurred at valuations inexcess of the “average” franchise valuation of $275 million, none of the four NHL transactionsconsummated since 2002 has occurred at a valuation greater than $161 million, and the last threehave traded at less than half that amount.

Third-Party ValuationsEach year, Forbes publishes valuations for franchises in each of the four major leagues. Thesevaluations are based on several criteria, including financial performance, market size, on-field,on-court or on-ice performance and facility status.

Exhibit 4 displays Forbes’ most recent NHL franchise valuations based on the 2002-03 season.

Exhibit 4Forbes NHL Valuations

($ in millions)

4

TEAM VALUE REVENUE OPER.

INCOME REVENUE MULTIPLE

NY Rangers $ 272.0 $ 113.0 $ (6.9) 2.4xDallas 270.0 108.0 5.6 2.5Toronto 263.0 105.0 13.8 2.5Philadelphia 252.0 101.0 3.5 2.5Detroit 245.0 89.0 (13.7) 2.8Colorado 229.0 88.0 (3.9) 2.6Boston 223.0 84.0 2.8 2.7Chicago 192.0 74.0 1.0 2.6Los Angeles 183.0 78.0 1.6 2.3Montreal 170.0 71.0 (5.4) 2.4Minnesota 166.0 79.0 20.1 2.1NY Islanders 151.0 56.0 (10.9) 2.7St. Louis 147.0 67.0 (29.4) 2.2New Jersey 145.0 73.0 (9.4) 2.0Columbus 144.0 66.0 3.6 2.2San Jose 137.0 65.0 (8.6) 2.1Tampa Bay 136.0 65.0 (0.7) 2.1Washington 130.0 62.0 (21.0) 2.1Vancouver 125.0 66.0 0.7 1.9Phoenix 120.0 43.0 (21.1) 2.8Ottawa 117.0 59.0 (2.0) 2.0Pittsburgh 114.0 57.0 4.5 2.0Florida 113.0 57.0 (9.2) 2.0Anaheim 112.0 59.0 (10.8) 1.9Atlanta 110.0 57.0 (0.9) 1.9Carolina 109.0 57.0 (13.0) 1.9Nashville 101.0 46.0 (2.8) 2.2Calgary 97.0 51.0 (5.8) 1.9Buffalo 95.0 50.0 (5.3) 1.9Edmonton 91.0 48.0 (0.1) 1.9

Average 158.6$ 69.8$ (4.1)$ 2.2x

2002-2003

5

Consistent with the expansion fee history and transaction values provided in Exhibits 1 and 2, theaverage Forbes NHL valuation trails the average Forbes NBA valuation ($265 million for the2002-03 season) by roughly $106 million. In fact, according to Forbes, the gap between the twoleagues’ valuations has steadily increased since 1997 as shown in Exhibit 5.

Exhibit 5Forbes Valuations: NHL vs. NBA

$0

$50

$100

$150

$200

$250

$300

1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03

Ave

rage

Val

ue

$0

$20

$40

$60

$80

$100

$120

Dif

fere

nce

NHL NBA Difference

Why the Divergence?Driven, or perhaps more accurately, slowed by a national television contract that is significantlyless valuable than that of the NBA (let alone the NFL), the NHL’s revenues have not kept pacewith rising player salaries. Little in the way of national revenues, coupled with the fact that theleague does not share local revenues, has placed the NHL’s “small-market” teams in particularlydifficult financial positions. And the league’s Canadian franchises have faced additional financialchallenges resulting from what has been, at times, a relatively weak Canadian dollar. Theseissues and others will be discussed in further detail throughout this newsletter.

6

PART II: NHL ECONOMICS

The Good News… NHL (Local) Revenues Have GrownUnder the stewardship of Commissioner Gary Bettman, NHL revenues have roughly quadrupledto approximately $2 billion over the past 10 years. This equates to an annual rate of growthapproaching 15%. Average NHL team revenues for the 2002-2003 season were nearly $70million. Exhibit 6 details revenue by team for 2002-2003.

Exhibit 6NHL Revenue by Team

($ in millions)

$-

$20

$40

$60

$80

$100

$120

NY

Ran

gers

Dal

las

Tor

onto

Phila

delp

hia

Det

roit

Col

orad

oB

osto

nM

inne

sota

Los

Ang

eles

Chi

cago

New

Jer

sey

Mon

trea

lSt

. Lou

isC

olum

bus

Van

couv

erSa

n Jo

seT

ampa

Bay

Was

hing

ton

Ana

heim

Otta

wa

Atla

nta

Car

olin

aFl

orid

aPi

ttsbu

rgh

NY

Isl

ande

rsC

alga

ryB

uffa

loE

dmon

ton

Nas

hvill

ePh

oeni

x

Source: Forbes.

Team revenues come primarily from two sources: (i) local revenues, including ticket sales, localtelevision, radio and cable rights, arena concessions, parking and team sponsorships; and (ii)national revenues, which are generated by industry-wide contracts, such as national televisioncontracts and licensing arrangements.

NHL revenues have increased in part because of the introduction of new state-of-the-art venues.These new arenas have driven increases in attendance, ticket prices, premium seating and namingrights and sponsorship revenues. With the recent opening of the Phoenix Coyotes’ new arena inGlendale, all but six of the league’s franchises are now playing in buildings that have been newlyconstructed or renovated since 1990.

Although the league experienced a 1% decline in attendance during the 2003-04 season, totalattendance has surpassed 20 million in each of the last four seasons. Nine teams played to 99%or more of capacity in 2003-04, with the league average being 91%. This is an area in which theNHL compares favorably to the NBA, as the NBA played to 88% of capacity, on average, in the2003-2004 season, with only three teams playing to 99% or more of capacity.

7

Exhibit 7 depicts NHL average attendance figures from 1997 to 2004, and Exhibit 8 showsaverage attendance by team for the 2003-04 season.

Exhibit 7NHL Average Attendance (1997-2004)

15,000

15,500

16,000

16,500

17,000

97-98 98-99 99-00 00-01 01-02 02-03 03-04

Exhibit 8NHL Average Attendance by Team (2003-04 Season)

10,000

12,000

14,000

16,000

18,000

20,000

22,000

Mon

trea

l

Det

roit

Tor

onto

Phila

delp

hia

Van

couv

er

St. L

ouis

Min

neso

ta

Dal

las

NY

Ran

gers

Col

orad

o

Los

Ang

eles

Tam

pa B

ay

Otta

wa

Edm

onto

n

Col

umbu

s

Cal

gary

Flor

ida

San

Jose

Phoe

nix

Buf

falo

Bos

ton

Atla

nta

New

Jer

sey

Ana

heim

Was

hing

ton

NY

Isl

ande

rs

Chi

cago

Nas

hvill

e

Car

olin

a

Pitts

burg

h

Source: Sports Business Journal; espn.com.

The NHL has also experienced an increase of more than 24% in ticket prices since 1994 (which isnonetheless the smallest increase among the four major leagues). Exhibit 9 depicts average ticketprices by team for the 2003-04 season.

Exhibit 9NHL Ticket Price by Team (2003-04 Season)

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

$55.00

$60.00

Det

roit

Phila

delp

hia

Tor

onto

New

Jer

sey

Bos

ton

NY

Isl

ande

rs

Otta

wa

Van

couv

er

Chi

cago

Min

neso

ta

Los

Ang

eles

NY

Ran

gers

Was

hing

ton

St. L

ouis

Nas

hvill

e

Col

orad

o

Col

umbu

s

Pitts

burg

h

Ana

heim

Mon

trea

l

San

Jose

Dal

las

Edm

onto

n

Cal

gary

Tam

pa B

ay

Buf

falo

Atla

nta

Car

olin

a

Phoe

nix

Flor

ida

Avg

. Pri

ce/G

ame

Source: Team Marketing Report

8

Both the league and the television networks have taken steps to turn the NHL game into more valuable television content. ESPN has reduced the number of games broadcast in each of the last two NHL seasons an d will do the same next season. In the 2004 -05 season, ESPN2 will air 40 regular season games, which represents a decrease of 30 games fr om 2003-04 and a 61 -game reduction from the 2002 -03 season. The hope is that by showing fewer games and highlighting more marquee match -ups, ratings would increase.

In an effort to generate more revenue for the league by reaching more fans and catering to their specific rooting interests, the NHL h as shifted much of its broadcast focus to satellite and digital cable provi ders. In May 2002, DirecTV renewed its out -of-market game package with the NHL for five years, but elected not to retain “small -dish” exclusivity. This allowed the NHL to conclude a deal with EchoStar and its Dish Network, making the “NHL Center Ice” package available to 7.5 mi llion additional subscribers. “NHL Center Ice” has the highest renewa l rate of all major sports television pay -per-view packages and the NHL should benefit from the extended reach provided by the new agreement.

In addition to satellite providers, the NHL’s out -of-market game package is available via iN Demand, digital cable’s pay -per-view service. Currently, the NHL is the only league to have its games availabl e on satellite and digital cable in both the United States and Canada .

Ratings IssuesProfessional sports leagues are dependent on lucrative national television contracts to provide significant revenues for their teams. This revenue is especially important to small market teams that are unable to ge nerate much in the way of local revenues. Cable and broadcast networks are willing to pay relatively large sums of money for sports content, which typ ically generates higher ratings and thus attracts significant advertisi ng dollars.

As is shown below, Nielsen ratings for the NHL trail those for t he other major league sports.

National Broadcasts

Cable Broadcasts

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1996 1997 1998 1999 2000 2001 2002 2003

NFL NBA MLB NHL

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1996 1997 1998 1999 2000 2001 2002 2003

NFL NBA MLB NHL






National Broadcasts

Cable Broadcasts






National Broadcasts

Cable Broadcasts

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1996 1997 1998 1999 2000 2001 2002 2003

NFL NBA MLB NHL

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1996 1997 1998 1999 2000 2001 2002 2003

NFL NBA MLB NHL

National Revenues Have Grown Too, But…The NHL has reached the end of a five-year, $600 million contract with the Walt DisneyCompany. The league’s new, one-year deal (with a two-year network option to extend) withESPN will reduce guaranteed annual national television revenue by 50% to $60 million. Inaddition, the NHL has entered into a landmark contract of sorts with NBC, whereby the NHLdoes not receive upfront rights fees, but instead, shares any net revenues evenly with the network.Exhibit 10 summarizes the NHL’s national television contracts since 1989 and illustrates both theleague’s significant increase in annual national television revenues, as well as the potential dropin the league’s revenues from this source if the arrangement with NBC does not bear fruit.

Exhibit 10Summary of Recent NHL Television Contracts

Network Seasons Covered*Average Annual

Value (in millions)Total Contract

Value (in millions)Sports Channel 1989-91 $17 $51

ESPN 1992-96 $16 $80FOX 1994-98 $31 $155

ABC, ESPN, ESPN2NBC, ESPN, ESPN2

1999-032004

$120$60

$600$60

* Year in which the season started.Source: Sports Business Daily.

Even at their peak, the NHL’s national television revenuesare only a fraction of the other major leagues. The NBA,for example, recently signed national television contractswith ABC, ESPN and Turner Sports that pay that league anaverage of $766 million per year – more than six times theannual value of the NHL’s just-expired contract. Exhibit 11illustrates the NHL’s current national television revenuesrelative to the other major leagues, and Exhibit 12 focusesmore closely on the disparity between NHL and NBAnational television rights fees.

Exhibit 11Major Leagues’ Current Annual Television Revenue

($ in millions)

9

$0

$500

$1,000

$1,500

$2,000

$2,500

NHL MLB NBA NFL

Source: Sports Business Daily.

10

Exhibit 12National Television Rights Fees: NHL vs. NBA

($ in millions)

$-

$100.00

$200.00

$300.00

$400.00

$500.00

$600.00

$700.00

$800.00

$900.00

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

NBA NHL

Source: Sports Business Journal, Sports Business Daily.

Team Revenues vs. Market SizeGiven the relatively small size of the NHL’s national television contract and absent revenuesharing, local revenues, that is, ticket and premium seating sales, local media contracts andcorporate sponsorships, represent the largest portion of total revenues for a NHL franchise. Aslocal revenues are influenced, if not dictated by market size, it would seem to follow that theNHL franchises in large media markets should generate the most revenues.

Exhibit 13 shows that primary franchises in large media markets make up the majority of the toprevenue-producing teams, and those franchises that play in ‘small’ markets, or are secondaryteams in large markets, have settled to the bottom of the revenue rankings.

Exhibit 13NHL Revenues vs. Market Size*

$0

$20

$40

$60

$80

$100

$120

NY

Ran

gers

Dal

las

Phila

delp

hia

Det

roit

Col

orad

o

Bos

ton

Min

neso

ta

Los

Ang

eles

Chi

cago

New

Jer

sey*

*

St. L

ouis

Col

umbu

s

San

Jose

Tam

pa B

ay

Was

hing

ton

Ana

heim

***

Atla

nta

Flor

ida

Pitts

burg

h

Car

olin

a

NY

Isl

ande

rs**

Buf

falo

Nas

hvill

e

Phoe

nix

($ in

Mill

ions

)

0

5

10

15

20

25

Pop

ulat

ion

(in

Mill

ions

)

Total Revenue Media Market

Source: Forbes, Sales & Marketing Management.*Canadian Teams are not represented due to limited media market data.** New Jersey Devils and New York Islanders are considered part of the New York City media market.*** Anaheim Mighty Ducks are considered part of the Los Angeles media market.

11

Playoff vs. Non-Playoff TeamsTeams that generate larger revenues are generally able to spend more to put together a team thatwill succeed on the ice. A successful team on the ice and trips to the playoffs are keys toensuring a team’s popularity, which in turn allows for increased attendance and/or ticket prices,sponsorships and other local revenues. Playoff game revenues further improve a team’s financialsituation. Not surprisingly, this circular relationship leads to playoff teams having higherrevenue, and vice versa.

As is shown in Exhibit 14, the revenue gap has persisted and has, at times, been fairly dramatic(20% differential in 2002-03, for example).

Exhibit 14NHL Revenues: Playoff vs. Non-Playoff Teams

($ in millions)

$30

$35

$40

$45

$50

$55

$60

$65

$70

$75

$80

97-98 98-99 99-00 00-01 01-02 02-03

Playoff Teams Non-Playoff Teams

Source: Forbes.

The Not-So-Good News…Payrolls Have Grown FasterWhereas NHL revenues have quadrupled (+300%) over the past decade, since the 1990-91season, the average NHL player’s salary has increased by more than 500%. Exhibit 15 illustratesthis growth in average player salaries.

Exhibit 15Average NHL Player Salary (1990-2004)

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Source: USA Today; Moag & Company Research.

12

For the 2003-04 season, the average NHL team payroll was $44.3 million. Exhibit 16 shows2003-04 payrolls for the 30 NHL franchises. The Detroit Red Wings led the league with a payrollof $77.8 million, while the Nashville Predators had the lowest payroll of $21.9 million.

Exhibit 16NHL Payrolls by Team

$-

$10

$20

$30

$40

$50

$60

$70

$80

Det

roit

NY

Ran

gers

Dal

las

Col

orad

o

Phila

delp

hia

Tor

onto

St. L

ouis

Los

Ang

eles

Ana

heim

Was

hing

ton

New

Jer

sey

Bos

ton

Van

couv

er

NY

Isl

ande

rs

Otta

wa

Phoe

nix

Mon

trea

l

Cal

gary

Car

olin

a

San

Jose

Tam

pa B

ay

Col

umbu

s

Edm

onto

n

Buf

falo

Chi

cago

Atla

nta

Min

neso

ta

Flor

ida

Pitts

burg

h

Nas

hvill

e

($ in

Mill

ions

)

Source: USA Today.

According to the league, NHL teams spend 73% of revenues on player salaries – highest of thefour major sports. Exhibit 17 illustrates the portion of revenue each team dedicated to its payrollduring the 2002-03 season.

Exhibit 17NHL Revenues vs. Payroll

($ in millions)

$0

$25

$50

$75

$100

$125

NY

Ran

gers

Dal

las

Tor

onto

Phila

delp

hia

Det

roit

Col

orad

o

Bos

ton

Min

neso

ta

Los

Ang

eles

Chi

cago

New

Jer

sey

Mon

trea

l

St. L

ouis

Col

umbu

s

Van

couv

er

San

Jose

Tam

pa B

ay

Was

hing

ton

Ana

heim

Otta

wa

Atla

nta

Car

olin

a

Flor

ida

Pitts

burg

h

NY

Isl

ande

rs

Cal

gary

Buf

falo

Edm

onto

n

Nas

hvill

e

Phoe

nix

Payroll Revenue

Source: Forbes, USA Today.

13

Given the string of recent, high-payroll Stanley Cup Champions (New Jersey, Detroit, Colorado,Dallas, etc.), it is evident that a club’s payroll is an increasingly important element driving on-icesuccess. Exhibit 18 plots average payroll versus the average number of wins for each NHL teamsince 1997. Exhibit 19 examines the average payroll for clubs that qualified for the playoffs from1997 to 2004 versus those that did not.

Exhibit 18NHL Average Payroll vs. Average # of Wins (Since 1997)

$0

$10

$20

$30

$40

$50

$60

Det

roit

Dal

las

Phila

delp

hia

St. L

ouis

New

Jer

sey

Tor

onto

San

Jose

Was

hing

ton

Los

Ang

eles

Phoe

nix

Ana

heim

Chi

cago

Mon

trea

l

Car

olin

a

Flor

ida

Van

couv

er

Bos

ton

Buf

falo

Pitts

burg

h

Otta

wa

NY

Isl

ande

rs

Edm

onto

n

Cal

gary

Col

umbu

s

Tam

pa B

ay

Atla

nta

Min

neso

ta

Nas

hvill

e

($ in

Mill

ions

)

10

15

20

25

30

35

40

45

50

(# o

f W

ins)

Payroll # of Wins

Source: USA Today and Sports Business Journal.

Exhibit 19NHL Average Payroll: Playoff vs. Non-Playoff Teams

($ in Millions) 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004Average Payroll of Playoff Teams 27.7$ 38.3$ 36.8$ 37.1$ 43.7$ 46.1$ 49.4$ Average Payroll of Other Teams 25.4$ 28.6$ 27.0$ 29.0$ 31.9$ 38.1$ 39.0$

Source: USA Today and Moag & Company Research.

14

The preceding evidence notwithstanding, a high payroll does not always lead to a spot in theplayoffs, as is echoed in the NHL’s Payroll Efficiency standings (Exhibit 20). Measured on adollars per point basis, 2003-04 playoff qualifiers such as Nashville, Tampa Bay, San Jose,Calgary and Ottawa suggest that team chemistry, player evaluation and management alsocontribute to on-ice success.

Exhibit 20Payroll vs. Points (2003-04 Season)

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Nas

hvill

e

Tam

pa B

ay

Min

neso

ta

San

Jose

Flor

ida

Atla

nta

Edm

onto

n

Cal

gary

Buf

falo

Otta

wa

Pitts

burg

h

Van

couv

er

Mon

trea

l

NY

Isl

ande

rs

Bos

ton

Car

olin

a

New

Jer

sey

Chi

cago

Col

umbu

s

Phoe

nix

Tor

onto

Phila

delp

hia

Col

orad

o

Los

Ang

eles

St. L

ouis

Ana

heim

Dal

las

Det

roit

Was

hing

ton

NY

Ran

gers

$ pe

r P

oint

0

20

40

60

80

100

120

Poi

nts

in R

eg. S

easo

n

Dollars Per Point Points

The Bad News… Profitability Harder to Attain/MaintainWith payroll growth outpacing revenue growth, many NHL franchises have struggled to turn aprofit. According to Forbes, in 2002-03, only 10 of the 30 NHL teams could claim to haveoperated at breakeven or better. Exhibit 21 details Forbes’ estimates of operating income by teamfor the 2002-03 season.

Exhibit 21NHL Operating Income by Team

($ in millions)

($40)

($30)

($20)

($10)

$0

$10

$20

$30

Min

neso

taT

oron

to

Dal

las

Pitts

burg

hC

olum

bus

Phila

delp

hia

Bos

ton

Los

Ang

eles

Chi

cago

Van

couv

erE

dmon

ton

Tam

pa B

ay

Atla

nta

Otta

wa

Nas

hvill

eC

olor

ado

Buf

falo

Mon

trea

lC

alga

ryN

Y R

ange

rsSa

n Jo

seFl

orid

a

New

Jer

sey

Ana

heim

NY

Isl

ande

rsC

arol

ina

Det

roit

Was

hing

ton

Phoe

nix

St. L

ouis

($ in

Mill

ions

)

Source: Forbes.

15

Included among the 10 teams deemed to be profitable by Forbes are the Pittsburgh Penguins(desparately seeking a new arena), the Los Angeles Kings (vehemently denied profitability) andthe Dallas Stars (previously announced by owner to be ‘for sale’) – teams whose currentsituations would seem to suggest otherwise. Moag & Company research indicates that as of the2003-04 season, only two teams – Minnesota and Nashville – generated ticket revenues in excessof player payroll, and that only four more teams (Chicago, Ottawa, Pittsburgh and Vancouver)would qualify if national television revenues are included.

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PART III: NHL ISSUES

Canadian Franchise IssuesThe NHL’s six Canadian franchises face financial and, consequently, competitive disadvantagesrelative to the 24 U.S. franchises. First and foremost, Canadian teams collect their local revenuesin Canadian dollars, while paying player salaries in U.S. dollars. This can and does create aproblem during periods when the Canadian dollar is relatively weak, as the Canadian teams areforced to pay their players in a currency that is, in effect, more valuable than the currency theyreceive from ticket sales, premium seating, local media, advertising and other local revenuesources.

As Exhibit 22 shows, that for the better part of five years, the Canadian franchises were facedwith a generally declining currency exchange rate that was particularly unfavorable during the2001-02 season. It is estimated that the unfavorable exchange rate cost the NHL’s six Canadianteams approximately C$15 million during the 2002-03 season.

If one is looking for a silver lining, the exchange rate has increased from US$0.63 to more thanUS$0.73 per C$1 in the past 18 months. The $0.10 increase in the exchange rate resulted in anincrease to the bottom line of approximately C$220,000 for each US$1 million in player salaries.

Exhibit 22Value of Canadian Dollar vs. U.S. Dollar

$0.58

$0.63

$0.68

$0.73

$0.78

1/1/

99

5/1/

99

9/1/

99

1/1/

00

5/1/

00

9/1/

00

1/1/

01

5/1/

01

9/1/

01

1/1/

02

5/1/

02

9/1/

02

1/1/

03

5/1/

03

9/1/

03

1/1/

04

5/1/

04

Can

adia

n $

to U

.S. $

17

The currency differential serves to further disadvantage the NHL’s Canadian franchises, most ofwhich are located in some of the league’s smallest markets. Exhibit 23 illustrates the Canadianfranchises’ financial struggles, as only the large-market and storied Toronto Maple Leafs rankamong the top ten in terms of revenues.

Exhibit 232002-03 NHL Revenues: Canadian vs. U.S. Teams

($ in millions)

$-

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

NY

Ran

gers

Dal

las

Tor

onto

Phila

delp

hia

Det

roit

Col

orad

oB

osto

nM

inne

sota

Los

Ang

eles

Chi

cago

New

Jer

sey

Mon

trea

lSt

. Lou

isC

olum

bus

Van

couv

erSa

n Jo

seT

ampa

Bay

Was

hing

ton

Ana

heim

Otta

wa

Atla

nta

Car

olin

aFl

orid

aPi

ttsbu

rgh

NY

Isl

ande

rsC

alga

ryB

uffa

loE

dmon

ton

Nas

hvill

ePh

oeni

x

Source: Forbes.

Canadian tax laws create additional financial and competitive problems for the teams that playnorth of the border. Canadian franchises typically pay higher property taxes or the equivalentthan do U.S. teams, and Canadian teams also typically pay amusement (or ticket) taxes that manyAmerican teams do not. Also, players on the Canadian teams are subject to a higher income taxrate, a fact that makes playing in Canada somewhat less appealing from a financial perspective,and thus places Canadian teams at a disadvantage when competing to attract and retain freeagents.

In 1995, in order to halt an exodus of teams from Canada to the U.S., the NHL created a currencyequalization program, which is funded from league-wide television, licensing and sponsorshiprevenues. Eligible teams may receive an annual subsidy from the league of up to US$5 million.To qualify for the subsidy, the Canadian teams must be in the bottom half of the league in termsof revenue and yet have revenues that are equal to at least 80 percent of the league average. Theteams must also meet sales quotas for season tickets, luxury seating and arena advertising.

Troubled FranchisesIn 2002, the NHL took over the operations of the Buffalo Sabres as owner John Rigas and hisfamily faced financial and legal difficulties stemming from Adelphia Communications. The teamfiled for Chapter 11 bankruptcy protection in January 2003. Burdened with $206 million in debt,the team was put up for sale and several bidding groups emerged. Ultimately, a group led byRochester businessman Thomas Golisano was awarded the team for a reported $75 million,which included primarily the assumption of liabilities and debt.

18

Also in January 2003, the Ottawa Senators filed for bankruptcy protection in Canada under theCompanies’ Creditors Arrangement Act. The team had been up for sale since its primary debtholder, Covanta Energy, declared bankruptcy in April 2002. During the summer of 2003,Canadian businessman, Eugene Melnyk, purchased the team and the Corel Centre forapproximately C$127.5 million.

Labor IssuesDwarfing any issues the NHL faces regarding its Canadian or other troubled franchises, however,is the looming expiration of its Collective Bargaining Agreement (“CBA”). The current CBAbetween NHL owners and the National Hockey League Players’ Association (“NHLPA”) expiresSeptember 15, 2004. Commissioner Bettman and the owners view the upcoming negotiations asan opportunity to fix the league’s economic system, and, as evidenced by each club’s $10 millioncontribution to a “war chest”, are prepared to do whatever is necessary, including enduring awork stoppage, in order to achieve such a ‘fix.’

Salary CapThe Commissioner has made no secret of the fact that the key issue from management’s point ofview is its insistence on achieving “cost certainty.”

With the recent adoption of a luxury tax by Major League Baseball, each of the major sportsleagues – other than the NHL – has now instituted some form of salary control mechanism.

The National Football League uses a “hard” salary cap, which is based on a percentage of leaguerevenues. Given the nature of the “hard” cap, NFL teams must remain under the cap at all timeswithout exception, which means that teams frequently release players and/or restructure playercontracts. NFL player contracts are thus not guaranteed.

The NBA also uses a salary cap that is based on a percentage of league revenues, though its cap isa “soft” cap. The nature of the NBA’s “soft” cap is such that teams may exceed the cap in certaininstances, such as when re-signing their own free agents. To encourage adherence to the cap, theNBA also imposes a luxury tax on teams that exceed the prescribed salary limits. Unlike theNFL, NBA player contracts are guaranteed.

A year ago, the perception was that the NHL was prepared to place a “hard” cap on annual teampayrolls at $31 million, and that existing contracts would not be “grandfathered”, that is, teamswould be immediately required to adhere to the “hard” cap, and would be permitted to restructureor renounce player contracts in order to do so.

More recently, the league has de-emphasized the notion of a “hard” cap, but rather has proposed alinkage between revenues and player salaries. Such a link, calculated along the lines of the NBA,would yield a “soft” cap in the range of $35 to $40 million per team. The players’ union, notsurprisingly, remains strongly opposed to a salary cap, luxury tax or any other mechanism thatwould constrain salaries.

19

Exhibit 24Comparison of League Revenues to Player Costs

$5.0Billion

$3.5Billion

$2.6Billion

$2.0Billion

58%to

66%

Morethan60%

57% 76%

NHL NBA MLB NFL

2003 League Revenue % of Revenue to Players

Source: The Washington Post.

Revenue SharingUnlike baseball, where the luxury tax and revenue sharing were viewed as two halves of a whole,there is currently no plan emanating from the Commissioner’s office to tie a salary cap to revenuesharing. Previously, the players’ union has said that it would only consider limiting salaries in thecontext of significant revenue sharing. That said, the league has suggested in the past thatrevenue sharing does not require NHLPA approval. If nothing else, this rhetoric suggests that theowners have been unable to agree even amongst themselves as it relates to revenue sharing.

20

PART IV: SUMMARY & OUTLOOK

What is the current economic state of the NHL?

The economic state of the NHL can be summed up rather succinctly:

ß An influx of new facilities has helped boost local revenues, though with few newbuildings remaining on the horizon, teams will need to re-focus on more traditional formsof organic growth, such as putting a better product on the ice and selling more tickets andsponsorships.

ß The NHL is leaving a period of growing national television rights fees, and entering anew era characterized by the league’s profit-sharing arrangement with NBC. If there is asilver lining to be associated with a $60 million decline in rights fees and a more hostilemarket environment as it relates to sports on major broadcast networks, in general, it isthat national television revenues have never represented more than a small percentage ofthe league’s revenue.

ß NHL teams are paying more in player salaries than ever before, thereby offsettingwhatever growth in revenues teams are able to achieve.

As we mentioned previously, our conclusion is that Forbes’ estimate (10) of the number ofprofitable NHL franchises is likely optimistic. Collectively, we estimate that the 30 NHLfranchises suffered operating losses of upwards of $250 million in the 2002-03 season. FormerU.S. Securities and Exchange Commission Chairman Arthur Levitt reported in February that 19of the teams had operating losses in 2002-03, and that league-wide losses totalled $273 million.

How can the system be fixed?

In theory, the answer is two-fold: (1) by growing revenues, and (2) by reducing expenses. Inpractice, we agree with the Commissioner that the answer begins with achieving some form of“cost certainty.” On the revenue side, by the end of 2004, 24 of the league’s 30 teams will be innew or renovated buildings, meaning no more “honeymoon” periods and the corresponding short-term surges in local revenues. And, at 30 teams, the golden goose of expansion has likely laid herlast egg for some time, meaning no more cash infusions that can be used to subsidize operatingshortfalls. To paraphrase Sherlock Holmes, “when all other possibilities have been eliminated,whatever remains, however unlikely, must be the solution.” In the case of hockey, ‘whateverremains’ is reducing expenses, the largest of which is player costs. Thus, however unlikely somemay believe it is that the owners and the players’ union can agree on some equitable form ofcontrol on salaries, we believe that such cost controls are the solution.

Will a $35-$40 million salary cap work?

As we have discussed, the NHL has indicated a desire to cap annual team payrolls at roughly $35million. For the 2003-04 season, however, only 11 of the league’s teams had payrolls at $35million or below. Thirty teams with $35 million payrolls equates to $1.05 billion in total leagueplayer payroll. For the 2003-04 season, that figure is closer to $1.3 billion, meaning that byagreeing to a $35 million salary cap, the players would effectively be agreeing to a $250 million,or 24% pay cut. If achieved, a $35 million salary cap and the corresponding $250 million inplayer cost savings would effectively erase the $250 million or more in collective operating lossescited above.

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What system will the NHL adopt?

Alternatively, what will the players get? The NFL’s “hard” cap, which has helped make thatleague the ‘King of Sports’, is predicated on non-guaranteed player contracts – that is, the abilityof the teams to release players in order to remain under the salary cap. Player contracts in theNBA and Major League Baseball, which are constrained by a “soft” cap and a luxury tax,respectively, are guaranteed. We believe the path of guaranteed player contracts is the one theNHL will follow as it represents, in conjunction with a control on salaries, something more akinto a true compromise.

04 06 nhl review

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