Teachers’ Maple Leafs In Freeze –

The National Hockey League’s financial troubles have been well documented over the years. The turmoil finally came to a head this past fall when the owners locked out the players, putting a freeze on the 2004/2005 season.

Teachers’ Private Capital, the private equity investment arm of The Ontario Teachers’ Pension Plan, as an owner of an NHL team, has found itself right in the middle of this labor dispute. Teachers’ originally invested in Maple Leaf Sports and Entertainment Ltd. in 1994, grabbing a minority stake in the holding company of the Toronto Maple Leafs, the Toronto Raptors (of the NBA) and the Air Canada Center. Teachers’ upped its holding in the company early last year, gaining majority control through a recapitalization.

Teachers’ has seen the value of the Maple Leaf franchise grow during its ownership, and the investment so far could easily be considered a success. But with the sparring between the NHL Players’ Association and the owners now reaching a pitch, few would necessarily qualify this as easy money for the pension plan. As of press time, the labor situation remained unsolved, and despite recent meetings between the players and owners, there doesn’t appear to be much reason for optimism. Most are anticipating that Commissioner Gary Bettman will sometime soon either cancel the entire season or issue a drop-dead date by which a deal must be hammered out.

The situation appears grim by any estimation, and most outsiders would assume that this turn of events took the pension plan off guard. However, Teachers’ had already anticipated such an event. “This certainly has not come as a surprise to us,” Teachers’ Senior Vice President James Leech told Buyouts. “When we restructured the ownership two years ago, we did it anticipating that this would happen… One of our alternatives [at the time] was to divest, but because of the uncertainty, it didn’t make sense to do that. So we made sure the finances were stabilized and we locked in long-term financing to prepare for the possibility of a lockout or strike.”

For Teachers’, the lockout has probably had more of a negative impact than it has for other team-owners, considering the Maple Leafs are one of the few profitable and successful franchises in the NHL. According to Forbes Magazine, the team has the richest cable deal in the sport, and last year generated operating income of $14.1 million on $117 million of revenue. Since 1998, the magazine estimates that the value of the Maple Leafs has jumped 135%, and based on last year’s performance, the team ranks as the second most valuable franchise in the NHL at $280 million.

In contrast, the league average for earnings came in at a deficit of $3.2 million per team last year, using data from Forbes, while the average valuation was $163 million per franchise. And these numbers, the NHL says, are far too kind. The league disputes Forbes’ estimates and has issued a report that claims the league last year lost a combined $273 million.

While hockey is deeply divided between the haves and the have nots, and the Maple Leafs would strongly qualify among the haves, don’t expect the pension plan to break ranks from the rest of the owners. “The model was not working. The increases in salary were by far outstripping the increases in fan and media revenue and it created an intolerable situation,” said Leech.

The owners appear intent on sitting tight until certain demands are met, and if they get their way, Teachers’ will be even better positioned to profit from the investment. Currently, the mantra being articulated by the owners is “cost certainty,” which most onlookers are taking as Canadian for “salary cap.” A salary cap would allow the Maple Leafs to continue to field a competitive team, while keeping costs down. It would also balance the playing field, and that would theoretically improve fan interest around the league, especially in the smaller markets.

The Players’ Association, meanwhile, is suggesting that teams look at revenue sharing as a way to improve balance. Leech did not comment on such an arrangement, but from an investment standpoint, it cannot be a good thing if the profitable teams are put in charge of bailing out the turkeys. The NHLPA has also floated the idea of creating a luxury tax that reportedly would be triggered once a team’s payroll exceeds $50 million or $55 million. The Maple Leaf’s payroll leveled off at around $62 million last year, according to The USA Today, making the team among one of the targeted few that would suffer from the proposed tax.

There is also the threat that when play does resume, fan interest will be unsalvageable. In the U.S., hockey has seen its standing as a major sport slip in the past decade, and outside of Boston, Detroit and a few other hockey mainstays, the absence of the sport has hardly induced a sigh. In Canada, not surprisingly, the lockout has led to anger and frustration. The Globe and Mail’s Roy MacGregor penned an editorial entitled “Let them stay out forever or until the NHL starts to think about its customers,” while one recent letter to the Toronto Star bemoaned, “Good riddance to the NHL.”

In the meantime, Leech says the Maple Leafs are doing what they can to stay busy. “The management is trying to keep engaged with the customers during the lockout and as soon as it ends there will surely be appropriate marketing strategies and promotions for the fans,” he said

While U.S. teams may have some difficulties luring spectators back to the arenas, in Canada, hockey is life. And as private equity firms generally target market leaders when making an investment, the fact that Teachers’ was able to do so with the Maple Leafs will ensure the team’s ability to rebound once the players again lace up the skates. “We were all glued to our TVs during the Canadian juniors,” Leech maintained, “But all that did was whet everybody’s appetite to get back to the arena.”