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As NHL expands, private equity could boost hockey's financial boom

Thomas Barrabi

With the National Hockey League in the midst of expansion and a top-dollar media rights deal on the horizon, existing team owners may have to join their peers in other sports leagues by looking to private equity firms as potential investors.

A sharp rise in team values across all major sports has made it more expensive than ever to own a stake in a pro franchise. While NHL teams have lagged behind properties in other sports in terms of valuation, the average franchise was worth a record $630 million as of last December, according to Forbes. That figure should experience a noticeable jump when NHL secures its next television deal after the 2020-21 season.

While the NFL limits ownership to individuals, the NBA and MLB are each exploring the possibility of allowing investment firms to buy minority stakes in franchises. The NHL could pursue a similar strategy as rising team valuations limit its pool of would-be investors, according to former Pittsburgh Penguins CEO and president Steve Ryan.

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“When you’re dealing with teams that are worth several billion dollars and a limited position is available, you wind up being a passive investor, but you have to really script a check for big numbers,” Ryan told FOX Business. “It’s a tougher sell when these valuations get to the astronomical level that some of them have.”

The NHL has no rules prohibiting private equity firms from holding ownership stakes in franchises. However, NHL Deputy Commissioner Bill Daly acknowledged that private equity has rarely pursued investments in individual clubs during the league’s history.

Wall Street’s focus on pure profitability does not easily translate to franchise ownership within sports leagues, where member clubs often place the health of the overall sport above a team’s individual needs. In addition, private equity firms are often unwilling or unable to alter their financial operations to comply with NHL ownership deals that are subject to board approval, Daly told FOX Business.

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Concerns about the ability of some NHL teams to maintain profitability, as well as foreign-exchange considerations for Canadian-based franchises, are additional obstacles to private equity investments, industry sources said.

The NHL is not actively exploring the possibility of investment funds taking minority stakes in its franchises. Still, its current financial outlook could be an attractive proposition to would-be investors. The league’s 31 active teams saw average operating income rise 39 percent to $25 million for the 2017-18 season.

NHL team owners have also benefitted from strong demand to start expansion franchises. The ownership group behind the Vegas Golden Knights paid a $500 million fee to join the NHL and saw an immediate return on their investment by earning a spot in the Stanley Cup Finals in the team's debut season.

Expansion revenue reached a fresh high-water mark last December when an ownership group led by TPG Capital CEO David Bonderman agreed to pay a record $650 million to start the NHL’s 32nd franchise in Seattle. Income from expansion fees are split equally among the league’s existing owners.

Bonderman’s involvement typifies the NHL’s traditional approach to dealings with the private equity sector. While Bonderman is a founding partner at TPG Capital, he purchased principal ownership with his money rather than that of his firm.

The same situation is supposed to exist with Carolina Hurricanes owner, Thomas Dundon of Dundon Capital Partners.  While Dundon bought control of the team in January 2018 for $402 million, the Dundon Capital Partners' website lists the Hurricanes under "current investments."

FOX Business contacted the Hurricanes and the NHL for clarification on the team's ownership status. The team did not immediately respond to a request for comment.

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The NHL almost became synonymous with private equity. In 2005 during the NHL's lockout, Bain Capital reportedly offered to buy all 30 franchises for more than $3 billion. The offer failed to generate much interest among ownership.

The NHL also allows corporate ownership. The Walt Disney Company founded the Anaheim Ducks franchise and owned the team until 2004. It has successfully developed "synergies" with feature films and TV series about fictional "Ducks."

The real-life hockey team — along with baseball's Los Angeles Angels, also owned by the entertainment giant — were slated for reality TV as the key components of a super-regional sports network, ESPN West. However, neither Disney nor ESPN could leverage cable operators and after six years, Disney sold both teams.

The Madison Square Garden Co. and its New York Rangers franchise recently avoided a fight between private equity and corporate ownership. MSG, whose stock is up more than 5 percent this year, had announced a spinoff of its sports properties, which include the NBA's Knicks and some minor league teams, from its entertainment properties.

That spurred one activist investor, Clifton Robbins of Blue Harbour Group, to push MSG to find new investors in the teams. Private equity giant Silver Lake Partners, which is already an owner of 10 percent of MSG, was touted as a potential investor or buyer.

But MSG CEO James Dolan, a wildly unpopular figure among New York sports fans, came up with a plan to maintain ownership and control of the teams through Class B stock shares.

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While competition to land the NHL’s next franchise has been strong in recent years, minority stakes are often seen as less desirable. Limited partners have little say in how their teams are operated and less upside if the franchise were to sell to new ownership.

On the positive side, limited partners are eligible for profit distribution based on a team’s operating results, Ryan noted. As team valuations soar, even a minority partnership can yield a massive return for a patient investor.

Before allowing private equity firms to invest in its franchises, the NHL would have to determine clear guideposts, such as whether investment funds could own interest in multiple franchises.

“It’s totally new territory,” Ryan said. “As you start to peel this back, it raises a lot of questions which have to be really carefully thought through. I suspect it’s going to go very slowly and will be the subject of a year, if not more, of analysis – both financial and legal analysis.”

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