Posted by John Vrooman on Saturday, July 11, 2015 in National Hockey League.

Interview with Pittsburgh Tribune.

Expansion Proposal.

I’m working on a story about the possible sale of the Pittsburgh Penguins. The Hurricanes have been on the market for at least a year, and the Penguins announced seven months ago they were exploring a sale but nothing has materialized. Some deals made in recent years managed to close in a few months.

• What impact do you think expansion efforts might be having on the would-be sales?

The estimated value of the Pens without Igloo development rights is probably $600 million (4 x revenues) compared to the average NHL value of $500 million for 2015.

With development rights the true value of the Pens + rights is probably about $700 million. The actual auction price for an NHL franchise is usually biased upward, the price in a seller’s auction market could go as high as or even higher than the reported asking price of $750 million.

Rumors of NHL 2 to 4 team expansion have probably flipped the advantage to the buyers and I suspect the parties are probably split between $600 million bid and $750 million asking price for the development bundle.

• Could the groups assembled for the would-be expansion teams have siphoned away any potential buyers or investors from the Pens and/or Hurricanes?

This in addition to the underperformance of three existing non-traditional hockey markets probably brings into question the timing and wisdom of another expansion strategy, particularly to more than 32 clubs. Elsewhere I have proposed a  combo relocation and expansion based on existing and potential markets.

In a perfect world from the profit max perspective of the NHL BOG the expansion markets should probably be GTA (Hamilton) and Seattle (in order) and the scuffling franchises in Phoenix, Florida and Raleigh should be retro-located to Quebec City, Portland OR, and back to Hartford (also in order). Las Vegas should  not even be in the hunt.

The NHL probably won’t put a second club in GTA because of competitive damage to the Leafs and the completely empty Seattle market didn’t even submit a relocation proposal. So by process of elimination that leaves the current expansion front-runners Quebec City and Las Vegas with the Coyotes, Panthers and Hurricanes still trying to stay above water. Putting a club in Quebec City makes economic  sense but getting down to the marginal non-traditional hockey heaven of Las Vegas is suggests that this is hardly a seller’s market and probably not an favorable climate to expand the League.

• Could the $500 million expansion fees that are being sought by the league establish a baseline that an existing team can sell for? And, if so, would that be for the better or worse for the Penguins? (BACKGROUND: The record sales price for a U.S. team is $320 million for the Devils in 2013, but in September stories came out saying the Pens were seeking $750 million.)

By all objective accounts the NHL over-expanded and under-charged during the questionable sun-belt strategy of the 1990’s. The ideal purpose of an expansion fee is to compensate or indemnify the existing members of the League cartel for reduction in league profit caused by expansion.

By adding nine teams in nine years and relocating four other clubs the League inadvertently shot themselves in the feet by increasing the players’ share of revenues from 56.6 percent in 1993 to 75.6 percent in 2003, and ultimately caused the lock out of 2004-05 with the hard salary cap at an initial 56 percent of HRR.

For all of this self-inflicted damage the League charged $50 million for the first 5 expansion clubs and $80 million each for the last 4 expansion clubs. The one-time payments from 9 non-traditional market clubs of $570 million should have at least compensated for an ongoing increase in the players’ share, and it doesn’t even come close.

The expansion fees obviously have some relationship to franchise value but is a perfect world the fee would be equal to the marginal difference that the expansion costs the existing league. League expansion increases labor costs because all teams share the same market for talent, but it also reduces the size of each per team share of shared revenues like the TV deals through 2021 (currently about $21 million annually per team). For example, a 2 team expansion would cost the rest of the league about $120 million per expansion club through 2021.

In the real world the leagues would expand to the point where the value of the expansion team was just equal to the expansion fee. If the fee was less than the other teams would be leaving money on the table, if the fee was to high then there would be any expansion buyers. This is apparently what the BOG has done by setting the expansion fees at a reported $500 million which is also equal to the value of the average NHL club.

• Is there more value in a new franchise or an existing one?

This depends on the inherent value of the expansion hockey market. In spite of  increased revenue sharing in the NHL almost 80 percent of the value of a NHL club still depends on its home market. The Penguins are valued by Forbes at about $560 million and by me at about $600 million both place the Pens at 11^th in value just above the average. All teams below the Pens in value are below the $500 million expansion fee so if the expansion market in Quebec City is higher than $500 million then go for it, and if the market in Las Vegas is worth less than $500 million then let it pass.

One of the advantages of being a member of a sports league monopoly cartel is that it is almost impossible to lose money. The value of the average NHL club has increased at 11.5 percent since the 2004-05 lockout which just about doubles the growth rate in the S&P 500. When you buy an NHL club you are buying the net cash flow of the club over time, but you are also buying the monopoly power clubs have in selling tickets, luxury boxes, sponsorships, media and concessions and the monopsony (one buyer) power and hard cap cost certainty the clubs have over the players.

The price of existing franchises probably already reflects the present value of its cash flows and monopoly power. For example the selling price of the Pens already reflects the Consol Energy Center. The value of the expansion markets probably reflects the fact that they are not already in the league or that they have previously lost a relocation club to a non-traditional market  the sun-belt, and the expansion fee reflects the monopoly power of the NHL.

The most lucrative expansion  opportunities are probably in Seattle and Quebec City, and the fact that Seattle didn’t even submit a bid indicates that the expansion fee is higher than the value of the market with good hockey potential and no NBA competition. The best investment would probably be Quebec City (second to a club in GTA that won’t happen).

• And what n plans, what impact does the Canadian dollar’s poor condition have?

The weak loonie is a major economic factor that probably caused most of the relocations form Quebec and Winnipeg in 1995-96. It is currently a financial advantage for the American clubs and a major factor in stalling retro-expansion or retro-location into the Great White North.