Ottawa Senators Case Study

Prepared for: Bruce Firestone

Date due: April 3, 2001

Prepared by: John Watson 212346

Gregory Patterson 280252

Kate Livesey 227987

The Ottawa Senators:

The Ottawa Senators are an NHL team, who were established on December 6, 1990 in the Nation’s Capital. Their first game in Ottawa after the return of the Senators was on October 8, 1992. The Senators opened the season with a 5-3 victory over the visiting Montreal Canadians.

In the 1999/2000 year, the Ottawa Senators clinched a spot in the Stanley Cup Playoffs with their win over the Philadelphia Flyers on March 28. The 2000 Stanley Cup Playoffs marked Ottawa's fourth consecutive trip to the post-season. The Senators outscored their opponents 139-98 in their 41 home games, going 24-12-5-2[1]. In 41 road games, the Senators went 17-18-6-0 and were out-scored by their opponents 112-105. Ottawa had a 17-13 record in one-goal games this season. The Senators recorded season high seven goals on two occasions (Mar 9 versus Pittsburgh and Mar 21 versus Atlanta). The Senators allowed a season-high 42 shots on goal against the Boston Bruins on Feb 1. Four of the Senators six short-handed goals this season came on the road (at Phoenix, Montreal (2) and Carolina). Ottawa scored two at home against Atlanta (Mar 4).

The Senators finished the 1999-2000 season with a 41-30-11-2 record and 95 points. Ottawa finished second in the Northeast Division, five points behind the Toronto Maple Leafs, and sixth in the Eastern Conference. Ottawa set a new franchise record for most home wins after going 24-12-5-2 at the Corel Centre. The Senators were 17-18-6-0 away from the Corel Centre.

After 41 home games, the Senators averaged 17,509 (17,852 capacity) fans and had 13 sell-outs. Ottawa’s average in 41 games in 1998-99 was 17,219 (16 sell-outs). After a 60-year absence from the NHL (between 1934/1995 and 1992/1993 hockey seasons), the Ottawa Senators returned to the NHL for the 1992-93 season.

Senators’ background:

In 1987, Anthony Pirelli got the idea to bring the Ottawa Senators back to Ottawa. The simple plan consisted of 1. Buying the land, 2. Winning the franchise, 3. Selling the surrounding lands, 4. Paying for the franchise, 5. Retaining the land for the building, 6. Building the building, 7. Winning the Stanley Cup in 7 to 12 years.

On June 12, 1989, Horizon Investments sent a letter to Mr. John A. Ziegler, President of the NHL, expressing their interests in acquiring an NHL expansion team here in Ottawa[2]. Later that month Horizon hired Rossetti Associates as the architects to build the Palladium, now known as the Corel Centre. The location of this entertainment facility is approximately 15 kilometers outside the city center, directly off of the Queensway (hwy 417), which is Ottawa’ s major highway (Please refer to Appendix A).

On September 6, 1989, Horizon investments held a press conference at the Chateau Laurier, a hotel in downtown Ottawa, to start the “bring back the Senators” campaign as well as a large media campaign. On November 28, 1989, Horizon unveiled their proposed plans to develop a 600acre project in Kanata consisting of an arena surrounded by a luxury hotel, shopping center, commercial office tower, hi-tech business park, two new residential neighbourhoods, and a Transitway Station (Please refer to Appendix B).

On May 7^th 1990, Horizon investments had a meeting with David Peterson, the then Liberal Premier of Ontario, who promised to provide full support of their NHL bid for an expansion team. This included rezoning the 600 acres of land located in Kanata and covering the cost of the interchange needed for the new arena. They also forecasted that the property taxes would be approximately $800,000 per year.

On May 31 1990, Horizon received their official invitation from the NHL to submit a franchise application. On June 30 1990, 100 out of the proposed 600 acres were rezoned for the Major Community Facility (MCF). On November 6th 1990, 11,000 pledges for season’s tickets were received by Horizon. This showed the large community support behind the NHL expansion bid. On November 14th 1990, Horizon Investments negotiated a lease to use the Ottawa Civic Centre until the Palladium had been constructed.

On December 2^nd 1990, Horizon officials, 150 supporters and a marching band traveled to Palm Beach Florida to try to secure their bid for the franchise team. Groups from Hamilton, Tampa, Anaheim, San Diego, Seattle, St. Petersburg, Miami, and Houston also tried to convince the NHL board members that their city was the best place for the NHL’s expansion plans. On December 5^th 1990 The Ottawa Senators’ bid team made a 45-minute presentation to the NHL board of governors, explaining their plans for the team, the Palladium, and why Ottawa would make a good location for an NHL franchise.

Some reasons behind why Ottawa was a good choice for the expansion team were (To see a map of the Proposed area, please refer to Appendix A):

30% population growth over the next 10 years;
Ottawa is the third largest tourist city in Canada with many tourist attractions including museums, Winterlude, beautiful parliament buildings etc.
Ottawa had a large population within a 70 mile radius;
Ottawa’s average household income at this time was $60,000;
Located between Toronto and Montreal. Easily accessible to other NHL hockey team fans.
Ottawa has a major international airport close to the planned location of the Palladium.
Ottawa has a lot of Government, and hi-tech visitors through out the year.

Architect Tom Brown developed a unique style of arena, which increased the capacity of the Palladium for boxes as well as reducing the distance from each box to the ice surface. With the old design of arenas, all of the boxes were along the top, therefore largely decreasing visibility because they were so far away from the ice. With this new state-of-the-art design, there are three levels of boxes built more on the vertical instead of the horizontal, which is what decreases this distance to the ice surface (Please refer to Appendix D for a Palladium Sectional diagram).

A definite bonus for Ottawa was that Hamilton had just built a new stadium called Copps Coliseum. This stadium was the old design type, which didn’t produce as many revenues as the new design of stadium that Tom Brown had invented.

On December 6^th 1990, the Senators’ franchise team was led into the basement of the Breakers Hotel in Palm Beach Florida where they were instructed to wait until being brought to the meeting where the franchises were going to be officially awarded. At that point the Ottawa Senators’ franchise team believed that they had failed in their bid for a franchise. As it turned out, Ottawa was awarded the franchise on December 6^th 1990. The Ottawa Senators hockey team returned to the ice after a 58-year absence from the NHL.

Current Financial Data: (Please refer to Appendix E for the Senators, and Corel Centre financial data for the 1999/2000 season)

There are many disadvantages to owning a Canadian NHL team as opposed to owning an American NHL hockey team. There are many opportunities that are provided to American teams for additional revenues that aren’t provided to Canadian teams. The NHL business plan, as you will soon see, needs to be altered in order to create a level playing field for all NHL hockey teams in North America.

The first major issue is that the national television rights to any game supersede the local television rights. For instance, if an Ottawa Senators game is being broadcasted on Hockey night in Canada, each team in the NHL gets an equal percentage of the revenues. If an American team is playing and the national carrier is covering it, all of the hockey teams in the NHL get a share. The big difference is that in the United States, the local T.V carriers take precedence over the National T.V carriers where in Canada it is the opposite. To put it plainly, 95% of the games in the States are carried on the local carriers whereas 90% of the games in Canada are carried on the National Carrier. This is a major disadvantage to Canadian teams because it severely decreases their revenue potential. To put it numerically, the national TV revenue in Canada from their 6 teams is $165 million (which is divided up between 30 teams) whereas in the States the national revenues earned by the 24 teams are $5 million (which are also divided up between 30 teams) despite the obvious market differences.

The second major issue of Canadian teams versus American teams is the tax differential. The Canadian NHL teams get taxed with five major taxes: Provincial Amusement Tax (PAT), Government Sales Tax (GST), Provincial Sales tax (PST), Infrastructure tax, and property taxes. American teams do not pay property taxes because the arenas are built by the city and leased to the hockey teams for $1 per year. Yet, the team receives all advertising revenues. The infrastructure tax in Canada is $2.50 per ticket. These taxes create a large disadvantage for Canadian teams because from a $100 ticket, Canadian teams take home about $30 whereas American teams take home $100. For example, The Corel Centre paid more property taxes than all US arenas combined in its first four years of existence.

To try to change how NHL teams are ran through out the league, Barb Smith made some major changes to the business plan of the Ottawa Senators when she bought the team. Firstly, she avoided retirement contracts by paying more attention to the collective bargaining agreements. Also, there was a 30-35% increase in players’ salaries between the 1992 to 2000 seasons. When Barb Smith took over, she was able to decrease this salary increase to 3.5% per year. She accomplished this by strictly adhering to the collective bargaining agreement which stated that the NHL players do not become free agents until the age of 31 and prior to that the players only have to be given a 10% raise after their first 3 years the team. This saves the Ottawa Senators a lot of money over the next few years. In the 2000/2001 season, Ottawa was considered the third most efficient team in the NHL based on salary dollars spent per point made[3]. For the 1998/1999 and 1999/2000 seasons, the Senators were the single most efficient team.

With respect to the Senators and Corel Centre debt, it has increased to $220 Million in the past 9 years. This creates a very large interest expense on their balance sheets, which increases their chances of default risk. In other words, if Ottawa has a really bad season and revenues decreased, the bank could end up owning the Ottawa Senators.

Dealing with how the Corel Centre was perceived as opposed to how the Madison Square Gardens in New York City was is another large difference between this Canadian team and all American Teams. For example, the caliber of players needed to sell out Madison Square Gardens is much higher than the caliber of players needed to sell out the Corel Centre. Madison Square Gardens needs players like Mark Messier and Wayne Gretzky to sell out and this is why NY Rangers have a $72US Million budget to spend on players’ salaries. Barb Smith on the other hand only has $28.5US Million to spend on the team. The difference Barb Smith has made to this Ottawa team is very apparent with the fact that Ottawa will definitely make the playoffs this year whereas the NY Rangers have no chance even though their salary budgets are more than triple that of the Senators.

Internal Analysis of Distressed Preferred Shares:

In restructuring the finances of the Corel Center, the organization sought and received approval from the government, to convert their outstanding debt from a 9% debt issue to a 4.5% Distressed Preferred Share. The following is an explanation of the advantages of this conversion to the organization.

Normally, it does not pay for a lender to convert a loan into preferred shares, because such shares typically carry a fixed dividend and a fixed retraction price, and are thus "taxable preferred shares" and "term preferred shares" under the Income Tax Act (Canada) (the "Act"). Dividends received by a lender (as a "specified financial institution") on a term preferred share are denied an inter-corporate dividend deduction, and thus are taxed at the lender's full corporate tax rate. Moreover, if the share is also a "taxable preferred share", the borrower as issuer of the share must pay a "Part VI.1 tax" on any dividends above the $500,000 annual "dividend allowance", at a rate that can be as high as 66 2/3%. A DPS, however, is deemed for five years from its issue date to be neither a term preferred share nor a taxable preferred share. This means that a dividend paid to the lender on the DPS will be a tax-free inter-corporate dividend. For example, a lender receiving interest at 15%, and paying income tax at a 44% rate, has an 8.4% after-tax return. It would get the same after-tax return if instead of interest it received an 8.4% dividend on a DPS.[4]

In the case of the Corel Center, the franchise had a Distressed Preferred Share option approved by government. This eased the interest burden the organization had, reducing the interest rate from 10% to 4.5%. This was of increasing importance to organization with the Canadian dollar continuously being outperformed by the U.S. dollar.

Questions:

1) What are some of the negative factors affecting the Ottawa Senators and the Corel Center currently?

2) Are the Ottawa Senators and the Corel Center a profitable investment?

3) Regardless of whether of not it’s profitable, what are some possible recommendations to make it more profitable?

4) Why else would one buy the Ottawa Senators and the Corel Center?