November 26 2008 07:00AM
By the time Wanye gets around to giving me all of these sections to edit, the economic crisis will be over. Ha ha! No seriously it won’t though -- apparently this is end of days. Hooray. -- Spyn
In sections I & II of this epic series of articles, we talked at length about how the financial health of NHL owners pose the most immediate threat to NHL teams. If these folks can keep jet fuel in their gulf streams, they can subsidize years of losses. If they can’t keep their cash cow businesses afloat the fire sale of assets will begin.
Today we will look at the Mightiest of Mighty Squadrons, the Mighty Oilers of Edmonton. Did we mention their might? Right then. On we go.
It’s difficult to do any sort of in depth analysis of the Edmonton Oilers Hockey Club as a standalone business. As a privately held corporation, their books are not disclosed publicly. It’s also difficult to speculate about the financial health of Rexall Pharmacies, the Katz Group and Rexall Sports for similar reasons. It would be a lot more fun for yours truly if any of these businesses had annual reports we could dig through and find some good stuff to share. Instead what we can do is make some assumptions and some educated guesses.
Like many entertainment-based businesses, the Oilers operations are pretty transparent. Asses in seats mean money in the bank. It isn’t as though the Oilers have a sideline business trading Asian municipal bonds that nets them a few million a year or something. They make money by putting Visnovsky on the ice for $7 million a year and betting that you and I will sit in the stands and watch him for more than that. This is fairly doable given that our beer tab at Rexall was $7.1 million last season alone. Why this one time...
Ah, we’re getting side tracked.
In determining the stability of Kay-Z -- which we say is more important than the finances of the Oilers -- we look at this company and the industry where he makes his loot. Again, this is a poor estimate as we have no “real” information regarding his partnership structure or debt structures but we can make some guesses.
Over the summer, while you were watching So You Think You Can Dance marathons, Daryl Katz was busy buying the Oilers for the record price of $200 million. During the extended purchase drama, it was evident that Katz wanted to buy the Edmonton OilersM -- not as a business that could necessarily sustain its purchase price, not to boost the Rexall Brand, not for personal glory or publicity. He wanted to buy the Oilers for the same reason we buy pay per view games -- because he is a fan.
This is pretty much a dream scenario for the NHL and all Oilers fans. If Daryl Katz didn’t exist, the Oilers would probably have to make him up. Here you have a guy with a rock solid business, tremendous acumen and saavy -- as viewed when he pieced together the deal to buy the Oil -- and a burning desire to own the Edmonton Oilers. He isn’t some thick-headed numbskull like “Dollar” Bill Wirtz, or our beloved Peter Pocklington. By all accounts he is a merger and acquisition wizard with a long term-view of societal demographics.
You: Zuh? Me: Right, we will explain.
Rexall is a nearly a recession-proof business: a chain of drug stores selling in large part a generic brand of Rexall Pharmaceuticals that the company also owns. The baby boomers aren’t getting any younger and years of stress and non-orthopedic shoes are going to catch up to them sooner or later. These trends are non-reversible and they bode very well for Rexall in the next 20 years.
There is an analogy you use when determining the viability of a company to acquire or invest in: “is this company selling vitamins or medicine,” meaning if people don’t purchase their product how affected are they going to be? A company that sells leather jackets for puppies? Vitamin sellers. Who cares if they go out of business? A company that sells condoms at the Playboy Mansion -- that’s medicine. They could raise the price to $100 per unit. If Miss July comes a knockin’ -- there isn’t an amount in the world you wouldn’t be prepared to pay.
You know what’s like selling medicine in this analogy? Actually selling medicine like Kay-Z does! A downturn in the old economy won’t affect Rexall if you buy your heart medication -- it’s sort of a priority. This is one of the last things you would cut back on, particularly in Canada where we are fortunate enough to have the government or some sort of subsidy in most cases.
So assuming all is well internally at the Rexall Corporation and the Katz Group -- and from all accounts they are very conservative and have low debt -- Katz is ensured that he will be balling-ass rich for the foreseeable future. Having said that, rich people don’t get rich by throwing more money after bad investments, and there’s some point where they will no longer subsidize operations of a losing business.
With $200 million recently shelled out to the fine members of the EIG, one can bet Kay-Z is pretty committed to seeing this through. If his finances or desire to continue to spend like an Arab Sheik wanes in the short term, we would be surprised to see it affect the operations of the team. The proposed arena can be taken off the table pretty easily, though, and this could be shelved depending on the nature of the deal put together. This is the most likely scenario if the team hits tough times.
How big of a bite was it for Katz to take $200 million out of the old wallet to buy the team? By all accounts it wasn’t much of a dent in the old fortress of cash in which he resides. In the February issue of Canadian Business Magazine, Katz’s net worth is reported to be C$2.37 billion which makes him the 486th richest person in the world. This was before he signed Tom Gilbert to that contract mind you. But we can still assume he is rich enough that if you took everyone in the world richer than Kay-Z and invited them to Rexall Place you could safely fit them in a single section of the arena. That’s pretty rich.
Assuming he financed the team in some sort of traditional debt load -- in the order of 40–70 per cent of the total price of the team -- Kay-Z can safely make all debt servicing payments on the team regardless of their financial performance. Debt servicing payments are different from payroll and cost of operation, but assuming revenues don’t fall to zero and Katz remains committed to the team, the Oilers ownership finances are as rock solid as they come in the NHL.
Not bad for a team that used to be the poor cousins of pretty much every other team in the league.
Wanye’s note: In the interests of not burning out everyone’s eyes we will split of our analysis of the Oilers actual operations and make this a five part series. You can read the first two parts of this series here: