The impossible dream

 

EDMONTON - Today is the day that the old, diehard owners of the Edmonton Oilers never thought they would see.

 
 
 
 

EDMONTON - Today is the day that the old, diehard owners of the Edmonton Oilers never thought they would see.

Today, Daryl Katz, the team's new owner, will send out cheques to the 34 former owners of the Edmonton Investors Group (EIG). The most debated, most public and most controversial private business deal in Edmonton's recent history will close, bringing to an end 10 years of EIG ownership.

The partners of the EIG -- a group that saved NHL hockey in Edmonton, led the Oilers to within one game of a Stanley Cup victory and built the team into an economic juggernaut by NHL standards -- are now moving on. But a number of the former partners are also looking back and looking within, still coming to grips with all of the tumult and acrimony that got them to this unexpected moment.

Last August, just 11 months ago, 32 out of the 34 EIG partners voted in no uncertain terms to turn down Katz.

"We had a motion and a vote and declared the Oilers are not for sale," EIG chairman Cal Nichols announced at a press conference on August 7, 2007.

"This is not about dollars. This is about Edmonton. An ownership group is best suited for Edmonton and the Oilers."

But then something happened.

Four months later, in early December 2007, Nichols announced he would sell his shares to Katz after all. Seven weeks later, each of the other 33 partners had also agreed to sell their shares, some more willingly than others.

So what happened? Why the abrupt flip-flop?

It's no secret that after his initial bid failed, Katz successfully conducted a hostile takeover of the Oilers franchise last fall and early winter, but the untold story of the EIG's demise is one of a bitter and messy divorce. Last September, two factions -- business partners who had come together with the best of intentions and had run the team harmoniously for years -- started to fight in earnest. They disagreed over everything from major personnel decisions to crucial financial matters.

Egos were bruised. Oilers management was shaken. Friendships ended.

The two factions came to distrust one another, so much so that Nichols, the single biggest champion of the EIG's community ownership model, ended up leading the charge to sell the franchise to a single buyer: Katz.

In retrospect, Nichols believes there was an inevitability to the divorce of the EIG factions. It has to do with the nature of business partnerships, he says, their ability to stay together when times are tough, then fall apart when things have never been better.

"You know, there's an interesting thing that I've learned in a lifetime of being around business and partnerships," Nichols says. "When you get into something together and you are really up against it, you are scrambling, you have all these obstacles, you have all these enemies, the competition out there.

"You hang together and you fight those wars and you're in the trenches and everything is fine except you're not making money. You're trying to keep the wolves away, but you're together. As soon as you become successful and start making money, that is where the trouble starts. People want to take credit for it (the success), they see the divvying it up differently. The guy sitting in the office next to you wants what you got, and the guy sitting next to him wants what he's got.

"It's an amazing experience, and that's why companies get built up. ... Then the next thing they've got to do is take it apart."

See OILERS / C6-7

The first inkling that Daryl Katz wanted to own the Edmonton Oilers came on a frigid and memorable Edmonton weekend in late November 2003. Wayne Gretzky and other old-time Oilers legends were in town to play in the now famous outdoor game at Commonwealth Stadium. At the same time, Katz and the Oilers were ready to announce that Katz's Rexall Drugs had just bought the naming rights to the Edmonton Coliseum, a ten-year deal in the $10-million range, making the 41-year-old Katz by far the largest corporate sponsor of the Oilers.

At a Hotel MacDonald luncheon to celebrate the outdoor game, Katz sat at the head table with Nichols, other dignitaries and their wives. Katz and Nichols didn't get much chance to talk, but Katz did take a moment to ask Nichols, "So how would a guy acquire a piece of the Oilers?"

Nichols had been met with many such queries at cocktail parties over the years, most often from guys who had had a bit too much to drink. He would always give the same answer: Put it in writing and I'll take it to the board.

But not once did any potential buyer ever follow up with anything in writing. For the longest time, the same was true with Katz, perhaps not surprising given the economic state of both the Oilers and the NHL.

The Canadian dollar had been stuck for almost a decade below 70 cents US, and while the Oilers took in Canadian dollars from their customers, they had to pay their players in expensive American dollars. Edmonton was also a small hockey town, but had to compete for players in a free market dominated by massive eastern Canadian and American hockey cities, which could pay top dollar for players. From Gretzky and Mark Messier to Curtis Joseph and Doug Weight, top players had left Edmonton for bigger contracts in bigger cities.

This same brutal economic equation had led to Quebec City and Winnipeg losing their NHL teams. In the fall of 1997, when American businessman Les Alexander tried to buy the Oilers, most likely to relocate the franchise to Houston, Edmonton looked doomed as well. The asking price for the Oilers was $100 million, and it is worth exploring for a moment just how bizarrely over-inflated, in economic terms, that price was.

When any normal business is to be sold, the interested parties examine how much revenue the business generates and what the expenses are. If there is a profit -- if revenues are greater than expenses -- the general rule of transactions is that the profit is multiplied by four, and that should be the selling price of the business. So a business that makes $3 million a year should generally be worth about $12 million, says Brian Hyrniuk, a chartered accountant and EIG partner. In some exceptional cases, if there is the prospect of tremendous growth for a business, the profit might be multiplied by five or even six to find a reasonable selling price.

In a good year, a well-run NHL team in an average-sized market might hope to make $3 million to $5 million, so the asking price for such a business would be, at most, $30 million, a number not remotely close to the $100-million asking price of the Oilers. To make matters worse -- far, far worse -- in 1997-98, the Oilers had no profit to multiply to come up with a reasonable price. For many years, the team's expenses had been higher than its revenues. If this were any other business franchise, it would have died right then, or perhaps been relocated to some other location to see if it might somehow work there.

Who would invest in such a dead-end deal, especially when there were so many other more promising places in the rebuilding Alberta oil economy to invest capital?

Well, Cal Nichols, for a start.

Nichols had already twice volunteered and led the charge to help sell season tickets so that the previous owner, Peter Pocklington, might keep the team in Edmonton.

In 1997-98, Nichols went out and convinced 36 other local multimillionaires to put up $60 million of their own capital and to take on a $50-million bank loan in order to finance the purchase of the Oilers, as well as the team's initial operating costs.

Many times in following years, EIG partners were asked: "Do you think you'll ever get a return on your money?"

Jokingly, they liked to reply: "Maybe never even a return of my money!"

"At the time it was looked at as a community donation more than anything else," says Hyrniuk, who was on the EIG board.

"I don't think there was anybody in the group who was naïve enough to look at it as an investment, given the financial state of the team, and the economics of the franchise in a small market," says Neal Allen, another EIG board member.

All that said, there was one economic benefit to investing in high-risk ventures, such as the Oilers then represented -- a tax advantage that allowed EIG owners to essentially write off losses incurred by the Oilers against other income. This tax advantage proved attractive to potential investors, Nichols says. "I can tell you that feature was probably the biggest single motivator to close the deal."

Even so, no owner signed up unless he or she was both a true hockey fan and a committed northern Albertan, someone who believed that Edmonton might as well turn out the lights and call itself Moose Jaw if the Oilers -- the city's one undeniably big-city, big-league asset -- ever left town. The EIG was galvanized with a sense of purpose, to prove the NHL belonged in Edmonton, that this city could make it work.

Many Oilers fans were grateful for their work, and for many years their gratitude helped keep the EIG going strong. "They probably thought more of us than we thought of ourselves," says EIG partner Manuel Balsa of Oilers fans.

Along with the dismal economics, another aspect of the Edmonton deal was deeply troubling to many. From the NHL head office to the fans on the street, few believed that such a large group of owners, the vast majority cut from the same headstrong entrepreneurial mold, could co-exist. "How can this possibly work?" Nichols was constantly asked.

He himself had his doubts. "In my mind, yes, this looked very unwieldly, unmanageable, but yet there was nobody else standing there willing to take this risk given all the things we were faced with."

Sure enough, within two years of buying the team in May 1998, the EIG almost fractured. A power struggle erupted over team president and general manager Glen Sather's handling of the budget. Sather had made it clear he wasn't going to answer to 30-odd owners, but preferred to deal with only one person, board chairman Jim Hole. A few times, Sather walked out in disgust from board meetings, saying he had better things to do with his time.

Some board members, including Nichols and Gary Gregg, who led the audit finance committee, felt they never got enough information from Hole or Sather.

"Glen wanted to do whatever he wanted, whatever he felt like," Nichols says, "and that little clique around him kind of liked what they were getting and they didn't care, 'We got the best hockey guy in the world, why are you questioning this?' "

The fight over Sather grew to be both stressful and public. It wore on Nichols, but he found a strong ally in the 50-year-old Gregg, a smart, hands-on leader with a brilliant financial mind, who had built his family business, Gregg Distributors, an oil patch supply company, from a one-shop operation into an oil patch and real estate empire. Gregg also had a strong tie to Oilers hockey -- his younger brother Randy having played for Sather on five Stanley Cup winners -- before Sather had unceremoniously traded Randy to Vancouver, a move the Greggs had never forgotten.

Gary Gregg had been one of the first local businessmen to come forward with $3 million to buy into the team and had since raised his stake to 685 shares, 9.14 per cent of all shares, making him one of the top shareholders, holding the same amount as Sather's biggest backers, Hole and Bruce Saville.

Gregg was as hard-headed a businessman as there was in the city. He liked to say that no employee was indispensable, that behind every good man there was another good man. He certainly believed that in Sather's case, all the more so as Sather hadn't won big in many years but was still making $1.8 million US a season, top dollar in the NHL for a GM. Sather had also overspent his budget on player salaries by $3 million in 1999-2000, which alarmed the EIG's bankers.

Gregg and Nichols teamed up to force the issue in December 1999. They told the board there had to be a change or they were going to sell their shares. The majority of the board sided with them, believing that if better financial controls weren't put on spending on player salaries, the team was doomed anyway.

In the end, Saville and Hole left the board. Sather refused to work with Nichols, and took a job in New York. But a seven-year period of relative stability was ushered in for the EIG. Things started to run so efficiently that many of the owners started to become convinced of the notion that group ownership wasn't just the only option for Edmonton, it was the best option.

Nichols himself often said that whenever a problem came up, the board would get together and all ten members would invariably come up with a better solution than any one member could have done on his own. "I think that was probably our biggest strength," says Neal Allen.

"We had a lot of Type A personalities, used to making their own decisions and going in their own direction, but collectively everybody came together and had a common cause."

The stability of the team went from top to bottom, with Nichols and Gregg powerhouses on the board, team president Patrick LaForge running the business end of the team, and general manager Kevin Lowe managing the players. Nichols was the lynchpin, the spokesman for the owners, and the only person on the board empowered to deal directly with LaForge and Lowe.

Nichols, LaForge and Lowe formed a tight group, each from a small town/small business background, Nichols from St. Walburg, Sask., LaForge from Lac La Biche, Lowe from Lachute, Que. Nichols had known LaForge since LaForge was a NAIT student who worked part time for Nichols at an Esso bulk plant back in 1972.

Each of the three came to trust the other to do his job and to do it well. "I don't care what it was, the three of us have been able to talk about it," LaForge says. "There isn't one thing that has faced us, personal, business, private, player transactions, whatever, that we haven't been able to talk about openly, because we all know there is no boogeyman in the room. We're all generally to the max on the same page, which is, 'Let's win. Let's win a Stanley Cup.' "

The three faced numerous difficult decisions, Nichols says, such as the trading of Doug Weight and, later, Mike Comrie, but the stress pulled them closer. "Never ever did we really disagree with each other. The conversations were sometimes extensive, but it was always to make sure we truly were on the same page philosophically. All those things probably even made us more bonded because of it."

From LaForge's point of view, Nichols did a great job of controlling the large ownership group, dealing with all their concerns and wants, as petty or goofy as they might be on occasion, such as when an owner had too much to drink at a game and wanted to barge in with a gang of friends for a post-game chat with the players. Nichols had to find ways to stop that kind of activity, even if he risked being unpopular with some owners.

"He took a lot of bullets, a lot of body shots," LaForge says.

Nichols himself understood that when he was at games, he was in front of his customers, so he had better dress appropriately, talk sensibly and not overindulge in liquor, but a few of his EIG partners saw themselves more as fans than as owners, and still like to party hard at games, just like other fans.

In Edmonton, ownership of the Oilers, for the most part, did not have its privileges. Owners still had to buy their own seats and most of the big owners did so wholeheartedly, buying entire suites. Gregg bought two suites as part of the $500,000 his business spent yearly on the Oilers. In total, EIG members bought $3 million in tickets and sponsorships from the Oilers each year.

All each owner got for his investment was one parking pass and two building passes, though the owners did like to joke that one other thing came with ownership: a muzzle.

Only one person was allowed to speak in public for the ownership group, Nichols, partly because the NHL demanded confidentiality, and partly because it would be unruly for the team to have 30-odd owners speaking out in the press.

Nichols put up a wall between the owners and the hockey operations. "I appreciated it every day, more than you will ever know," LaForge says, "because the only way we can do what we do with this business, so exposed and life in a fishbowl, is to know that you don't hear the chainsaw running when you're out at the end of the branch."

The shining star of the EIG wasn't just on-ice success, it was to make it to 2004 when the NHL would enter into negotiations with the players' association on a new collective bargaining agreement that would, the owners hoped, institute a hard cap on the amount that teams could pay on all player salaries, thus giving small-market teams like Edmonton a much better chance of competing for top players, while controlling costs.

But to get to 2004 proved an immense struggle for the EIG. The team scraped to break even and for seven years, the value of the franchise remained stagnant. The EIG also had to pay off its $50-million bank loan. This process was helped when $18 million came from expansion fees for new franchises in Atlanta, Minnesota, Columbus and Nashville, and another $19 million came in through the NHL's special currency equalization program to help small-market teams in Canada.

Another chunk of the principal was paid down in 2001 when the EIG's board made a cash call, asking for $14 million to cover operating losses, a move that pleased no one in the group. Those who contributed got a bigger stake at 75 cents on the dollar for their new shares, but they were putting yet more capital into a questionable business venture. Those who didn't put money in saw their shares diluted. It was a lose-lose. "It causes pain for everybody," Nichols says.

In 2004-05, the EIG lost $9 million during the owner's lockout of the players, but, in the end, the owners got a hard cap on salaries. At once, the new economic deal paid off in Edmonton. In the summer of 2005, the Oilers increased their budget for players salaries. Kevin Lowe's pricey acquisitions of superstar Chris Pronger, along with hockey aces Mike Peca, Dwayne Roloson and Jaroslav Spacek, propelled the team to within one game of winning the Stanley Cup.

To be an EIG partner in that Stanley Cup run of 2006 was to be in hockey heaven.

"It was ecstatic," Balsa says. "It was super ecstatic. It was excellent."

The best nights of the EIG came after Oilers home wins, when the group would congregate in a private tent outside the arena reserved for them and other VIPs. On the night of Game 6 in the final series, Prime Minister Stephen Harper and NHL commissioner Gary Bettman mingled with the local owners.

"They were pumped after 2006," LaForge of the EIG owners. "They could see and feel what their investment meant to the city and to the community. ... To get a pat on the back as you're going to church on Sunday or playing golf on Saturday, or at the office of your company, people come and say, 'I finally realize as a fan what you guys have done for us,' they were so happy it was unbelievable."

The good news was also reflected in the bank statements. The team made almost $11 million in 2006. In the fall of 2006, the franchise value shot up, increasing 40 per cent from its pre-lockout value to $167 million, according to Forbes magazine.

At the time, several shareholders, including heavyweights Hole and Saville, were talking about selling their shares back to the other partners.

In the fall of 2006, the EIG board did an informal poll of all 34 partners to see if anyone wanted to sell or was willing to buy. Only five out of the entire group, including Gregg, were interested in buying, but they were only interested in putting up a total of about $10 million at that point.

The EIG board decided that the entire group through the Oilers corporation should buy back the shares, taking on a $30-million loan to do so. The loan was small enough that the team could still make a profit, Nichols believed, while at the same time paying player salaries at the higher end of the league salary cap, something Oilers fans demanded.

"I thought this was all manageable," Nichols says. "There was no obvious sale option at that time, so we just had to soldier on and figure it out."

After the playoff success, Nichols was high as a kite, LaForge says, and ready to lead the team on a new front, leading the charge to build a new downtown arena.

Things appeared to be moving forward, again, carefully but steadily. But then, in the spring of 2007, more than three years after his initial inquiry, Daryl Katz finally got back to the EIG, and in a big way. He sent a letter asking if the board would be willing to sell him the Oilers franchise outright. The Oilers were suddenly a hot commodity.

 
 
 
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