Katz goes fishing, EIG won't bite
EDMONTON - News that billionaire Daryl Katz wanted to buy the Oilers from the Edmonton Investors Group was met with tremendous enthusiasm by the majority of Edmonton hockey fans.
EDMONTON - News that billionaire Daryl Katz wanted to buy the Oilers from the Edmonton Investors Group was met with tremendous enthusiasm by the majority of Edmonton hockey fans.
In many ways, Katz's timing on his offer could not have been better. In March 2007, the Oilers had hit a low. In the final month of the season, after the trade of beloved forward Ryan Smyth, the team had crumbled, finishing on a 2-18 streak, the worst stretch in franchise history.
Just then, at this ghastly low, Katz stepped up -- making his move, he has said, after several EIG partners approached him and asked if he wanted to buy the team.
To the chagrin of the EIG partners, many fans embraced Katz as a hockey messiah. He would help the Oilers compete with the biggest markets in the league, they believed. He would spend to the top of the NHL's salary cap each season, keeping stars like Smyth, not like the current penny-pinching ownership group.
The black mood of the fans was summed up in one newspaper poll, taken right after Katz's bid became public, which showed 63 per cent of Oilers fans preferred a single owner, rather than the EIG's group ownership.
EIG chairman Cal Nichols was frustrated with this giddy optimism. Nichols believed it was naive to think that money fixes everything. In fact, careful management of the salary cap, not lavish spending, was the key to succeeding in the new NHL. As for Katz's offer, Nichols and his board were equally unimpressed. They saw it as overly vague and not nearly enough money, just $145 million for the franchise, tens of millions short of something that might get their attention.
"It was just a number Katz threw out and he just wanted to see who would take the bait," says EIG partner and board member Neil Allen. "It was easy to pooh-pooh the offer. It was incomplete. We viewed it as a fishing expedition to see what number he could get 50 per cent of the shareholders."
"We really didn't see anything," says another board member, Dave Addie. "There was a lot of talk. Was the offer real or not real?"
A major point of opposition came out of concerns that Katz was a mystery man. Forbes magazine hailed him as a multi-billionaire, one of the 550 richest men on Earth no less, but Katz owned a private company.
Who knew how much he was really worth? Maybe he was another Pocklington, not a community-minded type at all, some EIG partners thought, not someone with Edmonton's best interests in mind, as the EIG believed it had.
"They felt the community-based strategy was the way to go, that it was the right thing," says Oilers team president Patrick LaForge. "It had saved the team from a single owner (Pocklington) before."
Adds EIG board member Brian Hryniuk: "This was an asset for the Edmonton and northern Alberta region and they just
didn't want to jeopardize it. Things were working fine. Why risk it?
"Collectively as a board, we pushed back. We really felt we had been a good custodian of the organization. We really weren't interested in having an outside party take over the Oilers."
The EIG board quickly got out the message to Oilers fans that it had rejected Katz's offer, though it also left it open for Katz to come back with a better offer. Nichols certainly had his selling price, partly because he wanted to financially support his son's business ventures. "I'm no different than everybody else," he says. "I've got to look at my own liquidity and maybe there would be a time where it made sense."
Katz's inquiry was the first time anyone had made such an offer to the EIG. The bid forced the board to calculate the market value of the franchise, LaForge says. "And that's not easy. These things aren't bought and sold every day."
Nichols' close ally on the EIG board, Gary Gregg, was determined that a single owner such as Katz not take over, so he made it known he would be willing to put $15 million into a war chest to help stave off Katz's overtures.
Katz didn't give up. Through the spring and early summer of 2007, his offer went up -- first to $150 million, and then to $185 million.
It was difficult for the EIG board to grasp what each offer amounted to, partly because the offers were somewhat vague, with several items having no certain costs assigned to them. There was also the issue of the varying tax implications based on how the deal might be structured.
Legal and accounting bills piled up through the spring as the board tried to make sense of it all.
"There were missing parts of the puzzle," board member Neal Allen says. "It was difficult for the board to get a grasp, and even more for the shareholders to get a grasp, of really what he was offering."
The $185-million offer was for the Oilers franchise itself, not for the shares owned by each individual EIG owner. If Katz bought the team in this manner, EIG members would have to pay taxes at the top 39-per-cent rate on their profits. It would have been better for the EIG partners if Katz simply bought their shares, because a different tax rate of just 19.5 per cent would then apply, as each partner's profits would be deemed a capital gain.
In the end, the EIG's number crunchers figured that a $185-million offer for the franchise asset amounted to about the same as a $125- to $135-million offer for all of their shares. If Katz wanted to get their attention, the EIG board concluded, he would have to do far better, making a bid of at least $165 million for the shares. Only then would the board consider recommending a sale.
Katz's interest pushed the Oilers owners to accelerate their long-standing plan to buy back shares from any EIG partner who no longer wanted to be part of the group. The desire of some to sell was driven by various factors. Some partners were getting old and wanted out. Others were in poor health. A few partners had died and their shares needed to be liquidated. Others were simply tired of the EIG's status quo, including Nichols' leadership of the group. A few partners complained that the whole idea of owning the team was to have some fun, but only one guy -- Nichols -- was now having it.
Some of the small owners had issues with Nichols' authority, believing their input was zilch.
EIG partner Manuel Balsa noticed a change in the group's demeanour over time. "I was somewhat disenchanted with some of the tensions that were beginning to happen inside the group. Cal was under some pressure."
Nichols was often portrayed as a local hero in the media for bringing together the EIG on its altruistic mission to save the NHL in Edmonton, but some of the owners now resented his status. They grumbled that he had too many perks, getting to travel with the team and hobnob with other NHL governors in first-class hotels in choice California and Florida destinations, Balsa says. "He took the team as if it was his own team. That occasionally can cause some friction. But, on the other hand, Cal worked very, very hard.
"I just would say to some of the other owners who were not so happy about it, 'Guys, let's look at it. With the privilege comes the responsibility, and Cal has
a lot of responsibility that he fulfils,
consequently he should be entitled to some privilege.' "
Much of the discontent was voiced in the EIG owners lounge at the games, where drinks were free, and after a few shots the venting would start up about
Nichols kept away from the lounge.
After Oilers losses -- and there was no shortage that spring -- he quickly left the building because people were always bitchy. After a win, he would stay to mingle, but he never wanted to appear like he was sucking at the EIG trough, so he usually bought his drinks at the public bar outside the lounge. If anyone asked him why, he would invariably say, "Why would I go in there and get free drinks when I can stand out here and pay for it?"
The lounge became a sore spot between the smaller owners and the big investors. The big investors tended to be the ones with their own expensive luxury suites and faced $600 food and beverage tabs each game, while many small owners ate and drank for free in the lounge, Nichols says. "They (the big investors) would look at them and say, 'Christ, they're getting more out of this than me, and they only put in a million and I put in five million.' "
But Nichols was willing to put up with the lounge, partly because in his mind the EIG was most likely to succeed if the ownership group was as broadly based as possible. He wanted more partners, more buy-in, not any less. Always in the back of his mind he had a plan to take the team public one day, so every Oilers fan could buy shares in the enterprise.
This vision wasn't embraced by every partner, though. Gregg, for one, felt that the partnership would be easier to manage and more efficient with a smaller number of owners.
Gregg himself planned his work schedule and vacations around Oilers board meetings and wished more of his partners would be prepared to make the same commitment. In his mind, a fellow paid his way in the EIG by showing such commitment, and those partners who weren't focused on running the team, who didn't want to ever be on the board, weren't essential to the EIG cause.
"New blood," Gregg liked to say. "Every company needs it."
Catering to so many small-time owners was cumbersome and time-consuming. There were a few partners whom no one else in the group had even met. Many partners were to content to stay away and let Nichols and his board run things. If it ain't broke, don't fix it, they reasoned.
But if important business came up and signatures of all 34 partners were suddenly needed, it was impossible for the EIG to move quickly. One partner was sure to have flown off in his private jet to ski in Switzerland, while another was vacationing in Thailand.
While the most hardcore EIG partners were frustrated with the group process, not one of them was keen to spend the many millions needed to buy out the less-interested partners. The big shareholders like Gregg, Bruce Saville and Jim Hole didn't want to have a bigger stake than anyone else, because if there ever was a crisis, everyone would naturally look to them to step up and solve it. Gregg's own business, Gregg Distributors, ate up 12 to 15 hours every day; he barely had time to go to the games, let alone try and run the Oilers.
Gregg, too, wasn't happy with everything Nichols did as chairman. For one thing, there was Nichols' handling of the arena debate. Nichols had put forward the notion that the Oilers owners should put $100 million towards the building of a new arena in Edmonton. Gregg didn't like that Nichols had talked about this plan before he had discussed it with his own board.
"Why do we even need a board?" Gregg had said on this occasion and on others, believing that Nichols had overstepped his authority.
But Gregg was still keen for Nichols, a man he greatly admired, to keep leading the group. He saw Nichols as a shrewd dealer, and liked to tell others that you never got any dumber hanging out with Cal Nichols, you only got smarter.
The other owners always asked themselves who would want to do Cal's job, and nobody ever once raised a hand. Gregg himself valued his privacy and needed all his time for his ever-growing business. He had no desire at all to be chairman, but he worried about what would become of the group if Nichols ever left it.
Balsa had the same view. "Cal was losing popularity and he was under more and more scrutiny," he says, adding that people wanted Nichols to stay on as chairman, but also wanted more say themselves. "People want some more freedom and more democracy, but nobody was willing to step up to the plate and take on the responsibility. This is the Catch-22. Talk is cheap."
In any plan to buy back shares from EIG partners who wanted out, the difficult thing for the board was to figure out a fair retirement amount, the dollar value at which the departing owners would sell their shares back to the remaining partners.
In most companies, if a minority shareholder wants to sell to the majority, he takes a 25- to 30-per-cent discount. Minority shareholders have no control of the company, no authority, so their shares are usually worth less, Nichols says.
With the EIG, all partners were minority owners. No one party owned more than 9.14 per cent, the amount held by Gregg, Hole and Saville. In the event that any one of the partners wanted to sell, Nichols and the board believed they should get only a minority share price, essentially a wholesale price, not a retail one.
In May 2007, the retirement amount was raised from $98 million for the shares to $125 million, which was tens of millions less than the estimated retail value of those shares on the open market. But just when the EIG thought they had come up with a fair retirement value, Katz would change his offer again. The EIG board got bogged down trying to keep up with Katz's various bids. "The energy that that sucked up over the better part of four months was absolutely incredible," Nichols says.
From his vantage point at Nichols' right hand, LaForge saw the strain on his boss and on the entire ownership group. "They were trying to find somewhere in this maelstrom of thoughts and debates and finance, accounting and legal work, a position that we all agree is the position," LaForge says.
But where the owners had previously believed that the 10 heads on the EIG board were better than one, it wasn't the case in this situation, LaForge believed. Because of the various interests at work with the 34 partners, consensus simply wasn't going to happen here. As LaForge repeatedly told Nichols: "You're blowing your brains out here trying to achieve something that is not doable. You're never
going to achieve a sustainable consensus position with this group. Not that people are right or wrong, it's just differing
opinions, differing views, differing levels of education."
The process spun out of control, LaForge says. "It was unruly to the max, wandering ... People wanted to get consensus but they wouldn't shut up. Everybody had to get the last word in.
"It was a lot of anxiety for everybody involved. Meetings after meetings after meetings. Cal is a huge communicator ... and it was driving him crazy because every conversation involved almost all 34 owners. I saw Cal physically just coming apart. Insanity starts to prevail rather than normality. Every day somebody would phone him with a question that took an hour to answer, and eventually 20 people would phone him with a question that would require an hour and he attempted to give them each a one-hour answer, and it's not possible."
Nichols hoped to work through all the issues, but he now agrees with LaForge that consensus just wasn't going to happen. "People were taking very, very firm positions. They dug their heels in."
Nichols decided to see if there was anyone else in northern Alberta, other than Katz, who would be interested in shares, buyers who might come in and replace those EIG members who wanted out. The team's economic prospects were vastly improved since the EIG had come together in 1998, but any new buyer would not get the same initial tax advantage -- which had allowed the EIG to write off losses against other income -- as that writeoff had now been used up.
All that any new investor could hope for was that their business would benefit from its association with the Oilers and that the franchise would go up in value.
The team's financial prospects remained iffy. As EIG board member Brian Hryniuk puts it, "It still requires some sort of playoff depth (success) in order for the Oilers and perhaps many of the teams in the league to really do anything financially. Even with the new collective bargaining agreement, it's not the type of investment that Daryl Katz would be making to get a good return on his investment. It's just not there."
Nichols worked with a capital placement consultant, who approached a number of local businessmen to see if they would be interested in each buying 10 per cent of the team at a cost of $13.5 million to $15 million.
"What do we get for that?" the potential investors asked.
"You get a parking pass," Nichols told them. "Two passes to the building for hockey and admission to the owner's lounge and free drinks and snacks before and after games."
"Yeah. And other than that, it's your risk on enhancement of franchise value. There's no dividends paid out."
In each case, the potential investors came back and said they had no further interest. "That was one acid test and that didn't go very far," Nichols says.
Through the summer of 2007, Nichols continued to lobby EIG owners to reject Katz. He knew the more that owners stayed on, the easier it would be for him and the others to raise the money to buy out those leaving. He also believed the group still had a contribution to make. "We had made all the right moves," Nichols says of the EIG. "And I still believed strongly in the group or community approach."
Before the Aug. 7, 2007 shareholders meeting, where the 34 partners were to vote on Katz's offer, Nichols huddled with LaForge. The two agreed that closure was needed here. Not only did the EIG have to reject Katz's offer, it had to tell both Katz and the public that the team simply wasn't for sale.
At the meeting, Nichols and his allies counted up all the correct moves the EIG had made, such as saving the team in 1998, balancing the books, retiring the $50-million debt, rebuilding the fan base, surviving the 2005 lockout, then watching as the value of the franchise shot up by 40 per cent, according to estimates from Forbes magazine. The Oilers had moved from being one of the poorest teams in the league, with revenues in the bottom five overall, to being a club that in 2006-07 generated the sixth-highest revenues in the NHL.
Only Saville and Ed Bean argued strongly in favour of selling to Katz. Saville had been unhappy with the way the board functioned right from the start and that had soured him on the EIG. As for Bean, he said Edmonton's future was with a younger and richer man such as the 46-year-old Katz, a person with drive and vision to raise the team to the next level.
But partner Neal Allen remembers the more telling argument voiced at that meeting: "We lived through all this stuff. We just finally got our finances in place and things are going along good. Why do we want to sell?"
Allen himself felt that if the majority in the EIG wanted to continue, there would be enough energy and capital to proceed. "I was perfectly happy to carry on. I didn't really need the money."
Adds board member Dave Addie: "I was staying. I liked the way the team was shaping up and the management. There was a bright future there."
In the end, only two of the 34 shareholders, thought to be Saville and Bean, voted to sell. Nichols was now able to stand before the news media and say the great Oilers sale story was over, once and for all.
Katz himself appeared to get the message. He issued a statement: "Clearly, I'm disappointed that the ownership group has elected not to proceed with a sale, but I accept their decision and wish them well."
Nichols was relieved. "When we tried to make it sound like it was final and over, that was for a reason: I was personally exhausted. It was a bit of a circus. We really did need to settle down the fan base because in my opinion it was dominating way too much air time, and it wasn't doing the franchise any good. In fact, it had the appearance at times of causing some instability and uncertainty as to where is this going longer term."
He and his wife Edna were also heading out on a three-week cruise of the Baltic. "I just wanted it behind me because had it still been lingering out there, I would have spent every day on a BlackBerry and a telephone and this was a trip that Edna and I had been looking forward to and I didn't want to spoil it."
In the end, Nichols and his wife had a wonderful vacation. Nichols returned to Edmonton refreshed and ready to charge forward. In no time, though, he had to face a new issue, one that would prove to be the beginning of the end for the EIG.