Small Time No More

Alberta’s hockey teams return to action this month following a busier than usual off-season, highlighted by reclusive drugstore billionaire Daryl Katz’s attempt to purchase the Edmonton Oilers. At first glance the offer sounded like a dream come true for fans.

Illustration by William Rieser

Katz not only bid $185 million for the team (valued at $161.7 million as reported by Forbes magazine last November) but also promised to help fund a new arena and guaranteed that the Oilers, under his ownership, would spend generously on their roster.

If his offer had been made five years ago, the 33-member ownership of the Oilers, known as the Edmonton Investment Group, might’ve pounced on it. Unfortunately for Katz, the National Hockey League’s economic landscape has changed significantly since 2002, which is why the Investment Group refused to sell.

One of the changes is the NHL’s current collective bargaining agreement (CBA), the centrepiece of which is a salary cap that ties players’ salaries to league revenue fluctuations on a sliding scale. This ensures that at best the players receive no more than 57% of league revenues in a given season. Capped players’ salaries ensure more revenue for owners and is also an attractive selling point for prospective buyers like Katz, thus contributing to the increase in franchise values around the league.

The main reason the Oilers are enticing to a guy like Katz, though – and why the current ownership won’t sell – is the rise in value of the Canadian dollar over the past five years. During the late 1990s and into the first half of this decade the loonie fluctuated between 63 to 70 cents US, crippling for popular teams like the Oilers and Calgary Flames whose revenues were in Canadian dollars but whose players’ salaries were in American greenbacks. The sluggish loonie, not the lack of a salary cap, was the reason for Alberta’s inability to retain their best players or bid competitively for free agents back then.

In the two years since the current CBA was imposed, the value of the Canadian dollar has soared to around 95 cents US, which has had a significant impact on the Calgary and Edmonton franchises. Prior to the season-killing NHL player lockout of 2004-05 the Oilers and Flames were considered struggling, small-market teams, but thanks to the robust Canadian dollar the two currently rank among the top revenue-grossing teams in the league. Cal Nichols, chairman of the Edmonton Investment Group, admitted to a Nashville newspaper in July that the Oilers ranked seventh overall in revenue for the 2006-07 season.

The Oilers and Flames weren’t the only Canadian teams benefiting from the stronger dollar. The six Canadian NHL teams accounted last season for one third of the league’s revenues, no small feat considering the other 24 teams in the league are located in mostly larger American markets. That stronger dollar is why the Oilers and Flames have kept pace with the NHL’s rising salary cap and don’t need a billionaire owner like Katz to do it – so much for the myth of the Oilers and Flames as struggling, small-market teams.

The Oilers ownership group is now making a lot more money than at any previous point in its tenure and with the dollar showing no signs of decline, they’re understandably unwilling to part with what could be a cash cow.

The City of Edmonton’s plans for a new arena, something the Oilers obviously support, is also a factor in the current ownership decision. The seating capacity at Rexall Place is 16,839 and, while the Oilers have little trouble filling the building, their attendance ranks in the middle teens out of 30 NHL teams. A bigger venue, seating more than 18,000 fans and with more corporate suites, could boost the Oilers’ revenues significantly higher.

It’s surprising that Katz didn’t at least try to pursue ownership of a new arena as the Oilers would have then had to negotiate a lease agreement with him and thus give him a potential foothold toward a future purchase. As it stands now it’s more advantageous for the Oilers to negotiate a lease agreement with the city than with a single arena owner.

The current owners were considered heroes by Edmonton hockey fans for purchasing the club nearly 10 years ago and preventing its relocation. It was love of hockey that spurred many of them to buy in, but it’s the potential for revenue growth that’s keeping them, and putting a rich, prospective buyer like Katz on the outside looking in.

Between the Lines is a column on current affairs topics that touch on business in the province. Lyle Richardson