Actually, Egil, Hamilton is not practical for reno reasons alone. The territorial issue is simply icing on the cake.
It is one thing to discuss building an arena when one has made an initial investment of the size made by the Calgary owners or EIG. It is quite another when one is making an initial investment of $220 million. I have done this in another thread, but allow me to run you through the math and some economic realities (all figures US$):
Since I was the target of your last post, please excuse me for reposting my response to your math..
You think so, huh? Here is something for you to chew on. Balsillie's wealth has been variously quoted as being in the $2 billion range. You want to know what that is made up of? It is made up of 11.5 million RIM shares. Multiplied by $164/share, that works out to $1.88 billion. I am sure he has exercised a stock option or two in his time, but I think you will find it to be shockingly low, and the ones he has exercised and then sold have been sold in order to finance completely the shares that he has retained. People seem to think that a non-dynastic billionaire like Balsillie has hundreds of millions in his checking account or between the cushions of his couch. Such is not the case. As stated above, Balsillie's billions are in his company's shares, as they should be. To the extent that he has other capital assets, they are most assuredly tucked away in investments.
I am fully aware of where most of Mr. Balsillie’s wealth lies. Local speculation seems to suggest that he would use about fifty million cash/liquid assets towards the franchise purchase and finance the remaining 170 million. However, since I have no concrete evidence to support this I will for the sake of argument concede your point and assume that he will initially finance the entire purchase.
Now, if you were to suggest that he would finance the purchase by selling 2 or 3 million of his RIM shares, well you don't really know too much about finance or taxes. The act of him doing so would result in his stock price coming under pressure and depress the value of his remaining holdings as well as his fellow stockholders.
Let’s play a little thought experiment here. RIM trades about 8-9 million shares per day. Suppose Mr. Balsillie was to sell 40,000 shares per month for 5 years. If this was done completely anonymously then based on volume alone there is no way that this would depress share prices. However, being an insider Balsillie could not sell 2.5 million shares without filing notice so the anonymous part is out the window. It is true that a substantial sell-off by an insider could negatively affect stock values. This is generally because it has the potential to create the impression that the insider feels future value of the stock may be less. But if it was clear that sale was to finance a highly public purchase and that the total to be divested was less than a quarter of his shares do you really believe that there would be a resulting erosion of confidence. (As an aside, contrary to popular belief tere are many that feel that it is actually the case that the real concern with insider trading is on the buying side rather than with mass sell-off.)
I am not suggesting that this exact scenario is realistic. I am very sure that if he does decide to sell his shares his approach will be much more elaborate, but it does illustrate that Mr. Balsillie could finance his purchase by selling RIM stock in a fairly benign manner.
Suffice it to say that such things are simply not done by anyone who has significant holdings in their company.
Here I might bring up Mark Cuban as a counterexample. As you know, after selling Broadcast.com to Yahoo for $5 billion in stock, he used hedging techniques to quickly divest himself of the Yahoo stock. He then used part of the proceeds to buy the Mavs. In fact, while Cuban may not be a conventional investor, there are some obvious similarities between him and Balsillie. In any case, moving a substantial portion of his assets into an investment for which he would have nearly complete control of the new company’s business plan is exactly the type of move that you would expect Cuban would suggest to Balsillie.
What's more, he would generate a gigantic capital gain on those shares and be forced to pay tens of millions in unnecessary taxes, which would further increase the amount of shares he would need to sell.
The only part I would not agree with is that the capital gains would be “unnecessary”. In the end, the only way that Balsillie’s stocks will not eventually generate capital gains is if he gives them away (something he has doneto a fairly subatantial degree). For someone with $2 billion in assets taxes are a fact of life. Of course, there are ways to reduce the impact and Mr. Balsillie would no doubt make every attempt to do so.
As for his other capital investments, he would face the very same tax issues. It would be horrific financial planning, and I assure you that guys who get as rich as this do not engage in poor fiancial planning.
There is more to financial planning than tax issues. Again, Mark Cuban’s name comes to mind. He has frequently railed against investors making decisions primarily on the basis of tax issues. I am not saying that he is right, but just pointing out that there is more than one way to look at this.
FURTHERMORE, given that he would be paying interest of something less than 10% (perhaps much less, in fact) if he were to borrow the money, he would be foolish to finance the purchase instead through the sale of assets which are currently appreciating at much more than that interest rate (RIM is doing wonderfully, having tripled over the past year), on top of the huge tax bill as aforesaid.
We agree that the purchase of a sports franchise is a very complex investment. We are both being very speculative. Though I would say that for Mr. Balsillie to leave such a large percentage of his wealth in one company could in itself be considered rather foolish from a risk management point of view.
In short, he would borrow the purchase price for the team and project finance the bulding of an arena if he were to want to move the team to KW. There is no other remotely feasible manner of proceeding.
This we disagree on. There are other options. However, for the rest of the post, I will assume that he will indeed seek long term financing for his purchase.
$200 Million, plus a $250 million arena, plus incidental and start-up costs and lease breaking fees (to say nothing of territorial fees, if applicable) is a big nut, even for a billionaire. Contrary to some around here, it is not petty cash.
Agreed, though the territorial fees are the primary reason why I do not see Hamilton as a realistic long term destination. $150 million to improve someone else’s building plus say $100 million more for territorial rights seems a bit much to me compared with what you could build in KW for the same price. This would also seem to be much less straight forward to finance since there are not obvious assets to back up this part of the deal.
That is a fair point, but here is the thing. It is one thing to expect or rely on franchise value appreciation, which one might expect. However, that appreciation is not monetized until the team is sold by him (if ever).
This goes for RIM stocks as well.
The $800 million in carrying costs is hard cash that must be financed out of cash flow. What that means is that, right out of the box, a KW team would have to generate revenues of probably somewhere around $110 million ($40 in carrying costs, a $40-45 million payroll and $25-30 million in operating costs), which in fact would put them in the upper echelon of revenue generators, which would result in a revenue sharing bill on top of the above (say $5-10 million more, who knows).
Here is where the post really starts. Let’s say that Mr. Balsillie decides to stay in Nashville. Everything you have said so far still applies. The only thing that changes is that the carrying costs will be reduced by about $24 million. This is a non-trivial amount. However, it is mitigated by the potential difference in revenue a team in Southwestern Ontario could generate as compared to the same team in Nashville. If numbers that have been flying around here are to be believed the difference in gate receipts between Nashville and all the Canadian teams is upwards of $400K per game. This amounts to a difference of about $17 million over the regular season. Because of higher ticket prices there could be additional revenue gains with even one round of playoffs. Even giving Nahsville the benefit of the doubt a case could be made that a KW based team could generate a net gain of at least $10 million dollars over a Nashville franchise. This would mean that Balsillie would need to come up with about $14 million more per year to make a go of it in KW than he would to stay in Nashville (Admittedly, these numbers are pulled out of the air but my sense is that the error is in Nashville’s favour). If it really is Mr. Balsillies desire to have a team in his back yard then this alone number does not seem to be large enough to prevent him from doing so.
This is to say nothing of the cost of operating his new facility. One might think that a shiny new arena would be filled up by concerts and other events? I highly doubt that, given that Toronto's venues would provide huge competition for those acts, as well as Copps here in Hamilton, which has a hard enough time getting major acts in itself.
This has always been my main concern with a potential KW move. I am still not sold on the areas ability to draw top acts in large enough numbers to keep the building going. However, there is no doubt in my mind that the immediate area is starved for such a facility and that if these events could be scheduled, they would sell-out. I also think that the Region would step-up with partial funding (say $50 million as a guess)
I hope that clarifies the "math" somewhat. Since you billed yourself as being math-literate, I have taken you at your word with this detailed response.
Thank you. It certainly does. Though to be honest, my goal was to draw others into the conversation. Since the “math” we are talking about is actually quite trivial, (say in comparison with Functional Analysis), your post should do the trick.
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By the way, at prime your $40 million annually corresponds to a 20 year amortization
including principle. As such under your terms the interest costs will be more like $300 million.
These costs do have positive tax implications.
All of this being said, I do not think that Hamilton will be the final destination.
I do agree with gscarpenter2002 that the reno cost plus the territorial rights would be
the deal-breaker.
I bet they would sell out. At least, in terms of the fans in the seats. Not sure about the corporate side - on the other hand, if Balsillie is also building a new state of the art arena in a better location, he could probably offer up incentives to the corporations that would also see that side suitably represented too. (First dibs on boxes in the new arena, say, if you stick it out for 2 years in Copps).
