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McKenzie: Situation with Coyotes will be messy

Bob McKenzie
5/6/2009 10:20:30 PM
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Do you know why I went to journalism school?

Because I was too dumb to become a lawyer or an accountant, yet here I am having to make sense of legal and financial issues that are way beyond my pay grade.

So let's see if we can navigate our way through this maze that is the Phoenix Coyotes, Chapter 11 bankruptcy and Jim Balsillie's $212.5 million (USD) offer to purchase (conditional on the franchise being relocated to southern Ontario).

The first thing you need to know is that NHL commissioner Gary Bettman was in Phoenix today, ostensibly to put the finishing touches on an intent to purchase agreement from Chicago White Sox owner Jerry Reinsdorf, whose intention was to apparently keep the financially-troubled Coyotes in their current home of Glendale, which is also home to Reinsdorf's spring-training baseball facility (a mile away from the Coyotes' Jobing.com Arena). That offer was expected to materialize within the next few days.

We don't know a lot about the Reinsdorf deal but suffice to say it likely wasn't in the $212.5 million range.

In any case, today's events clearly caught everyone, from the Coyotes' staff to the NHL head office, completely off guard.

Coyotes' owner Jerry Moyes, who is in deep debt as a result of his ownership of the franchise, circumvented whatever offer to purchase might have been coming from Reinsdorf by filing for Chapter 11 (reorganization) bankruptcy with an Arizona court. This was obviously done because Moyes was aware that Balsillie was prepared to make an immediate offer to purchase the moment the bankruptcy was filed.

It would seem obvious that Moyes knew that Balsillie's offer of $212.5 million was far more than anything that was coming from Reinsdorf or anyone else who might be interested in keeping the team in Phoenix. As the team's largest unsecured creditor to the tune of more than $100 million - unsecured creditors only get proceeds from the sale after secured creditors are looked after – Moyes knew his best chance of getting remuneration was with a bankruptcy-induced sale proposal from Balsillie.

Balsillie's bid of $212.5 million is what is known as a ''stalking horse bid.'' All that effectively means is that Balsillie's bid officially kicks off an official auction process. If anyone chooses to outbid Balsillie, they must do so by at least $5 million. The bankruptcy court is obliged to accept the highest offer that provides the best financial relief to the secured creditors, which ironically includes the NHL as the second largest ($35 million). It is unfathomable to think anyone would make the $217.5 million offer to keep the team in Phoenix.

But where this starts to get confusing is the conditional aspect of the offer. Balsillie is only prepared to pay $212.5 million as long as the franchise is moved to southern Ontario.

And that is not something, it would appear, that Moyes or Balsillie can arbitrarily achieve on their own.

The question then becomes, can a bankruptcy court in Arizona mandate the NHL to relocate or transfer a franchise in order to satisfy the needs of the Coyotes' secured creditors?

It's an interesting legal question and without putting words in anyone's mouth – no one is commenting anyway – the safe bet is that Balsillie's group believes that's a possibility while the NHL doesn't believe a bankruptcy court can tell it how to conduct its affairs.

In fact, based on the press release issued by the NHL in the wake of the bankruptcy filing, it's clear the league questions even more than that.

The wording of the NHL press release suggests the league believes Moyes was perhaps not within his rights to file the bankruptcy claim and that he, by virtue of the NHL monies forwarded to the team since October, may not have been in control of the franchise. In any case, the league said it has now ''removed'' Moyes as an official of the club.

Clearly, the league is at odds with Moyes and vice versa.

We don't need to provide a history of Balsillie's relationship with the NHL, but twice he has attempted to purchase, and relocate, NHL franchises and twice he has failed to accomplish that. Balsillie has demonstrated he's committed to putting a second team in southern Ontario.

For now, the next big development would appear to be coming out of the bankruptcy court, which convenes on Thursday. Although it's quite possible the NHL will mount a legal challenge even before then to challenge Moyes' authority to file for Chapter 11 bankruptcy

But let's assume the case does get to bankruptcy court. If the bankruptcy court deems that it cannot enforce the ''relocation'' aspect of the Balsillie offer, then it would be obliged to take the best ''unconditional'' offer. In other words, if someone else – Reinsdorf? – came in and made a lesser financial offer than Balsillie but attached no conditions on location or financing, that offer would ultimately have to be accepted.

But if the bankruptcy court deems it can enforce the ''relocation'' or ''transfer'' of the franchise from Phoenix to southern Ontario, then the sale to Balsillie can be accepted, although you would have to believe the NHL would legally challenge the validity of a court claim of that nature.

Whether the Coyotes' reportedly ''iron-clad'' lease with the city of Glendale is a factor is another issue entirely.

The potential for this to be a legal quagmire appears to be extremely high.

In the meantime, Balsillie will mount a massive and no doubt highly successful public relations campaign to add a seventh Canadian franchise. In fact, as soon as the story broke, Balsillie already had a website – www.makeitseven.ca – up and running. Balsillie will drape himself in the flag and with rampant backing from the majority of Canadian hockey fans, and probably the unofficial support of the NHL Players' Association, beat the drum for the NHL to endorse the move of a financially-troubled sunbelt franchise to a more revenue-friendly venue in the home of hockey.

Where precisely in southern Ontario Balsillie would put the Coyotes remains to be seen. In the past, it has always been Hamilton, but Balsillie's bid this time carefully omitted a specific location and only identified ''southern Ontario'' and an ''unserved'' market. How all that plays out in terms of the Toronto Maple Leafs and Buffalo Sabres remains to be seen.

The NHL, meanwhile, is likely to battle Balsillie on the issue of ''control.'' While the league will get destroyed in the court of public opinion in Canada, it is quite likely to exert what it perceives to be its legal rights on how it does business. That is, the league believes it ultimately controls who owns NHL franchises and where they are located.

To do that, NHL commissioner Gary Bettman will ultimately require the backing of the board of governors, but he has had it in the past. It remains to be seen whether he has it this time, but this has all the makings of a battle royale.

The battle lines are clearly drawn. While Bettman and the NHL will take a beating in that court of public opinion in Canada, one suspects this situation will ultimately be decided in a legal court.
 
 

Bob McKenzie

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