I wrote this blog on June 10, 2013 and have been sitting on it. Late this afternoon, June 13, 2013 Mike Sunnicks of the Phoenix Business Journal reported on Glendale’s concerns about the RSE bid. I share the city’s concerns. I see no reason to hold this back any longer.  Remember I am looking at the RSE deal having been a former councilmember. The fact that RSE is using borrowed money to finance this deal with very little of their own equity is disturbing. With such a small proportionality of investment it allows RSE a great deal of latitude to abandon Glendale and relocate in a few years.

I know how desperately fans want to keep the Coyotes here. I share that sentiment but not at any price. It’s time we all took an objective look at this deal before embracing it. There are those who will say if it’s not a Jamison deal I am against it. That is not true. If I were still on council I would have a fiduciary responsibility to make decisions that are in the best interest of Glendale based on the facts. Truthfully, if I were on council, I would not accept this deal based upon the facts that are publicly available about RSE’s deal at this time.

So please save your hate email and nasty tweets. I know that I have angered you but once you get past that initial anger, please take a hard look at this deal. Here goes what I wrote several days ago:

Everyone is well aware that the NHL blessed Renaissance Sports and Entertainment (RSE) as a legitimate contender for ownership of the Coyotes. They even chaperoned RSE’s first meeting with Glendale City officials. However, note that the NHL has NOT made a formal announcement to date stating that they are in fact, selling the team to RSE.

Coyotes logoMost of the Coyote fan base and the media seem enthralled with the news and are ready to embrace an NHL/RSE deal. But there are two factors that have so far been ignored. No one in the media has really “kicked the tires and looked under the hood” of this deal; and will Glendale be willing to pay a lease management fee greater than its budgeted and soon-to-be-approved $6M a year?

So why don’t you and I? Let’s take a closer look at this deal. RSE has raised $45M in equity ($10M coming from Gosbee). We will use these figures all of which have been widely publicized in the media and to date unquestioned by any journalist. RSE is getting $200M in loans. One loan from Fortress Investment Group is $120M. Sources say the interest rate is 8%. RSE is getting a loan from the NHL for another $80M. Sources say the interest rate is 5% and that payments start the first year – not in 5 years. The interest on these two debts could be as much as $13.6M a year. My goodness! $13.6M a year in interest! That’s WITHOUT any payment on the principle! Is it any wonder that RSE would like to get an annual lease management payment of $13M-$15M? This deal is heavily debt laden.

Let’s look at costs associated with Jobing.com. According to Coyotes Newco, LLC, the NHL entity that runs the arena, in their Annual Budget submission to the City of Glendale for Fiscal Year ending June 30, 2014, Total Annual Expenditures are projected at $12,468,912 and the Annual Net Cash Requirement as projected by the NHL is $9,088,193. Earned revenue from events will be in the $3.3M range. Based upon these figures submitted to the city by the NHL, the entity currently running the arena, RSE will spend a minimum of another $9M as a Net Cash Requirement. Who would know better what it costs than the NHL currently doing the job?

So we have $13.6M in annual interest payments and $9M in cash needed to operate the arena. Simple math says the minimum figure that RSE will spend every year is $22.6M. The $45M of equity that RSE raised will last almost two years. Where do they get the money to continue? Don’t say from the revenue generated by the arena events. That revenue will offset the total annual arena expenditures of $12M. Ok, tires kicked and the hood has been looked under.

Fortress is not in this deal out of the goodness of its heart. The reason Fortress has the option to purchase equity in the team is that they know darn good and well that when RSE flips the team, it will be much more profitable for them to be in the game and get their expansion check profits than just simply to be repaid at 8%. If RSE can get out of its lease in year 3 or 4 it’s a brilliant strategy. They will make a killing on expansion fees and will have essentially bought a team for only $45M in real equity.

Glendale City Council

Glendale City Council

That leads to the second question. Will Glendale be willing to pay a lease management fee greater than $6M a year? For the sake of argument let’s say Glendale is willing to go as high as $10M a year. How does it find the $4M it is short? Preliminary approval of the budget says monies within the budget may be reassigned to different departments/categories but overall budget expenditures are capped at the approved amount and may not be increased. One scenario could be that the NHL is willing to forgo the second $25M payment owed to it by the city. The city could then apply those funds and cover the $4M shortfall needed to pay a $10M annual lease management fee for 6 years. Or the city could ask for greater revenue sharing from the new owner in the form of a percentage of the concession revenue, a larger ticket surcharge, all of the naming rights revenue and have the team create a new revenue stream in the form of a parking charge. All seem counterproductive but could happen. Would it cover the $4M shortfall?  I am sure somebody somewhere will have created positive projections but there is no way to be sure until one sees the revenues generated in the first year of this scheme.

If the city were to agree to pay $10M a year that would cover RSE’s need for cash to operate the arena but obviously it does not cover RSE’s $13.6M (or thereabout) annual interest payment on their debt. It looks like RSE’s equity investment if used to cover only that debt would last about three years. Then what??

There are those who will be very unhappy reading this analysis because they will perceive the recitation of these facts based upon widely media reported numbers as “negative.” Why bother with facts and dash hopes of RSE becoming the new owner? These numbers are as reliable as possible using sources available. These concepts are known to the NHL and potential owners. Now the fan base should objectively analyze these numbers (or any other numbers revealed by the NHL, potential owners, the city or the media) as we hope and wait (not so patiently) for a final end to this misery of limbo regarding team ownership.

The obvious conclusion is that RSE will bleed money and that will be the rationale for their relocation of the team after a few, short years. Just the news no red-blooded Coyotes fan wants to hear.