Could Private Equity Solve Pro Hockey's Problems?

(Corrects name of the company that took Bauer public in ninth paragraph.)

When private equity firms go shopping for a takeover, they look for certain qualities. Weak management. Underachieving revenue. Opportunities to expand by taking on debt. Problems that are driving down value, but could be solved by a fresh set of outside managers.

Sound like any professional sports you know?

Private equity firms like to buy distressed properties, and right now the National Hockey League—fourth of the four pro sports, nonentity on SportsCenter, and days away from its second work stoppage in seven years—is as distressed as it gets. Fans have long fantasized about new league management (booing Commissioner Gary Bettman has become a tradition at the Stanley Cup ceremony), and the idea of private equity swooping in to the rescue is actually not as far-fetched as it sounds. In early 2005, with players and owners at an extra-bleak moment of a season-ending labor dispute, Bain Capital made a surprise offer to buy out the entire league for $3.5 billion.

Three men—Stephen Pagliuca of Bain, and Robert Caporale and Randy Vataha of Game Plan LLC, a sports consultancy—made the pitch to a meeting of the NHL’s board of governors at a New York hotel that spring. By buying out all 30 teams and combining them into a modified single entity, they argued, they could streamline operations, boost TV revenue, and negotiate down player salaries from a position of absolute strength.

“They actually clapped at the end of the presentation,” Caporale says. “Which was interesting, because part of the presentation, the part that my colleagues asked me to give, was the one where we said, ‘You’re running this business all wrong.’”

The bid failed after a number of owners made it clear they were unwilling to part with their franchises—which, to some, hold far more emotional value than real worth. Still, the episode offers a useful window into how private equity operates: spotting troubled entities, using leverage to buy them out, and renovating the business. Then, and again today, the NHL is a surprisingly good fit.

“This certainly fits all the characteristics of what a distressed asset is,” says Tobias Moskowitz, author of Scorecasting and a finance professor at the University of Chicago’s Booth School of Business, where students are fond of blowing off exam steam on the ice.

With more capital, the NHL could use the National Basketball Association’s template for expanding into Europe and other markets, Moskowitz says, and outside managers could drive a harder bargain on player salaries. Not surprisingly, salaries are the league’s highest cost, but at 57 percent of league revenue they are also higher than those of the National Football League (47 percent) and the NBA (about 50 percent). Meanwhile, “the NHL certainly has cash flows that it will spin off almost immediately. You’ve got merchandising, you’ve got ticket revenue. So I think that would make this very attractive.”

Private equity is no stranger to hockey. Phil Falcone, the founder of Harbinger Capital Partners, skated for Harvard before playing professionally in Sweden, and today owns a minority stake in the Minnesota Wild franchise. The St. Louis Blues were until recently owned by TowerBrook Capital Partners, a private equity firm with offices in London, New York, and San Francisco. Providence Equity Partners, a Rhode Island firm, considered a bid for the Toronto Maple Leafs last fall, Bloomberg reported. And Kohlberg & Co. took equipment giant Bauer (BAU), whose skates are worn by two out of three players, public in January 2011 after three years of ownership.

Susan Chaplinsky, who teaches private equity at the University of Virginia’s business school, says a buyout firm that found itself in control of the NHL would be able to wring value out of everything from selling off assets to buying goods—peanuts, pucks—at scale.

One aspect, though, might pose a challenge to the usual private equity way of doing business. “In an airline industry, I can see a private equity shop going in and taking out or reconfiguring the contracts for the bag handlers,” Chaplinsky says. “You can replace them with technology, or with other workers. But if you go in and redo the contract for Sidney Crosby, is he going to play as well? The problem is, although there’s a lot of seemingly physical assets around this, in the stadiums and all that, at the heart of this there’s one huge intangible asset, which is the players.”

Valuing the NHL fairly remains a challenge. In 2005, Bain upped its offer to $4 billion, Bloomberg reported, before the deal fell through. Since then, attendance is up. “Revenues are higher,” Caporale says. “They’ve grown every year. There’s a new TV contract. The owners certainly believe it’s worth more, and to a certain extent I may agree with them.”

Does this mean another private equity effort could be under way?

“We’re thinking about it,” says Caporale. “Thinking only.”

Summers covers Wall Street and finance for Bloomberg Businessweek.

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Could Congress Compromise on Taxmageddon?

Right after Election Day, Congress and the president will face a gargantuan problem: By Dec. 31, drastic tax increases and spending cuts will kick in to suck about $607 billion from the economy. The Congressional Budget office has said the combination could push the U.S. back into a recession. It would also result in 83 percent of U.S. households facing an average $3,701 in tax increases, according to the Tax Policy Center.

Resolving the problem before the deadline, will of course be up to the very people who brought the country to the brink of default on its debt last summer and almost shut down the government at year-end because they couldn’t agree on whether to extend payroll tax cuts everyone claimed to support. With a track record like that, no one feels confident. And as my Bloomberg News colleague Richard Rubin reported Monday, lawmakers are nowhere near a deal. Representative Henry Waxman (D-Calif.) told Rubin that he and other lawmakers “don’t expect much from Congress” until after the election.

Yet there are signs that a compromise on Taxmageddon could be reached.

One hint is a comment made on television last week by Senator Lindsey Graham (R-S.C.). Graham told ABC he’d be willing to go against his own pledge never to raise taxes. A majority of Republicans has signed this pledge, which was espoused by anti-tax crusader Grover Norquist. It has come to be treated as dogma by Republicans who swept the House in 2010. The government possesses limited tools to get out of its fiscal mess—tax or spend—and unwillingness to cave on one of them has left both sides paralyzed.

“We are so far in debt that if you don’t give up some ideological ground, the country sinks,” Graham said. He seemed to suggest that he’d allow the expiration of the Bush tax cuts, which contributed $1.8 trillion to the deficit over the past decade. “When you talk about eliminating deductions and tax credits for the few, at the expense of the many,” said Graham, “I think over time the Republican Party’s position is going to shift.”

Graham isn’t the only one who has changed his mind about the pledge, but he is one of the most prominent. A number of additional members of Congress, citing the urgency of the country’s fiscal situation, have shifted positions as well.

These shifts probably won’t avert the drawn-out fight in December that everyone in Washington is bracing for. But they are a sign worth paying attention to: They signal that more Republicans are growing weary of the stalemate, and that on the biggest issues, some of them are willing to bend.

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A Flood of Crude Could Mean Oil Prices Will Drop

Two measures of oil availability have reached their highest levels in decades, according to Michael Shaoul, CEO of broker Oscar Gruss & Son. Demand “has been overwhelmed by supply,” he says.

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Merkel Says ‘Could Back’ Draghi as Trichet’s Successor at ECB

May 11, 2011, 7:00 AM EDT By Rainer Buergin

(Updates with euro in fifth paragraph.)

May 11 (Bloomberg) -- German Chancellor Angela Merkel signaled her backing for Mario Draghi as the next president of the European Central Bank, leaving the Bank of Italy governor unopposed by Europe’s political leaders.

“I know Mario Draghi,” Merkel told Die Zeit newspaper in an interview published today. “He’s a very interesting and experienced person. He’s very close to our ideas of the stability culture and solid economic policy. Germany could support his candidacy for the office of the ECB president.”

Merkel’s remarks, her first to mention a candidate for the ECB post by name, were confirmed by the Chancellery and by her chief spokesman, Steffen Seibert.

Germany is the last of the four biggest euro-region countries to endorse Draghi after French President Nicolas Sarkozy told Italian Prime Minister Silvio Berlusconi on April 26 that he would back an Italian. Spanish Finance Minister Elena Salgado called Draghi an “excellent candidate” the next day.

The euro failed to react as the news broke today. It was up 0.25 percent to $1.4392 as of 12:26 p.m. in Berlin.

Euro area finance ministers tentatively plan to make the ECB nomination when they meet in Brussels on May 16. Germany has previously signaled that European leaders will make a decision on an ECB candidate at a June summit.

Weber Pulls Out

Draghi became the frontrunner in February when Germany’s contender, then-Bundesbank President Axel Weber, pulled out of the race to succeed Jean-Claude Trichet at the ECB. Jens Weidmann, formerly Merkel’s chief economic adviser, took over at the helm of the Bundesbank this month.

Draghi’s candidacy is a done deal in Merkel’s coalition, a government official said in Berlin on condition of anonymity because of the sensitivity of the matter. The government’s main concern is having a candidate in place who will represent German interests and Draghi fits the bill, the official said.

The eight-year term of the ECB’s current president ends in October, creating an opening at the top of the world’s second- most powerful central bank after the U.S. Federal Reserve. While Germany alone cannot dictate who wins the post, its status as Europe’s largest economy and biggest guarantor of aid to peripheral euro countries make it the dominant voice in the appointment.

Debt Crisis

Draghi will inherit an ECB very different to the one that Trichet took over in November 2003. As ECB president, Draghi will have to eventually steer the central bank out of a sovereign debt crisis that that forced it to take the unprecedented steps of buying government bonds, a move some council members said jeopardizes its independence.

The ECB is also trying to convince politicians that Greece can’t be allowed to restructure their debts, a move that Executive Board member Lorenzo Bini Smaghi says could see part of the Greek banking system collapse.

At the same time, Draghi will also have to convince investors and voters that he can fulfill the ECB’s primary mandate and get inflation under control. Germany’s biggest- selling Bild newspaper earlier this year raised questions about whether an Italian could be trusted to get a grip on prices given the country’s inflationary history. The newspaper last month backed Draghi’s campaign, saying that Merkel wanted to support “the most German of the remaining candidates.”

Inflation accelerated to 2.7 percent in April, the fastest pace in 2 1/2 years and the ECB raised interest rates in that month for the first time in three years.

MIT-Trained

Draghi, a Massachusetts Institute of Technology-trained economist, has worked at the World Bank and Goldman Sachs Group Inc. He is also chairman of the Financial Stability Board, which was established by the Group of 20 nations in 2009 to oversee development of standards to strengthen global regulation.

In a sign Draghi understood the need to meet German skepticism head on, he appealed to the German inflation-fighting mindset, saying on April 13 that monetary policy is still “accommodative” even after the ECB raised its benchmark rate on April 7.

In February, he told newspaper Frankfurter Allgemeine Zeitung that Germany is an example for other nations, calling for tougher sanctions for budget-rule breaches and vowing to ensure price stability.

--With assistance from Brian Parkin, Tony Czuczka and Patrick Donahue in Berlin and John Fraher in London. Editors: Alan Crawford, Leon Mangasarian

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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