Jeff Shumway knew the Phoenix Coyotes were in deep financial trouble as he headed into a meeting at the Glendale Civic Center last Oct. 14.
The National Hockey League club was losing more than $30-million (U.S.) a year, attendance at games had plummeted and efforts to find other investors had gone nowhere. Mr. Shumway, the club's CEO, knew something had to be done and he called the meeting to discuss the team's future.
More than a dozen people gathered to hear what he had to say. They included Coyotes' majority owner Jerry Moyes, his long-time lawyer Earl Scudder, representatives from lenders MSD Capital LP who manage money for computer magnate Michael Dell, and David Zimmerman, the NHL's chief legal council.
Mr. Shumway was blunt. Without substantial changes the Coyotes were not viable in Phoenix. It was time to consider selling the club, moving it or filing for bankruptcy protection.
Over the next seven months, Mr. Shumway and the others wrestled over the options.
Today, an Arizona bankruptcy court will begin hearing arguments to determine the fate of the franchise.
Mr. Moyes wants to sell the club to Canadian businessman Jim Balsillie, who plans to move it to Hamilton. The NHL wants to keep the Coyotes in Phoenix and argues it controls where teams play. The league is being backed by the National Football League, National Basketball Association and Major League Baseball, which have filed motions in support.
While the problems facing the Coyotes go back years, court filings show that everything came to head during that meeting last October.
Mr. Shumway told the gathering that he had been grappling with the club's financial woes for months. He'd travelled to the NHL's head office in New York four times since June, seeking financial help. The league had given the club an advance on some of the national television revenue all teams were due to receive in late October. But it wasn't enough. The Coyotes were still on track to lose $36.3-million for the 2008-09 season.
The situation was about to get worse. Despite some of the lowest ticket prices in the league, Coyotes attendance had dropped below the NHL's revenue-sharing requirement. The league mandates that each club meet certain benchmarks, including selling an average of 13,500 tickets a game, in order to qualify for a full share of television revenue. Teams that don't meet the benchmarks get less money. For the Coyotes, that meant a $4-million reduction to $10.4-million in 2008.
Mr. Shumway laid out four options - status quo, find a buyer, move the team or renegotiate the club's 30-year arena lease with the city of Glendale, the Phoenix suburb that had spent more than $180-million building the Jobing.com arena in 2003.
He ruled out the first option, telling the meeting that under current conditions the club was not viable. The second and third options involved the NHL operating the team, finding a buyer or getting out of the arena lease, such as through bankruptcy protection. But he said, "ultimately [the]NHL will conclude that [the]team must be moved."
The meeting quickly became heated. The MSD officials, who are owed nearly $80-million, rejected talk of loan concessions and Mr. Moyes said if the city and others didn't relent, he would put the team into bankruptcy protection. NHL deputy commissioner Bill Daly said Mr. Moyes announced he was "broke" and "done" financing the team, opening the door for the league to take control.
Nothing was decided and by early November, the club was running out of cash and slashing costs.
On Nov. 3, NHL commissioner Gary Bettman summoned everyone to New York for an "all-hands meeting." Joining the discussions was Glendale city manager Ed Beasley.
According to Mr. Shumway, Mr. Bettman persuaded Mr. Beasley to provide up to $15-million in lease concessions. Then in private chats with Mr. Shumway and Mr. Moyes, he said he could get even more. Mr. Shumway wasn't convinced. He'd calculated that even if the club received $24-million worth of breaks, it would still be $4-million in the hole.
Mr. Daly said the league offered to provide further funding to the club in return for Mr. Moyes signing documents that handed the league voting control. Mr. Moyes, he added, would be able to keep his titles to avoid public embarrassment. From then on, he said the league ran day-to-day operations and fired Mr. Shumway on Jan. 23, 2009.
Mr. Shumway has insisted the league never ran the operations but merely received weekly financial updates. He also said he received assurances from Mr. Zimmerman that the documents Mr. Moyes signed concerning voting control did not change anything in terms of club management. As for his own departure, Mr. Shumway said it was voluntary.
Long before any of these meetings took place, Mr. Moyes had been quietly shopping the team around for nearly two years. Finally in April, his lawyer, Mr. Scudder, found a potential buyer.
He'd been contacted by Richard Rodier, a Toronto lawyer who represents Mr. Balsillie. Mr. Rodier had been tracking the club's fortunes in the press and he told Mr. Scudder that Mr. Balsillie was interested in buying the club and moving it to Hamilton.
Mr. Balsillie, co-chief executive of Research In Motion, had been through this before. He'd made unsuccessful attempts to buy the Penguins in 2006 and the Nashville Predators in 2007, ruffling the NHL's feathers both times with plans to move the clubs to HamiltonOn April 3, Mr. Scudder told Mr. Bettman about the offer. Mr. Bettman told him relocation was up to the league and that he preferred the Coyotes remain in Phoenix. If the club was to be moved, Mr. Bettman added, "it should first be offered to Winnipeg" where the team had come from in 1996.
Mr. Bettman had been struggling to try to find a buyer himself. In an internal e-mail dated April 4 he said "this is looking more and more difficult since no one seems to be excited about a team losing 40mm". He had one nibble, a proposal to keep the team in Phoenix from Jerry Reinsdorf, a Chicago businessman who owns baseball's Chicago White Sox and basketball's Chicago Bulls.
Mr. Scudder kept negotiating with Mr. Balsillie and they came to a deal on April 17, worth $212.5-million. Mr. Balsillie was ready to put $20-million down and fund the Coyotes through the Chapter 11 process.
On May 5, Mr. Bettman and Mr. Daly headed to Phoenix to go over Mr. Reinsdorf's proposal with Mr. Moyes. Before they could meet, Mr. Scudder called to say the Coyotes had just filed for Chapter 11 protection and planned to sell the club to Mr. Balsillie.
Mr. Bettman was furious. He had no idea discussions had gone that far and insisted he was in control of the club. Furthermore, Mr. Daly said they had told Mr. Scudder about the Reinsdorf offer four days earlier and he had encouraged them to pursue it, claiming no better offer had come in.
They quickly filed legal papers claiming Mr. Moyes had no authority to put the team into protection and alleging Mr. Balsillie had a history of breaking league rules. Mr. Moyes countered that he had authority and he attacked the league's rules on relocation, calling them a violation of anti-trust laws.
As the court hearing begins today, the stakes couldn't be higher. This could be Mr. Balsillie's last chance to buy a team while the NHL is fighting to preserve its authority over where teams play.
"What is at stake here is not simply an ownership interest in a standalone business," the league said in a court filing, " but, rather, the fundamental structure of the thirty-team NHL venture itself." ***
Fate of a franchise
Today a U.S. court will begin sifting through legal arguments and evidence pointing to the behind-the scenes power struggle for the Phoenix Coyotes. This is an e-mail from NHL commissioner Gary Bettman to his deputy, Bill Daly, and legal counsel David Zimmerman.
"Spoke to Scudder. Nothing has changed since last week - hasn't heard from Chambers and still waiting for an offer from Profitt. I reiterated that we're running out of time. I made arrangements for Taveras to do due diligence for Reinsdorf. We both agreed that we are trying to maximize value (and recovery for Jerry Moyes) but this is looking more and more difficult since no one seems to be excited about a team losing 40mm. He said this could depend on how much Glendale will contribute. He also said that while he's not agreeing (or is authorized to agree), just getting Jerry off the hook is certainly something that they are focused on. I told him that at some point, if we don't have an alternative, I will have to start looking at the moving option. He then told me that people are starting to circle. I asked what he meant and he said that he heard from Rodier. I said that he is not authorized to talk to anyone about moving - they are trying to sell the Coyotes in Phoenix and I have the proxy - so that if anyone asks him about moving he should decline to talk about it and refer them to me. He said he understood. He then asked about Southern Ontario and I responded that it's a league opportunity, the building is too old etc. and, frankly, if this team had to move, it should first be offered to Winnipeg. I also said that getting out of the lease will be an issue and he responded that it can be done in bankruptcy. I suggested that unless he has DIP financing the club will be deal because a bankruptcy court won't void the lease in time for next season's schedule, no one seems to want to fund the losses and that Jerry will get nothing in a bankruptcy (and we still have his guarantee). That's my report."
Jeff Shumway says the league never ran the Coyotes' operations but merely received weekly financial updates.
Jim Balsillie, co-CEO of Research in Motion, had a $212.5-million offer, with plans to move the club to Ontario, in place by April 17.
NHL commissioner Gary Bettman had also been seeking a buyer for the Coyotes. He had one nibble to keep the club in Phoenix.
Coyotes owner Jerry Moyes, who wants to sell to Jim Balsillie, is challenging the NHL's rules on relocation, alleging they violate anti-trust laws.