Potential bidders for the Ottawa Senators will get their first look at the club's books this week and they could be in for a shock.
The club was put up for auction last week and Game Plan, a Boston company organizing the bidding, is starting to send out financial material to prospective buyers.
Sources familiar with the club's finances said bidders will discover that buying the team and the Corel Centre is more complicated than many expected and could top $200-million.
Any bid for the Senators will almost certainly have to pay off its major creditors -- the National Hockey League, the Canadian Imperial Bank of Commerce and FleetBoston Financial. They are owed $108-million, including interest and emergency funding the banks extended when the club filed for bankruptcy protection in January.
But that's just the beginning. A new owner will be expected to pay $15-million the Senators owe the NHL for a strike fund in case of a labour dispute (all NHL teams must contribute to the fund and Ottawa is among the few clubs yet to pay). The Senators also have about $7-million owing in deferred player contracts and the club will likely require about $10-million in working capital.
That totals $140-million just for the team. The real challenge for bidders will be the Corel Centre.
The arena is not part of the Senators' bankruptcy filing and it is not included in the auction. But anyone who wants to buy the Senators and keep the team in Ottawa, such as Toronto-born billionaire Eugene Melnyk, will have to deal with the arena.
The Corel Centre is technically owned by Rod Bryden, whose bid for the club collapsed last week. However, Bryden's shares have been pledged to Covanta Energy Corp., a U.S. company that financed construction of the building. Covanta is owed nearly $300-million by the club and the arena. Anyone wanting to buy the building has to deal with Covanta.
Bryden's failed bid would have paid Covanta $31-million for the arena. Covanta officials were unavailable, but sources said there is no guarantee the company will settle for that much now.
Covanta is in a strong negotiating position. The Corel Centre makes money, about $18-million a year thanks to a favourable lease with the Senators, and Covanta faces no urgency to sell. Covanta is operating under bankruptcy protection and it put the Corel Centre up for sale a year ago.
Bidders for the Senators could decide not to buy the Corel Centre and instead negotiate a new lease with Covanta. However, the current lease includes a $50-million break fee. It is unclear if that fee has to be paid if the lease is cancelled under bankruptcy protection, but it would factor into negotiations.
Another complication is the concession operation at the Corel Centre, which is run by Aramark, a U.S.-based food company. The Senators owe Aramark $5-million that must be addressed if the club hopes to have catering for its 147 suites.
Then there is a $21-million loan the Corel Centre owes the Ontario government for an overpass. It is being paid back through a surcharge on tickets.
Finally, bidders have to factor in the fees that are piling up in connection with the Senators' bankruptcy protection. Game Plan is expected to charge a fee of up to 3 per cent of the value of the deal. The court-appointed monitor overseeing the bankruptcy protection is also generating millions of dollars in fees that must be covered by the Senators.
So far, Melnyk and Bryden's former partner, believed to be New York businessman Nelson Peltz, are the front-runners in bidding for the club. A Toronto-based limited partnership that was part of Bryden's bid has raised $287-million to buy the club. The partnership is monitoring the auction to see if it can participate in an offer.
Melnyk, who controls Biovail Corp., certainly has the cash. In 2001, he received $122-million in total compensation. Last fall, he sold $21.5-million (U.S.) worth of company shares. He also exercised options to buy 1.6 million shares at $7.75 (U.S.) each. Those shares are worth about $36.25 (U.S.) today.
One source familiar with the auction process said, unlike Bryden, bidders in the auction will not have to negotiate with creditors. However, creditors will have to approve the winning bid.
"All someone has to do is come in and say 'I'm willing to pay X and I want it free and clear,' " the source said. "It's like if someone defaults on a mortgage of a house and the banks foreclose, they would auction it off to the highest bidder."
Paul Waldie