Thursday, September 13, 2012

Deep Breath

The great Edmonton Arena saga took another twist yesterday: with little warning, city councillors met in camera to discuss a request from the Katz group. The specifics were not made public, but the essence of it seems to be Katz wants the city to kick in more money. City council basically said no - we'll stick with the deal we agreed to.

Katz is drifting into the realm of hated owners like George Steinbrenner and Art Modell. Because details are sketchy and communications from the Katz Group are poor, Daryl Katz went from a reclusive but supportive owner to a greedy bastard in one day. The mayor came out of the private meeting talking about frustration instead of optimism. The only thing missing was the angry mob with torches and pitchforks storming stately Katz manor.

There are so many tangents and missing pieces to this whole complex story. I understand some of this is because business negotiations often are better done in private so some sensitive details may be withheld. We don't have nearly all the answers yet. Here are some of the main questions in my mind:

Is $450 million enough to build the arena?

No, according to a release put out by Katz after yesterday's meeting. But that is for an "iconic arena that is well-integrated with surrounding neighbourhoods." On the other hand, this amount should be enough to build a decent facility, based on a couple of comparable examples. Pittsburgh's Consol Energy Center was completed a couple of years ago at a cost of $321 million, which is about $350 million in 2012 dollars. I looked up housing price information in Pittsburgh as a rough benchmark of how expensive construction costs are there compared to Edmonton. On average, real estate is about 25% cheaper in Pittsburgh than in Edmonton, so $350 million to build a building there would equate to $450 million here. I know, this is anything but scientific, but I needed some way to get a feel for the relative costs. Seattle just announced their own arena project, with a price tag of $490 million, so it would seem we're in the ballpark if you'll excuse the baseball metaphor.

Edmontonians will remember a few years ago when oil prices spiked and the Alberta oil patch was booming. Great for the economy, but all of a sudden many skilled tradespeople were up in Fort McMurray making crazy money, and those who stayed put could, and did, jack up rates for any kind of construction work. If the deal is not finalized and costs locked in soon, there is a legitimate risk of construction costs going much higher if we head into another oil boom.

I'm all for the iconic arena concept (although I hate the word - reminds me of the "world-class" meme that Toronto went through a while back, when it had a bad inferiority complex and was jealous of New York City.) But the idea is to build something truly great and unique, as opposed to mediocre or half-assed. This is exactly what Edmonton needs. Currently, our city is associated primarily with West Edmonton Mall, simply because it's big. There are plenty of mediocre, medium-sized malls here that nobody outside Edmonton cares about, and for good reason. We certainly don't need an expensive vanity project to make us feel better about ourselves, but once in a while we can show a little character and vision, shoot for the stars and create something fantastic. The current design is pretty amazing, but there is a real risk if costs escalate that things start getting watered down or eliminated completely. Basically, if we're going to spend a fortune on this thing, it should be done right, instead of some embarrassing compromise that makes the whole city look amateurish.

Why should Katz care about any of this? From a business perspective, he wants a new arena with more seats and boxes; his ticket revenue depends on the number of seats, not whether the walls are made of stamped zinc or grey concrete. Designing more space for concessions might boost beer sales between periods (I'm guessing - I wonder if that happened when they expanded the concession areas at Commonwealth a few years ago). Since the Oilers sell out every night and should continue to do so until Taylor Hall retires, it wouldn't matter much whether the building is iconic and well-integrated or not. Katz has also purchased some land next to the proposed arena site, so he actually does have some skin in the "neighbourhood redevelopment" game. And while he is currently Satan to many Edmontonians, it is possible Katz is looking beyond the bottom line for his hockey team, and actually cares that the city executes this project properly.

One more angle here, from Colby Cosh at Macleans. His article from last March raises the idea that, simply, Daryl Katz may not have the deep pockets we assume he does. He points to an increasingly regulated drug market in Canada, which suggests drug store profits may be declining. And since Rexall is not a public company, we don't know for sure what it's worth; we're relying on an estimate from Canadian Business magazine as to how much money Mr. Katz actually has.

Will the Oilers leave Edmonton if the deal falls through?

As I write this David Staples has put out a few tweets suggesting that yes, this is a real possibility, and cites mainly NFL teams as examples. I disagree. Early in his commissionership Gary Bettman did indeed relocate hockey teams as part of a push into the southern US. However, since about 1997 after four years on the job, he seems to have reversed his thinking and has worked to keep teams in their existing markets. He supported the Canadian Assistance Plan, designed to help Canadian teams with revenues in Canadian dollars but paying salaries in US dollars (worth about 50% more at the time). The Oilers certainly benefited from the plan, and it may have helped prevent the team leaving town in 1998. Bettman wants stability in the NHL, and relocating franchises is a last-ditch option. I'm not sure that an owner can even move a team unilaterally without league approval.

Putting on the Katz businessman hat once again, threatening to move the team is standard negotiating strategy. I am amazed how many people, including Edmonton city councillors, respond to this threat. Even if Bettman gives his blessing to move the Oilers, Edmonton is currently one of the most lucrative hockey markets in the world. Our ticket (and beer) prices are near the top of the NHL, and merchandise sales have to be solid as well. I remember seeing someone with a Nugent-Hopkins Oilers jersey about a week after he was drafted. At that point nobody was even sure if he would play in the NHL that year, but someone spent $150 for the jersey regardless. This town loves the Oilers, and puts its money where its mouth is.

So no wonder people freak out when the prospect of the Oilers leaving town comes up. I think it's all bluff, but even if I'm wrong and the NHL leaves town, it won't be for long. This is too rich a market to be untapped, especially when the majority of teams seem to be struggling financially.

Should the Oilers become a community-owned team?

I'm not sure why this comes up as part of the arena debate. Maybe Katz is perceived as the obstacle, and if there was a new ownership group more committed to hockey than profit, the arena would get built. I like the idea of a publicly-owned franchise, and it certainly works in Green Bay. I'm sure many hockey fans would chip in for a few shares each. But there's a flaw here: how would a community-owned team pony up $100 million, much less be in a position to make future financial guarantees as Katz has?

A consortium like Cal Nichols' EIG might work, where a dozen or so fairly wealthy investors would own the team. They would have the resources invest cash and commit to the future, but why would they negotiate any differently than Katz has? They would presumably be experienced businesspeople who would no more want to negotiate a bad deal for themselves than a single owner would. In other words, why would a small group of people do things any differently than a single person? Their interests are the same.

I doubt Katz would sell the team in any event, unless forced to.

Why can't we just get it done?

I hear this every afternoon on the Team 1260: just build it already. I really sympathize with this thinking, that we should not worry about getting the best possible deal, just a deal good enough to make it happen. The Seattle deal announced yesterday - quite the coincidence - involves public money but the terms are so much better for the public than what we have on the table here. Until yesterday, city council struck me as complete pushovers in this negotiation. But they showed some backbone for the first time and said no to Katz' new demands and reaffirmed the previous agreement is as far as they will go.

As soon as one party starts to say things like "we need this at any cost", you have no leverage. A fair agreement is almost impossible to negotiate if one side knows how badly the other party wants it. The more desperate you are, the worse a deal you get. You would not go into a job interview saying "I want this job so bad I'll take any salary," even if it were true. Same principle here. It would be a huge strategic mistake for either side to eliminate the possibility that they could walk away from the deal at any time.

What happens if the deal dies?

The Oilers have a rental agreement with Northlands for another two years. I guess they would keep playing there beyond 2014 absent a better facility and assuming the team is still in town. As a hockey venue, it is small by today's standards, and the ice quality is a problem. You would think ice would not be an issue in a cold, dry city like Edmonton, and it never used to be, but it is now. You notice it during games: passes jumping sticks, skates getting caught in ruts. This must be a solvable problem. Invest in new ice-making equipment, especially if you know you'll be there more than a couple of years. But there's really no reason NHL hockey can't continue at the old coliseum for a while. And let's not forget that this is where great things happened not too long ago. Physically the building is dated, cramped and ugly, but it has history and tradition and that should count for something. If the new arena is not built, it will be a giant missed opportunity for downtown, but we'll have saved a boatload of taxpayer cash and still have a half-decent place to watch the best hockey in the world.

Take a deep breath, Edmonton. Everything will be fine, one way or another.