COYOTES: HERE TO STAY

Takeaway: This deal was a lesson in perseverance & teamwork. Quitting at any point would have been easy, but we persevered & put the puck in the net.

By Daryl Jones

 

Four years ago, Keith, myself and Todd Jordan, our Managing Director of our Gaming, Lodging & Leisure team, embarked on a journey in which many people predicted we had little chance of succeeding at. With the support of our colleagues at Hedgeye, we entered the process to purchase the Phoenix Coyotes, a bankrupt NHL franchise.  Our proposal to purchase the team was seemingly received well (as you might imagine Keith played the lead role in that meeting!) and enabled us to become the key contender to own the team.

 

Coyotes_normal

 

Our analysis of the situation in Phoenix was vintage Hedgeye. We started with a macro perspective that it was likely the ideal time to buy a distressed asset in the Phoenix region as housing was literally in free fall.  Our view was that housing would ultimately revert to the mean, and thus home prices would see a strong recovery, which would then drive discretionary spending on things like sporting tickets.  In the Chart of the Day, we show the improvement in home prices in Phoenix since that period.

 

We then took a hard look at the financials of the team (hat tip to our colleague Anna Massion for some good work here), we found a business that was bloated on the cost side with some easy pro-forma cost reductions.  On the revenue side, we developed a plan for steady revenue growth with the unique idea of playing five games in another market (think the Buffalo Bills playing in Toronto).  Even though we came to agreement with the NHL on the parameters of a purchase via a letter of intent, the deal ultimately fell through as we were unable to agree to terms on an arena lease.

 

At that point, we chalked it up as a loss, but a win on the learning side, and watched over the last couple of years as various other groups attempted, yet failed, to purchase the franchise.  With the advent of the new collective bargaining agreement in 2013, which from our view created a very compelling economic situation for smaller market NHL teams, we decided to revisit the opportunity, almost three and half years after first looking at the team.

 

Coy7_normal

 

Over the course of the last few months, we and our partner Anthony LeBlanc were able to put together a very intriguing financing package with a major hedge fund as the lender. With Anthony’s guidance, an arena lease was negotiated that exemplifies a true public / private partnership.  And finally we found a lead equity investor in my friend George Gosbee from Calgary, who is now the Governor of the franchise, and closed the transaction earlier this week.

 

For Hedgeye and our partners, the deal was a true lesson in perseverance and teamwork.  Quitting at any point would have been easy, but ultimately we persevered and put the puck in the net.  While we are quite excited about the prospects for NHL hockey in Phoenix, I will ease the minds of any NHL hockey fans out there . . .  despite owning a small piece of the team, you can be rest assured Keith and I won’t be getting on the ice any time soon!

 

- Daryl "Big Alberta" Jones is Director of Research at Hedgeye Risk Management. In a prior life, he was a defenseman on Yale University's Men's Ice Hockey team.