Friday, June 06, 2008

Boots turns to Balsillie

It wasn't all that long ago that Boots Del Biaggio and Jim Balsillie were seen as in competition for the same entity, two well-moneyed (or so we heard) investors looking to purchase the Nashville Predators.

Now, with Boots in trouble — and is there ever a heap of it — we learn that he turned to Balsillie to get him out of a jam.

After all, if you're facing financial difficulties, what better way to pull out of a hole than to sell to the highest bidder. And, as we've seen previously, Balsille sets the standard in that department:
Mr. Del Biaggio, a California-based financier who is facing fraud allegations and is reportedly under investigation by the U.S. Department of Justice, tried to sell his 27% preferred equity stake in the Tennesse-based NHL franchise and that of his business partner to Mr. Balsillie during a meeting on May 22.

According to sources familiar with the events, a tentative deal was arranged that would have seen Mr. Del Biaggio's combined one-third minority interest, with an estimated book value of US$30-million, transferred to Mr. Balsillie for a "significant premium."
We've seen this story before. And it has a similar ending this time around:
However when an advisor to Mr. Del Biaggio ... informed NHL Commissioner Gary Bettman of the discussions, sources say the 40-year-old investor was discouraged from proceeding with a deal.
This is a story that's been developing over the past few days, one that Toronto radio personality Bob McCown has been following closely but that I didn't hop on due to the ongoing finals. McCown had Balsillie's advisor, Richard Rodier, in studio Wednesday to talk about what Mr. BlackBerry's next step would be, and Rodier dropped some plum hints that this was headed back into the limelight.

Then, last night, McCown revealed that Del Biaggio will file for bankruptcy as soon as today, and broke down some of the backroom shenanigans that have gone on thus far.

When Boots bought 27 per cent of the Nashville franchise with his funny money, several key sections of the agreement would have allowed him to later move that team to Kansas City:
  • he could buyout other partners if the team lost significant cash
  • he could sell his stake if the team was stable
  • he assumed no risk but would claim profits if there were any
A nice deal, all in all, but one that would reportedly not be extended to Balsillie if he took over Boots's share:
...Mr. Del Biaggio delivered a message to Mr. Balsillie's camp on May 23 that the league would not give it blessing to confer the same rights, which had been approved for the troubled U.S. financier, to the Canadian billionaire...
Here's what Rodier told McCown on Wednesday:
"I think it will become apparent in the next week or so that the commissioner's view is that there are no circumstances under which he wants Jim Balsillie in the league if there is a scintilla of chance that he might be able to apply for a relocation of the team to Southern Ontario within seven years."
Nevermind next week — it took less than two days.

And now there's absolutely no question what Balsillie's facing from the league offices.

One more pertinent point here: Rodier also indicated Wednesday that he believed Balsillie could put together a deal for an NHL team by September.

Rodier also seemed to suggest that the difficulty at that point wouldn't be getting the board of governors' approval; it'd be getting to the board vote at all.

Stay tuned.
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14 Comments:

At 1:58 PM, June 06, 2008, Blogger itchit said...

There seems to be comments from people in the legal profession on this blog from time to time. I would be interested to hear their take. To me this prejudice against Balsillie and a possible Canadian relocation seems obviously unfair. Is it illegal? Can Bettman be sued? Maybe I am overreacting because I live in Hamilton, but I've got to ask how much further evidence of Bettman's prejudice has to be exposed before he is not allowed to get away with it anymore?

 
At 2:07 PM, June 06, 2008, Blogger J. Michael Neal said...

Balsillie has the league over a barrel now. Once good, ol' Boots files for bankruptcy, a US federal court is involved. It can force the sale of del Biaggio's assets in order to cover debts. Those assets include not only the ownership stake, but all of the various goodies that came with it. The shielding from losses? That's an asset. The right to move the team? That's an asset. His call option on the rest of the team? That's an asset.

Unless the contract signed with del Biaggio is structured a lot more cleverly than anything else the league has done lately, Gary Bettman can't just make all of these clauses disappear. Further, if Balsillie is the highest bidder for assets that the trustee is selling, then Bettman is going to have to convince a judge that he shouldn't be the one to purchase them. The job of the judge and the trustee is to protect Boots' creditors, not keep a hockey team in Nashville.

This isn't going to end well from the perspective of the league office.

 
At 2:08 PM, June 06, 2008, Anonymous Anonymous said...

Nothing like wanting to keep a financially sound, savvy Billionaire who loves hockey out of the NHL ownership group. Good call Gary Bettman and Co.

 
At 2:13 PM, June 06, 2008, Anonymous Anshu said...

I would assume as a private entity, the league can make whatever decisions it wants. The owners have selected Bettman to make those decisions, so I don't think there is any illegality here. I could refuse to sell my private business to Ballsilie too, without justifying that decision to anyone.

So I think they way this gets resolved is for the owners to force the change by either ousting Bettman at the next available opportunity and replacing him with someone who doesn't hold the same view of Ballisilie and Canadian relocation, or encouraging/forcing Bettman to change his current position.

I'm guessing the owners figure Bettman is on the right track for getting a major US television deal, so they'll defer to his judgement. I don't hold that opinion, but I suspect the owners do.

 
At 2:14 PM, June 06, 2008, Blogger J. Michael Neal said...

itchit, IANAL, but I don't think that prejudice is a material issue in this, particularly once it heads to bankruptcy court. There, money doesn't so much talk as it does get up onstage and tap dance while singing the Hallelujah Chorus. I've been involved in a (very small) corporate bankruptcy, and all sorts of people get run over in the interests of getting as much money back to the creditors as possible.

Some of it depends upon which chapter of the bankruptcy code this is going to be handled under. Things are a lot less dire, both for Boots and for Bettman, if this is going to be a Chapter 11 reorganization. There, they can make claims as to which assets should be sold off, and have a greater say in what happens. From what little I've heard of the specifics, though, and based upon the nature of the lawsuits Boots is facing, I'm betting that this ends up in Chapter 7. Once there, all bets are off and the trustee and the judge can put Bettman in a little tiny box.

 
At 2:17 PM, June 06, 2008, Blogger J. Michael Neal said...

I would assume as a private entity, the league can make whatever decisions it wants. The owners have selected Bettman to make those decisions, so I don't think there is any illegality here. I could refuse to sell my private business to Ballsilie too, without justifying that decision to anyone.

It isn't a question of legality. However, once this goes into bankruptcy court, things get more complicated for the NHL. There rights as a private organization who can limit membership have to be weighed against the rights of del Biaggio's creditors. If the NHL asserts its rights in such a way that the value of Boots' assets are lowered, the judge will likely take a skeptical view of it.

 
At 2:33 PM, June 06, 2008, Anonymous Anonymous said...

I would assume as a private entity, the league can make whatever decisions it wants. The owners have selected Bettman to make those decisions, so I don't think there is any illegality here. I could refuse to sell my private business to Ballsilie too, without justifying that decision to anyone.

I'm no legal expert, and I'm not sure I completely understand the relationship between the NHL and each individual owner of the franchises. But on the flip side of the above statement, can't any owner chose to sell his team to anyone he pleases? What I mean is, why is it so difficult for Boots to sell to Balsille?

I gather that the NHL would have to approve the ownership change, and maybe that simply answers my question. But if someone wouldn't mind explaining how the relationsnip between the NHL and each individual owner works, I'd appreciate it.

 
At 3:30 PM, June 06, 2008, Anonymous stephen said...

Rodier's interview with Mcgown makes it sound like he and Balsillie could attempt to make an Ontario expansion franchise a poilitcal issue. That would be a fun fight to watch. Might explain why Balsillie is busy keeping his name talked about.

Did i hear Rodier correctly make the same suggestion Melnyk once did, that net of revenue sharing the Canadian teams account for 40% of something?

 
At 3:55 PM, June 06, 2008, Blogger itchit said...

@ j.m. neal :"Balsillie has the league over a barrel now."
- could be the title of Dolores Claman's next big hit!

 
At 5:05 PM, June 06, 2008, Anonymous Gerald said...

J. Michael, not sure if you're a lawyer, but while Del Biaggio's contractual rights are assets as you mention, the assets also come encumbered with certain other provisions. Specifically, the limits on transferability that may be set by the NHL with each of its member clubs.

While bankruptcy courts do have some latitude in this regard, they do not have carte blanche. It is entirely unclear (at best) that the NHL would be compelled to provide their consent to a change in ownership of a quarter of the Predators. Similarly, there is undoubtedly a shareholders agreement between the Preds shareholders which requires consent for any transfer (this is a universal feature in structures of this nature), and the same question would apply.

 
At 6:09 PM, June 06, 2008, Blogger J. Michael Neal said...

Gerald, I am not a lawyer, but that's never stopped anyone on the Internet. Regardless, I think that it's extremely likely that the bankruptcy court can, in at least some instances, override the NHL's ability to control the sale.

Let's start at the outside edge of the question. The argument that the court does not have the authority to override these implies that the NHL could prevent any sale of del Biaggio's ownership stake at all, simply by never approving any deal. It seems pretty clear to me that this wouldn't fly. I would bet that the court has the power to force a sale. If it can't, then we have found a very nifty bankruptcy shelter for rich people, that extends well beyond sports. Just make the sale of your major assets contingent upon someone else's approval, and, voila!, they can't be seized from you.

The question then becomes how far back from this outer edge the court can walk. In principle, selling the assets for less than they are worth isn't much different from not selling them at all. I can come up with all sorts of scams that, faced with bankruptcy, involve selling my assets to friends for less than they are worth and screwing my creditors.

I'm sure that a lawyer could come along and take all the fun out of this debate with facts and things, but my guess is that the NHL will retain some power over who the stake can be sold to. However, that power would crumble in the face of a bid that is substantially higher than the one that the NHL prefers. So far, Jim Balsillie has presented a front that he's willing to pay an insane price. I think the NHL may make the mistake of playing chicken with someone who is actually crazy.

 
At 10:00 PM, June 06, 2008, Anonymous Gerald said...

Gerald, I am not a lawyer, but that's never stopped anyone on the Internet.

Indeed.

If it can't, then we have found a very nifty bankruptcy shelter for rich people, that extends well beyond sports. Just make the sale of your major assets contingent upon someone else's approval, and, voila!, they can't be seized from you..

Surely you can see the flaw in that thinking. If not, consider the problem of what one does when one is not bankrupt and wants to divest one's assets for other reasons.

The question then becomes how far back from this outer edge the court can walk. In principle, selling the assets for less than they are worth isn't much different from not selling them at all. I can come up with all sorts of scams that, faced with bankruptcy, involve selling my assets to friends for less than they are worth and screwing my creditors.

JMN, the creators of the bankruptcy statutes actually had the brain cells necessary to anticipate that kind of behaviour. It is called a "preference" and is voidable.

I'm sure that a lawyer could come along and take all the fun out of this debate with facts and things,

Sorry about that, JMN. I hope I didn't ruin things too much.

So far, Jim Balsillie has presented a front that he's willing to pay an insane price.

An "insane price"? sorry, JMN, but the only people who think he offered Leipold an "insane price" are the hockey media and fans who have no clue how to value a business in the first place, much less do the due diligence to assess the value of the franchise. JB offered a small premium (10%) over the next highest bidder in a competitive environment. In a commercial setting, that is not what one calls an "insane price".

 
At 9:55 AM, June 07, 2008, Blogger J. Michael Neal said...

Gerald, is it your argument, then, the the NHL could, if it desired, prevent any sale of the ownership stake of a bankrupt owner?

 
At 9:35 AM, June 08, 2008, Anonymous Gerald said...

JMN, what I am saying is that it will depend to a great extent on the terms of the relevant documentation: the constating documents of the NHL, including the NHL's by-laws and other ancillary documents that the owners are required to sign (and I assure you that there are many) and the terms of the shareholders' agreement between Del Biaggio and the rest of the Nashville owners (of which I assure you there is one).

It will also depend on the particular circumstances, and I feel very confident indeed in assuming that the peabrain sports media knows a mere fraction of the relevant circumstances.

 

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