Nathan Vardi, Forbes Magazine dated December 20, 2010
On the surface Geoffrey Molson's acquisition of the Montreal Canadiens is a heartwarming tale. Together with his two brothers, Andrew and Justin, this seventh generation of the storied Molson brewing family reacquired a hockey team that their great-uncle and grandfather first bought in 1957. "This is a very exciting time for our family," Molson said after agreeing to purchase the team last year.
Exciting for the NHL, too. The $575 million Molson rounded up to pull off the leveraged buyout of the Canadiens--the purchase price included the Bell Center arena and a side entertainment promotion business--was the most ever paid to buy a hockey franchise. It made George Gillett Jr., the man on the other side of the deal, into one of the most profitable hockey investors ever. There's another side to the story. Half the funds used in the buyout were borrowed, and many of the obvious tactics used to bolster the team's value were already used by the prior owner. It could be years before the deal makes financial sense.
How can a hockey team be worth $575 million? NHL franchises are generally valued at between two or three times revenue, but the Canadiens sold in 2009 for closer to four times revenue. FORBES estimates the team is worth only $408 million. By comparison, a few months after Molson closed on the Canadiens, the Tampa Bay Lightning were sold for $93 million, $113 million less than the amount paid for them in 2008.
"These were not just financial investors," explains Drew Dorweiler, who runs Dartmouth Partners, a Montreal business valuation firm. "This deal was about purchasers looking for business synergies, strategic advantages, blocking their competitors and obtaining broadcast content."
Hard to remember, but a decade ago no one saw opportunity in the Canadiens. The team was inept on the ice and barely breaking even financially. When the publicly traded Molson brewing company, in which the Molson family held a big chunk of shares, put the team up for sale, the only buyer to emerge was Gillett. A Colorado financier, Gillett has specialized in debt-fueled sports and recreation ventures ranging from skiing to English Premier League soccer and Nascar. Montreal fans were suspicious of this outsider in 2001. Had they realized part of Gillett's attraction to the sacred hockey franchise was its usefulness as a tax shelter for the cash his other businesses were producing, there may have been a revolt. Gillett borrowed heavily, putting down $50 million or so in a $180 million transaction for 80.1% of the team and 100% of the arena.
Funny thing, though. Gillett ended up falling in love with Montreal, and the town embraced him. He took advantage of the Molson brewing company's neglect--it hadn't even bothered to sell the arena's naming rights--and grew operating profits to $40 million or so annually. He put the team on a French-language cable network and built a concerts-and-events promotion business that kept the arena filled on most nights and now generates some $10 million a year of operating profits. Gillett made another key decision: He kept Pierre Boivin as the Canadiens' president, figuring the manager appointed in 1999 would flourish after being unshackled from a major corporation. Boivin became one of the most respected hockey executives in the NHL.
But by 2009 Gillett needed cash to deal with debts unrelated to the Canadiens. Selling the team helped, but one of Gillett's companies still defaulted on a $70 million loan connected to his investment in the Liverpool Football Club. In the sale of the Canadiens to the Molsons, however, he made nearly seven times his original investment, pocketing some $340 million in dividends and realized gains. "The numbers don't show the pride we had in owning this marvelous asset nor the heartbreak we suffered in selling it," says Gillett, who still watches every Canadiens game from his home in Vail, Colo.
To make the $575 million deal happen the Molson family contributed $140 million for a controlling interest in the team and building, says a person familiar with the situation. But the Molson family needed help to outbid several interested buyers, like a group headed by Stephen Bronfman, who had hopes of using the Canadiens to build a regional sports television channel, and another led by Pierre Karl Péladeau, who runs communications company Quebecor and was searching for content for his broadcast and wireless offerings. One of the partners in Péladeau's proposal was René Angélil, the husband and manager of Céline Dion.
Part II : http://www.forbes.com/forbes/2010/1220/nhl-valuations-10-geoff-molson-montreal-canadiens-thin-ice_2.html
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