As you may have heard Wednesday on your local sports blog, Sixers managing owner Josh Harris is reportedly bidding to buy the New Jersey Devils, a team in the National Hockey League that, according to league sources, plays in New Jersey and loses money like they've been on a bad beat at Borgata for the last ten years. Also, they are a bitter rival of your Philadelphia Flyers, a point that may have been mentioned a few times by sports talk radio hosts yesterday as yet another example of how the Sixers are the absolute worst.
Lost in the ranting and raving about "THEY'RE OUR RIVALS" was a more interesting point, which is what the purchase could potentially mean for the future of the Sixers. It does raise some interesting questions about what the long-term business plan could be for an owner who owns two different teams in different markets, but the arena operating rights in one.
First, let's look at what we know for sure. Josh Harris has made his fortune buying and turning around distressed assets. He purchased the Sixers in 2011 for around $290 million, amidst reports that the previous owner, Comcast-Spectacor, had not been able to turn a profit on the team in ten years. Today, two years later, the team is estimated by Forbes to be worth $418 million.
The New Jersey Devils are the textbook definition of a distressed asset in the sports world, or in any world, quite frankly. The NHL is reportedly considering a takeover of the team due to massive debt. According to Forbes, the franchise is $230 million in the red, and is now missing payments on a restructured loan. The other interested parties seem to be having trouble gathering the investors needed, or are just plain scared off by how dire the financial situation is. This is pretty much right in Harris's wheelhouse.
The intrigue is not in the hockey rivalry, because I'm pretty sure Josh Harris couldn't care less about that aspect of the purchase. The overlap in between Sixers and Flyers fans isn't particularly great, and the symmetry between the two organizations was practically non-existent when they shared an owner, even less so now that all they share is a building. The value of the purchase lies in the arena operating rights to the Prudential Center. That's the more interesting note to Sixers fans.
The Prudential Center is a valuable piece of real estate. As an arena in the New York/New Jersey Metro Area, it's obviously in demand for non-sports acts that don't want to pay exorbitantly high rent at Madison Square Garden. In 2011, Prudential Center was the fifth highest grossing 15-30K-seat arena in the country for events. It's fallen off since then for two glaring reasons. One is the opening of the Barclays Center in Brooklyn, which undoubtedly took a good chunk of potential events away, but the other is the inability of the Devils to book events from a practical standpoint. Arena operators give event promoters an up-front cash deposit to secure their services, but the Devils lack of cash flow has made them unable to pay promoters upfront before they've collected revenue from the show.
That's where Josh Harris comes in. Harris has the upfront cash flow to book non-Devils events in the arena (i.e. Concerts, pro wrestling, circuses) in addition to the anchor tenant in the form of the Devils. He also happens to own a professional basketball franchise that could move there.
The Sixers current arena arrangement is an interesting one. According to CSNPhilly's John Gonzalez, upon buying the team, ownership entered into a long-term lease agreement with the owner of the building (stop me if you've heard this one before), Comcast-Spectacor, estimated to run for "at least 20 years" and containing "significant lease provisions and protections." So that's it, right? Game over! Crisis averted! I'd like to thank the Roots!
Not so fast. Leases can always be bought out if the right amount of coin is thrown at the other party. The Wells Fargo Center wouldn't fold up if the Sixers left town. It's still the only large arena in the Philadelphia area, and wouldn't have too much trouble booking acts for a large chunk of the 41 dates that the Sixers occupy the building, with potentially better attendance than the Sixers have gotten in recent years. If Harris really wants to pack up and leave town, I can't imagine Comcast-Spectacor would put up too much resistance as long as he flashed some money to make it happen.
There is immense value in operating an arena. The situation the Sixers are in as a tenant of the Wells Fargo Center is sub-optimal if you own a professional basketball team. Naturally, you want to be in control of all aspects of your franchise, and that includes the arena rights. So what does a basketball owner do if they want to own their arena? Get the city to build one for you, of course.
Many people who follow the Sixers, both smart and not-so-much, see the writing on the wall. Eventually, the Sixers are going to want to build their own arena. Now, that fight probably won't happen until the Sixers become a hotter property, because let's face it, as currently constructed, the city would probably laugh Josh Harris out of City Hall. The Sixers don't have the demand required to build a second major arena in this city.
Every good businessman knows that the way to get what you want is to accumulate leverage. No one can deny that operating a state-of-the-art basketball ready facility 20 minutes from New York City is leverage when trying to get the city to build them an arena. So the popular theory goes as such:
Josh Harris is buying the New Jersey Devils and the operating rights to the Prudential Center as leverage to get the City of Philadelphia to help the Sixers build their own arena. Harris threatens to move the team to Newark if he doesn't get what he wants, or even more interestingly, threatens to move both of his teams as a package deal for a city to put themselves on the map.
Here's why I don't think it's that simple:
1) NBA owners already have plenty of leverage options if they want to threaten to move their team at this point. Seattle is sitting right there as the logical location, a top 15 market with a proven basketball track record, and a city council that's a little more willing to play ball at this point. Las Vegas is also an option.
2) The city wouldn't play ball with the Sixers because they're cutting their budget as it is and from a practical standpoint, really don't need two major arenas in town, which is why the PBR Bar and Grill is where the Spectrum used to be.
3) It's a very expensive purchase to create leverage. It's far more likely that Harris sees the value in operating the arena on its own, as well as potentially turning around the faded Devils asset. He doesn't need the Sixers to turn a profit in that arena.
4) Operating the Prudential Center deters Harris from moving both teams as a package deal, because the building needs an anchor tenant to remain viable. The only appeal as a package would be for Harris to turn around and flip the Sixers, Devils, and Prudential Center operating rights to another buyer down the road, but I'm not sure that they would need to play in the same building to accomplish that.
5) Putting three basketball teams in the NY/NJ metro area just seems a bit much. That's the situation with hockey, and it's working so well that two of the three teams have faced major financial issues in the last 10 years. They'd be moving into a location where they would be a very low priority on the media agenda, barring a major on-court turnaround (i.e. WigginsWatch).
6) Moving the Sixers to Newark opens up a more interesting possibility, and that is potential expansion. I think if this came up, it would be years down the road. Let's say, hypothetically, the Sixers announce plans to move in 2018, and actually do it in 2019. At this point, why wouldn't the NBA handle it the same way they handled Charlotte, awarding them a team pretty much the second the Hornets moved to New Orleans? Except this time, they can expand by two, putting a Philadelphia franchise in the East and a Seattle franchise in the West, while leaving Las Vegas on the table as the stick for owners to use with their own cities in the future.
Plus, at this point, the Wells Fargo Center would be 23 years old, and the idea of building a new arena to house both the Flyers and the new NBA franchise wouldn't be so ridiculous. In fact, it's entirely possible that Comcast-Spectacor would be interested in buying the expansion franchise as an anchor tenant for a potential new arena of their own.
That last potential tangent aside, I just don't see this potential purchase as anything more than another depressed asset for Harris. I don't doubt that he'll eventually try to get his own arena in Philly, but I don't think that he'd move the team to Newark just because he owns the arena. Using it as leverage is even risky just in case the city would call his bluff.
Then again, I'm not a billionaire, and my business sense is limited at best. So here's what I'm taking away from this situation, and what I think is important to you, the loyal reader who made it past my convoluted expansion theory without closing the page in confusion: The story here from the Sixers fan point-of-view isn't that he's buying a rival hockey team, but rather he's buying the rights to an arena in a major market. Is it likely that he moves the Sixers there? Probably not. There's a lot that would have to go wrong for that to happen. Is it impossible? Unfortunately, no. This probably isn't the last you've heard of this story.
Unless somebody else buys the Devils and I just spent 1,700 words on nothing, of course. Oh well. It's the process that counts.