Thursday, March 26, 2009

It's All Relative

George Gillett's in a huff because the media are focused on him these days. We all know the story of his asset review at the moment, we all know about his big loan up for renewal. But George is being as adamant as he can be about his intentions to sell (undecided) and the state of his businesses:
"The businesses are all in excellent shape financially, they all are healthy, they've got strong incomes and relatively small debt in this difficult world," Gillett said.


Why shouldn't we believe that? After all, as we can see, George Gillett has the stature of an NHL player. It's all relative as they say.

I think to understand Gillett's statement, one needs to spend a minute in the man's shoes. How else could someone state that one club with an estimated $510 million in debt and another with and estimated $240 million in debt have relatively small debts in this difficult world.

I am well aware that many businesses are run in this way. But a lot of things we knew to be certain about business have changed in the past few months, haven't they? Isn't it true that banks used to be able to take risk so long as they could sell it along to other banks and gamblers? I think this practice is now seriously in question. Is it not fathomable then, in a financial environment where banks' purse strings are tight as they've been in a while, that running a business on more than 2/3 debt might be going out of fashion. Don't tell me you don't think so too, George. If you didn't, BMO would be looking to help another billionaire come multimillionaire.

To be fair, one can see where the rosy picture of the Canadiens comes from. In relation to his other assets a team with 72% debt and an operating profit (albeit shrinking thanks to currency markets) is a gem. In total, George has been taking a hit if you trust the estimates. According to this article, George Gillett had a net worth of $1.1 billion in November 2007. Whereas this new list from January of this year shows his dramatic fall from grace to £300 million (or $435 million in USD). Not a good year.


Canadiens (Gillett's) debt can hurt them (him as Habs owner)

I find it hard to fathom that in all the articles I read about the Canadiens value (from Forbes) that no one bothers to mention the Canadiens debt load (also from Forbes). Because of this debt, the Canadiens owner must earn more money than, say, Mike Ilitch in Detroit (who has no debt) in order to service his interest payments.

If revenue goes down across the league – Detroit suffers because they might have to get a loan, but Montreal suffers more because their owner (already in debt) runs closer to the line. This is the kind of situation where owners start sapping profits to make sure they don't default on payments. This is the situation fans in Liverpool have been complaining about for a while.

I'm not saying Montreal is going to fold. I am merely suggesting that despite the operating profit that we all hear about, the Canadiens might not be a good enough investment for Gillett to hang onto at the moment – hence the portfolio review.

In terms of the way this bad news can hurt the performance of the team – I'd think that's minimal. Compared to the bombshells of the weeks before this one was tame. Last season, this would have been the Canadiens bombshell of the year, this year it's almost good news.

It's all relative. Aren't you glad?

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