Edmonton Arena Funding - Why Not Try An IPO?

As Daryl Katz, Pat LaForge and Kevin Lowe trawl Northern Alberta looking for a public disbursement for their Downtown Hockey Brigadoon, battle lines have been drawn among the people of Edmonton.  On one side (a bit less than half of downtown residents, and a bit more than half of downtown workers) are mostly Oiler fans who, rightly or wrongly, believe that the Oilers are losing money and cannot make money in Rexall Place; they believe the team spokesperson(s) when they say the team will not play in Rexall beyond 2014.  On the other side are people who believe, rightly or wrongly, that the Oilers are a private enterprise and that asking for a combined $300 million handout from the city and the province is corporate welfare, especially because there is no ownership or guarantees that come with the $300 million. 

The Oiler fans have tossed around many ideas to cover the public funding desired by Daryl Katz.  Suggestions include ticket levies, entertainment taxes, an "entertainment district tax", a special Albertan lottery, and an outright handout.  None of these ideas have gone over well in individual discussions, but the underlying sentiment remains:  a certain percentage of the populace wants to see a significant governmental contribution to the Arena District.

In the midst of all of this, Ric Marshall at the Examiner came up with an idea that has merit - create the capital of the public investment via an IPO.  Says Marshall:

What if:

• The natural inclination to borrow money was sublimated to raising it?
• A venture fund was listed, and issued an Initial Public Offering (IPO) for an equity stake in the new arena?
• The strike price was low enough to encourage liquidity and minimize the barrier to entry, somewhere between twenty and a thousand bucks.

It's a novel idea - let the public support the Arena district privately.  Make sure to click through and read Marshall's article - I'll be glossing over details that he spells out.  After the jump we'll look at why it should work.

In the midst of the run-up to the stock market bubble of the late 90's, IPOs were so wildly successful that even professional sports teams took portions of their franchises public.  Two key IPOs took place in the last half of the decade: the Cleveland Indians and the Florida Panthers.  The Boston Celtics went public a decade prior.  Each IPO occurred because the respective owners wanted a large cash infusion without losing control of the team, and without risking a corporate voting bloc coming to fruition against them.

The Celtics went public in 1986, offering 40% of the team as a publicly-traded partnership.  The IPO raised $48 million, with a team market valuation of $120 million; no arena or other real estate was included in the partnership.  From the article:

But it was like no other IPO in the world. For example, "We were immediately deluged with individuals trying to buy from one unit to ten units..."

Fans wanted a piece of the team for novelty's sake and were willing to plunk down dollars to call themselves a Team Owner.  The IPO was successful in bringing a large amount of cash to the Celtics ownership group.  The team was later taken private again during a follow-on sale.

The Florida Panthers went public in 1996, as part of Wayne Huizenga's Florida Panthers Holdings IPO.  The initial share price of the IPO was $10 per share, and Huizenga raised $67.3 million.  Like the Celtics, the fans wanted a piece of the Panthers too:

The general public could buy a minimum of one share as Huizenga fostered fan ownership as a novelty, purchased for emotional satisfaction rather as a serious investment...more than 8,000 fans purchased one to ten shares. Under the NHL franchise agreement, Huizenga retained a 51 percent ownership of the team.

Huizenga then began adding hotels and luxury properties to the Florida Panthers Holdings portfolio and would later sell the business for $1.25 billion in 2004.

The Cleveland Indians went public in 1998, offering a low-priced IPO, much like the Celtics and Panthers:

The Indians on June 4 became the first Major League Baseball team to go public, with an initial offering of 4 million shares that raised $60 million.

With proper care and management, the stock itself could appreciate and hold value, much like that of the Indianapolis Indians, a AAA team affiliated with the Pittsburgh Pirates' system. The Indianapolis Indians were sold to the community over fifty years ago:

In 1956, 6,672 people ponied up $10 per share and bought 24,498 shares of stock in the city's struggling minorleague baseball team. The move was designed to take the money-losing team off the hands of its owner, the Cleveland Indians, and keep it in Indianapolis.  ...The Indians' last offer to buy back shares was for $5,000 per share in 1997.

Granted the story is outdated, but it's yet another instance of a closely-held, but publicly-traded community asset.

And it's the asset that's key here.  Supporters of the project continue to call the arena a public asset, though the only person or people receiving public good are the owners of the arena themselves.  The public has been put in a situation where they have no say over the arena or the development surrounding the arena.

By taking the new arena or the new Arena District public, Daryl Katz could create the same thing in Edmonton - a closely-held, probably thinly-traded, public asset.  This idea is different from the examples above in that rather than the team being offered via an IPO, it would be the arena or surrounding real estate.  Katz could create a holding company, much like Huizenga created with Florida Panthers Holdings, to own the future arena.   He could then offer 25% of the arena via IPO.  Marshall left an enormous range for his share/fund entry price in his version of an IPO, from $20 to $1,000 dollars, but I think an initial share price of $50, with three million shares offered would be a perfect way to allow a low cost of entry into the stock.  Millions of shares would be purchased by fans who wanted to have a piece of the arena, or as gifts from non-fans to fans. It would be a closely-held, almost never traded stock held for sentimental and fanatical reasons.

A public offering would also enable Oiler fans worldwide to purchase shares.  While an Edmonton-based or Alberta-based tax would rest solely on the backs of the local citizenry, an IPO enables the fans outside of Alberta to bear the costs of the project by purchasing shares in the arena.  Considering the large number of readers The Copper & Blue has from outside of the Edmonton metropolitan area, Alberta and even Canada, I foresee a market for the shares that a local tax couldn't tap into.  Those outside revenue streams would be a bonus to the project.

The IPO would generate half of the $300 million public investment the Katz group says is required to build the arena, and the 25% ownership wouldn't have an impact on day-to-day operations of the arena.  Katz would still own 75% and even if the the shares issued were full voting shares, a 25% vote couldn't change the direction of the arena against the wishes of Mr. Katz.  If the initial IPO is successful, Katz can offer follow-on shares to raise additional money for construction and development.

Mr. Marshall has it right - sublimating the wanton desire to tax the residents of Edmonton and Alberta with an IPO places the issue directly in the hands of the public.  What better referendum on a new arena and Arena District than giving the public the option to put up their own money in order to construct the building?  If Mr. Katz and his supporters are convinced that public support is a necessary component of this project, a 25% non-controlling share of the project should be a drop in the bucket to get the public on board and involved.