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Players Salaries Are Key To The Senators Sale
OTTAWA — The sale of the Ottawa Senators, parent club of the Griffins for the rest of this season, could be completed by the end of this month.
If so, the closing will highlight one of the most creative financing deals put together in recent times.
Owner Rod Bryden is selling the franchise in 1,300 units for $150,000 each (Canadian) to the Ottawa Senators Hockey Club (OSHC), a limited partnership of Ontario residents who earn at least $125,000 annually.
Bryden will continue to run the club after closing, which may come as early as Feb. 28, and should get about $185 million after expenses and commissions are deducted from a sale that is expected to pull in $203 million.
In return, the buyers will be able to deduct all of the club’s losses from their personal income.
Bryden said the Senators lost between $40 and $50 million the past few years and he expects the red ink will flow for a few more. So investors are figuring to get some healthy write-offs as the assets of the club have been shifted into the partnership. The franchise was valued at $190 million for the sale.
Ken Tammadge, a tax partner with BDO Dunwoody in Ottawa, said the assets include players’ contracts, certain fixed assets and the franchise itself, which is being treated as a form of capital with a very low write-off rate. He pointed out that the most attractive, and unique, aspect of the deal is that 60 percent of the purchase price has been attached to the largest cost — namely, the players’ contracts, which total $27 million this season.
“As a result of that, that 60 percent allocation allows for a fairly accelerated write-off of that portion of the costs. In many cases, a two-year period,” said Tammadge. “Potentially longer, depending on whom they have under contract and for how long.
“There is some calculation required there, I guess, in terms of the 60 percent allocation as to how much is written off in one, two or three years. But the basic thrust is that a good portion of that 60 percent will be written off over the first two years for the investors buying in, and when that deduction will be taken at the partnership level,” he added.
Twenty-five percent of the purchase price has been allocated to what the agreement calls eligible capital expenditures, which have a low write-off rate. Other assets make up the remaining 15 percent and have varying write-off rates.
“This arrangement has a better matching of the write-off when the expenditures are incurred. If you look at a typical team, the major cost is the cost of the contracts, renewing contracts and the signing of key players to generate the revenue stream,” said Tammadge.
He added that investors will get a deduction for the amortization of the contracts and for the actual salary payments.
Another crucial feature of the deal gives Bryden up to 10 years to buy the Senators back. Three-quarters of the re-purchase price has been fixed, but not made public. The remaining quarter will be set at fair market value when Bryden exercises his option, which he has said he will do. So some observers have seen the deal as basically a loan to him.
“In some respects it is,” said Tammadge.
“There is a flow-through of some new funding into this arrangement that will provide repayment of existing indebtedness of around $62 million, and provide about $5 million of working capital to the operating partnership.
“I think part of the reason that it is identified this way, is to identify it as funds flowing into existing indebtedness as opposed to flowing into Bryden’s pockets.”
Tammadge said Americans with Canadian holdings can’t buy into the partnership because it has been set up for Ontario residents only. Having non-residents in the OSHC would raise some withholding tax issues regarding distribution.
Bill Roth III, a tax partner at BDO Seidman locally, added that there could be foreign tax limitations for Americans based on their income, along with rules on how they could claim the deductions.
“Typically in a lot of partnerships like this, if it’s generating losses, the losses may not be currently available in the U.S. unless there are other activities that they have to generate a similar type of income,” said Roth, who is also a Business Journal columnist.
Roth remarked that he hasn’t seen a partnership like OSHC used here. Normally, he said, limited-liability companies are created as partnerships in this country for smaller transactions and are usually kept to a half-dozen investors.
“In the U.S. if you get beyond a certain number of partners and some other issues, you run into securities issues and a number of tax rules that apply to larger partnerships. So it makes it sometimes a little more burdensome to go that route compared to some others,” said Roth. “But it can be done.”
When asked whether the deal to buy the Senators was a creative one, Tammadge quickly responded with an “absolutely.” Why? Because appealing parts of different, but standard, limited partnerships were extracted and rolled into this one.
“They’ve put an attractive tax angle into it. They’ve put an attractive financing angle to it. And they’ve put an attractive buy-back option into it,” he said. “So they’ve probably rolled a few features into one limited partnership that you just don’t see very often.”