Unfinished business: profits, a new arena and a billion-dollar lawsuit

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This was to have been a seminal year for Ottawa Senators owner Eugene Melnyk, who died late Monday at age 62.

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Melnyk had been looking forward to the relaxing of COVID-19 protocols. His hunt was intensifying for a deal that would produce a new arena. And he was relishing the thought of taking on his former business partner, Trinity Development founder John Ruddy, in a $700-million civil lawsuit due to go to trial in Ottawa on Sept. 12.

Now everything is up in the air, including the fate of the team. While Melnyk has long made clear his desire to keep control of the Senators in the family, not much is known publicly about the wishes of his university-age daughters, Anna and Olivia. Depending on the terms of the will, it’s possible that Melnyk’s partner, Sharilyne Anderson, or mother, Vera, could also influence things.

The new owners will acquire a money-losing asset that has nevertheless appreciated in value over the years. Should they opt to sell, Melnyk’s daughters could reap a very large capital gain and not have to worry about the difficult economics of running a National Hockey League franchise in a small-market town. Are Anna and Olivia as enthusiastic about NHL hockey as their father? Maybe not.

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Melnyk acquired the team and arena out of bankruptcy in 2003 for less than US$100 million. The latest valuation estimate, offered by Forbes Magazine, pegs the NHL franchise at US$525 million. However, the team’s debt at the same time has risen steadily — from US$40 million to an estimated US$250 million — thanks to regular operating losses.

During the pandemic, the losses have been considerable. Thanks to a nearly US$50-million drop in revenues in fiscal 2021 (ended June 30), the team lost an estimated US$30 million, down from a small profit in fiscal 2019.  Operating losses will be significant this year as well. Thanks to COVID-19 health protocols, seats in Melnyk’s Kanata arena have been mostly empty this season. Revenues are also down in sponsorships, in-arena signage and food concessions, among other pieces of the business.

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Not only that, the Senators will once more fail to generate playoff revenues.

Melnyk coped, however, thanks to lower operating costs and league-backed financial assistance. Little more than a year ago, the NHL advanced US$30 million to each of the teams — courtesy of a US$1-billion private placement by the league, according to regulatory filings by the parent company of the New York Rangers. The Seattle Kraken — which began play this season — last April forwarded the final instalment of its US$650-million franchise fee, providing nearly US$22 million in proceeds for the Senators.

Even if fans return in pre-pandemic numbers — hardly a panacea in the case of the Senators — the team soon must build a new arena to replace the three-decade-old Canadian Tire Centre structure in Kanata. Melnyk had been seeking financial assistance from local and other levels of government to offset the capital cost of US$500 million-plus. Assuming a deal at some point, the Senators would become a key tenant, entailing additional lease expenses.

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A new NHL arena was to have been the centrepiece of the RendezVous LeBreton project, a multi-billion dollar development to transform the open lands west of Ottawa’s Parliament Hill precinct.

RendezVous LeBreton, a partnership involving entities controlled by Melnyk and Ruddy, fell apart in 2018 in a dispute over economic interests. Melnyk sued (through Capital Sports Management Inc.), arguing that a separate, but nearby real estate development by Ruddy’s Trinity Development at 900 Albert St. would reduce the value of real estate in LeBreton Flats. Ruddy countersued (through Trinity Development) for $1 billion, maintaining that the economic activity associated with the 900 Albert St. apartment and retail complex would be to the benefit of the LeBreton Flats project.

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The court has allocated four months for the civil trial, providing some insight into the complexity of the issues. But will it go ahead? Melnyk had been a driving force in launching the litigation, believing firmly that he had been wronged. However, his case likely rested heavily on personal testimony. Much of this might have been provided during a lengthy process of discovery conducted by lawyers. While such testimony can be entered into evidence at trial, there is no opportunity for cross-examination.

What happens now will depend heavily on who, exactly, winds up in control of the Senators’ holding company — and whether they would be open to a settlement that would avoid a drawn-out trial. A factor here might well be how wedded they are to Melnyk’s views about keeping the team in the family. If the new owners do turn out to be welcome to the idea of a sale, much could change very quickly in downtown Ottawa.