Amidst Silence, Questions Surround Devils in Wake of Kovalchuk Saga

Following Arbitrator Bloch’s decision to uphold the NHL’s rejection of Ilya Kovalchuk’s 17-year, $102m contract, many NHL fans assumed General Manager Lou Lamoriello and the New Jersey Devils would be quick to counter with a revised deal under more Bettman-friendly terms.

Who will own the Prudential Center?

Trim a few years and raise the final years to $1m.

Ideas from the outside were aplenty, but the parties involved have yet to make a sound for over a week.  This should be no surprise coming from an organization that’s notorious for playing it’s cards close to the vest, but an old Emily Dickenson quote reminds us that “Saying nothing…sometimes says the most.”

The Big Day

It wasn’t always like this.  On July 20 everyone had plenty to say.

Despite already knowing the Kovalchuk deal had been rejected by the league, Lamoriello, Kovalchuk, owner Jeffrey Vanderbeek, and new coach John MacLean spoke their minds freely at a press conference to announce the re-signing. Lamoriello answered questions and curiously passed the contract off as ownership’s brainchild:

“This is a commitment ownership wanted to make to this type of player. All I can do is say whether the player is a player that can fit into the team, help the team and was not a risk as a player. As far as what the financial commitment is, that was out of my hands.”

Owner Jeffrey Vanderbeek openly rejected that notion and claimed the mega-deal was a team effort:

“No, this is not my signing,” Vanderbeek said. “It was a combination of the whole organization. Certainly Lou did a lot of the heavy lifting. My partner, Mike Gilfillan, was very supportive and helpful. This is never just about one person.

“We did what we could to put our best foot forward. You make a decision and you don’t look back.”

In the wild aftermath of this situation, we’re forced to look back and wonder how two respectable men could possibly have such drastically different ideas about how a $102m contract came about.

The Clash

Lou Lamoriello was inducted into the Hockey Hall of Fame last season and Adam Proteau of the Hockey News recently said “Lamoriello lives by nobody’s rules but his own and has three Stanley Cup rings to underscore their legitimacy.”

When Lou was hired as Team President by John McMullen in 1987, this was certainly the case.  Lamoriello made himself General Manager and has rarely been tested throughout much of his reign.  He’s always had the last say — be it through free agent negotiations or simply taking over the head coaching job days before the playoffs.  Lamoriello builds teams the right way – his way.

But we’re also constantly reminded that hockey is a business.  Jeffrey Vanderbeek, a former Executive Vice President at Lehman Brothers, knows how to make money.  He puts his best foot forward, makes decisions, and he doesn’t look back.

Jeffrey Vanderbeek and Zach Parise (Flickr/NJ State Library)

When he bought the team in 2004, the organization was reportedly $70m in debt despite continual success on the ice.  He made a strong push to relocate the Devils to a state-of-the-art arena in downtown Newark with the hopes of curing their attendance woes.

After months and years of political volleying, plans for the Prudential Center finally came to fruition.  Newark would pitch in $220m towards the building of a new arena and the team would pay rent and a percentage of revenues back as a tenant.

It’s probably fair to assume that Vanderbeek’s group needed additional help to make this a reality as Forbes now has the team at $250m in franchise and arena debt. [THW was unable to acquire details behind this number]  In fact, the Devils rank first at 112% on Forbes’ list of highest Debt/Value % teams in the NHL.  (By comparison, Phoenix is second at 101% and Dallas is third at 81%)

The impact of over-leveraging can be beneficial in good times but devastating in bad times, as Vanderbeek knows well.

His former firm Lehman Brothers declared bankruptcy in the midst of the recession after suffering massive losses due to the subprime mortgage crises.  Vanderbeek insisted the Devils would not be affected by Lehman’s demise, but that doesn’t mean his wallet remained intact.  How far he was financially invested in the firm remains uncertain, but he filed a $61.1m claim against Lehman as an unsecured creditor arguing he was owed the money under a 2004 separation agreement.

But Vanderbeek had a vision.

He saw a way to revitalize a devastated downtown Newark and always felt “the Devils need a new arena that can provide a game-day experience that is certainly equal to the best team in the National Hockey League and certainly equal to the product that is put on the ice.”

Did it work?

The Devils have made the playoffs every year since the lockout, but attendance has only risen from ‘bad’ to ‘disappointing’ since the opening of the arena in 2007 (2006-07 #28; 2007-08 #20; 2008-09 #19; 2009-10 #21) [Edit: Figures are based on % arena capacity].  Arguments can and have been made questioning the safety and transportation issues of Newark, but it starts and ends with the product on the ice.

No team has been more successful on the ice than the Devils over the past decade and a half, but “[Larry] Robinson, an NHL Hall of Fame defenseman, won a Stanley Cup as Devils’ coach in 2000 employing a tight-checking defensive style which is not conducive to the new NHL “more goals = more viewers” philosophy.”

Vanderbeek hinted at as much just a few weeks ago:

“Lou is all about giving the organization the best chance to succeed. To win. He also knows, like I do, [Kovalchuk] is the best chance to put a lot of people in the seats to grow revenue.”

Enter Ilya Kovalchuk stage left.

Since the lockout, the dynamic Russian winger has tallied 230 goals in 393 games and no player has scored more since 2001.  With most teams locking up their stars long-term, opportunities to acquire a pure goal scorer of his caliber are few, far between, and sometimes nonexistent for a franchise.  At March’s trade deadline, the Devils saw a chance to land a player they may never be able to again.  A player with the ability to put fans in the seats and pull fans out of them, all in one evening at ‘The Rock’.

He didn’t come cheap.  A minor-league system ranked #26 of 30 by HockeysFuture.com could ill afford to lose a 28-year-old proven defenseman, two prospects, and a first round pick for a short-term rental.  A quick look at their ‘seasoned’ roster leaning heavily on Patrik Elias, Brian Rolston, Jason Arnott, Jamie Langenbrunner, and Martin Brodeur doesn’t scream long-term success.  Whether they realized it or not, the Kovalchuk trade was going all-in on the core in place before the window slammed shut.

Five playoff games.

That’s all they got last year.  It couldn’t have gone worse for all parties involved.  Questions remained about whether a team could be built successfully around an offensively-minded player like Kovalchuk; Lamoriello sacrificed valuable assets and had one lousy playoff win to show for it; and Vanderbeek can’t/won’t wait for a rebuild.

It became evident that Kovalchuk had to stay this summer, but how do you put a price on a player who can’t be compared to any free agent in recent history?

The former Thrasher turned down a $101m offer from Atlanta to stay with the team – that’s probably a good starting point.

The League

In today’s salary-capped NHL, Lamoriello knows he can’t pay Kovalchuk the $10m or more annually he feels he deserves and still field a playoff-caliber team over the next five years.  Most savvy General Manager’s feel the same, and some have resorted to signing stars to carefully constructed long-term deals that pay big money upfront.

Common sense tells us these contracts have the effect of circumventing the salary cap, but Lamoriello has watched for years as GM’s parade into the NHL central registry office with these lucrative contracts in hand.  With no so much as a slap on the wrist from Commissioner Bettman, I’ve wondered from the beginning whether Lamoriello had simply seen enough.

Kevin Sellathamby at In Lou We Trust echoed the same sentiments the other day:

What if Lou intentionally signed the deal knowing it would get rejected? Lou was against these deals, so what better way to get rid of them by pushing the envelope too far? There wasn’t alot of risk involved with the deal; had Kovalchuk’s contract been approved by the NHL, the Devils would’ve secured the services of one of the league’s top goal scorers with a decent cap hit. If the deal was rejected, it will be one of the few, if not the only blemish on the Hall of Famer’s record. However the deal was rejected as we all know, but the rejection of Kovalchuk’s contract is leading to the NHL looking into other lifetime contracts, as well as other steps forward for the league in writing the next CBA, which will have less loopholes regarding contracts and term.  That and the Devils can still sign Kovalchuk, although to a much less controversial contract.

Many feel the Devils will end up with Kovalchuk in the end, but I’m not so sure.  Vanderbeek surely wants the player for the reasons outlined above, but how far will Lamoriello be pushed when it comes to investing close to 20% of his payroll in a single player?

Before signing with New Jersey, a number of teams reportedly expressed an interest in signing Kovalchuk to a one-year deal at the NHL maximum salary of $11.88m.  Colorado, St. Louis, and Los Angeles all have the ability to still make that happen and may be on the phone right now.

The Arena and the City of Newark

Oftentimes when a team has their financial backs against the wall, there are only a few ways to avoid selling the team or declaring bankruptcy.  An owner can dig into his pocket as Jerry Moyes did to the tune of $40m a year in Phoenix; but with the Vanderbeek group’s financial stability unknown, focus shifts to the second option which is underway in Columbus.  THW’s Jeff Little has detailed the Blue Jackets dilemma in his ‘Arena Chronicles‘ and concluded “economic realities dictate some degree of public participation in Arena development and operation.”

This is a viable option when taxes or other city and state revenue streams can be diverted into arena funding as Pittsburgh was able to do, but in Newark this isn’t a possibility.  This is a city attempting to bridge a $150m budget deficit by cutting “everything from toilet paper to printer paper.”

In fact, Newark isn’t even sure they want to hang onto the portion of the Prudential Center they currently own [via Greg Wyshynski at Puck Daddy]:

Councilor Ronald Rice said in a June letter to members of the Municipal Budget Committee that the idea [to sell the arena] is a “radical” one that could save money while bringing in an upfront payment of as much as $80 million.

Luis Quintana, a former vice president of the council who has served on the nine-member body since 1994, said today in a telephone interview that a sale of the 18,000-seat facility might bring $200 million. The arena doesn’t pay taxes or water fees, and transferring it to private ownership would allow Newark to collect both, he said.

Mayor Corey Booker has disputed this idea, but Newark won’t be lending a hand if or when the Devils begin to stumble.  If the Devils can’t find quick success on the ice and increase revenues, something will have to give and Vanderbeek might run out of options.

All things considered, saying nothing really does still say a lot.

In the end, it might just come down to a General Manager who wants to win the right way, against an owner that wants to win right now.  In Gary Bettman’s NHL, is there still room for both in New Jersey?

I’m not so sure.

Mike Colligan

Mike Colligan

Managing Editor
Mike Colligan is an NHL analyst at Forbes SportsMoney and The Hockey Writers. Email: MJColligan@gmail.com
Mike Colligan
@fangdali1 yep, exactly - 2 days ago
Mike Colligan
Mike Colligan

22 Comments

  1. This deal is all Jeff Vanderbeek’s doing. He is going to ruin the Devil’s just like he did Lehman Brothers.

  2. Mike – One thing to understand in the analysis of the team’s finances…

    There are at least two entities connected to the organization and arena, one being the hockey club, and one being Devils Arena Entertainment LLC

    VBK is certain to segregate the hockey related revenue/expenses from the concession and other related revenue and expenses. Any complete analysis of the team’s financial picture has to dig into both. Since DEA is not an entity that the league has nearly the same jurisdiction over (if any), the figures for DEA are going to be very difficult to discern.

    Assuming DEA is very profitable (the reason why team owners want to also own the arenas is due to the non-sport revenue streams), VBK/DEA can fund any losses that the team may incur for many years.

    No one – Forbes included has dug into this. I encourage you to do so in order to get an even more complete picture.

  3. The real challenge for the Devils is the number of sports teams in the market, and their established fan bases. The Devils were essentially dropped into Rangers/Islander country with the hope that there would be conversion and South Jersey would switch their allegiance from the Flyers to a team with NJ on the sweater. A very tough sell, I would argue the demographic of a Devil fans skews much younger than the other teams…thus less disposable income for season tickets and general individual game attendance. Finally, within a 15 minute commute, there is another hockey team which allows fans of out of market teams another option in seeing their team live.

    Now pile on the following which all compete for sports entertainment time and money: Giants, Jets, Knicks, Nets and for central/south NJ: Eagles, Flyers, Sixers

    The actual arena location in Newark is not an issue. It is easy to get to via car or public transportation, and you do not go near any of the less desirable portions of the city.

  4. Furthermore – making the playoffs has only brought in two or three extra game revenue for the past 7 years. One long run will help as another reader pointed out.

  5. One other thing this article conveniently omits.

    A 40+ goal scorer named Parise.

    The assertion that this team will lean heavily upon the aging vets is completely false. This team’s core has shifted to Parise, Zajac, Clarkson, Greene, Volchenkov and Kovy if he’s here.

    Breathing Rolston and ‘core’ in the same sentence is just farcical.

  6. A. Further on the attendance: The Yankees are only at 88% as well. The Nets are at 60%, and average 2000 less people per game.

    Yet, the Nets are looking for a new arena to be built, and I don’t think the Yankees have any problems.

    TV revenue is still the biggest issue when it comes to NHL teams – and that is squarely on Bettman’s shoulders.

    B, While the breadth of prospect talent across the organization is certainly less than breathtaking, the depth is actually quite tremendous. Yes, there is only Jeff Frazee in Goal. Yes, after Tedenby/Henrique/Josefson there isn’t alot to rave about at forward (although those three all are likely 2nd line players…Tedenby a potential allstar). The defenseman pool is the deepest I’ve seen it in 20 years and perhaps the best in the NHL, with Corrente, Urbom, Gelinas, Burlon and perhaps as many as 14 potential NHLers that could certainly bring more talent or draftpicks back to the organization.

    Good article though – despite it’s slight truth-stretchings towards being sensational.

  7. Jeff Rhoodes says:

    A deep run in the playoffs will put them in the Black. The high debt/ratio is normal for new arenas/stadiums. I have no worries about the long term health fo the franchise and arena in Newark.

  8. Jeff Rhoodes says:

    Mike,

    What is the % of revenues the City of Newark gets from the arena aside from rent?
    The Council has publically stated (whined) that they don’t get “anything” from it.
    Thanks,

    • Mike Colligan says:

      I tried digging up the details a few weeks ago but couldn’t – this is a good article though:

      “The city had put up $220 million for construction of the arena, which is home to the New Jersey Devils, and entered into a complex rental agreement through the Newark Housing Authority. Under that contract, the Devils as the arena’s principal tenant were to pay a base rent, along with graduated percentages of arena revenues.”

      Source: http://www.nj.com/news/index.ssf/2010/06/devils_newark_housing_authorit.html

      The Council quotes you referred to about “not getting anything from it” are confusing – but that may have been a frustrated jab at the Devils because they haven’t paid the rent yet. Interpreting political statements and motives can be an impossible task.

      But that article also says city council is annoyed about inheriting a bad deal from the James’ days. They’re obviously trying to squeeze any dollars they can out of it, but as Chris Wassel commented earlier, they need to be careful.

  9. Jeff Rhoodes says:

    Marv, the writer did not take into account the $$$ generated at The Rock, which is much higher with 88.1 capacity than what Buffalo grosses at 100% capacity.

    • Mike Colligan says:

      And every indication points to Buffalo losing money despite not spending to the salary cap and receiving help from revenue sharing.

      NJ also pays a graduated percentage of arena revenues to Newark on top of their rent.

      The Devils are not profitable (even after withholding rent for 3 years) with a team that makes the playoffs every year. The question I raised is what happens if the team doesn’t make the playoffs?

  10. Mike Colligan says:

    I should’ve made this more clear, but the attendance ranks are based on % capacity, not actual attendance, in an attempt to even the playing field and address your concern.

    Last season the Devils were at 88.1% capacity.

    • Really, because espn has it ranked as actual average attendance first for all the pro leagues: http://espn.go.com/nhl/attendance

      And 11 teams had over 100% capacity. If they came close, like 95%, they’d still be in the bottom half in that category as well. 88% isn’t bad considering the competition in this area and only a handful of teams in the NHL are decent box office draws to begin with.

  11. Bottom line is when you have a new arena and only make it to the first round and no further, high debt is to be expected. Ask the Penguins a few months from now. And it has been going down little by little.

    And you realize that even if they came close to selling out every game, they’d STILL be in the bottom half in attendance at best. The place is small, only ~17,600.

  12. Terrible article from people who have no clue about the Devils nor the City of Newark. Wasted my time reading it.
    The Devils to Newark has been a huge success, to say othewise means you have zero credibility.

  13. This is a pure leverage mood that could come back to haunt the city of Newark. Jeff Vanderbeek knows some people that I am sure are worth more than he. It would not be hard (since Newark named its asking price) for one of his buddies to plunk the necessary cash and then the Devils would pretty much control it all. Newark does not want that in the long run.

    This will be a fun side story. That rent I believe is 5.7 million btw.

  14. Ted Leonsis, not George McPhee.

  15. This is a very well written article, but some concerns with a few of your sources:
    a.) Forbes – These are very broad estimates they make on available evidence. My boss is listed my Forbes as being worth 1.2 billion, when his acountant says he’s closer to 5.
    b.) Hockeysfuture – great site, except the team rankings are difficult to compare to each other. The Devils are lucky to have an author (Jared Ramsden) who never overrates prospects. Some other teams prospects are highly over-inflated by their authors and the “organizational rankings” are a little iffy. Carolina went from #2 to #30 after trading Jack Johnson to the Kings. That’s suspect in itself.
    c.) Newark – It’s important to note that the arena is a major boon to the city and that their “consideration” to sell their stake (paid for by a Newark Airport overexpansion windfall) is more likely a leveraging point to get the Devils to pay money withheld because Newark did not build the park in front of the arena the city promised. They wouldn’t be dumb enough to sell their stake now. (if the lease agreement even allows them to, which I’d be sceptical about…)

    The fact that the Devils (Vanderbeek) own the arena (and they shelled out 100 million of their own money), make money on all events hockey and non-hockey related, including all concessions and half of parking (and the fact that they are consistently at the cap ceiling) leads me to believe that the team is far more profitable than reported. I think the Kovy covet has more to do with Vanderbeek following the George McPhee model (who doesn’t see much action outside the first round either)

    • Mike Colligan says:

      All valid points.

      A – I worked on getting more details behind the Forbes numbers for that very reason but was unsuccessful. The numbers aren’t absolute, but they also aren’t throwing darts.

      B – While prospect depth is certainly subjective, PremiumScouting.com also just released their in-depth review: “The Devils have a substantial lack of talent in their system, although I think the 2010 selection of Jon Merrill helped them substantially as I felt he was a top ten prospect. They likely will churn out quite a few NHL’ers in the next few years, but the upside here is really lacking.” That’s my concern – when the stars retire, who will replace them?

      C – Everything about the Newark situation has to be taken with a political grain of salt; but my point was simply if things turn sour, Newark won’t be throwing money their way to save them like other cities have.

      I can’t speak confidently to the profitability of the team now, but the danger of big debt is that there’s no room for error. A few slumping years and it can spin out of control quickly.

      Thanks for the insightful comments.

  16. Pingback: Kovalchuk Part VI - The Return of Lombardi? (All Kovy to Kings Talk Here) - Page 103 - Los Angeles Kings Hockey Fan Forum

  17. this is a great article. I want the Devils to find a way to resign Kovalchuk just to see if he *can* make such a big difference to the Devils’ attendance. I have serious doubts he’ll make any difference whatsoever, but it would be fun to watch.

    • Mike Colligan says:

      Thanks saget. I agree. Another factor to consider is the team’s style of play would probably have to change to create that excitement and take full advantage of Kovalchuk. Perhaps the reason for the “retirement” of the defensive-minded Lemaire?

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