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Under Melnyk, the Senators have lost $94 million

The proprietor of the Ottawa Senators since 2003, Melnyk had seen his once-staggering wealth — more than $1.5 billion when he bought the team and arena — shrink significantly. The pharmaceutical entrepreneur is still, by any ordinary standard, immensely wealthy. But his diminished fortune — estimated in the hundreds of millions of dollars — is tied up in a variety of assets and commitments unrelated to the hockey team. Melnyk has sufficient cash to cover his Senators’ cash losses — which have been averaging close to $10 million per year. But last August he faced the prospect of significant further bleeding. And it worried him.

Indeed, Melnyk was more exposed to the financial consequences of a lockout than outsiders realized. Prior to the expiry of the players’ collective agreement, he had been negotiating a new loan to cover the team’s $130-million debt — held by a syndicate of eight banks including Scotiabank and CIT Group of New York. The loan had expired at year-end 2011 and had been operating under a series of extensions, with appropriate financial penalties applied. Melnyk was being forced to cover millions of dollars in extra debt interest payments until he could line up a new set of lenders.

Ordinarily, Melnyk might have been able to convince the original group of eight to agree to new terms on a fresh loan. But some members of the syndicate had decided to get out of the business of lending to sports teams and others were concerned by the extent of the Senators’ debt load, which is approaching 50 per cent of the estimated $300-million value of the team and the arena. This is high, even by the standards of the NHL. The Senators consider it manageable.

It was only after the league returned to action, allowing the Senators to generate revenues from ticket sales, that Melnyk finally arranged $150 million in fresh financing — this, according to Davies, the law firm that helped to negotiate the deal. He signed a four-year deal in April 2013 with a pair of U.S. specialty funds. By this time, the mantra of conservative spending was even more firmly embedded in the Senators’ financial culture. This posture would be an important factor in the ill-fated contract negotiations involving the Senators’ long-serving captain, Daniel Alfredsson.

The issue was not so much whether Alfredsson would settle for $4.5 million or $7 million — the initial variation between the two sides. It was, rather, the context. Under NHL rules, the Senators can allocate up to $64 million US for players’ salary next season. But the team was holding the line at $51 million US or so. The lower figure was established by Senators’ general manager Bryan Murray, though he did so understanding full well the financial stresses endured by the team over the past year. For Alfie, the $13-million gap represented money not being spent on hiring free agents who might increase the Senators’ odds of progressing further in the playoffs.

When the Swedish star revealed July 5 that he had accepted a one-year contract worth $5.5 million US to play for the Detroit Red Wings, disbelief among Senators fans gave way to anger, then resignation. More recently, there has been a cooler appraisal of what it takes to create a winning franchise in a small market such as Ottawa. While financial commitments to his outside business and personal interests have hurt Melnyk’s flexibility with respect to the Senators, he appears quite at peace with the idea that you don’t have to spend big money to create a winner in the NHL.

Things were supposed to be different with Melnyk, who rescued the Senators from bankruptcy on Aug. 26, 2003. Melnyk at the time was CEO and largest shareholder of Biovail — the Toronto-based drug maker he founded in 1989. The value of his shares in the firm was $1.5 billion. In addition, he had exercised share options in 2000 and 2002 for gross proceeds of nearly $68 million US.

Yet Melnyk chose to finance nearly half his $127-million purchase of the Senators and the arena with debt.

“We were in a blackout period” Melnyk explained, referring to the period during which key executives of publicly traded firms such as Biovail are prohibited from trading shares. Normally, a restriction such as this would merely entail a delay in Melnyk’s ability to buy or sell shares. But this would prove a most unusual financial quarter for Biovail — on Oct. 3, the company reported that its revenues for the three months ended Sept. 30 would be at least $45 million US below what investors had been expecting. It was the first time Biovail had fallen short of financial expectations — and company officials blamed the shortfall on a truck accident involving the spillage of a significant amount of Biovail pharmaceuticals.

That explanation would later be challenged by investigators from the U.S. Securities and Exchange Commission but the short-term impact was a steep fall in Biovail’s share price that pushed the value of Melnyk’s shares from $1.5 billion to little more than $600 million in just two months. When the blackout period ended, Melnyk had no desire to sell what he regarded as undervalued shares for cash. “We thought the shares would recover,” Melnyk said.

But they never did, not on Melnyk’s watch. He quit as CEO in 2004 and resigned as chairman in 2007. After he lost a fight to regain control of Biovail from a competing faction of directors, Melnyk sold his entire stake in the firm (now called Valeant Pharmaceuticals), generating several hundred million dollars in proceeds. Along the way, he reinvested the proceeds in a dozen businesses, including two early-stage pharmaceutical startups, Trimel and PurGenesis.

Melnyk’s decision to divest his Biovail shares — a great chunk at less than $20 per share — cost him dearly, at least in the short-term, because Valeant’s managers have proved sharper than he expected. Had he held on to his stock, Melnyk would have realized more than $1.5 billion in capital gains. (Valeant shares closed Thursday at $106.12 per share.)

However, this sort of inactivity is not the way of entrepreneurs.

“I wouldn’t have bought other things that are going to make me a lot more money,” he replied when asked whether he has regrets about selling his Biovail stake. “PurGenesis is a little company but it’s got the potential to become a billion-dollar company,” he added, referring to the Quebec-based startup that is trying to build a business on the basis of the anti-inflammatory properties of certain plants. Earlier this month, PurGenesis revealed its lead drug candidate, aimed at reducing inflammation in bowels, had done well in a proof of concept clinical trial. However, it may be years before the drug passes all regulatory hurdles, assuming it is successful.

Melnyk claims most of his businesses are profitable. Exceptions are his two pharmaceutical startups — which require minimal funding at this stage — and, of course, the Senators. Because the team has consistently been a money-loser, he has quietly been selling holdings here and there to generate cash. “I sold a little bit of Trimel stock,” he said, and recently sold his Junior A hockey team, the St. Michael’s Majors, along with a significant portion of his herd of race horses.

How much are the Senators costing him? It’s impossible to be definitive because, despite its high public profile, the team is a private company. Not only that, the NHL regularly warns the 30 franchise owners not to divulge details about their operations. Nevertheless, Melnyk and two of his long serving senior executives — Leeder and chief financial officer Erin Crowe — offered some insight into the team’s finances.

On Melnyk’s decade-long watch, they say, the team has generated a grand total of just $6 million on operations — that is, total revenues minus the costs associated with paying and moving the players, advertising and managing the arena. After subtracting items unrelated to operations — such as interest on the team’s debt and capital expenditures to keep the arena up-to-date — Melnyk has had to absorb cumulative cash losses of $94 million. In short, he is losing an average of $9 million to $10 million a year. And this excludes the additional interest and fees related to the debt extensions.

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