Daryl Katz and the future of the Edmonton Oilers

Daryl Katz is making a big bid to get the Edmonton Oilers a new arena, but so far it’s not working out—and that could spell the end of the NHL in the Big E.

CB Staff 0

Daryl Katz (right) and NHL Commissioner Gary Bettman. (Photo: Bruce Bennett/Getty)

Daryl Katz (No. 15 on the Rich 2012 list, with a net worth of $3.08B) has never had to worry much about optics. For most of his career, he has operated outside of the public spotlight. His company, the Katz Group, is privately held. His drugstore chains, the most recognizable of which is Rexall, never built much brand personality. Katz rarely showed up in the media, and he seemed to like it that way.

That changed when he paid $200 million in 2008 to buy his hometown hockey team, the Edmonton Oilers. He now makes almost daily appearances in the local media, which obsessively report on his tortured efforts to negotiate a new arena for the team. Katz contends the Oilers need a new facility to remain a viable franchise in Edmonton, while city council hopes the project will help revitalize the downtown. The strained negotiations collapsed last month when council voted to end all formal talks with his firm. “There’s always some rancour in negotiating,” says Brad Humphreys, a University of Alberta professor who studies the economics of sports. “But I cannot think of another instance where somebody has made the public officials so mad they say, ‘Forget about it.’” The fate of the arena is now uncertain. If Katz is to be believed, so too is the Oilers’ future in Edmonton.

Katz is also under fire for $430,000 in donations paid to Alberta’s Progressive Conservative party during this year’s spring election. When the party disclosed its campaign finances last month, not only were the Katz Group and Katz himself among the donors, but so were his parents, his wife, and other executives connected to the arena complex. Alberta’s chief electoral officer is currently investigating. At the time of the donations, the funding for the arena was short $100 million, and both sides were hoping the province would pony up. While there is no evidence to suggest Katz was attempting to influence the Alberta PC party to contribute money to the arena project, even the faintest whiff of currying favour has killed what little chance there was for the government to share costs.

The tussling over the arena, during which Katz made veiled threats about moving the Oilers from Edmonton three different times, has damaged his reputation with fans. When he first bought the team, “there was a lot of excitement,” says city councillor Kerry Diotte. Katz was a local boy, and his considerable financial heft ensured a bright future for the franchise. “A lot of that goodwill has been squandered,” according to Diotte.

“Just because you can make a huge amount of money operating a drugstore chain doesn’t mean those skills apply to operating an NHL team,” Humphreys says. “A lot of rich guys don’t understand that.”

Still, Katz has good reason to be confident. The son of a pharmacist who owned a handful of drugstores, Katz went on to work as a franchise lawyer. In 1991, he read an article citing Medicine Shoppe International as a top retail pharmacy franchise, and called the company’s CEO in the U.S. to inquire about Canadian franchise rights. He was told the company was already on the verge of selling them. Katz immediately recruited his father, roped in the province’s venture capital arm as an equity partner and convinced the company to sell him the rights.

The Katz Group developed a voracious appetite for pharmacy chains, and quietly grew into the country’s second-largest drugstore chain within a decade. Katz was the dealmaker, and left the operations to others, but he was unquestionably in charge.

That autocratic style may have worked to build a national drugstore chain, but it has proved less helpful at city hall. Katz and the city took three years to decide on a basic funding framework for the $450-million arena complex: $100 million from the Katz Group, $125 million from a ticket levy, and $125 million from the city. But even after three years of negotiations, the project was still short by $100 million. Both sides hoped the province would step up, despite refusals from former premier Ed Stelmach and current premier Alison Redford.

A few councillors grumbled that the Katz Group’s $100-million share of the arena financing simply wasn’t good enough. Instead of paying up front, the company would shell out $5.5-million per year for 35 years. Katz even extracted an agreement from the city to pay $2 million annually over a decade for a vaguely defined “marketing partnership” with the Oilers. And while the city would own the arena, the Katz Group would get all of the revenue and retain naming rights.

Though Katz had already won a number of concessions from the city, he is accused of hitting council with fresh demands in September, including a $6-million operating subsidy and a requirement that the city rent space in an office tower the Katz Group planned to build. “Those demands were just outrageous,” says councillor Diotte. Katz told an Edmonton radio station that the demands were not new at all. “To suggest I tried to change the deal at the last minute is really unfortunate,” he said.

Things quickly fell apart. The city requested that someone from the Katz Group appear before council in a public session. But instead, Katz took a trip to Seattle to scout for opportunities. “Katz Group has been listening to proposals from a number of potential NHL markets for some time,” read a statement issued by the company. Oilers fans were outraged that Katz was considering moving the team. The uproar forced him to buy a full-page ad in the Edmonton Journal. “I took for granted your support and your love of the Oilers. That was wrong, and I apologize,” he wrote.

Still, his relationship with city council did not improve. Katz refused to send anyone to council; council voted to end formal negotiations and look at other options—including building the arena without the Katz Group’s involvement. The city administration is expected to report back on alternative options in December.

Council could very well be bluffing to entice Katz back to the table. The city has some leverage in these negotiations: few people believe Katz could move the Oilers. The team has a fierce and dedicated fan base in Edmonton, and games regularly sell out. The NHL, which isn’t receptive to moving franchises, is going to be reluctant to let Katz move the Oilers from a strong hockey market to another city where the team could flop. That helps to explain why the city hasn’t capitulated to Katz’s demands.

Katz has been characteristically silent since negotiations stopped. (He did not respond to interview requests from Canadian Business.) Humphreys expects talks to resume, as a completed deal is in both sides’ interests. He also predicts an arena will be built eventually, and with substantial public funding. “That’s the way these things always happen,” he says. Edmonton is just holding out longer than most cities. Katz’s negotiation tactics have not been elegant, but history suggests he’s right to play hardball. Humphrey’s research has shown that owners almost never lose money on the sale of a professional sports team. If Katz still can’t get what he wants from the city, he always has the option of selling the Oilers, and almost certainly at a profit. Even in the worst-case scenario, Katz will come out a winner.

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