For the first time in years, I’m excited about being a Leafs fan. Those changes at the top–from GM to President to Coach–are what we’ve all been waiting for. Sure, we may need a few years to be a top contender, but we’ve got to start somewhere. Nobody has disputed the success of the organization as a business, though. For proof, here is a story I wrote more than 10 years ago for CPA magazine, a profile of the CFO of MLSEL.
Ian Clarke shakes his head as he signs the first paycheques of the 2002/2003 NHL season for the Toronto Maple Leafs in his downtown Air Canada Centre office.
“Sometimes I’m signing biweekly payroll deposits that are more money than I’ll make in a year,” he says with a boyish grin. But he doesn’t seem to mind. It’s not just for the financial returns that Clarke is senior vice-president and CFO of Maple Leaf Sports & Entertainment Ltd. (MLSEL) – which owns the Toronto Raptors, the Leafs, Raptors TV, Leafs TV and the 19,800-seat Air Canada Centre. “I am proud to be associated with these teams,” says the 42-year-old CA, who clearly loves what he does. “I’ve felt very lucky to work with a great bunch of people in a fun business.”
When Clarke joined the company as a controller in 1990, it was known as Maple Leaf Gardens Ltd. and had 110 full-time employees with revenue of $36.6 million. Since then, the organization has experienced explosive growth, especially in the four years since the Leafs bought the Raptors and the ACC, and the organization became the MLSEL. Today the number of employees – coaches, marketing staff, maintenance people – is 380, plus about 1,800 part timers (ushers, ticket-takers, concession staff). Revenue has grown to more than $350 million from $70 million just before the merger.
Clarke oversaw most of the financial changes during this period, and while he modestly refuses to claim any personal responsibility for the organization’s successes, it is clear that his boss sees him as a special and valued member of the MLSEL team. President and CEO Richard Peddie, recognizing his energy and proactive attitude, named him senior vice-president in 1999, a few months after the ACC opened.
“Ian is an excellent CFO,” says Peddie. “The output of his whole team – he has IT as well – is fast, accurate and thorough. Our monthly financial package is one of the best I’ve ever put out, and that’s the feedback from our banks and directors as well. The board seldom seems to have questions.”
BORN AND RAISED in Montreal to a family of modest means – dad was a highschool teacher and university professor, mom worked in accounts at Bell Canada – Clarke graduated with a BComm from Concordia University in 1984 and moved to Toronto in the fall to article at KPMG. Among his clients were the now-defunct Grafton Fraser retail chain, Ontario communications and cable giant Rogers and, from 1985 on, Maple Leaf Gardens. When MLG’s secretary treasurer Donald Crump announced he was leaving to become CFL commissioner, MLG “borrowed” Clarke from KPMG in May 1990 and offered the 29-year-old the controller’s job a few months later.
“Ian showed a wisdom and a sense of how to deal with issues that were far beyond his years,” says Bill MacKinnon, a former partner in Clarke’s audit group and currently CEO of KPMG. (Clarke describes MacKinnon as his mentor.) “Frankly, I think that’s what attracted the Gardens to hire him. And he’s a natural leader. He would have made an excellent partner if he’d stuck around.”
Up to the early 1990s, vestiges of the Harold Ballard ownership era had left the MLG management group with a tough fight in the arena of public opinion, as the organization had somewhat of a reputation for being a cash box. The fans just kept coming though despite their team’s poor performance; indeed, ticket revenues exceeded player compensation. But the new management was trying to turn the organization’s image around, and Clarke came in as this was getting underway.
“The new strategy was to invest in our team and our arena,” he says. “In the Gardens itself we fixed up the concourse and the food and beverage outlets, we started selling beer and we added more corporate suites. ” And they started spending more on talent. According to Clarke, player remuneration, which is estimated by ESPN to be US$54.3 million, today far exceeds ticket revenues. (Clarke will not disclose either amount but does acknowledge it is the team’s largest source of revenue.)
Then came the greatest change: its purchase of the Raptors and the ACC. In late 1995, the team played in the unwieldy SkyDome. Its owners had been accumulating land near the lakefront to build a more basketball-friendly venue that could also host concerts. About the same time, MLG, led by Steve Stavro, was also looking to build a modern home for the Leafs downtown. It soon occurred to both the groups that it might be wiser to put two teams under one roof, since what makes an arena profitable is having a sports team to play in it – guaranteeing audiences for a certain number of nights (41 regular NHL season games, plus any playoff games). With two teams, at least 90 games would be locked in, plus there would be revenue from concert bookings and the associated food and beverage and merchandise sales.
So, in April 1998, the Leafs bought the Raptors and the ACC, which was already under construction. The newly minted MLSEL added to the ACC a practice facility, larger and more suites, escalators and a brew pub, making it a $265-million project. The arena opened in early 1999.
Practically overnight, the organization where Clarke was CFO had grown from corner store to supermarket. (MLSEL’s value has been estimated to be $1 billion.) “Ian played a big role in that transition,” says Ken Dryden, president of the Toronto Maple Leafs and Clarke’s boss from 1997 until the merger. Indeed, Clarke found himself involved in all the due diligence and legal work that must be done in a merger; he also temporarily had HR reporting to him as the two organizations were put together. Dryden says Clarke was now managing something that had much more of a corporate structure.
The MLSEL’s transformation mirrors the change underway then in the sports and entertainment business across North America. Up to the early 1990s the industry had been laid-back and shapeless; now it has become more structured and is being run in a more businesslike manner. Teams have to be organized: they need financing to cover the ever-increasing player salaries, and as a result grading agencies such as Moody’s have, for the past four or five years, been examining teams’ creditworthiness.
Player salaries are, of course, a major challenge for Canadian teams since players are paid in US dollars, while revenues are in Canadian dollars. “That means we need to generate $1.57 [depending on the exchange rate] for each US dollar we pay out,” explains Clarke.
One of the ways Clarke deals with this is to hedge annually. “Let’s say today I decide I’m going to buy US$4 million next April. The bank that I deal with will lock me into an exchange rate, say, $1.57. That way I can do my budget for the next year knowing that I bought that amount of dollars and what my cost for those dollars will be. Then as we go to set our ticket pricing and other pricing, I know what our cost base is. Clarke says he hedges between 65% and 80% of the US dollars he will need on a yearly rolling basis, and goes unhedged for the remainder. “Hedging means we don’t end up looking at a big unexpected hit due to the exchange rate shifting.”
The dollar-value discrepancy is a legitimate issue for Canadian clubs, but observers say it’s something they know going in. “Owners shouldn’t complain about that,” says David Coriat, CA, CFO of Standard Broadcasting Corp. Ltd., in Toronto. Coriat was on the Raptors board of directors representing former owner Allan Slaight before the Leafs bought the NBA franchise. “There’s no question the lower dollar value has an impact compared to US-based teams, but it’s a known factor when you decide to buy a team. Owners can moan all they want about it, but that’s the reality. And despite that, it’s still worthwhile to run those franchises in Toronto.”
The financial figures appear to bear him out. MLSEL is not a public company so Clarke won’t disclose numbers. Forbes magazine, which annually publishes estimates on NHL franchise values, speculated last fall that the Leafs are worth US$241 million (seventh in the league; Detroit is No. 1) and have an operating income of US$24.2 million – by far the highest in the league. Indeed, the next highest team is the Minnesota Wild, at what seems in comparison paltry at US$12.1 million. The Leafs’ debt-to-value ratio is 26%, down from 68% two years earlier; most if not all of that debt is thought to be the construction of the ACC.
Clarke also won’t break down the values of the MLSEL’s respective assets (Leafs, Raptors, digital channels, and the ACC) but the latter is thought to be of great value to the company.
“It’s a very well-run building,” says a respected Toronto-based sports business consultant who did not wish to be named. “It’s stand-alone good.”
Another advantage that many US team owners have over their Canadian counterparts is little or no property taxes and government-funded arenas. According to Clarke, MLSEL not only spent $265 million on the ACC, it also spends millions on upgrades each year. Next year, for example, it will spend $6 million.
“Improving the facility is one of our challenges every year,” he says. “It’s what our fans have come to expect.” But there is a lot of interest cost that goes along with that kind of money, he adds. “If you’re in a US city where the local government finances that and gives you the revenue streams, it’s obviously easier. But when you pay $265 million for your building, you have to carry that interest component. If you don’t get funding, your financial model changes.”
But again, say critics, this is just a fact of life. “These people operate a private business, and they operate it for profit,” says David Shoalts, a 16-year veteran hockey reporter with The Globe and Mail. “What goes on in the US has nothing to do with what goes on here.”
Besides, he says, NHL teams in cities such as Phoenix and Nashville, to name just two, have “basically been handed their arenas, yet they’re still in trouble.”
There’s no denying that the economic realities of running an NHL team in Canada make it especially difficult for smaller markets such as Calgary and Edmonton. But Toronto is fortunate in that it’s home not only to extremely loyal fans, but, more important, also to so many corporate head offices. That partly explains why the Leafs have an average attendance of 100% despite having the highest ticket prices in Canada (the average ticket price is US$60). League-wide, according to an October 2002 Team Marketing Report survey, they are fifth-highest. MLSEL also put ticket prices up for this season by almost 10%, which is the fourth-highest increase in the league.
“You have people who feel our ticket prices are high,” says Clarke, “but it’s one way we mitigate the 63 dollar.”
The currency difference is a valid reason for having to charge a lot for tickets, says the sports business consultant who declined to be named. “But I feel it’s tied more to what the market will bear. And they have a huge corporate base. I mean not a lot of individuals are paying the $200 a seat per game for season’s tickets.”
Shoalts is more blunt: “The Leafs have proven that in this market, people will pay anything to watch hockey. Those corporations will just sign the cheque every year for season’s tickets and not even look at the price. People will line up to pay.”
How else do the MLSEL teams earn money? After fan attendance, Clarke says, it’s broadcast rights, followed by such corporate sponsorships as Molson, Air Canada and Bell, and also suite rentals. Clarke won’t reveal numbers, but the Raptors are thought to be taking in between US$25 million and US$30 million a year from the NBA for TV rights in the United States; all NBA teams receive the same share. “That definitely helps the team’s financials,” says Clarke. The Raptors’ local TV deals are not nearly as lucrative (no dollar figures are available). The Leafs, for their part, get an equal share along with all the other Canadian NHL teams of national TV rights — according to the Globe, that works out to between US$6 million and US$8 million per club. But the real TV money for the Leafs comes from local TV rights, estimated to be $23 million a year, by far the highest among Canadian NHL teams.
A UNIQUE organization such as this — which has two teams in one arena that it owns – can certainly create some synergies. “You have less overhead so you can maximize efficiency,” says Clarke. “Not too many sports organizations in North America can say that.” But this also puts MLSEL in the unique position of having to market both a newer franchise in a sport that is relatively unknown in Canada, and a 75– year-old team playing a game that’s part of the fabric of this country.
“The Leafs are a tradition here, they’re the blue and white, and the Raptors are up and coming – they’re establishing an identity as exciting, young, vibrant,” says Clarke. “We keep the two separate. We recognize that a trap you can fall into is trying to market yourself to the public in a confused way.” And yes, he acknowledges, in keeping the teams separate there are some extra marketing costs, but ultimately it pays off.
Another challenge is to figure out how to turn basketball into something as popular and as tied into the Canadian psyche as hockey. “Our research shows that basketball is very close to being the second most popular sport in Canada,” Clarke says. “But we need to get the grassroots going. We know that if you play a sport as a kid, you become a fan in the future. It’s about getting new fans into the arena”
One way of doing that, of course, is to attain and keep as many big-name players as possible. “We jumped a hurdle last year when we re-signed all our free agents, including Vince Carter and Antonio Davis,” says Clarke. “So now we can start to say, yes, Toronto is a hockey town, but it can also be a significant basketball town in the minds of the players.’ And what MLSEL needs to do now, he says, is build on that, have people come see the product.
Unfortunately, the first half of this season has been plagued by injuries, which hits the bottom line hard. “First, you have to go out and get more players who can play, while you’re still paying the injured player,” explains Clarke. “Second, if the injuries mean your team loses a few more games, some fans might not come. And if they don’t buy a ticket, they’re not in the arena buying your T-shirts or your hot dogs either.”
But the Raptors are in no way a liability to the company. The team sold almost 14,000 season’s tickets in 2002, a slight decrease on the previous season but easily in the top third of the NBA. And last season they sold out more than 80% of their games. Fan attendance to Raptors games is also in the top third in the league, according to Clarke.
It’s true that average NBA salaries are higher than those in the NHL – last year they were US$4.5 million versus US$1.64 million. According to Clarke, though, the overall payroll is about the same for both teams, since included with the Leafs’ payroll are farm team players (the Raptors don’t have a farm team). “You’d always like to be more profitable. But the Raptors are fine,” he says.
“The Raptors aren’t causing problems for MLSEL,” agrees the sports business consultant. “If they continue to not be a winning team, then perhaps the profitability of MLSEL will be affected if ticket sales go down. It will be interesting to see how the fan base reacts”
Clarke won’t disclose the amount or proportion of money that has been budgeted for MLSEL’s respective teams, other than to say that 70% of overall company expenditures are for payroll, but he does say that the organization’s philosophy is that the teams are its engines. “In sports you can take the attitude that if things go to the tank you’ll spend less on players, but we say spend on players and you’ll bring back the fans through success. You’ve got to make an investment to have it pay off in the long term. And it’s a continual process.”
Despite the spending, Maple Leafs fans are frustrated that the team hasn’t won the Stanley Cup since 1967. Clarke, however, is adamant the organization wants its flagship to win it as much as they do. The company truly believes it’s running things the way the fans want it to.
“We have spent significant money on the Leafs to win the championship,” he insists. Unfortunately, he says only one team out of 30 is going to win the Stanley Cup, “but in the past four years we’ve gone to the final four twice. Not many teams can say that. But we haven’t had the ultimate success we’ve wanted, and that our fans have rightfully wanted.” In the past four years they have ranked in the top seven or eight teams in the league in terms of spending.
“If anyone wants to say we’re not committed I would argue at great length with them. This year we increased the team payroll by 32%.” In fact, reveals Clarke, this spring the Leafs will be either the third– or fourth-highest spending team in the NHL.
Clarke and the MLSEL definitely want playoff success because, besides making the fans happy, it’s also very profitable. This is because salaries are paid only during the regular season games; players earn league and contract bonuses in the playoffs. “So if my players’ salaries exceed ticket revenues during the regular season,” Clarke explains, “I need other revenue to make money. But when you make the playoffs, tickets revenues are a bonus.”
The organization has certainly come a long way in the dozen years that Ian Clarke has been part of it. Indeed, another change was the sale by 75-year-old chairman Steve Stavro, of his controlling interest to BCE Inc.’s Bell Globemedia. When the two teams first merged, Clarke and others carried out best practice studies on cities with arenas for both an NHL and an NBA team – such as New York (Rangers and Knicks) and Vancouver (Canucks and Grizzlies, which has since moved). Now, sports organizations are doing best practice studies on MLSEL. “People are coming to us and asking how we did it,” says Clarke.
“We’re winning marketing awards, arena awards, and that’s what we’re about– we have a championship vision. We want to be No. 1 in North America.”
For now, the unique combination of elements that make up MLSEL appears to be a match made in sports heaven. And Ian Clarke embodies that perfect fit.
Bonnie Munday is a freelance writer based in Toronto
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