NHL expansion proves a daunting task for most cities

The deadline to apply for a National Hockey League expansion franchise passed this week, and only two cities bid—Las Vegas and Québec City. But to establish a team, both cities would have to overcome significant hurdles that continue to weigh on some of the league's newer organizations.

A Quebec Nordiques fan shows his support for their return to the NHL.
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Billionaire businessman Bill Foley filed to bring a squad to Sin City, and media company Québecor is looking to settle a team in the eastern Canadian city. The NHL made applications available to bidders on July 6, and while 16 ownership groups expressed interest, only two followed through with submissions.

"Apparently, only Mr. Foley and Quebecor have the confidence in their ability to secure an arena and suitable ownership capability to move forward with this process," the NHL said in a statement Tuesday.

The groups—which were hit with $10 million application fees partly to test their financial flexibility—now have to file at least two more rounds of documents while the NHL evaluates their proposals. But even if chosen, a Las Vegas or Québec City team may struggle to make money in a league already riddled with financially underperforming franchises, experts told CNBC.

"While they're more viable than many existing cities, they're most likely going to go through years of operating losses," said Andrew Zimbalist, a professor of economics at Smith College who has studied sports business.

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The NHL declined to comment on the process beyond the statement it issued Tuesday, saying it would "provide no further updates until there is something substantive to announce."

While the number fluctuates, more than 10 NHL teams typically operate at a loss in any given year, Zimbalist said. That's a third of the league.

The NHL's shared TV revenue has quadrupled since the last round of expansion, but the addition of new teams will split that cash into more pieces and cut into the amount existing teams receive. To set up a franchise and compensate existing owners, expansion team owners will have to shell out a lofty fee.

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NHL Commissioner Gary Bettman said in June that a $500 million expansion fee would not be out of the question. Vrooman said that new teams would likely have to pay at least $240 million.

The organizations would already find themselves in a hole as they attempt to sell tickets, draw sponsors and ink local TV agreements. Considering the Las Vegas and Québec City TV markets are the 45th- and 59th-largest in North America, the cities may struggle to get the viewership that big-market contenders such as the Chicago Blackhawks and New York Rangers draw.

Many of the league's younger franchises have struggled. From 1991 to 2000, the NHL added nine franchises, many of them in warm-weather cities.

One of those teams—the Florida Panthers—filled 63.7 percent of its seats at home games last season, ranking last in the league in attendance, according to Vrooman. The Arizona Coyotes and Carolina Hurricanes, which were both relocated to their current locations in the 1990s, had 75 and 66.7 percent attendance at home last year, respectively.

Expansion and relocation franchises, particularly in warm cities, run some of the highest debt totals in the league relative to team value, according to estimates from Forbes. Arizona, Carolina and Florida all have accumulated debts of more than 50 percent of their value.

Cities where a team might work

Vrooman devised a system for picking the best expansion cities, based on league trends, costs and potential fan bases. According to his system, a second team in the Toronto area would make the most economic sense, he said, followed by Seattle.

Montreal or Québec City comes in third, followed by Portland, Oregon, and Hartford, Connecticut. Las Vegas ranks sixth in Vrooman's model. He suggested that Toronto and Seattle—two areas that were considered contenders for expansion teams but did not officially apply—were the most logical choices for new franchises.

Quebec City
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Vrooman said the NHL would benefit from moving the Arizona, Florida and Carolina franchises. Québec City, Portland or Hartford could field teams in their place, he said. (The Carolina Hurricanes were previously the Hartford Whalers.)

Zimbalist added that while Las Vegas would work better than some current warm-weather franchises, it faces unique challenges, as sports falls low on the entertainment priority list in the gambling and nightlife hub.