Edmonton wants a new $100 million arena

One hundred million dollars. A one, eight zeroes. That is what’s standing between the city of Edmonton and its planned new downtown home for the NHL’s Oilers. No big deal, say supporters of the space-age barn that would replace aging Rexall Place. That’s a fraction of the cost of a major highway overpass. Done right, say the starry-eyed, it could transform Edmonton’s infamously sleepy downtown. But where is the money going to come from? The city’s sweetheart deal with its richest citizen, Oilers owner and pharmacy billionaire Daryl Katz, left that $100-million gap to be shaded in through the largesse of “other levels of government.”

So far, those other levels have refused to consider it, and pretty convincingly, too. When Rexall Place (originally the Edmonton Coliseum) was built in 1974, the city got help from, among others, the federal agriculture department. But in government circles, the days of that kind of creativity are over. The federal government passed through a period of fiscal stimulus when the financial crisis hit, but wanted the money to go to “shovel-ready” projects. Edmonton’s dream palace didn’t even exist on paper yet.

The messages from under the dome of the Alberta legislature are largely the same now. Asked about the funding gap, Edmonton city manager Simon Farbrother says, “There continue to be informal discussions with the province,” and notes that a provincial election is around the corner in the spring. In an auction for votes, it is possible that new Premier Alison Redford might improvise anything. But Redford’s preferred branding, a close adviser warns, is about “people, not buildings.” Her predecessor, Ed Stelmach, was an old-fashioned pavin’ politician. Redford’s campaign focus—an unsurprising one for a human-rights lawyer—is expected to remain squarely on health, education, and seniors.

The $100-million gap thus continues to hover menacingly in the ether, even as the city spends $30 million upfront on arena design. The construction cost for the rink is estimated at $450 million, with $125 million of this to come from a “facility improvement fee”—i.e., a ticket tax on Oilers customers. Another $125 million comes directly from the city, which has promised not to increase property taxes to cover the cost.

What a lot of Edmontonians are wondering is why Daryl Katz can’t close the funding gap all by himself. Katz’s net worth is estimated to be $2.8 billion by Canadian Business, which ranks him 18th on its Rich 100 list (ahead of iconic names like Frank Stronach, Seymour Schulich and Charles Bronfman). Until recently, when he was surpassed by a couple of Calgary oilmen and the natural order of things was restored, this lifelong Edmontonian was considered the richest Albertan. In fact, because his 1,800-store Katz Group pharmacy empire is privately held and few are privy to his debt arrangements, it is inherently difficult to be confident in any estimate of Katz’s net wealth. (The chain includes PharmaPlus, Rexall, Guardian, and IDA drugstores, among others.) The Katz Group declined to comment on the arena plan.

Katz keeps a low profile in Edmonton, though his compound across the river from Hawrelak Park has become an informal tourist attraction, and locals have learned to watch the skies for his private jet when a hockey player needs wooing in free agency or calling up from the minor leagues. His wealth, earned by buying up unprofitable mom-and-pop drugstores and turning them around with superior marketing and supply techniques, has made him an increasingly contentious figure in the city as council struggles to buy him a big glass showcase for his Oilers. (It doesn’t help that his closed-circle approach to management, so effective in the pill trade, has yielded nothing but putridity for the Oilers in the standings.)

Other new arenas in Canadian NHL cities were built almost entirely with private money, but Katz’s advocates, who include a horde of downtown property owners, have succeeded in leveraging Edmontonians’ fears of losing the Oilers franchise in the event of a downturn in the dollar. Dwindling exchange rates still seem natural to some Canadians, even though the loonie’s current near-parity with the U.S. greenback represents the long-term historic norm.

And it is not clear where the Oilers might go even if Katz decided to seek greener pastures. Forbes magazine’s latest valuations of the market value of NHL teams have the Oilers, despite their “small market,” ranked in the dead centre of the league at 15th. (They are worth an estimated $212 million, which cannot be too far off, since Katz paid an estimated $200 million for them in 2008.) The Oilers contribute to revenue-sharing for beleaguered American clubs, and, like other Canadian teams, get just a one-thirtieth share of TV money that is mostly earned in Canada.

Katz has been handed control of the prospective new arena and its revenues, in exchange for nothing more than paying the maintenance costs, keeping the team in town, and kicking in $100 million upfront on the construction cost of the building. At least, that is the deal Edmontonians thought they were getting until Oct. 14, when his arrangement with the city was finalized. The city has promised the Oilers $20 million over 10 years in promotional funding, and the “up front” $100 million coming back will now be paid out over 30 years. As ex-mayor Cec Purves pointed out last month in a stinging critique of the arena project, that means Katz is technically making no equity contribution to the building at all. (He is to cover half of the estimated $50-million cost of a pedestrian overpass connecting the arena to the downtown core.)

When you look at Katz’s main business line, the reluctance to let go of cash becomes understandable. The provinces, led by Ontario, are using regulation to cut drugstores’ margins on generic drugs and make them more dependent on providing advice to customers at tightly circumscribed rates. Katz Group and Shoppers Drug Mart tried to fight back with a vertical-integration move toward selling their own private-label generics; a December decision from the Ontario Court of Appeal, however, upheld the province’s right to forbid the practice. According to analysts, this sets up a race among the big drug chains to take over small outfits and independent stores that can still be modernized—changed to adapt to a world in which the money isn’t made at the drug counter, but in the candy and cosmetics aisles.

The Katz Group’s strong desire for cash was made clear on Jan. 30 when it announced the sale of $920 million in assets to McKesson Canada, a pharmacy logistics company with which it has a long-standing relationship. The all-cash deal included Drug Trading Co., the marketing and purchasing arm for many of Katz’s non-Rexall-branded pharmacies; in exchange for about a billion dollars now, Katz Group becomes a McKesson customer for functions it used to perform on its own. Katz also sold McKesson the franchise business of the Medicine Shoppes chain, the very asset with which he began his business in 1991 after leaving the practice of law. The billionaire has a long track record of philanthropy, but having just sold the heart of his empire, he may not be likely to solve the city’s $100-million mystery with a surprise gesture of liberality.