An Increase in Capital Gains?

After watching his AOL stock value shrivel and his NHL Capitals hemorrhage tens of millions of dollars, entrepreneur Ted Leonsis is hardly the high flier he was when he and fellow investors bought the team in 1999.

This is not the same $675 million man Forbes magazine declared he was in 1999 (at the peak of the economic boom, his AOL stock was worth about $1 billion). But his stock (he retains more than 5 million shares and options of AOL alone), cash and sports empire are still believed to be worth more than $400 million.

“Who hasn’t been beaten down?” said the 47-year-old entrepreneur, back as vice chairman of AOL and president of the AOL core service after several years of exile within the company. “In the great American drama there are three acts. First, you and your company come out of nowhere and surprise everyone. Second, the hero falls very publicly. The third act is all about redemption and comeback. At any one time in life and career, you will be in one of those acts.”

Leonsis is in his third act, attempting his comeback by testing whether he has the business skills to save the Internet company he helped create and to revive the hockey team he’s sworn to turn around.

The 40-foot yacht has been sold, and the sharp-elbowed, backyard basketball games with fellow AOL executives have ceased. He even dropped 45 pounds to get in fighting trim. “I have asked him to get re-engaged as much as possible, and he has done it in spades,” said Jonathan Miller, chief executive of America Online Inc. “He certainly is Washington D.C.’s ‘comeback kid’ this year. I hope the hockey team as well as AOL counts as the comeback.”

“I am frustrated,” admits Leonsis, aware that his five-year goal of making the team profitable has been undermined by recession, the NHL’s troubled economics and his own lack of discipline on player salaries. Forbes estimates the Capitals are worth $140 million, but there is downward pressure on franchise values given the state of the NHL: the Buffalo Sabres and Ottawa Senators declared bankruptcy this year, and several other teams are on the market.

Leonsis views the Capitals as a public trust, a way to give back to the community. He lifted a huge financial burden from former owner Abe Pollin when he bought the chronic money-loser from him for $85 million in 1999. But it’s clear that the financial stress is starting to be felt by his sports holding group, Lincoln Holdings, of which Leonsis owns 60 percent. The Capitals will lose more than $20 million this season, adding to an estimated $40 million or so in cumulative losses during his first three seasons and creating a need for more contributions (known as “cash calls”) from partners to cover those losses.

“Hockey and sports generally have proved to be a more difficult industry than he originally expected,” said Marc Ganis, a Chicago-based sports consultant. “But despite the financial reverses he and many others in tech have suffered the past few years, he’s well positioned to be a major player in the sports industry.”

Those who know and those who have worked with Leonsis said he loves the attention he gets as a local sports mogul, but attention alone isn’t enough. He’s committed to making the Capitals successful.

“He’s a very competitive guy,” said Charlie Fink, a former AOL senior vice president who worked under Leonsis. “He bought the Caps because he wants a Stanley Cup. I think the team is a source of frustration for him and a very hard thing to figure out. He did not buy a hockey team to struggle at .500.”

Under Leonsis, season ticket sales have increased to 12,000 from around 2,000 when he took over. He’s dramatically improved the game experience and signed Jaromir Jagr for an annual salary of $11 million. He works at doing all the right things, mingling with fans, answering dozens of e-mails a day, posing for pictures. The result: more buzz about the Capitals around Washington, where he gets high-fived at restaurants, and throughout professional sports. “I just like to watch what he does with the Caps,” said Dallas Maverick owner Mark Cuban.

“He’s brought in a lot of good players and he’s not afraid to spend the money,” said Jason McCarthy, 21, a fan who recently traveled from New Jersey to see the Capitals. “Now it’s a matter of finding the chemistry.”

Jeffrey Citron, a corporate finance and sports business consultant based in Toronto, says “the frustration is that they haven’t had the on-ice results to match his efforts off the ice.”

The perennially underachieving Capitals have not markedly changed their ways since Leonsis took over. The team won the Southeast Division in the 1999-2000 and 2000-01 seasons but lost in the first round of the playoffs both years to the Pittsburgh Penguins. The team missed the playoffs last season. This season the team is near the top of its division and has clinched a playoff berth, although it has performed poorly at times.

Jagr hasn’t had the impact the organization hoped for: sellouts are rare and the Capitals have yet to challenge for a Stanley Cup. Attendance is down about nine percent from last season, the third-highest decline in the NHL, averaging 15,670 in an 18,277-seat arena, according to Sports Business Journal. People in and around the game said Leonsis, a marketing whiz and the architect of Michael Jordan’s arrival with the Wizards, hoped Jagr would have an overnight impact on the Capitals.

Leonsis said his team may face a more fundamental problem than can be cured by winning or jazzy marketing.

“Maybe the hockey model is broken in Washington,” he said. “This is concerning.”

The hockey situation is testing Leonsis’ talent for business, which has been strong on the big marketing idea (such as Jagr and Jordan) and motivating people, but not as strong on day-to-day operations and details.

“Ted’s a showman ... great at people skills,” said Fink. “He’s not going to take home a briefcase full of 50 contracts and read them over. That’s been cited as a weakness of his, but I can’t think of anybody who does everything.”

Miller said Leonsis “is a marketing and branding whiz ... a big-idea guy” who has also immersed himself in the details of AOL and has buckled down to do the work.

“All I can do is play my position,” said Leonsis.