Pro Challenge at crossroads that might require founders to sell
The Denver Post
The USA Pro Challenge has the fans. It has international television coverage, supportive sponsors, the world’s top teams and Colorado communities that clamor for host duty.
But after five years, what the Pro Challenge still lacks is a title sponsor that can keep it alive.
This is not a new problem. Professional cycling is largely supported by benevolent billionaires, who are always in short supply. Endless doping scandals haven’t helped the sport either.
The Pro Challenge, though, has an additional obstacle to overcome in its quest for a big-money sponsor: the race’s owners, the deep-pocketed but lawsuit-plagued father-son team of Richard and Rick Schaden, who insiders say need to let it go.
“I think it might be appropriate to hand it off,” said Ken Gart, the powerful Denver businessman who serves as volunteer bike czar for Gov. John Hickenlooper, tasked with growing the state’s network of trails and fostering its bike culture.
Rick Schaden, who launched the Pro Challenge in 2011 with a promise of a five-year commitment, said he does not foresee selling but does hope to keep the race afloat.
“This is not a sellable race, in my opinion,” he said. “We will be working the phones real hard for a little more government support and a little more support from cities that benefit.”
Losses have dwindled every year, from an estimated $10 million that first year to $2 million this year.
“If that gap continues to be smaller and smaller, you know, we want to keep doing it,” said Schaden, who is missing this year’s race while he rallies with owners of his 350-restaurant Smashburger chain in Minnesota. “Our goal is to keep the race going. We are very open-minded as far as how we can do it.”
Next month, Schaden and race chief Shawn Hunter will pore over 2015 race metrics, concession sales and sponsorship support. They will decide the future of the race in about 60 days.
While Rick Schaden’s business reputation has been marked with contentious lawsuits, the Pro Challenge has become a key tourism asset.
“He’s had incredible vision and courage. He’s invested a huge amount of money,” Gart said. “But every business goes through cycles and matures over time. … I hope he does the right thing for both him and the state of Colorado.”
When Rick Schaden and his dad started the Pro Challenge, they called it a long-term play. Rick Schaden envisions the event in 20 years becoming something like tennis’ U.S. Open. In 2014, he told The Denver Post he wasn’t planning to get rich off the race, calling it “a privately funded community asset.”
That hasn’t changed.
“It is important to the community. That’s why we started it. It belongs in Colorado. Colorado should have an international cycling event,” said Schaden, who moved to the state in the early 1980s.
So far, they have invested at least $20 million into the Pro Challenge.
But the founders of Quiznos, Smashburger and Live Basil food chains also are being targeted by two behemoth hedge funds in a contentious federal lawsuit.
Avenue Capital and Fortress Holdings were the largest lenders to Quiznos during several years of financial distress. The funds say the Schadens and six other company executives orchestrated a conspiracy to defraud the global investors in a 2012 restructuring of the struggling sandwich chain.
That restructuring deal forced the Schadens to cede majority control of Quiznos, which they founded in Boulder in 1991. The restructuring forgave about $300 million of Quiznos’ $875 million debt. Avenue Capital and Fortress said in a U.S. District Court claim filed in July 2014 that the deal was fraught with fraud that cost the investors “hundreds of millions of dollars.”
Fortress and Avenue Capital accuse the Schadens of defrauding the global investors by “concealing, misrepresenting and artificially inflating” Quiznos’ cash flow, growth potential and other financials, reads the lawsuit.
Fortress and Avenue Capital are titans in the insular world of sports. Last year, the funds purchased the Milwaukee Bucks for $550 million. Insiders say some potential sponsors of the Pro Challenge — from the health care, oil and gas and sporting goods industries — do not want to risk irking the international investment firms that together control $85 billion of assets.
The hedge funds’ lawsuit is one of many the Schadens have endured over the years. The former chief executive of Smashburger sued them last fall. Hundreds of Quiznos franchisees across the country have sued the family , accusing them of squeezing store owners to bolster corporate profits.
It’s not uncommon to see franchisees sue franchise companies, but the accusations against the Schadens are persistent. Between 2006 and 2009, the Schadens and Quiznos faced four class-action lawsuits representing about 6,900 angry franchisees in Colorado, Wisconsin and Illinois.
In 2009, the Schadens settled the lawsuits for $95 million.
The Schadens’ Smashburger has churned through nearly every marketing firm in Colorado, leaving a wake of bitter and influential players in the state.
Pitfalls in staging a race
“A lot of people have looked at this race, but they have shied away from any association with the owners. I don’t think anyone wants to see that out there … but it’s true,” said one of the most influential players in Colorado’s tourism industry.
The source asked not to be identified because the remarks could harm the race, which contributes about $120 million of economic impact across Colorado and serves as a week-long commercial for the state.
Schaden said the lawsuits have not impacted the race. They were filed in 2014, so they could only affect this year’s race, he said. Schaden said the title sponsorship struggle has more to do with the lack of large corporate headquarters in the Front Range. Plus, he said, professional cycling is a young sport in North America.
“It will come into its own in the U.S.,” he said. “It’s just going to take time, and that has a lot to do with the title search.”
Recognizing the race’s ability to lure potential visitors from afar, the state’s tourism office upped its investment in the race to $500,000 for the past four years from $300,000 in 2011.
“We feel that’s a good bang for our buck,” said Al White, the former director of the Colorado Tourism Office who works as a senior adviser for the Colorado Office of Economic Development and International Trade.
The Pro Challenge’s primary benefit is its reach abroad, White said.
“People see Colorado who have maybe never even dreamed of Colorado, and they see it as a bicycling mecca,” White said. “That kind of marketing is invaluable.”
But still, White said, “We need to be careful how much we do invest.”
Professional bike races, like the ill-fated Tour of Georgia and Tour of Missouri, show the dangers of public ownership. Both races foundered as shifting politics and budget-tightening shut the funding spigot.
Those races were successful and delivered big economic impacts to local communities, said Jim Burrell, whose Medalist Sports organized the Georgia and Missouri tours as well as the Pro Challenge.
“But then the whole state loses when there’s a shift in parties or budget cuts,” Burrell said. “Government should be a partner but not necessarily an owner.”
Finding financial security
Under the leadership of race chief Hunter, a variety of mid-level sponsors have kept the Pro Challenge afloat.
Before joining the race, Hunter served as president of AEG Sports, the Philip Anschutz-backed firm that owns the NHL’s L.A. Kings and four Major League Soccer teams. Hunter helped AEG secure a $225 million, 15-year sponsorship deal for the AEG-owned The O2 arena in London. He helped land California biotechnology company Amgen as title sponsor for the AEG-owned Tour of California in 2006. That was a $3 million annual deal back then.
Hunter said he has cut costs, but the goal is an elusive partner who could take the race to the next level and give it the stability to thrive.
“We have done a good job of keeping a lean operation,” Hunter said. “Every year we’ve seen a nice improvement.”
Television coverage is his biggest expense, but cutting that, Hunter said, would only hurt the race.
“It’s important for us to maintain the marketing base and distribution base we have built over the last five years,” he said. “You’ve got to do television right to do justice to the state, the communities and our partners in the event.”
A title sponsorship deal would put the Pro Challenge in the black.
Hunter said he wants the race to continue to work with large, regional brands that have a connection to Colorado. New partners, like Edward Jones Investments, Lexus and Pepsi, are essential.
But the title sponsor should be a Colorado company, or one that has powerful local ties, he said. (Hunter declined to discuss his boss or his legal troubles, saying only that sometimes Rick Schaden can be “unpredictable.”)
Finding financial security is hardly a problem unique to the Pro Challenge. Bike races across the world often struggle to find and sustain sponsors. They tend to come and go, just as team sponsors do.
“Beyond the big races, like the Tour de France and a handful of others, all of these events have the same problems,” said Boulder-based business analyst and cycling advocate Steve Maxwell. His theouterline.com website offers solutions to ethical and financial problems that have long plagued professional cycling.
The present business model — support from benevolent billionaires with a passion for cycling — is not sustainable, Maxwell said.
“You can target a very attractive demographic with bike racing, but apparently that demographic is not big enough to bring in the really big sponsors,” Maxwell said. “And unfortunately, the sport keeps shooting itself in the foot with the doping allegations. All that eventually translates into sponsorship troubles.”
Michael Aisner ran the Coors Classic bike race from 1979 to 1988, when it died after Coors pulled its support.
Aisner said the Pro Challenge’s struggle to land a title sponsor has nothing to do with the Schadens.
It’s a matter of finding that company that wants visibility and brand awareness or wants to entertain clients or vendors. That company needs to like the television viewership numbers but not rely solely on them to justify its return on investment, Aisner said.
“There is a title sponsor out there somewhere that could find meaning in the return the Colorado race could provide,” Aisner said. “The hard part is finding them. It’s an expensive proposition, but it’s an extraordinary event. It’s going to take a real hunt to find a company who no one ever thought would be a sponsor. It’s not the obvious ones. It’s an attractive event, and it is sponsorable.”