The word is out that New Zealand Rugby (NZR) and the Players Association are meeting again this week to try and move this deal forwards but given that the Players Association are proposing a solution to a question that is not being asked it is highly unlikely that any meaningful progress can be made.
Let’s remember that from the very being NZR have been looking for a partner who will be in a position to use their skills to drive the commercial revenue of New Zealand Rugby significantly northwards. Word around their opening thinking some two years ago was that they would lease the rights to running the commercial revenues to a third party for something like $60 million and that party would share in an upside of that revenue.
It’s certainly an environmental assessment that is bang on. Even prior to COVID, global revenue in rugby union was in trouble, Six Nations and the English Premiership had issues with both sponsorship and television deals, which all of a sudden didn’t automatically go up, South Africa signed a TV deal, which went down in value for the first time in years, and of course Rugby Australia couldn’t even find a buyer for the rights to their domestic competition.
The sporting world has changed, how content is viewed has changed, how advertising revenue is earned is vastly different from even five years ago with sponsorship values linearly linked to it and finding people willing to play for specialist streamed content is not going to be restricted to the traditional rugby markets.
New Zealand of course is a concentration of all the issues facing global rugby as a simple function of population. We need to find ways to access these new global revenue streams and need a partner with the skills to make this happen: skills, no matter how parochial we want to be, that simply do not reside in Aotearoa.
Enter global specialist technology investor Silver Lake, who are already invested in both Manchester City and UFC. Without knowing anything else about them, that is a promising start.
Simply put, Silver Lake are willing to pay NZR $390 million, right now, for the right to have input into the running of the commercial revenues with a view to getting their return from the upside available. To assess the size of the bet Silver Lake are making, if they are unsuccessful, it will take them 17 years to get their money back based on 12.5 per cent of current revenues.
I am being generous and using 2018 revenue numbers in order to not make this look even worse. Seventeen years just to get your capital back without earnings! That is an enormous leap of faith in a global minority sport, and private equity people don’t make bets like this unless they believe in a considerable upside.
Let’s address a few of the concerns that have been fired at NZR by the NZ media and frankly, by too many uninformed ex-players.
1. Private equity investors only want to make money
No s*** Sherlock, and I for one hope they make a shed load of out this transaction because if they do, New Zealand Rugby will have enough to invest in every nook and cranny of our sport for years and years to come.
Should Silver Lake be able to double the value of their stake, which seems a sensible target for a PE firm, then the value of NZR’s 87.5 per cent stake in the commercial revenues will go up by $2.7 billion with 2108 commercial revenues doubled every year into the future. I would take that as an outcome any day.
2. Private equity investors will outsmart NZR
That would probably be a valid concern if NZR were doing this with their own staff and running it out if a spare break room at NZR headquarters on the back of an envelope. But they are not. NZR are represented by an investment bank Jefferies of New York – there are no dummies running around in that business is my guess.
Jefferies will be well compensated for their role in this deal, and so they should be: this is a big money transaction and genuine expertise is required, and NZR have hired it.
Let’s also remember Silver Lake are not setting the terms of the transaction here, they are responding to an offer document written by Jefferies, and they would have been assessed against the key criteria as set by NZR, and their bid would have been assessed against all other proposals received.
Silver Lake is not the only option available as has been presented in the New Zealand media, it is the winning and best bid with others assessed and discarded.
3. We need to be wary of the private equity sector as they are not to be trusted
Well, that may have been in the case in 1985 and if you had a balance sheet of undervalued assets, an overfunded staff pension fund and no way of fighting off a hostile 100 per cent takeover bid on the stock exchange.
But the world has moved on significantly in terms of transparency and regulation and the days of barbarians at the gate are behind us. Silver Lake are a public investment fund after all.
Silver Lake will end up with a minority share of the to-be-formed commercial entity, with only two seats on that board, and no seats or influence on the NZR board. But most importantly, Silver Lake’s objectives are totally aligned with that of NZR in the commercial space.
4. Why NZR and the Players Association cannot agree
We can take as read that the Players Association do not have any fundamental disagreement with the sale of a portion of the future commercial revenues of NZR as they are proposing a share market listing as an alternative.
I am not going to be critical of that deal or the firm proposing it but we need to understand why it is so fundamentally different from the PE transaction.
In its essence it is a one-off capital injection, nothing else changes, the deal is done, the raised capital is injected to NZR and the world carries on. The ongoing revenue challenge for NZR doesn’t go away, the reliance on traditional forms of revenue remain, the current viewing audience target remains and the likelihood of continually being outbid by French billionaires and Japanese corporations for our players remains exactly the same.
The amount of capital being raised would certainly push the spectre of near-term liquidity issues, and loss issues well down the time line, no question, but it still doesn’t change anything.
Once the losses continue to rack up and 2016 to 2021 produced only one net profit year for NZR, we will be back in the same boat? What do we do then? Simply sell off another chunk of the commercial revenues and then another? This is ‘frog in the slowly heating water’ stuff when a circuit-breaking solution is needed.
By the way, putting our faith in the revenues from the British and Irish Lions as being the base on which our business is built is just not prudent as SARU is finding out right now. Going forward, each of the shareholders in the Lions will have CVC sitting at their domestic tables and their focus will be on prioritising domestic issues – don’t expect past Lions revenues to be any indication of those likely in the future, would be my bet.
I sincerely hope both parties can reach an agreement here that advances the position of New Zealand Rugby, because the alternative is seriously dangerous. We need progress here. Perhaps a good place to start: what question is it you are arguing over and who has the right to set the agenda?
It is worth noting, I have no skin in this game, I don’t know any of the key players and have formed the above opinions based only on publicly available information.