A day at Twickenham has always been a popular way for (English) deal-makers to unwind. But in recent years rugby union has become as important for business as it is for leisure.
In 2018, pan-European private equity firm CVC Capital Partners, fresh from a successful investment in Formula 1 motor racing, took a 27% stake in Premiership Rugby in a deal worth around £200m. Then, in a £120m transaction in May 2020, it took a 28% stake in the Pro14 rugby competition, and a year later paid £365m for a one-seventh share in the Six Nations tournament.
More deals are on the cards. In April this year, New Zealand rugby’s 26 provincial unions voted in favour of a US$281m investment by buy-out firm Silver Lake, for a 12.5% stake in the commercial rights of the All Blacks. The Springboks, the South African national team, is understood to be exploring similar options.
Moving the goalposts
The financial impact of COVID-19 lockdowns has been felt across the sporting world, prompting clubs and unions to seek capital injections from third parties. According to Deloitte’s 2021 Football Money League survey, the 20 biggest European football clubs saw a fall in revenues in 2019/20, from €9.3bn the previous season to €8.2bn. Rugby has also been hit, with World Rugby chief executive Alan Gilpin estimating that it has cost the sport at least £1bn.
“Lockdowns have seen all sports suffer significant declines in stadia-related revenues and face additional costs from media rebates for matches that couldn’t go ahead,” says Luke Reeve, head of debt advisory at EY, who has advised on a number of sport deals. “Many leagues and clubs have found themselves in need of investment.”
In the case of rugby union, the hit has been particularly acute, with many clubs already under financial pressure even before the onset of coronavirus. A report published by former UK government minister Lord Myners, reviewing the English Rugby Premiership’s salary cap, found that in the two years before the 2018 deal with CVC, the 13 clubs currently in the top rank had lost a combined £88.7m. Only Exeter Chiefs posted a profit during the period under review.
With losses mounting, seeking outside investment became a necessity. Rugby fans, administrators, clubs and players have had to come to the table despite being nervous about the implications of taking on third-party commercial capital for grassroots rugby and the game’s traditions.
For former England rugby sevens captain Ollie Phillips, now heading up leadership development and behavioural change consultancy Optimist Performance, the investment that has come into rugby over the past three years shows that the professional game is about to make a step change in its development.
Phillips explains that, historically, the game has relied on the patronage of individual benefactors, who have been happy to cover any losses with their personal wealth. This was also flagged by Lord Myners, who noted that clubs relied on the support of individual owners for their viability and sustainability. For example, financier Nigel Wray owned Saracens, a top London club, for 26 years before selling it to a consortium for £32m in October 2021.
“There have been some fantastic people who’ve put huge amounts of their own money into the game. But this model is inherently fragile because it relies on the goodwill and balance sheets of individuals, which can be disrupted at any time,” Phillips says.
“Investment in rugby is a sign of its maturity and it’s something that has to happen. The game needs to be put on a solid commercial footing to ensure its long-term sustainability. It can’t go on losing money hand over fist and counting on individuals to fill the gaps.”
Phillips adds that private equity investment will not only put the game in a more stable position commercially, but can also ensure that the development of the game at all levels is better supported over the long term. “Third-party investment can be of huge benefit to the whole game. If clubs are on a firmer financial foundation, it follows that there will be more resources available for grassroots rugby and player development.”
Critics of the institutional takeover argue that the deals will marginalise the sport’s lower leagues and push away the amateur clubs and players who make up the popular base of the elite.
Rugby’s need for cash may be obvious, but it’s less clear why hard-nosed private equity firms would find it appealing. Traditionally, sport has been financially very risky. There are also growing concerns about the long-term effects of concussion on the health of rugby players.
EY’s Reeve argues that investments such as CVC’s highly profitable foray into Formula 1 have shown that there is significant untapped value to unlock in sports media and commercial rights. “Private equity firms have formed a thesis that commercial and media rights in well-supported sports have been undervalued and there’s long-term growth to capture from cross-selling broadcast, sponsorship and commercial rights. Sports organisations have been able to penetrate new global markets far more effectively than other channels, with football’s reach into Asia a prime example. In the case of rugby, there’s significant interest in the sport in northern Europe, Asia and the US that has yet to be fully tapped into.”
Phillips says investment from the likes of CVC has helped put rugby in a much stronger position when negotiating with broadcasters. Sky, BT, Amazon, the BBC and other terrestrial networks currently compete for the rights to English club and international rugby union. “If I’m a broadcaster who wants to become ‘the home of rugby’ I must have nine or 10 different conversations with the Six Nations, the Pro14, the Premiership, the Autumn Internationals… the list goes on,” he says. “It just becomes too disparate and exhausting for broadcasters to navigate. Investment by private equity has the potential to consolidate a very fragmented market.”
CVC has already taken steps along these lines with the Pro14, which has been rebranded as the United Rugby Championship. The deal will see the inclusion of more South African teams in the competition alongside the core Welsh, Irish, Scottish and Italian teams.
CVC is rumoured to have locked in new deals with the BBC in the UK, SuperSport in South Africa and RTE in Ireland. As far as fixture lists are concerned, the United Rugby Championship will host fewer games on weekends, when there are scheduling clashes with internationals, reducing the risk of diluting audiences and freeing up the availability of star international players to play for their clubs.
It’s believed that CVC’s position as a single holder of commercial rights has made it possible to package deals more effectively. The buy-out firm’s position across a number of competitions has also meant it has been able to progress with plans for a global club tournament.
Phillips concludes: “By pulling rugby together on the financial side, it becomes easier to speak with one voice and establish a better commercial proposition. Rugby will be in a much stronger place if it can bundle all its assets together for broadcasters and put a big, premium price tag on the package.”
While there is no doubting rugby’s commercial pulling power, it should be remembered that investing in sport, where fan passions run high and glory on the field all too often trumps financial prudence, can prove to be a tricky business.
Private equity has noted the diverse stakeholders involved in sport and the structures of rugby investments have been tailored accordingly. So far, rugby union deals have been for minority stakes, allowing unions and competitions to retain control.
Writing on digital platform SportsPro, Blackstar Capital’s head of sport finance James Paul agreed with Optimist’s Ollie Phillips that the value for private equity firms has been in taking charge of commercial rights management. These firms have also been negotiating other requirements in deals, including improved broadcast infrastructure at all member clubs.
He speculated that there will be more club-specific deals as owners and rights holders are now realising that there’s no reason why rugby can’t be a sustainable, profit-making operation. Quite a turnaround for a sport that only recently received a government bailout.
What has underpinned private equity interest in rugby?
Sports valuations have been steadily rising. In 2011, the most valuable European football club was Manchester United, worth $1.86bn. By April 2021, there were 12 clubs that were worth that amount. We’ve also seen CVC Capital Partners pay a steep $2bn in 2006 to buy Formula 1. A decade later, Formula 1 turned into a spectacularly profitable deal: CVC made about $4.5bn on its initial stake, a return that’s twice the average for private equity. Looking at more than 25 years of data, analysts have now found that the return on an investment in major-league sports, in the past five years, has overtaken that of leading index funds.
What’s made governing bodies want to take in third-party capital?
The sports industry has been one of the hardest hit during the global pandemic, suffering the effects of lockdowns, competition cancellations and infected players. The NFL lost $4bn in revenue in 2020 and top European football teams have lost a combined total of $2bn. Similarly, World Rugby’s CEO Alan Gilpin said that COVID-19 had cost the sport approximately £1bn in revenue. These critical operating losses have led several clubs to experience cash-flow concerns. This is one of the reasons we have seen third-party capital play a part in rugby, and many other sports, in recent times.
What are the new revenue streams to be exploited?
We’ve seen sports hike rates by as much as 20% in some media cycles and buoyant media rights would lead to some undesirable business models. However, based on CVC’s success with Formula 1 and the idea that the way people consume sports media is ever-changing, they are likely to look to change rugby’s engagement with fans.
What ultimately will underpin the returns for private equity investors?
It’s all about getting better alignment. For example, when RBS sponsored the Six Nations, France had a deal with a banking rival Société Générale. That sort of conflict did not help maximise sponsorship rights. You only get a premium price when you provide exclusivity and bundle rights into one, rather than selling rights individually. In American sport, value is enhanced through centrally negotiated deals. Similarly, domestic and international calendars need alignment and other structural issues need resolving.
Investment in sport is not a short-term solution. It took around 10 years for CVC to exit Formula 1 and that is a good timeframe to consider for other sports, too.