INSIDE THE SILVER LAKE STAND-OFF
Explaining what NZ Rugby's proposed $465m deal means
Since rugby turned professional in the mid-1990s, New Zealand Rugby’s balance sheet has been built on the four pillars of broadcast revenue, sponsorships, ticket and merchandise sales.
The national union has done better than most in maximising value in all four areas and combined with prudent management locked away cash reserves that were in excess of $100 million when Covid-19 hit.
But, like almost every other national union, NZR was finding it — pre-Covid-19 — increasingly difficult to make ends meet due to rising player and administrative costs.
Money going out was outpacing money coming in, and were it not for the $45 million windfall brought from hosting the 2017 British and Irish Lions tour, NZR would have been in a precarious financial state when the pandemic hit.
Since former chief executive Steve Tew pointed to the iceberg ahead in 2018, NZR has significantly cut costs by making about 40 per cent of its fulltime staff redundant last year.
It has increased income by negotiating what is thought to be about a 30 per cent lift in broadcast revenue and is forecasting a jump in sponsorship, having priced five-year naming rights to the family of All Blacks jerseys at $180m.
It is understood NZR are forecasting revenue will steadily climb over the next five years, reaching $248m in 2025, which will generate a $23m surplus.
About 53 per cent of NZR’s income is locked into fixed costs — player and provincial union payments — and with a need to replenish capital reserves which have fallen to $60m post-Covid, the improved status quo still won’t generate enough money to begin trying to fix the myriad problems blighting the grassroots.
Rugby in this country must break its reliance on the four traditional revenue pillars or face being dragged into a perennial battle to survive as the deeper pockets of the European and Japanese clubs and incessant demand for players will hike wages to the point where they stress NZR’s balance sheet to breaking point.
NZR says it has explored almost every possible option of capital raising; from stock-market flotation, to bank debt borrowed against future earnings, to long-term environmental, social and governance bonds (ESG), but none are as effective or as appealing as striking a partnership deal where it sells a portion of its commercial assets to a private equity investor and works with them to grow revenue.
Having run a bidding process through investment bank Jeffries, NZR wants its provincial unions to vote in favour of approving a deal where Silver Lake Partners invest $465m for a 15 per cent stake in the national body’s future commercial revenue.
Under the agreement, Silver Lake and NZR would set up a new offshoot company — CommercialCo — that will hire world-leading sports management and marketing personnel and be exclusively responsible for growing income.
Silver Lake’s pitch is built on using their capital and access to technological expertise to transform NZR from an organisation that turns over about $190m annually to one that will, in the next 10 years, generate between $400m and $500m a year.
The maths stacks as favourable — an 85 per cent share of $500m is 60 per cent more than a 100 per cent share of $248m.
Silver Lake believe they can find, engage and then monetise anything from 20 million to 65 million potential offshore All Blacks fans.
It is understood their key means to do this will be building, owning and operating a streaming platform that will afford subscribers unique All Blacks content, opportunities to buy discounted products as well as live broadcasts of tests and archival footage.
They also want to create offshore All Blacks centres of excellence where people can pay to access intellectual coaching and leadership property and better execute the core areas of broadcast, sponsorship, licensing and merchandise.
There are, in time, plans to build an e-sports venture given the success of the Jonah Lomu PlayStation game back in the late
1990s and to buy commercial stakes in other rugby properties — Japan, the United States and Fiji have been identified as potential investment opportunities, while it is thought Silver Lake will soon confirm they have bought stakes in Rugby Australia and South Africa Rugby.
The NZ Rugby Players’ Association, among other reasons, are not supporting the deal because they say details around the specifics of how this quantum leap in income will happen remain sketchy and questionable as to whether they are achievable.
Although NZR and Silver Lake say they can see 20 million people paying $10 a year to “support” the All Blacks, there is a long and treacherous road to travel between an engaged fan becoming a paying fan and NZRPA are looking for numbers, details and timelines to support the forecasts.
The upsides are compelling but the risk of selling 15 per cent of future revenue is that Silver Lake will have to grow income by a minimum of 16 per cent annually for NZR to be better off. NZR has been one of the best performing unions in the world and has grown revenue by about 8 per cent a year over the past decade.
NZRPA have concerns NZR are taking it on trust that private equity managers always make money and while Silver Lake has many success stories in its investment portfolio, so too have there been failures.
Not everything private equity touches turns to gold and NZRPA want a stronger business case to be made — greater clarity on the mechanics of how Silver Lake believe they can grow revenue to about $350m a year before the end of the existing broadcast cycle in 2025.
The players are potentially going to be the biggest winners if Silver Lake succeeds, but they recognise the ecosystem of rugby — professional and amateur — will be facing catastrophe if growth is less.
The Silver Lake deal comes with a dangerous potential downside — and the fear is that NZR could be forced to sell off yet more of their assets to bail themselves out in time.
The other significant concern for the NZRPA is that Silver Lake’s promise to grow revenue could be something of a Trojan Horse.
Silver Lake have valued NZR at $3.1 billion, which is more than 16 times their annual average revenue over the past five years.
It is the biggest multiple seen in the sports world and the valuation could legitimately be justified on the basis the All Blacks are a globally recognised brand that have struggled in perpetuity to financially capitalise on their profile. But there is another argument that private equity firms are entering rugby to empire-build.
Another group, CVC, has bought significant stakes in Northern Hemisphere competitions and these cash-rich investors are buying stakes in under-capitalised, distressed rugby assets with a view to bringing them all together in time to strike a massively increased broadcast deal.
When the top 10 nations in the world were looking at selling rights to their Nations Championship concept in 2019, they were valued at $6b. The prospect of that deal alerted everyone to the value of national unions working collaboratively to sell rights.
It also showed that if the leading nations could agree to an annual competition rather than meaningless tests in July and November, it would flood the game with cash.
It is understood Silver Lake’s revenue forecasts jump from about $350m a year to around $500m in 2026 — the year after the existing broadcast deal expires.
The All Blacks are the jewel in rugby’s crown and so Silver Lake could effectively be land banking — knowing that at some point in time, they will sell all their rugby assets to CVC or vice-versa ahead of a mega broadcast deal being reached — but either way, the $465m they paid will be worth significantly more.
The rewards of partnering with Silver Lake are potentially enormous, but so are the risks. But the risk of continuing with the traditional revenue model is probably even higher.
Something needs to change and Silver Lake, despite having holes in their plan, are the only credible option on the table.
The NZ Rugby Players’ Association, among other reasons, are not supporting the deal because they say details around the specifics of how this quantum leap in income will happen remain sketchy.