Promotion and relegation are essential at all levels of game
Nick Cain: What are your thoughts on the Council’s recent rubber-stamping of changes to promotion-relegation, putting a ring-fence between Premiership and Championship clubs for the first time in over 40 years? Francis Baron: “I believe automatic promotion and relegation is essential at all levels of the game, and that it is a material factor in maximising TV revenues by giving meaning and excitement for viewers at the end of the season at both ends of the table.
“In 2003 I had the casting vote on whether or not to maintain promotion and relegation. I voted to keep it, and set out the reasons for my decision in writing to the game.
“Much of what I said still remains valid, and although I can understand the problems associated with the Coviddestroyed current season, unfortunately the decisions taken are not restricted to just dealing with that issue.
“My observation then was that even at professional level rugby is a sport first, and a business second. If we do not get the rugby decisions right there is no basis for sound businesses.
“The RFU has a duty to make sure that the ethos and values of rugby union are maintained, and that the right rugby decisions are taken. By doing this, the RFU can create the right environment for the business of professional rugby to grow and flourish.
“It was not my belief then, nor is it now, that the role of the RFU is to provide for ‘investor protection’ in the sport, or provide a safety net for badly run clubs and businesses at any level of the game.”
NC: How important are the right rugby decisions in encouraging investment in the game at all levels?
FB: “As in any industry there has to be a mechanism to allow new entrants to bring new ideas, resources, and talent to the arena. Equally, as in any industry, there will be failures, and the system has to be able to provide the right exit route for them to either regenerate or compete at a lower level.
“Promotion and relegation does both, and since the advent of professionalism it has been the established position at the top end of the game. It is also worth noting that in 2003 of the 12 clubs in the Premiership that season, seven had achieved that status through the process of promotion and relegation.
“My assessment is that investment is essential at all levels of the game if we are to achieve the RFU’s objectives for the development of the sport. Investment requirements at Premiership level are obviously more significant due to the need to increase stadia capacities and improve facilities, but investment also needs to be encouraged at levels below the Premiership.
“There were suggestions in 2003 by Premiership clubs that the raising of finance would become ‘virtually impossible’ if automatic promotion and relegation were maintained – yet there was no evidence of this, with half a dozen clubs undertaking stadium development projects or plans at that time.
“PRL also made no submissions on how removing promotion and relegation, or moving to a play-off, would assist the growth of the game generally. The balance of probabilities lies with promotion and relegation as more likely to generate interest, participation and growth in the game.
“It is a key objective of the RFU to return the game to a growing sport in terms of numbers of clubs, teams and participants. Market research data in the strategic plan also showed that participants in community rugby clubs are one of the main sources of spectators for Premiership clubs – therefore they need a thriving and growing community club base for their own commercial success.”
NC: Are you concerned that external investors like CVC could in future sell their various shareholdings in English rugby to overseas or conflicted parties, and impact on the RFU retaining control, or ownership, of core assets such as Twickenham? FB: “While I understand the financial pressures that the game worldwide is under post Covid, I believe that bringing in outside financial investors of the type of CVC is dangerous.
“CVC now have significant stakes in Six
Nations, the
Premiership and the PRO14.
Their business model is to hold these investments for a period of around five years, inflate their profits, and then sell them on. Their sole focus will be on maximising revenues, in particular TV rights, without considering wider rugby issues.
“They are likely to sell their holdings on as a package probably to a media group (as they did with F1). The potential conflict of interest with the Unions in such a situation is clear. I’m sure CVC would like to take a stake in Twickenham Stadium
(right) if an opportunity arose. I would not be surprised if this has not already been floated with the RFU.”
NC: What is CVC’s likely strategy as an external financial investor in Rugby Union, and what are the implications for the game?
FB: “CVC are a huge and successful global Private Equity firm. They have $118 billion of assets under management. Their business model is to buy undervalued or poorly managed businesses and sell them on to generate their financial return in about a five year time period. CVC’s timing has, for them, been good by buying into the Six Nations during the Covid pandemic. As a result they have basically bought ‘low’. They are hoping to sell ‘high’ when crowds return and TV money rises.
“The involvement of private equity firms in the management of rugby organisations, with a sole purpose of generating significant financial returns for their investors, raises significant issues for the game. Members may rightly ask the simple question, why? Are we not able to manage our own financial affairs any longer?
“The RFU have sold 14 per cent of their financial interest in the Six Nations to CVC for probably around £90m spread over five years (the total Six Nations deal is £365m over five years). In a PLC such a transaction would require the approval of shareholders in an SGM. If the RFU were still following PLC standards this transaction should have been put to Members for their approval.
“Such an approval process would, of course, have required the RFU to disclose to its members the principle terms of the agreement. Without that detail it is difficult to judge on the wisdom or otherwise of the transaction.
“CVC in their Press release stated that the Unions retain fulldecision making responsibility for ‘all sporting matters’ but only a ‘majority control over commercial decision making’. It is not always possible to separate the two issues, so the detailed terms of the agreement would be essential to know.
“However, it would be fair to surmise that a hard-nosed financial operator such as CVC would not pay £365m without retaining a very significant degree of control over that money.
“The other significant issue is of course the rights of CVC to ‘sell on’ their 14 per cent stake at a profit. Who can they sell to? Do Unions have any rights to veto prospective purchasers of concern or conflict with the Unions’ interests? Are there pre-emption rights over any CVC sale for the Unions? What about the position of Italy – could they be replaced? What happens to their stake?”
“Bringing in financial investors of the type of CVC is dangerous”
NC: Why has a policy which makes the performance of the England team paramount – reflected in a vast increase in PGA payments to the Premiership for player release – been so damaging?
FB: “The simple answer is the PGA agreement was far too costly, and should not have been approved by the Board. It has not been justified by England’s overall results, and it has resulted in redundancies and cutbacks in the Community game.
“The performance of the England team is clearly important, not least for revenue generation. However, it is interesting to look at the relevant cumulative funding of the professional game in each of the Home Unions over the period 2012 to 2019.
“These are: RFU £417m, IRFU £250m (Euros @ 0.85), SRU £195m, WRU £190m.
“Has the large RFU excess funding been well spent? Let’s look at the number of times each Union has won the Six Nations over the 2012 to 2019 period to give us a ‘return on investment’
metric. This shows Wales as a clear winner: RFU 2016, 2017; IRFU 2014, 2015, 2018; SRU None; WRU 2012, 2013, 2019.
“Another such ‘return on investment’ metric would be RWC performance. The performance of each Union in terms of the stage they reached in each RWC 2011, 2015, and 2019 are as follows: WRU: Semis, Quarters, Semis; RFU: Quarters, Pools, Final; IRFU: Quarters, Quarters, Quarters; SRU: Pools, Quarters,
“PGA agreement was far too costly, and should not have been approved”
Pools. Ranking these on a basis of zero for Pools exit, 1 for Quarters, 2 for Semis and 3 for Final we get a table of WRU 5pts, RFU 4pts, IRFU 3pts and SRU 1pt. Draw your own conclusions…”
NC: Why is it imperative that there is a c. 50-50 split in funding between Community and Professional rugby?
FB: “It is essential to have a flourishing Community game. It is the proverbial base of the rugby pyramid – more players, more spectators, more TV viewers, more sponsor targets. As RFU chairman Andy Cosslett said in his report to members in 2017, “Members clubs safeguard the game as a whole”.
“I first introduced this policy in the 2000 Strategic Plan as a 50/50 share of available profits, and following the signing of the eight year agreement with PRL (the ‘Long Form Agreement’) in 2001 this policy was refined to a 50/50 split of funding to the Professional and Community games.
“The 50/50 split policy provides an essential framework within which negotiations can take place with the professional game. It sets negotiating limits for the CEO and Board.
“By committing under contract to pay £200m to PRL over eight years – a contract Andy Cosslett now accepts as “costly” – any shortfall in forecast RFU revenue generation in that period, in the absence of any reserves to fall back on, have inevitably come in funding cutbacks to the Community game.”
NC: What are your views on the Community funding split having now shrunk to 30 per cent?
FB: “It is very concerning but, sadly, very predictable to anyone reading the annual financial accounts of the RFU. Trends in this declining share have been evident since 2015. Over this period the cash funding of the Community game has been flat, whereas that to the Professional game has risen by 48 per cent and overheads have increased by 34 per cent.
“This has resulted in the halving of Championship funding in 2019, and significant Community game redundancies in 2018
(c. 60 rugby development officers and community rugby coaches).”
NC: Why is it so important for the RFU to have a substantial financial reserve? What are the pitfalls of the current situation where there are not just zero reserves, but a deficit of £24.4 m?
FB: “All well-run companies seek to maintain and grow sensible levels of reserves to handle the periodic ‘rainy day’ or infrequent major ‘external crises’. This enables them, in the short term, to maintain dividend payments or to hold off major redundancies.
“The policy the RFU have been following is essentially to run at a loss and use reserves to cover normal everyday expenditure, claiming the virtue of maintaining rugby ‘investment’ at £100m plus.
“Any experienced director with PLC experience would know this policy position was unsustainable other than for a very short period. The RFU’s ‘rainy day’ appeared in 2018 when the CEO announced lower expected commercial revenues going forward. The result? Redundancies and cost cuts. “The major ‘external crisis’ arrived in 2020 with Covid pandemic. The RFU had no reserves left to cushion the financial blow. In 2019 the RFU reserves were negative £24m. The reserves of the IRFU were positive £105m, and the WRU’s were positive £25m. They were both in a far better position to face the uncertainties of Covid. “Another way to look at reserves is as a ratio of total capital employed. On this basis the RFU’s reserves ratio was nine per cent. The IRFU’s was 70 per cent, the WRU’s was 16 per cent, and the SRU’s was minus 13 per cent. By way of corporate comparison, Kingfisher PLC, of which Andy Cosslett is chairman, had £3.2 billion of reserves in 2019, with a reserves ratio of 40 per cent of capital employed.
“The 2005 and 2008 Strategic Plans both contained a financial rule regarding reserves. This was to increase reserves by a minimum of £2.5m each RWC cycle. Reserves in 2011 were £62m so, if the rules had been followed, reserves in 2019 should have been £67m and not minus £24m. The difference of £91m would have arisen largely as additional cash.”
NC: What should be done to remedy the situation – and where would it be on your list of priorities?
FB: “Financial planning and discipline has to have the top priority. A post Covid financial re-appraisal is needed and must be clearly communicated to the game. A post Covid ‘Recovery Strategic Plan’ is also desperately needed, but it must follow proper consultation with – and feedback from – the Members. The Plan needs to be in granular detail and not another flimsy ‘glossy’.
“I advised the Board in 2018 that the RFU needed to re-adopt the financial rules from the 2008 Strategic Plan, or sensible amendments to them. I had two meetings with Andy Coslett and Helen Weir (senior independent non-executive director and chair of Audit Committee) in 2018, and sent them a memo of recommendations, at his request. I heard nothing further.”
NC: Are the Financial Golden Rules of previous Strategic Plans applicable in the current pandemic circumstances, or do emergency measures need to be taken first?
FB: “The RFU needs to establish a new planning framework for the post-Covid world following the finalisation of the financial accounts for 2020/21 – which will not make pretty reading. It is essential the RFU learns from the past to successfully manage a way forward. A clear set of financial rules are essential.”
NC: How long would it take to put in place a business plan to turn the RFU back into financially the strongest Union in the world?
FB: “Without sight of the 2020/21 financial accounts, which will set out the full impact from Covid, it is not possible to form a clear view. However, I would be surprised if we were not looking at five years if the PGA cannot be re-negotiated, and maybe three years if it can.”
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How democracy was undermined at the RFU