Private equity and sport, a happy union?
Posted in Corporate M&A and securities
Last week the twelve Premiership Rugby clubs and London Irish RFC decided to reject the reported £500m offer from CVC Capital Partners for a 51% stake in Premier Rugby Limited.
Premier Rugby Limited is the private limited company which owns and operates Premiership Rugby, manages the competition and, perhaps most importantly, negotiates and sells the commercial and TV rights.
All Premiership Rugby clubs, and London Irish RFC, hold an equity stake in this company and their unanimous consent was required for the deal and, on this occasion, CVC’s offer was kicked into touch. Reasons for the rejection remain closely guarded but objections to the price put on the table and concerns over a loss of control and an unwillingness to sell a majority stake have been widely reported in the press.
CVC and other private equity players may return to the field with a more attractive offer and one which seeks to allay clubs’ fears of loss of control and concerns that the pursuit of financial returns may compromise the values of a game steeped in tradition, whose professional era is not much older than some of the clubs’ players and coaches.
Some of these fears stem from the concerns expressed by the F1 teams in relation to CVC’s private equity track record in sport. Typically, private equity firms have preferred direct investments in teams or franchises, with many North American NBA, baseball and NFL teams, for example, attracting PE interest. However, CVC’s most notable sports investment was its involvement in F1 where, after acquiring a direct stake in F1 in 2006, it is reported to have earned approximately £3.5bn from its original £1.4bn investment. A handsome return and one which will whet the appetite of many a club owner in Premiership Rugby, where profit is as elusive as the silverware itself. Most Premiership Rugby clubs ran at a loss during the 2017‑2018 season. With wage bills rising, a pay day from CVC would be a welcome boost to help them compete for top rugby talent, to reach the play-offs in Premiership Rugby and to qualify for the European Rugby Champions Cup or European Rugby Challenge Cup, with the associated commercial rights income that comes with such on-field success.
The clubs will see the potential for growth in Premiership Rugby that CVC may offer. It has deep pockets and, if it is willing to dig into them, its financial clout could help increase attendances, sponsorship, advertising and achieve more lucrative commercial rights. However, many cite the example of F1 as a reason for rejecting the offer, contending that CVC made a great deal of money from F1 but this was at the sacrifice of the sport and to the detriment of the teams. They argue that the pressure of financial return resulted in diminishing audiences due to a lack of free‑to‑air coverage, a struggle to compete for sponsorship against F1’s own sponsorship activities and a failure to invest into F1 to ensure the longevity and popularity of the sport.
With a revised offer, could the right deal structure help the clubs guard against the issues flagged by the F1 teams? Clearly, if the clubs maintain majority control this would be easy to manage. However, this may not be as attractive to CVC who will be concerned that a minority position will not be as liquid when it comes to exit in 3‑5 years and that they need a majority and control to generate the internal rate of return required by their fund.
If so, could the clubs consider a minority position with the protection of a well-balanced shareholders’ agreement to protect the clubs?
The answer is probably yes. Such equity documents could provide a number of protections to the clubs whilst allowing them to benefit from the upside in valuation and potential dividend income. These protections include:
- minority veto rights and protections to guard from profit taking at the expense of the game by ensuring minimum income was re‑invested before dividends were distributed to shareholders;
- control over the amount of leverage in the form of debt taken on by Premier Rugby Limited;
- provisions to allow the clubs to retain control over key aspects of the exploitation of the commercial rights, for example, by ensuring that free-to-air coverage was maintained in key markets such as the US alongside the sale of premium rights packages; and
- ensuring equality of information is provided to the clubs with continued representation at board level, and possible weighted voting rights on certain topics, e.g. changes to salary caps.
In addition, conflicts of interest exist in the modern game between the clubs and players and the clubs and country. When you add to this mix a further financial conflict, careful management of these will be required. This could be tackled up front in the equity documents to try to manage the potential rucks which will inevitably arise as the game evolves and tries to grow.