Investment, Politics & Governance, Rugby, Global

Opinion | Crouch, bind, invest: Why the influx of investment into rugby union will keep rolling in

James Paul, portfolio manager at Blackstar Capital, considers whether a change in mindset and increased commercial sophistication brought about by private equity investors could herald a new era for rugby union.

by James Paul
Opinion | Crouch, bind, invest: Why the influx of investment into rugby union will keep rolling in

After the most disrupted year in the sport’s calendar since turning fully professional in 1995, the vast majority of rugby union fans will be hoping that this weekend’s Six Nations kickoff marks the beginning of a return to normality for the sport.

However, while the 11th hour approval granted this week by the French government to allow the tournament to take place as planned (as well as rumblings within the sport that many expect club stadiums to be full again by this autumn) suggest that we are indeed on that trajectory, the sport’s financial and commercial situation remains anything but normal.

The headlines over the past couple of years have been dominated by talk of transformative financial investment into the sport, particularly by alternative investment firm CVC Capital Partners, which has secured minority stakes in England’s Premiership Rugby (for UK£200 million) and the Pro14 league contested by clubs in Ireland, Scotland, Wales, Italy and South Africa (for UK£120 million). Recent reports suggest that CVC is close to another deal with the Six Nations itself (worth UK£365 million), while rival firm Silver Lake is believed to be negotiating a similar style of investment in New Zealand Rugby (to the tune of US$330 million).

For a sport which only turned professional 25 years ago, and which was recently deemed by the UK government as sufficiently vulnerable to require bailout funding of UK£135 million, it’s fair to wonder why these financial giants are close to injecting over US$1 billion of equity capital into the game’s blue-chip properties.

The answer, as always, lies in the fine print of the underlying transactions. While all the reported deals are for minority ownership stakes ranging between 15 per cent and 30 per cent of each property, each of the agreements hand considerably more control over the commercial exploitation of the rights to the investment firms. The usage of the new funds is also quite prescriptive, introducing, amongst other conditions, enhanced requirements for broadcast capabilities at the constituent clubs.

It is clear therefore that, as one would expect, the private equity groups are lining up plans for significant growth to each property’s central broadcast deal as their primary route toward value creation. There has been a lot of public speculation that CVC will look to bundle all of their deals together and solicit bids for the single package; it’s certainly easy to see how any broadcaster might find the opportunity to become the ‘home of rugby’ attractive - irrespective of whether they are a traditional player such as Sky or BT, or a newer entrant like Amazon - and hence raise their bid beyond what they might have offered for each individual property.

An alternative theory which has been debated much less in public is whether CVC may instead look to create a single, unified ‘Rugby Channel’, whereby consumers would purchase a direct subscription offering access to all three properties. Such an arrangement is not without precedent; comparable packages are offered by, for example, international viewers of the major North American leagues.

That said, such a proposition is unlikely to be unveiled imminently. Although the Six Nations’ current UK rights deal with BBC and ITV expires in 2021, Pro14 has a series of fragmented broadcast deals and Premiership Rugby has a domestic deal in place with BT until 2024. Thus, if CVC is indeed looking to bundle the three into a single property, then this is unlikely to occur until 2024 at the earliest.

A key consideration for the investment firms in creating broadcast packages will be the trade-off between the size of the viewing audience and the potential revenue per viewer. The audiences on free-to-air TV are of course larger than those behind a paywall, especially if the paywall relates to a new service with no existing user base (unlike Sky, BT, etc.) However, the additional revenue from subscription payments means the earning potential per viewer on free-to-air TV has a much lower ceiling than those of premium services, and the opportunity to take a much larger slice of that pie by setting up a new channel may ultimately prove the most tempting.

Certainly, it seems unlikely that the Six Nations will remain exclusively free-to-air in the long run, as it is difficult to imagine how broadcasters like the BBC can raise the value of their bid to a point whereby CVC can realise its desired return.

It is not just the properties themselves which are seeing renewed interest in investment. The majority of the central broadcast revenues will continue to be distributed to the underlying clubs, and so for any investment firm interested in the opportunity presented by rugby and a believer in CVC’s presumptive strategy, purchasing a stake in a club is a comparatively much cheaper, and hence more accessible, method of following that strategy.

Combined with an increased willingness from owners to listen to offers (on the back of the financial difficulties created for many clubs by the pandemic), it is likely that we will see a number of club-specific deals follow in the next 12 to 24 months. Several club owners have privately confirmed approaches, predominantly from American firms, and there is intense speculation that a deal is imminent for London’s Saracens, where owner Nigel Wray is expected to sell up to 50 per cent of the Premiership club.

Even once CVC’s grand vision has ultimately been revealed, many in and around the sport see numerous opportunities for further growth. For all that the pandemic has laid bare many of the financial vulnerabilities in rugby, the continuing interest in investment underlines that it may ultimately benefit the sport in the longer term.

Existing owners and rights holders alike have awoken to the idea that rugby can and should strive to be a sustainable, profit-making enterprise rather than choosing to place less emphasis on commercial growth and instead relying on support from wealthy owners or benefactors, as has historically been the case.