Saru vote for equity sale faces major barriers from dissident unions still unhappy with structure

After a delay and weeks of lobbying and negotiations, a vote by the South African Rugby Union’s (Saru) general council to accept or reject an equity sale for a minority stake in the organisation will go ahead on 6 December.

The general council will vote on whether to sell a 20% stake to Seattle-based Ackerley Sports Group (ASG) for $75-million (R1.3-billion).

It needs a 75% vote to pass. That remains an unlikely scenario while several unions oppose the sale.

What is not in question, though, is that there is a need for equity funding to safeguard Saru by bolstering cash reserves and assets. Those both for and against the sale to ASG at least have found common ground on that score.

In the past week, it emerged, according to Rapport, that billionaire Remgro owner Johann Rupert is fronting an alternative offer.

The Rupert plan, such as it is, won’t be on the table on 6 December for two reasons – it would take months of due diligence by Saru CEO Rian Oberholzer and his team to consider the offer and table it to the general council: and second, Saru and ASG are in an exclusive negotiation period so Saru cannot negotiate with another party.

Only one proposal is up for vote. If it’s rejected, it will be back to the drawing board for Saru.

Impasse

Saru has explained its position, the historical context of seeking equity and why ASG emerged as the one offer on the table. (See graphics below)

Part 1: Saru’s explainer summary of the proposed equity deal. (Content supplied)

Part 2: Saru’s explainer summary of the proposed equity deal. (Content supplied)

Part 3: Saru’s explainer summary of the proposed equity deal. (Content supplied)

But seven unions, led by the four United Rugby Championship (URC) clubs, the Bulls, Lions, Sharks and Stormers, originally opposed the sale. They, with Boland, Griquas and the Cheetahs were signatories to a letter sent on 14 October demanding a postponement for the vote on 17 October. They succeeded.

The “dissidents” wanted more clarity on vital aspects of the deal. Their major objections could be distilled to the following points:

1. The 10% advisory fee

The biggest red flag is a fee attached to the deal set to be paid to Eddie Jordan and Associates, which is described as being absurdly high in comparison to industry norms. In some contexts, a 10-15% commission might be considered reasonable for an agency bringing in a sponsor, but this is a different type of transaction – it’s not a sponsorship sale; it’s a merger and acquisition-style deal involving significant capital. According to the objectors, the fee seems out of proportion to the value being provided.

The fact that no explanation of who negotiated the fee with Eddie Jordan, or how it was approved internally, was also concerning.

“The fee doesn’t just seem high – it also appears to be entirely disconnected from the value added by the people involved,” a source said. “Without a clear paper trail, it’s impossible to justify the size of the fee or its legitimacy.”

2. Mezzanine debt and equity hybrid: The deal involves a combination of debt (with a 6% return) and a significant equity kicker (the 80% profit share until the debt is repaid), which can be quite expensive for the borrower.

First tranche: $35-million is invested initially, and the investors receive 80% of the profits until their instrument (likely a debt instrument) is repaid, plus 6% interest.

This creates a situation where they get a strong cash flow from the business, but only if the revenues actually grow—basically, a situation where the investor takes on risk but is compensated with significant upside if the business performs well. (Saru have repeatedly stated that ASG are taking on significant risk).

Second tranche: The next $15 million is funded by 80% of the profits from the first $35 million invested, but that doesn’t necessarily mean the total investment will reach $75 million. ASG might not actually need to invest the full $75 million, because they’re taking 80% of profits and can use that to fund the next tranche.

3. The Test match hosting issue:

Revenue shifting from the provincial unions (like the Bulls, Stormers, Lions, etc) to the Commercial Rights Company (CRC). Historically, unions that host Test matches retain the associated revenue, but under the originally proposed structure, the CRC would centralise Test match hosting and retain the revenue from them.

Impact on Unions: For the unions, this could lead to a shortfall in revenue because they no longer control Test match income. It could lead to a situation where unions lose revenue, but the CRC sees an uptick. This didn’t sit well with the unions because, effectively, a switch was being flipped, and the unions were left with fewer resources while CRC got more, with 80% of that additional revenue going to the investors.

R200-million extra revenue: The shift of Test match hosting from unions to CRC means an additional R200-250 million in revenue flows into CRC. This is a significant sum, and it’s where the revenue split—especially the 80% going to investors—becomes a contentious issue. The unions may see their income from hosting Test matches diminished, while CRC gets the benefit of this added revenue, and the investors take 80% of it until their debt is repaid.

What is important to note is that in the past few weeks Saru, ASG and the dissenting unions have altered the above Test match model.

It has been agreed that all Test venues would get a share of revenues (even in seasons they don't have a match) to an agreed value.

Cheslin Kolbe of the Springboks during the Castle Lager Rugby Championship match between South Africa and Argentina at Mbombela Stadium in Nelspruit, South Africa, on 28 September 2024. (Photo: Dirk Kotze / Gallo Images)

4. External minority investors

Another big concern is the idea that external investors are coming in as minority stakeholders but somehow are supposed to “drive the business.”

They believe this is a narrative used to justify bringing in investors, but it’s management that drives the success of a business—not the shareholders. External investors might provide capital, but without competent, incentivised management, the value of that capital is effectively wasted.

The point of creating a CRC is to develop a professional and competent team capable of maximising revenue.

Are these external investors going to be actively involved in the business, or are they just capital providers with no operational role? If it’s the latter, then the deal structure seems skewed in favour of the investors with little benefit for Saru or the management.

5. The structure of the deal — loan vs equity

Another major point of contention is how the deal is structured. It sounds like this is being presented as an equity deal with a 20% stake for the investors, but it’s actually much more of a loan.

The 6% yield on the loan isn't particularly high, which suggests that there’s more at play here than just the loan structure.

There is concern that the investors may be getting too much equity (20%) for too little risk, which makes this an extremely expensive form of capital for Saru.

If the investors aren’t taking on any operational risk, and they get a chunk of the revenue without having to bear the costs of running the rugby operations, then this deal seems heavily tilted in their favour. Saru, in effect, is getting the short end of the stick—giving away a substantial portion of future revenue for money that doesn’t come with any real downside for the investors.

6. Incentives and risk alignment

Investors are generally incentivised to see the business grow so they can see a return on their capital, but that doesn’t mean they’ll be the ones doing the heavy lifting.

If management isn’t fully aligned with the owners, or if they don’t have the right incentives, then the potential for value creation is limited.

It sounds like Saru has the majority control (80%) but little actual influence over the commercial side of the business.

Meanwhile, the external investors hold a minority share but get a large chunk of the upside, which could lead to a disconnect between the financial interests of the investors and the management team.

Saru and ASG believe they have answered these concerns over the past six weeks since the original vote was postponed.

Global crunch

In the past week the Rugby Football Union (RFU) in England and the Irish Rugby Football Union (IRFU) both declared massive losses for the past financial year.

The RFU revealed a loss of £34.4million (almost R800-million) in the 2023-24 financial year while the IRFU confirmed a deficit of €18.4 million (R350-million) over the same period.

It’s actually miraculous that Saru’s net loss in its last audited report was a mere R6.8-million deficit in the 2023-24 financial year, when set against its far more well-heeled competitors.

Why does this matter? If two of the most well-resourced and richest unions in the sport are susceptible to such huge losses, what chance do the likes of the Saru underpinned by a weak currency, have without some form of equity nest egg?

The outcome of the vote on Friday will reveal if they convinced the sceptics in their organisation or not. DM