Securing private equity funding is a direly critical global financial lifeline for rugby

Canan Moodie of Bulls is tackled by Ioan Lloyd of Scarlets during the United Rugby Championship match between Llanelli Scarlets and Vodacom Bulls at Parc y Scarlets on October 18, 2024 in Llanelli, Wales. (Photo by Chris Fairweather/Gallo Images)

By Craig Ray

23 Oct 2024

The equity sale saga currently playing out in South African rugby is just one example of a sport that has significant problems.

Last week’s successful blockade of a vote by South African Rugby Union (Saru) members on whether to secure equity (loan?) funding was a microcosm of the vast financial issues facing the game.

There has been criticism of the proposed deal from a group of seven unions, which raised several concerns. Their intervention led to the vote being postponed and even potentially for the R1.3-billion offer from little-known American consortium Ackerley Sports Group (ASG) to fall through.

“Good” some might think, with some justification. “How dare we sell 20% stake in the Saru (essentially the Springboks) to Americans!” has been a standard line of criticism levelled at the proposed deal.

The issue that has stuck in the craw of the unions against the deal has been that the R1.3-billion ASG pays upfront is a loan in all but name and that Saru will have to pay it back over time.

In addition to the “loan” (at favourable 6% terms it must be said), ASG will also own 20% of a new Commercial Rights Company (CRC).

On the face of it, it seems like ASG holds all the cards but, if we’re brutally honest, rugby is not as attractive as some of the hype would have us believe. Potential investors do hold the aces – they don’t need rugby; rugby needs them.

If ASG delivers with the promised commercial growth through their network of investors (another claim that is being challenged), then Saru owning 80% of something valuable must be better than owning 100% of something bankrupt?

Saru entered into this negotiation with a unanimous mandate from its members (the unions). Despite all the noise in recent days and weeks, the members cannot claim that they were completely in the dark about proceedings.

They voted unanimously for Saru to proceed with ASG over the Luxembourg-based CVC in December 2023. CVC already has stakes in Six Nations, URC and England Premiership.

There weren’t as many strident objections then. Even so, the very structure of the organisation, which has led to the current pause in the deal, is why it exists in the first place – to provide checks and balances.

If the dissenting unions have a better suitor or better offer, they must show their hand soon because the clock is ticking.

Warrick Gelant of the Stormers during the United Rugby Championship match between DHL Stormers and Munster at DHL Stadium on October 19, 2024 in Cape Town, South Africa. (Photo by Ashley Vlotman/Gallo Images)

Objectives

Why then was Saru given this mandate? Saru Corporate Affairs general manager Andy Colquhoun explained to Jeremy Maggs on his Moneyweb podcast.

“There are a number of objectives (behind the search for an equity partner),” Colquhoun said.

“The first one is that Saru has zero reserves. If we had another Covid, we would be wiped out as a sport, or we’d be playing amateur rugby. So one of the first planks of any equity deal, regardless of who it would be, would be to create a reserve that Saru could fund itself through times of trouble.

“Secondly, we always have a short-term budgetary issue in any year, but that’s a small part of it.

“If you compare our business to that of some of our European and our peers in New Zealand, we are a small commercial operation compared with them.

“I think the most graphic example is New Zealand, the sponsors on the New Zealand jersey earn eight times as much as the Springbok sponsors that we earn from our Springbok jersey sponsors.

“So we lag commercially and with Ackerley’s expertise and experience in various sports around the world, we believe that they can take us, really make a step change in our commercial prospects.”

How much influence ASG has in the commercial global market is one of the assertions unhappy members are challenging.

Also, it was re-emphasised that the new CRC would not have influence over rugby matters.

“There will be a board created with six members, three from Saru, three from the investor and then an independent chairman, who would be nominated by the investor and approved and signed off by Saru,” Colquhoun explained.

“So, they will then shape the commercial future of this organisation and that gives them control over that side of the business. What we see, the expertise that they will bring will be particularly around digital transformation and fan engagement.

“We’ve got a large online following at Saru, but we’ve never had the resources or the skills and the expertise to create a meaningful relationship at a digital level with that audience.

“In the most recent weeks there have been concerns raised about the structure of this deal and some of the finer details of it. We hope that we’re addressing that. We’re continuing to address that with our members.

“There’s general consensus that this is the way to go. The simple fact that our four United Rugby Championship (URC) franchises have their own private equity investment would indicate that there’s broad acknowledgement that we cannot do rugby things in rugby ways without help from corporate expertise.”

Global issues

It seems that rugby is always, at the very least, in a mild state of crisis somewhere in the world, but usually in several places at once.

From issues over law interpretations, sanctions for red and yellow cards, actual lawsuits due to health issues from concussions and problems with solvency and complications around equity investment, the game feels like it’s in a constant existential crisis.

Rugby is a big sport, but it’s hardly global in terms of recognition and reach. Its foundations are built on the strength of a handful of national teams and a fistful of leagues.

And even among those rugby bastions in England, Wales, South Africa, New Zealand, France, Australia and elsewhere, most are facing significant challenges, including financial collapse.

Last month the Rugby Football Union (RFU), which governs the game in England, released its study into the solvency of Premiership clubs. It was not good reading.

Leonard Curtis, a leading UK corporate recovery and insolvency firm was commissioned to compile the report and concluded that only three clubs – Leicester, Northampton and Gloucester – would be viable.

Based on the publicly available figures of the clubs, available for the study, it revealed that collectively English clubs lost £30.5-million (R702-million) in 2022‑23.

Worcester, London Irish and Wasps have all disappeared in a scrum debt in the past 18 months.

Most clubs in the English game only exist because of funding from wealthy individuals.

“This is now a line in the sand moment where all the spin and bravado around how rugby is faring needs to stop,” former England international James Haskell said at the publication of the report.

“Rugby for me appears to believe that just because we have always done it in a certain way that is the right way, when it’s clear that unless drastic change happens our game is heading for a very untenable position in the future. We say we are professional but, in my humble opinion, we are far from it and at times resemble the Wild West.”

Just this week Gloucester owner Martin St Quinton told The Telegraph: “At the moment, we are far too dependent on high-net-worth owners writing out huge cheques every month to pay the wages. It’s just not a good model, which is why there is investor fatigue … because it is fatiguing.”

You could easily substitute that sentence for one of the owners of the four South African URC clubs.

Affects all

St Quinton and Haskell were referencing the English game, but they could have been referring to South Africa, or Wales, or Australia and even New Zealand regarding the general state of finances.

And it’s not only clubs and national unions. The URC cannot even afford to have a refereeing bunker review system. That is hurting it because some avoidable mistakes have become big issues.

In the past two weeks, the Bulls have seen a player red-carded only for it to be rescinded or downgraded at a disciplinary hearing days later. But by then the damage is done.

Australian Rugby is on life support and is desperately in need of the 2025 British & Irish Lions tour to stabilise finances, in the short term at least.

Welsh Rugby nearly collapsed in 2023, and remains in a precarious position. And despite much being made about the giant Silver Lake equity buy-in to New Zealand Rugby in 2023, the deal doesn’t appear to be delivering the promised returns.

A private equity owner of one of South Africa’s URC franchises even joked that they didn’t buy a stake with much hope of making money.

It might have been a throwaway line, but it emphasises the reality: rugby is not some glamorous investment with buyers falling over themselves to invest in the game. DM

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Business Maverick

Objectives

Global issues

Affects all