Stormers equity deal set to be ratified this weekend, but private investment is no silver bullet in salary arms race

8 Jun 2023

South Africa’s leading rugby franchises might be heading into a salary arms race that could become unsustainable even if underpinned by private funding.

There has been some back-slapping and self-congratulation in South African rugby circles in recent weeks with the news that the salary cap for the major franchises has been raised to R85-million per year.

That’s up from R67-million, and, in addition to that, player squad sizes have been increased to 57, with an additional four “marquee players” allowed to be drafted outside of the cap. That’s an extra cost that could come in at R20-million.

This new policy only really impacts the four URC clubs – the Bulls, Lions, Sharks and Stormers – and has been hailed as a way to keep South Africa’s best talent at home.

The idea is that the best South African players could be paid more and therefore choose to stay at home instead of chasing pounds, euros or yen.

But raising the salary cap, while theoretically logical, is practically going to lead to an arms race that might not be sustainable. And it certainly won’t be possible without private equity cash injections.

The Bulls, Sharks and Lions have private equity partners of varying wealth and strategies funding them currently.

The Stormers have an offer of close to R160-million on the table. The members behind the deal are a mixed South African/Irish consortium. That deal is set to be ratified at the next meeting of Saru’s financial and executive committees later in June.

One of the terms of the deal is that debt incurred in the current administration process, as well as historical debt, will be paid back to Saru by the equity partner, which is north of R70-million leaving R80-million to R90-million in the pot for the Stormers funding.

Under the terms, Saru recoups money from the loans extended to the Western Province Rugby Football Union (WPRFU) and the WPRFU won’t be encumbered with that debt when the administration period is over.

And Daily Maverick understands there is also an amount set aside to assist clubs in a modest way.

Valuable mechanism

In terms of easing cash flow concerns and quickly building cash reserves, equity buyouts are an essential mechanism for achieving those outcomes.

But they are not a silver bullet. Most equity partners are in it to make a profit, usually through a future sale of their stake once they have driven its value up.

And competitive sport being, well, competitive, it means only one team can win a title in any given year. Success is the greatest driver of value and most teams won’t be successful by that measure. That means their value might not grow as hoped, leading to dissatisfaction on the part of those putting in the money.

The current disbursement of broadcast money from Saru is R40-million per URC franchise. At best, a team such as the Stormers rakes in another R60-million in sponsorship money. That sponsorship figure is much lower for the Lions, for instance.

That already signals there is a problem because, after Saru’s modest disbursement, teams could need more than R40-million in other revenue streams to plug the salary cap gap if you include the four marquee players.

And if the union doesn’t host a Springbok Test match, which can roughly earn an additional R8-million to R10-million after expenses and fees to Saru, the shortfall becomes vast. It also doesn’t include salaries for coaches, operational, marketing and management staff.

Gate takings, season ticket sales and corporate suite rentals are additional sources of revenue but are modest earners in the current climate.

The Stormers are by far the most successful team when it comes to putting bums on seats in the URC, and their three extra home playoff games earned the club another R20-million in revenue in 2023.

But that’s not guaranteed when budgets are drawn up at the beginning of a financial year. Projections can only be accurate based on guaranteed gate takings in the regular season. Anything over and above that should be a bonus to bolster cash reserves, and not be seen as a “must-have” to break even.

This is why private equity money is the only possible solution in the current rugby ecosystem. Wealthy benefactors with deep pockets can cover a shortfall of R20-million to R30-million annually. But for how long?

Broadcast revenues are not suddenly going to rocket up to cover the payment gap, and unless a team is successful, match-day attendance will not miraculously double.

England warning

Three clubs in the English Premiership – Worcester, Wasps and most recently London Irish – have gone out of business in the past 10 months. Three clubs, all with histories stretching back to the 19th century, have gone under.

The demands of professional sport and its associated costs such as salaries, in the wake of a pandemic and massive competition for fan interest from more sports, are factors in this situation.

South African rugby as a whole is teetering on the edge. Saru declared a small R4.5-million loss in its last financial year and has projected another shortfall for the next. It is desperately trying to sell a stake to a private equity partner – in this case, CVC Capital.

CVC has bought stakes in the United Rugby Championship (URC), Six Nations and English Premiership.

CVC bought a 14.3% stake in Six Nations for a reported £365-million in April 2021. It guaranteed a cash injection of £95-million for the Rugby Football Union (England’s governing body) over the following five years, and about half that for the Welsh, Irish, Italian and Scottish rugby unions. France also received £95-million.

The Six Nations purchase was CVC Capital Partners’ third acquisition in European rugby along with portions in URC and the English Premiership, in which it holds stakes of 28% and 27%, respectively.

Yet, despite this influx of cash, it has not saved three English clubs from collapse and there should be a lesson in that for South African rugby. In its current form, it’s unwieldy and imbalanced.

Income versus costs

The Springboks and URC franchises bring in about 80% of sponsorship and broadcast revenue to Saru annually.

Test match ticket sales account for another large chunk of the remaining 20%, meaning that out of the R1.547-billion Saru earned in 2022, less than R100-million of it came from the other mouths it feeds.

Essentially, little else in the South African rugby ecosystem makes money – not the Currie Cup, not junior competitions, not the Mzansi Challenge, the bulk of the 15 provincial unions or the women’s game.

Not even the Blitzboks earn much money, although the Cape Town Sevens tournament does provide some income, but even that saw a R30-million decrease in 2022.

Outside of the Boks, and to a much lesser extent, the four URC and European Professional Club Rugby (EPCR) franchises, everything else in the local game is a cost. So the need for private equity is vital, even if it is flawed.

The smaller unions rely on Saru handouts, via broadcast disbursements, for survival. They simply do not add commercial value, even though they add historical and player development value.

Yet the 11 “smaller” unions, at least structurally, wield as much power in the local game as the four “bigger” unions. The status quo could barely be maintained when the financial situation was healthier, but in these austere times, the fissures have widened.

It’s against this backdrop that rugby in South Africa is trying to survive and thrive.

“Private equity in our professional structures is extremely important and necessary,” president Mark Alexander said in his annual report to Saru’s general council earlier this year.

“It contributes in a significant way to our rugby ecosystem nationally. Therefore, we must all ensure that everyone benefits on an equitable basis from our growth as an organisation – and that we don’t kill the golden goose within our franchises in the process.

“It stands to reason that the more we succeed in international competitions, the more marketable we become and the more we will all benefit. We need to address ways to include the private equity structures in our decision-making processes to ensure that everyone has a seat at the table.” DM

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South Africa

Valuable mechanism

England warning

Income versus costs