Private equity firm CVC Partners has invested hundreds of millions of pounds in return for minority stakes in rugby tournaments with the most prestigious being the Six Nations.
With its first investment being its £200m plus deal for a 27% stake in Premiership Rugby in England, followed by £120m for a 28% interest in the United Rugby Championship (URC), in which the four Welsh regions compete, they were positioned as a potential commercial turning point for the game with CVC bring its expertise from investing in other sports to bear to effectively grow commercial revenues through new and improved media and advertising deals.
For the equity diluted unions with regards the Six Nations, the thinking was, and remains so, that additional revenues generated with the input of CVC will offset the impact of the private equity firm taking its ‘slice of the cake’.
In agreeing to give a 14.3% stake in the tournament to CVC the six unions - Wales, Scotland, England, France, Ireland and Italy - could collectively receive £365m if commercial targets are met.
The CVC investment, as with its deals for the Premiership and the URC, was made from its fully invested VII fund. The Six Nations deal also covers the women’s and 20s tournaments and the autumn international series. Unlike the other two investments, CVC doesn’t have commercial control of the Six Nations company.
In heralding the deal back in May 2021, both parties said: “CVC will bring to the partnership its significant experience in sports, as well as its global network, working alongside the unions and the Six Nations Rugby management team, to deliver on ambitious growth plans for the Six Nations Championships and Autumn international series."
CVC declined to be interviewed to discuss the performance of its rugby investments and whether it is looking to bundle up the TV rights for the Six Nations, the URC and the Premiership into a single for sale package.
It is not unusual for private equity firms to be media shy and it has to be remembered that they invest on behalf of its institutional investors. Across its funds CVC has taken equity stakes in more than 120 companies worldwide with north of £100bn of funds under management.
In this context its rugby investment exposure represents less than 1% of its portfolio. Like any private equity firm, with a spreadsheet of investments to monitor, it can afford to see a few investments not performing as envisaged, while some can exceed initial return on investment forecasts. CVC’s stake in the Six Nations is not linked to commercial performance. In other words whether commercial targets are achieved or not, its 14.3% stake is enshrined. That is also the case for the URC and the Premiership, although there is an option for an equity increase with an “exceptional” commercial performance.
If CVC take a long-term view, as it did with its investment in Formula One, and take out dividends, before looking to exit either to another investor, or potentially wrapping up its stakes in all three tournaments and seeking a stock market flotation - assuming of course there is investor appetite for a listing. The unions could seek to buy out CVC, but that is extremely unlikely. CVC could look to increase its current stake at an agreed price.
For the WRU when the deal was announced it said it could be worth up to £51m before costs. After accounting for professional advisory fees incurred on the investment and tax, it has confirmed that the most it could get is £48.5m with a guaranteed non contingent £40.5m.
The additional £8m is dependent on CVC helping Six Nations hitting a revenue growth performance target. With no guarantee that this will be achieved, the WRU could by the end of the five years of draw down - up to 2026 - have received £40.5m.
With regards the URC (which was known as the Celtic League when the deal was signed off) the WRU will receive around £30m, excluding any contingent amounts. After professional fees its first payment was £4.9m in 2020, £2.8m in 2021 and £7.5m last year. It will receive further payments this year and next of around £15m. If commercial targets are met the WRU could get a further £6m.
However it is understood that this is no longer an expectation. The URC money is going in its entirety to the regions. Given their participation in the competition the equity dilution is borne by them and forms part of the new six-year funding deal with the governing body. The deal sees the regions, assuming there is no reduction in number, facing a significant cut in player squad budgets.
On the Six Nations deal the WRU received its first payment of £6.1m last year, net of professional fees, with a further receipt this year. There are options each year for the following three years- which given the financial challenges facing the game in Wales will be exercised.
On diminution the WRU said: “CVC will acquire a 14.3% stake in Six Nations if all options are exercised, so the WRU’s commercial distributions will reduce by this amount on an ongoing basis. However, the WRU remains confident that the combined involvement of CVC and the collective pooling of commercial rights in Six Nations will grow the commercials and mitigate the dilution of income.”
Based on the WRU’s return from Six Nations of around £20m per year, the full dilution is around £3m a year. So, unless revenues from new commercial deals are generated, this dilution will be material in terms of funding the professional game.
The Welsh regions used to enjoy around £12m from URC and European competitions and the 28% dilution, once fully realised, will equate to around £3m.
The acid test on CVCs input will be on the next Six Nations TV deal, currently a free to air split between terrestrial broadcasters ITV and the BBC that runs to the end of 2025.
One option could be putting the games behind a new pay wall digital channel, or potentially a subscription provider such as Amazon, Netflix. BT or Sky. However, seeking to put the Six Nations into a subscription model could run into political difficulties. Could you imagine the public outcry and sense of disenfranchisement if people had to pay to watch Wales playing England for a tournament that touches so many people not just in Wales but the other home unions?
A valid question is why did the unions need to give up equity in the tournament to a private equity firm? They would argue that CVC has the expertise and track record to ensure significant commercial growth. But if the Six Nations weren’t confident in their commercial deal making abilities - and they had been doing incremental improving deals for years - why didn’t they just recruit personnel with the necessary expertise needed, or outsource commercial activities?
With CVC’s share of commercial revenues now in play - wouldn’t a better bet in the case of the WRU have been increasing its banking debt facilities or perhaps bringing forward future revenue from events and matches at the Principality Stadium through a securisation deal?
Well perhaps, but whatever alternative options to equity fundraising, it would have incurred interest charges and of course having to repay the capital over time.
Under the WRU’s former chief executive Steve Phillips, with the backing of the board, the union was seeking to commit the majority of Six Nations receipts to fund Ebitda (earnings before interest, tax, depreciation and amortisation) enhancing capital projects.
Perhaps they were seen as an insurance policy against CVC not being able to substantially grow the commercial pie. The original plan was only for a small percentage of the Six Nations money to go to the professional game. That has now been increased to well over half.
The first casualty of the WRU’s capital project strategy was a planned roof walk attraction at the Principality Stadium. While only early stage projections it had an estimated cost of £4m, but a potential annual revenue generation of £1m. The WRU’s majority ownership of the Parkgate Hotel on Westgate Street, next to Principality Stadium, has not been financed with CVC receipts or WRU funds.
The union has entered into a 45-year financing deal with L&G which was ring fenced solely to acquire and renovate the hotel. After being impacted by Covid restrictions, it is understood that the hotel is performing strongly, with positive cashflows of around £1m.
While some of the Six Nations money was always intended for the professional game, including the regions - whether the four become three or not - that has now increased to well over half. What happens to the remainder will be a matter for the new chief executive and chair of the WRU discussions with the regions if the current deal is to be amended.
The regions themselves have to share some of the responsibility for the enforced financial constraints on the game from profligate spending on players and at best their own modest commercial activities. Between them they only generate around £15m annually from ticket sales and sponsorship and advertising deals.
Having four regions within a 60 mile radius doesn’t make it easier to drive commercial incomes, with them often chasing the same revenue targets. In the case of Ireland its four sides are spread out to cover the entire land mass, both north and south.
So, will CVC’s investment prove a turning point and help transform the game in Wales and the other Six Nations unions?
Agreement on a global playing calendar is on the back burner and is now targeted for 2026 at the earliest. Whilst seen as a potential bulwark against the French domestic game’s financial dominance in Europe, there is currently no prospect for a British Isles league. Perhaps CVC is working on an array of lucrative commercial deals that are close to being signed off. And if it remains invested for the long-term whose to say that there couldn’t be significant upside deals in the years ahead too.
But as it stands the WRU, the other unions and respective leagues, are experiencing a dilution on incomes given CVC’s income participation from its investments, against the backdrop of the financial and structural challenges facing the game, particularly here in Wales.
If CVC doesn’t deliver, and let’s hope that they do, then it would be fair to ask what was the point in the first place.
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