By Cameron Caldwell (University of Glasgow) and Niklaus Straussberger (Vienna University of Economics and Business)
Trend Summary
In the wake of the Coronavirus pandemic, professional sports worldwide came to a halt, suffering significant losses attributed to foregone revenues across their three revenue pillars broadcasting, commercial, and matchday. Especially revenues from matchday were dampened due to the absence of spectators. However, private equity firms are lured by the sports businesses media and broadcasting rights, which constitute the single most significant revenue source for the franchises.
The sports industry attracted considerable attention from buyout funds like Silver Lake and CVC since many firms still exhibit extraordinary growth while being high cash flow generative and mature businesses. By providing capital injections and offering operational support to reshape clubs' and leagues' commercial operations, investment professionals worldwide seek to create value by taking a long-term approach.
Football and rugby are two sports that have caught the special attention of financial sponsors recently, given that in an increasingly globalized world, sports clubs can use increased financial capabilities to target a worldwide audience and subsequently fuel international growth. Silver Lake disclosed a 10% stake in City Football Group, valuing the sports group at a record $4.8bn while other funds like CVC and Bain Capital are currently leading two distinct consortia in a bid to handle Italian football leagues Serie A's broadcasting rights. Moreover, Elliott gained full control over AC Milan after Chinese businessman Li Yonghong defaulted on the US fund manager's loan.
With successful engagements like this already announced, there are many more transactions in this universe lined up as funds hope to implement successful turnaround strategies to capitalize on the commercial operations of some of the world's most well-known sports franchises.
Trend Overview
While the absence of sport from our screens was short lived as most leagues and professional competitions resumed by July, the recovery of sport looked promising to any bystander. However, with severely depleted revenue from the absence of fans, sports were already struggling and the prompt restart of sports was deemed necessary to save broadcasting rights from falling through. While the collapse of broadcasting rights was largely avoided, sports clubs and competitions that were not necessarily looking for financial backing have found themselves in difficult situations which have opened opportunities for private equity investors and other financial institutions.
Figure 1: Revenue Breakdown of Major Sports Leagues (World Economic Forum)
Sports clubs are fortunate they have multiple income streams which are predominantly from 3 areas: broadcasting, commercial and matchday. Clubs initially felt the impact of the coronavirus through matchday revenues, with social distancing and lockdown restrictions preventing fans from attending events which completely wiped out this source of income. Commercial revenue, which includes merchandising and sponsorship, was not as dramatically impacted but took a hit as fans purchased less merchandise and some corporate partners backed out of deals due to their own liquidity concerns. Broadcast revenues make up the largest portion of revenue in sports and while the quick restart of sport may have saved broadcasters from requesting large rebates, there is still uncertainty regarding this in the future with the possibility of cancelled matches/competitions due to further restrictions or teams themselves contracting the coronavirus.
Sports must also consider the extra cost of operating during the pandemic, ensuring health and safety protocols are followed, forming player bubbles, testing players/staff regularly etc. This has put financial pressure on sport in general and has encouraged private equity firms to invest. With sport franchise valuations skyrocketing over the last decade, the downturn has reduced valuations and represents a good time to buy. Private equity investors are also tempted by the stable cash flows sports typically exhibit, and combined with strong growth potential, as fans return and matchday revenue is recouped over the next few years, an investment in sports could prove a very lucrative investment.
Indeed, there is still scope for further continuation of this trend into 2021 as sports continue to struggle, despite the return of competition. CVC Capital, one of the largest players in sports private equity, is on the look for further professional sports investment opportunities, currently negotiating with the Six Nations over a £300M cash injection. While the competition is in desperate need of finance as the respective nations announce significant losses, the deal presents some barriers to closure as the UK nations seek government funding which would have to be repaid swiftly if the CVC deal closes.
In Football, Italy’s top league, the Serie A, has begun a negotiation period with CVC Capital Partners, Advent International and Fondo Strategico Italiano over a stake in its newly formed broadcast rights business. It is thought significant value can be attributed to the TV rights for the league with the possibility of international reach growth for the 2021/22 season and beyond with media rights still to be negotiated. The negotiations also came after CVC Capital’s exclusive talks with the league ended without a deal earlier in the year. On the other side of the hemisphere in Australia, KKR have expressed interest in Rugby Australia and the Melbourne Rebels, a Super Rugby team. While the specifics of the discussions have not been disclosed, it will be interesting to see if private equity purchases an outright stake in a club or a competition.
Trend Drivers
Recently, the field of sports has attracted significant attention from private equity firms. Sports leagues serve as the primary target for financial institutions. Principally, private equity firms can benefit from such investments in two main ways. The first category is purchasing a minority stake in the holding companies running the professional sports leagues to get in charge of the entities' commercial operations. The other option is to offer loan or debt deals to the league's clubs to enable further growth.
By partnering up with investment professionals, executives of sports leagues like Serie A's Paolo Dal Pino hope to realize their ambitious plan to make their league more attractive to the public and more profitable. However, such profound strategic revisions require massive investments to lure spectators back into the stadiums. Clubs need financial capabilities to attract international star athletes to remain relevant in an increasingly globalized market.
In this regard, private equity professionals can step in and manage the league's broadcasting rights, international trademarks, and commercial development. According to Financial Times, in the case of Serie A, private equity funds are confident of increasing revenues sourced from broadcasting by renegotiating TV deals with their partners - Sky being the premier Italian football league's leading broadcaster. As indicated in the chart below, Serie A lacks behind its rivals in the aspect of matchday and commercial revenue as well. Private equity firms are eager to tackle the various income streams by providing financing to modernize stadiums and maximize incomes from ticketing and corporate hospitality.
Figure 2: Big 5 European League Revenues (Financial Times)
Private equity also sets its sights on single clubs, like Silver Lake did when acquiring a $500m stake in City Football Group, the owner of not only Manchester City but also other clubs in China, US, Japan, Spain, and many more, making it a truly global football company. The 10% stake presents a record aggregate valuation of $4.8bn for a sports group. This points to industry characteristics, which, according to MarketWatch, plays a considerable role in the sudden interest of private equity in sports. The sector depicts many assets that are high cash-flow generative. Albeit mature, it still experiences an extraordinary growth rate. These industry attributes match private equity investors' expectations since they can bring in their expertise to run the businesses focusing on efficiency and cash flow generation. Funds also tend to buy assets ancillary to the sports and entertainment business to capitalize on along the value chain; they acquire companies involved in talent management and broadcasting rights and venue development and ownership.
The biggest lever of value might be the media rights of sports entities. Eleven Sports chairman and founder Andrea Radrizzani argues that leagues should "customize the way they market rights" globally. Marginal audiences could be unlocked and generate desperately needed revenue by moving away from the traditional rights distribution model. Direct-to-consumer (DTC) solutions and pay-per-view (PPV) offerings might be two innovative ways to approach spectators. This change should come naturally, given the shift in the media landscape over the last decade. However, countless sports leagues and clubs failed to make this transition, which inherently caused a lack of capitalization in the interaction with the global audience. By moving away from a model that sells exclusive partnerships in relevant markets, the sports teams' businesses need to interact with their fans worldwide flexibly and more directly.
This transition's key driver is to utilize the newest technologies and adapt to an unprecedentedly changing media landscape.
Deals to Know About
Announcement Date: 27/11/2019
Acquirer: Silver Lake
Target: City Football Group
Value: $500m
Rationale:
The acquisition will enable both parties to converge entertainment, sports and technology to deliver high growth rates over a decade-long time horizon
The capital injection will be used to fuel the clubs' international expansion through the acquisition of new clubs or a stadium development in New York.
Announcement Date: 11/07/2018
Acquirer: Elliott Management
Target: AC Milan
Value: $400m
Rationale:
Elliott Management gained control of AC Milan after Li Yonghong defaulted on the loan provided by Elliott when he bought the club in 2017
Implementing a successful turnaround strategy to sell the club for over $1bn by restructuring the commercial operations and optimize monetization
Announcement Date: 11/07/2016
Acquirer: WME-IMG (Silver Lake subsidiary), Silver Lake, KKR
Target: UFC
Rationale:
Increase the presence of UFC around the world and profit from extraordinary pay-per-view track record
Announcement Date: 22/05/2020
Acquirer: CVC Capital Partners
Target: PRO14 Rugby (Celtic Rugby DAC)
Acquirer Advisors: Oakwell Sports Advisory, Freshfields
Target Advisors: Bird & Bird
Value: £120m
Rationale:
The 28% acquisition of the PRO14 professional rugby union league will enable both parties to continue to invest in both the professional and amateur stems of the sport throughout the pandemic, as well as to improve league operations.
4 new South African teams are expected to join the league in 2021, and there is speculation of further expansion of the league internationally and the capital injection could be used to help promote and draw new teams to the league.
Announcement Date: 26/02/2018
Value: $3bn
Rationale:
The partnership, backed by Gerard Piqué the Football star as founder and president of Kosmos, reformed the traditional Davis Cup tournament structure, creating an annual season finale ‘World Cup of Tennis’
The partnership enables the International Tennis Federation (ITF) to fund grassroots development projects further and pay players larger appearance fees, encouraging more of the top players to attend.
Kosmos will gain the ticketing and hospitality rights as well as the responsibility for media and sponsorship rights. They will be entitled to a portion of the income as well as revenue share.