The sports industry has never been through a period of such convulsion and uncertainty as that precipitated by the global coronavirus pandemic, with governing bodies, leagues and clubs having had to face decisions over their ability to fulfil fixtures, and in some cases whole competitions, with ramifications for the financial health of the whole ecosystem.
Is it better to return to play inside empty stadiums, and suffer the short-term hit of no matchday revenue, with the prospect of gaining some television money, or be able to admit a small percentage of fans, with an increase in overhead costs? Or, is the best way forward to wait until stadiums will be full again, while trying to keep the business ticking over?
This crisis has also come at a point in time when top-level sport and big business is becoming more closely aligned, as an industry whose hitherto rising value has been undermined is being staked out by financial giants with plenty of capital.
Oakwell Sports Advisory, a London based company that specialises in offering corporate finance advice in the sporting realm, is stepping up work to bring these parties together.
At the moment, there's a general question for a lot of sports properties and governing bodies: Have they got the right commercial strategy in place?
Oakwell, which works across a multitude of sports in the UK and Europe, including soccer, cricket, rugby union, cycling and tennis, acts as a sounding board and partner to sports properties looking to attract new capital, and to outside entities, including private equity groups, wanting to get involved in the business.
Andrew Umbers (pictured, above), the firm’s co-founder and a partner, tells Sportcal's The Boardroom: “At the moment, there’s a general question for a lot of sports properties and governing bodies - have they got the right commercial strategy in place?”
He sums up Oakwell, saying: “We aim to help investors enter fragmented sports, and also to help owners look at how to manage their properties better commercially. As a corporate finance house, we provide both strategic and financial solutions to our clients.”
Assessing why private equity investment is necessary now, more than ever, Umbers says he believes that "outside the US, sport has been underinvested in for upwards of a decade," and that part of the problem has been "sports distributing 100 per cent of their revenues, and not keeping anything back to invest in their own infrastructure and properties.”
With player and management salaries rising just as fast as broadcast rights and sponsorship fees, sport faces a challenge to ensure that it maximises its potential.
Explaining the benefits third-party investment can bring to a sport or league, Umbers says: “Private equity brings a robustness, as well as significant added value, and it can also act as a reset for every aspect of a sport - structure, governance and commercial strategy.
“It’s an attempt to partner with available capital, to improve everything about a fan’s experience of that sport or franchise, both in-stadia and on television, and also to increase participation. The marriage between outside investment and sport should be one where the whole ecosystem benefits, and should be built on trust between them and the existing shareholders - without that group thinking the crown jewels are being sold."
Private equity should only get involved in commercial decisions, because that's where it'll add value
Umbers, the former chairman of English soccer club Leeds United, sees private equity as something that is “definitely here to stay… there’s a lot of capital out there that’s ripe for investment in sport.”
He adds: “It’s no different to the relationship that some sports have with banks, or that which plenty of franchises have with their owners from whom they have always asked for funding traditionally.”
Umbers also dismisses suggestions that outside investment inevitably leads to sports being changed fundamentally, saying: "Private equity should only get involved in commercial decisions, because that’s where it’ll add value. From a sporting and regulatory perspective, it shouldn’t get involved or interfere… Those decisions should be left to the traditional stewards.”
He adds: “Private equity shouldn’t actually get involved operationally - it’s meant to empower the other management so that they can make better, more informed, operational decisions.”
An area in which private equity is regarded as potentially having too much of an influence is in media rights, with a perception being that such firms are all too ready to sacrifice free-to-air coverage, which may have been in place for many decades, in favour of exclusive, and more lucrative, pay-television deals.
In terms of meeting the need for financial security while retaining wide visibility, Umbers can see both sides of the argument, saying: "There is definitely a role for FTA broadcasters, but not without the large pay-TV networks… their funding is a necessity for every single sport in the UK.
“The reality is that FTA TV tends to provide very little of sport’s revenues compared to other broadcasters.”
Oakwell has been particularly vocal about English cricket’s need for increased capital to help it weather the effects of the pandemic, and Umbers cites the importance of the England and Wales Cricket Board's five-year, £1.1 billion ($1.45 billion) rights deal in the UK, in which established partner Sky, the country's leading pay-television broadcaster, is the senior partner.
He says: “There’s a fantastic deal in place there, a real stroke of genius… We think it will be a tremendous fillip for them. That broadcast arrangement is a political as well as a financial statement.”
Umbers is also positive about the likely impact of The Hundred, the new short-form competition featuring new city-based teams that the ECB was planning to launch this year, but has now been delayed until 2021 because of the impact of the pandemic.
He sees “real potential there that they have a tournament which can be turned truly international, and appeal to its participants, fans and broadcasters. We can certainly see the appeal of third party investment into The Hundred should the ECB be keen on that… they do have a need for working capital.”
Under the aforementioned rights deal, which came into effect this year and runs to 2024, a limited number of England Twenty20 fixtures and matches from The Hundred will be shown live on the BBC, the UK's public-service broadcaster.
Last October, months before the pandemic struck, Tom Harrison, the ECB’s chief executive, said his organisation was “75 per cent reliant on pay-TV for revenues… (which is) a substantial amount in reliance, and enables us to invest in both the grassroots and professional game.”
One of Oakwell’s most well-known clients in the private equity sector engaged in sport is CVC Capital Partners, the firm which over the past three years has invested in various UK and European rugby union competitions, having previously had a controlling stake in Formula 1 from 2006 to 2016.
The group is currently in the process of negotiating the acquisition of a 14.5 per cent stake in the Six Nations, the prestigious European national teams competition, albeit the deal has been delayed by the Covid-19 situation. Earlier this year, it bought a 28 per cent stake in the Pro14, involving clubs from Ireland, Scotland, Wales, Italy and South Africa, in a deal worth £120 million. Oakwell has been CVC's advisor on both deals.
The private equity firm made its move into rugby in December 2018 when it bought a 27 per cent holding in England's Premiership Rugby for £200 million.
If CVC make a significant return on the 15 to 30 per cent of a competition they acquire a stake in, then so do the original stakeholders who still make up the vast majority
Some concerns have been expressed that CVC is targeting the Six Nations, traditionally shown free-to-air in the UK, in part to foster lucrative rights deals with pay-TV networks, but Umbers believes that its involvement in rugby union will be mutually beneficial.
He says: "Rugby is a fragmented sport, played with no aggregated commercial strategy, both nationally and across the globe. It could be so much better if it was acting as one, and CVC could be the catalyst for that change… We have to think long-term about the improvements that need to be made commercially in rugby, because it certainly requires capital.
"Every investment made by CVC in rugby - and by private equity in general - has to stand on its own two feet… You have to look at the single merit for all the different competitions, so this is not just an aggregation story.”
He adds: “If CVC make a significant return on the 15 to 30 per cent of a competition they acquire a stake in, then so do the original stakeholders who still make up the vast majority.”
Elsewhere, there have been reports this year that CVC has held talks with the rugby unions in both New Zealand and South Africa over potential investment opportunities.
On that front, Umbers says: "For the southern hemisphere nations, they know that CVC is always open to a conversation. That’s the same with World Rugby - they know CVC will always welcome them in when it comes to having these discussions.”
He adds: “Will this manifest itself in CVC doing anything in southern hemisphere rugby? For us, the question should instead be - do the southern hemisphere nations want a unified approach. The ambitions of CVC in rugby are to help European nations… (but) those countries and their unions can’t exist on their own… They need a strong Sanzaar (the organiser of southern hemisphere competitions), and a strong rugby structure down there.”
With the pandemic having had a serious impact on the international and domestic calendars this year, the desire for outside capital is likely to have intensified, and Umbers says: "I hope rugby accelerates its timeline in the next year or so in terms of private equity investment - if it doesn’t, I expect one or two unions will be in need of state aid.”
Umbers also sees European soccer as vulnerable, saying the current situation has “exposed the underlying issue of costs being too high as a percentage of revenues at the franchise level, looking at clubs all over the board.”
He believes that even applies to teams in England's high-profile and money-spinning Premier League.
Umbers says: “Right now, we don’t believe that many owners have ascribed lower valuations to their clubs to reflect the drop in revenues. We’re seeing broadcasting domestic revenues in soccer down 10 to 15 per cent - that’s for the next five years potentially - as contracts with leagues have had to be renegotiated through force majeure.
“The whole ecosystem’s therefore shifted down in terms of value, meaning revenue then decreases, so clubs have to look elsewhere - and harder - to find either revenue improvement areas, or cost savings.”
CVC is one of at least six private equity firms to have submitted binding proposals to Italian soccer’s top-tier Serie A over potential investment in a company which would be launched to control the league’s media rights for a decade.
The company did enter exclusive negotiations with the league in May over an offer to acquire 20 per cent of any new company created, in a deal worth some €2.2 billion ($2.58 billion), but that window has now ended.
While he does not elaborate on CVC's position with regard to Serie A at this time, Umbers says the league's proposal is not one that could have been foreseen prior to the pandemic, and can envisage other European leagues going down the same road in the not-too-distant future.
Oakwell works with clubs from England’s second-tier Championship, as well as from the Premier League, and also with teams from leagues across the European continent.
Various industry experts have ominously suggested that in the short term, it will be difficult to find non-broadcast based revenue sources, especially with uncertainty over when full attendances will be permitted at matches.
As a result of the turbulence, Umbers says Oakwell is “working with a lot of leagues on what their working capital needs are, and what financial solution is the right one for each property, whether that’s equity, debt, or another option.”
The group is also helping clients put measures in place to ensure some level of financial stability if a second wave of the pandemic does sweep across Europe, on the basis that caution is likely to be the best policy in the short to medium term.
Sport needs to look at its governance, its corporate structure, and needs to work through its capital requirements for the next two or three years
While some observers have suggested that there should be permanent valuation changes in soccer, others think that the situation has accelerated existing trends, with what was going to take place over the next five to 10 years having happened inside six months.
Umbers believes the next couple of years are "crucial" to how sport bounces back from the current crisis.
He says: “Sport needs to look at its governance, its corporate structure, and needs to work through its capital requirements for the next two or three years… Only then can you budget with some accuracy, and I don’t think we’re there yet.
“It should definitely look more at approaching institutional money with partnerships in mind, because we think that’s going to have a significant role in the industry’s future financing. Our role now is to help persuade capital partners to get involved in those solutions, and put together structures and valuations that make sense.”