ANALYSIS | Private equity: a gift from rugby gods or pandora’s box?

Jurie Roux (Gallo)
Jurie Roux (Gallo)
  • SA Rugby is in advanced talks with potential equity partners, which could have a major impact on whether South Africa play in the Southern or Northern Hemisphere.
  • "An equity partner is not your friend," says SA Rugby CEO Jurie Roux.
  • Roux fears South Africa will get left behind financially if they do not sign up an equity partner.

South African rugby is edging closer to a European-style private equity partnership that will pour much-needed cash into its ailing coffers.

The coronavirus pandemic has, by all accounts, been catastrophic for revenue in the sport but the silver lining is what it offers SA Rugby: a guilt-free, clean break from Sanzaar’s shackles.

SA Rugby are negotiating with a number of potential equity firms, as confirmed by CEO Jurie Roux on Monday, with CVC Capital Partners and Silver Lake Partners being the leading candidates, according to reports.

CVC have their sights set on the Six Nations, after acquiring 27% of the English Premiership (for £200 million) and 28% of the PRO14.

Silver Lake Partners, who own a stake in City Football Group, Manchester City’s owners, were reportedly in talks with New Zealand Rugby. Whoever wins the SA Rugby bidding war could influence whether South Africa plays its rugby in the southern or northern Hemisphere.

SA Rugby looked on with green envy while the nations that make up the Celtic DAC, which owns PRO14, pocketed close to £120 million (approx. R2.5 billion) from the sale of their 28% share to CVC.

South Africa, who aren’t a shareholder in the venture despite having the Cheetahs and Southern Kings in the competition, didn’t pocket a cent. Their benefit would be derived from television rights revenue and sponsorship.

But the intricacies of the deal gave Roux the glimpse he needed to see how the model would work in the largely amateur-driven South African rugby model.

"Private equity is the adult in the room," says Roux.

"All of us as administrators sometimes get bogged down by politics and decisions that are not always rugby-related.

"The adult in the room, in terms of commercial value, drives you to the correct decision.

"You will not have a 16-team Currie Cup competition if there is no commercial value in it. If the sponsor is willing to pay R15 million for a 16-team Currie Cup competition but R110 million for a six team, double round Currie Cup; which option do you think you need to take?

"There’s no other decision there other than the commercial decision, and obviously the rugby decision. What private equity tends to do is completely stay out of the rugby decisions and ensure there’s enough money to service the amateur side and the professional.

"They have no influence on your national teams or the selections, the composition of them or how many national teams you have. They are basically there to help you drive your commercial value."

CVC are a ruthlessly successful conglomerate but they’ve been described as a shadowy organisation that refuses to hold press conferences or breathe a word about their investments publicly.  

Recently, they pulled out of Formula One, where they sold their controlling stake to Liberty Media after making 450% return on investment between 2006 and 2017.

The then-team Force India deputy principal, Bob Fernley, said about CVC in 2016: "All their actions have been taken to extract as much money from the sport as possible, and put as little in as possible."

Raising hosting fees in pursuit of bigger profits drove traditional circuits such as Silverstone and Monza to the brink of bankruptcy, according to The Guardian. Teams, too, weren’t spared the dreaded financial red zone, in a sport ironically flush with cash.

"You need to be realistic about equity; an equity partner is not your friend," says Roux.

"They are there to make money, along with you, and in the end sell that stake to either somebody else or sell it back to you or publicly list that. As long as you’re aware of what you’re doing and what you’re entering … you just need to go into it with your eyes open.

"What equity companies are telling us is that we are doing a pretty bad job of what we’re doing and they see a bigger commercial value than we are seeing.

"With their contributions, they are able to drive those commercial values higher and get to a higher net profit every month. After paying you money up front, they take a dividend of whatever the component (percentage share) is every year.

"Hopefully everybody will make the correct decision with all of the information in front of them."

Despite the dangers, SA Rugby does not want to sit back and watch England, Ireland, France, Scotland, Italy and Wales pocket £300 million (approx. R6.4 billion) combined, which they would get if CVC bought 14% of the Six Nations.

Roux’s fears are that European countries will pull way ahead financially and thus usurp the world champions on the field of play as well. Already, top South African talent, young and old, is being pillaged at gold export rates to overseas clubs – a situation that would worsen in SA didn’t jump aboard the gravy train.

CVC would preferably like to throw South Africa into the Six Nations mix and expand it to a Seven or Eight Nations, with Japan. This model could be trialled as early as the beginning of 2021, should the Springboks be unable to host Tests or tour Europe or Australasia before the end of the year due to COVID-19 restrictions.

In time, CVC also want to create a "Club World Cup", which would be another revenue driver, involving the biggest clubs in the world. A lot of that, though, would hinge on a global rugby calendar, which is already in the works.

But what are the provincial unions’ fears, who are SA Rugby’s shareholders and whose buy-in is critical?

Says Roux: "The fear is that we are closing down smaller unions and we won’t look after the amateur game, that they are all gonna suffer and that they lose control, etc.

"But none of that can happen in that environment. You’re selling about 25% of your commercial rights and that’s all you have. All of the elements that are a danger for you, you will protect through special clauses to ensure that the minority and the majority partners are protected.

"To get a private equity transaction, you need the buy-in of all the unions.

"I’d like to think that the rationale in terms of the business plan that comes with it will make it crystal clear. Part of that business plan will be that the rest of the world will all be doing it.

"However, that does not mean just because the rest of the world is jumping into the fire that we need to jump in the fire.

"But by not jumping into that fire, the rest of the world is getting injections of between £15 million and £150 million. Commercially we will be far worse-off than any of them and we will be the only ones not part of that synergy when they work together.

"I’d like to think that the business case – whether it’s the commercial value in it or rand value in pounds or dollars – will make enough sense for people to understand that it’s the right decision to make."

The right decision, in this case, will only be known once the blanks in the private equity cheques have been filled and when SA Rugby knows the true cost of ceding some control to bottom-line driven corporate Vikings.

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