Secret report highlights three risks in NZ Rugby's Silver Lake deal

Monday, 30 May 2022

Silver Lake is not likely to be a permanent partner, but once the deal is done, it will be hard to go back, the report warns.

A deal that would see NZ Rugby sell a share of its commercial rights to a US investor in return for at least $200 million in cash is fair, but it probably wouldn’t be possible to “put the genie back in the bottle” and there are risks, according to a leaked report.

The confidential report, commissioned from consultant PWC by NZ Rugby and circulated in March to provincial rugby unions and the NZ Māori Rugby Board, also said that NZ Rugby did not have an immediate need for all the money.

The NZ Rugby Union will hold a special general meeting on Thursday to vote on the transaction, which would see the rugby body spin-off its commercial arm into a new business dubbed CommLP, in which US private equity firm Silver Lake would be allowed to buy a minority stake.

Silver Lake would effectively acquire a 5.7% to 8.6% share of profits from ticket sales, broadcasting and merchandising rights, sponsorship deals and other commercial activities primarily relating to NZ Rugby or rugby in New Zealand, in return for a payment of between $200m and $300m.

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The US private equity firm would also own a controlling 85% stake in a new entity called Global Rugby Opportunities (GRO) that would invest in “rugby related opportunities globally” alongside CommLP.

The leaked report states the cash influx from the investment could help grow the game and “shore up the wider rugby system” while viewership and participation declines, and allow NZ Rugby to take “increased risks in pursuit of new global revenue streams”.

But PWC listed as a risk its estimate that CommLP would need to grow revenues by 8.1% a year from new business initiatives to offset the dilutionary effect of private investors having a share of NZ Rugby’s commercial income.

The report states the new initiatives NZ Rugby has been considering include “executive coaching and All Blacks clinics”, new opportunities in e-sports, “virtual signage” and merchandising, and a new streaming platform that could potentially earn of revenues $20m over the next five years.

The executive coaching services and educational clinics could bring in more than $47m over that period, according to the estimates quoted in the report.

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But PWC said the “achievability of the new business initiatives remains uncertain” saying they were not supported by detailed business plans.

It said though that they would be “more achievable with Silver Lake as a partner” describing it as a “world-class partner with an investment track record that can provide capability and connections”.

The consultant also said it saw “more upside than risk” in the creation of the GRO business, noting that NZ Rugby has “not historically developed substantial commercial opportunities that are not related to rugby in New Zealand”.

But it said it was “ambiguous” where CommLP’s rights would end, and that NZ Rugby would “lose the sovereignty over the creation of new global rugby initiatives in its own right”.

Given the relative size of the shareholdings Silver Lake would own in CommLP and GRO, there “may be circumstances in which Silver Lake prioritises its investment or the commercial interests of GRO which may conflict with the interests of CommLP”, it cautioned.

PWC also said in its March report that a number of provisions of the deal had yet to be agreed, “which could materially impact the strategic and commercial benefits from NZ Rugby’s perspective”, listing that as a third risk.

NZ Rugby has been approached for comment, but spokesman Toby Robson said it was unlikely to do so.

The report queried whether NZ Rugby currently needed extra cash on the scale that would result from the transaction, saying the proceeds “appear to be in excess” of NZ Rugby’s current requirements, although it said a “minimum level of investment” was required to attract a partner such as Silver Lake.

It also indicated that the decision to invite in external investment was likely to be irreversible.

“The ‘genie in the bottle’ concept is valid. Once any equity is sold, NZ Rugby is very unlikely to be able to re-acquire that stake.”

NZ Rugby will consider an ‘IPO’ of its commercial business if the Silver Lake deal proceeds, but Silver Lake could also sell its stake privately with fewer restrictions than previously mooted, according to PWC’s report.

Silver Lake was not likely to be a permanent partner for NZ Rugby, it said.

Under the deal, the board of CommLC would need “in good faith to consider” an initial public offer (IPO) of the business in five years, it said, which would provide one possible means for Silver Lake to exit.

PWC said Silver Lake would want to “capitalise on its investment” within five to 10 years.

It is understood at least one provincial rugby union remains concerned by an observation from PWC that the deal gives Silver Lake more flexibility over who it could sell its stake to than an earlier version of the proposed agreement.

NZ Rugby would control the board of CommLC, but the appointment or termination of its chief executive, chief financial officer and chair, as well as transactions worth more than $100m and loans of more than $50m would require Silver Lake’s approval, the consultant said.

NZ Rugby has not seemed to struggle for want of connections.

“We note that we have not been able to find an executed example of a national governing body selling a stake in a separate commercial entity, though we deem this as neither a positive, or a negative, just an observation,” PWC said.

The report revealed four NZ Rugby staff were likely to receive bonuses of between 9% and 12% of their annual pay to recognise “extraordinary workloads” over the past 18 months, and some other staff associated with the transaction smaller bonuses.

“NZ Rugby states that these discretionary bonuses have not been communicated with the relevant staff and are not success fees or incentive payments designed to incentivise a transaction,” it said.

Wellington Rugby Union chairman Russell Poole said he believed PWC’s report was very thorough.

“Like all investment opportunities it has some very good, positive stuff about it and some things to be aware of.”

There was “nothing of alarm at all”, he said.

Some issues “had been very well talked through and resolved” since the report came out, but it was not appropriate to go into detail about that, he said.

Northland Rugby Union chairman Andrew Ritchie declined to comment on the report but said it was supportive of the Silver Lake transaction and highly likely to vote for it.

A number of other provincial unions declined public comment, saying they had agreed not to comment until after Thursday’s vote.

How the cash from the sale would be used

$38m: Seed and working capital for the commercial business CommLP.

$37m: Short-term sustainable investment fund; capital payments to ‘a wide range of stakeholders’ in the game.

$29m: Contribution to new ‘Legacy Fund’ to encourage community participation in rugby.

$151m: Addition to NZ Rugby’s reserves.

$8m: Costs of the deal, including fees to investment bank Jefferies and consultants.

(Assumes $200m raised from Silver Lake and $63m from other investors)

NZ Rugby says these figures have since been updated – it says reserves will be $120m, with $60m for the legacy fund.