After the private investment at the Sharks, SA Rugby magazine investigates how a franchise evaluates an equity split.
If the collapse of the proposed equity deal between Western Province Rugby and the US-based consortium MVM Holdings has taught us anything, it is how little understanding the general public has of what it takes to acquire a South African rugby franchise.
While Province’s administration took a flogging in the media for the kind of seemingly deliberate leaden footedness in negotiations that left their would-be investors with no option but to call off the talks, there was a section of the public that supported its stance on grounds that the Americans’ initial outlay of $6-million for a 51% stake was a pittance.
But the Sharks forwarding their bank details to the very same MVM Holdings, for the very same amount and shareholding, only served to further emphasise the conflicting views on what buying into a franchise is worth these days.
Rightly or wrongly, the man on the street considers Western Province and the Sharks to be commercial equals, so when they react in opposite ways to the same offer, all manner of questions arise regarding the basic guidelines of the process.
Some of the questions are: if $6m is chump change, how much should a franchise actually set you back? What are you buying for that money? Does SA Rugby have a basic template and/or price in place for how franchises should be bought? How does the equity split between investor and union work in real time in terms of decision-making, etc?
Fresh from concluding the deal Western Province appeared not to want – the broad strokes of which are a 51% stake for the US consortium, 26% for the KZN Rugby Union and a scaled back share of 23% for SuperSport (from 49%), with the optional extras of having Roc Nation help market their brand – Sharks chief executive Eduard Coetzee explained why the process of acquiring a franchise wasn’t a one-size-fits-all thing.
‘There’s no steadfast formula because the franchises are all in different scenarios with shareholdings,’ he says. ‘The Lions have Altmann Allers, who’s a sole proprietor as such, we’ve got SuperSport as a listed company, then you’ve got the Bulls who have two companies in Patrice Motsepe and Johann Rupert, and you’ve got Province, who just have the clubs.
‘So everything’s different … I think the first thing you need if you want to buy a share of a franchise is you have to have a willing seller. That’s born through need or ambition to expand or whatever – I think ours was a little bit of both.
‘We were in a position where Covid accelerated the fact that we needed to have an outside shareholder to bring in extra cash, we also wanted grow and SuperSport, as a listed company, have a different responsibility to their shareholders so they can’t just keep pushing cash into our business.’
With SA Rugby said to have been so desperate to get the now defunct Southern Kings off their hands they ignored the red flag raised by the name and offloaded them to the Greatest Rugby Company in the Whole Wide World for the same amount they’d sunk into the spectacular failure, determining the value of a franchise is understandably not an exact science.
Setting a price
Coetzee reckons determining a franchise price ‘is like refereeing a scrum because no one really knows’.
‘How do you determine need? Our need was determined by our Covid loss and shareholders’ loans and all of those things. So those all come into play and then you determine what your selling price is. But the shareholders’ agreement that follows that is where the big value lies because it obligates certain shareholders to act differently in certain scenarios.
‘So a majority shareholder can, in that purchase agreement, maybe say, “I’ll fund future losses to the extent of X, Y and Z”, which is either a period of time or a fixed amount. Then there are also minority shareholder protection clauses – the KZNRU in our case.
‘They’re not cash flush so we protect them that they’ll get a guaranteed certain amount of money and won’t have to pay in on potential future losses. So it’s a whole deal you’ve got to put together.’
The last point sounds logical enough, but it hasn’t always been as simple in practice.
A massive part of why the Kings’ investors and Eastern Province Rugby were at each other’s throats throughout their unhappy alliance was because the former felt they didn’t owe their minority partners anything, while the latter felt entitled to some of the funding from SA Rugby.
Also, Western Province’s proposed deal floundered in part because of the control question. While seemingly happy to talk a 51% stake for MVM Holdings, they still wanted to be in control of rugby matters.
Coetzee hazards a guess that the investors’ insistence on control may have been, in all probability, to protect their interests: ‘I think the 51% majority maybe wasn’t the big issue it was giving up control on certain things.
‘But If you’re going to buy 51% of a business and you know there’s a huge probability you’re going to have to pay double the purchase amount in the next five years because of future potential losses, you’re going to want to have a say in the management of the business – so do you limit your risk?’
Franchise vs Federation
News of US investment firm Silver Lake being in advanced talks with New Zealand Rugby for a 15% equity in a business they value at over $2bn filtered through the same week as the conclusion of the Sharks deal, and many have leapt to the conclusion the Durban franchise were taken for a ride due to the vast difference in outlay.
But Coetzee explains that, as one is a governing body and the other a franchise. ‘In our business you’ve got a stadium, you’ve got expenses, so it’s a different business model to a federation.
‘A federation, for instance, make Players Of National Interest contributions, but they don’t run a team, a stadium and all those things. The purchase into a federation from a private equity is, in my opinion, based on returns. They’re almost buying an income stream, where with us you’re buying a going concern where you buy a business and trade it.
‘What private equity does is buy an income stream, so they invest in a business because they want a return. They value it and say the All Blacks are worth $2bn so they’ll buy 15% of it and they work that out on guaranteed broadcasting distributions, sponsorships and the value of the brand; all those things.’