• From the vault: Privatisation puzzle

    Following the disintegration of the Kings’ private shareholding agreement, we look back at a past feature from SA Rugby magazine that investigated the challenge of privatisation.

    READ: SA Rugby takes control of Kings with ‘extreme reluctance’

    In a challenging economic climate, privatisation in South African rugby has been touted as a possible means to add much-needed financial stability and professionalism to the game, wrote CRAIG LEWIS in the March 2019 issue of SA Rugby magazine.

    At the end of 2016, SA Rugby announced a sequence of ‘ground-breaking’ decisions aimed at improving the state of the game. One of these was to allow for private equity partners to take 74% ownership of shareholdings in the commercial arms of unions, rising from the previous 49.9% limit.

    In allowing for this majority stake, it was a purported move towards improved professionalism, privatisation and financial sustainability.

    ‘The executive council has decided to open the door for greater private equity investment in rugby and greater business involvement to help recapitalise the game,’ SA Rugby president Mark Alexander explained at the time. ‘We make no secret of the fact that in these tough economic times the rugby business is taking the same strain that every other South African business is facing. There is a battle to find and retain sponsors and supporters, and we could not continue to do business in the same way. Rugby needed to make major decisions to find new ways of doing things.’

    In effect, the constitutional changes opened the door further for independent investors with business acumen to acquire considerable control over unions facing an increasingly tumultuous economic climate. The carrot was dangled, and towards the end of 2018, a reported R45-million buyout deal was concluded to see the Kings effectively become South Africa’s first privately-owned franchise. A consortium – made up of local businessmen Rory Stear, Loyiso Dotwana, Gary Markson, Kenny Govender and Vuyo Zitumane – took 74% ownership of the Kings franchise, with the EPRU holding a 26% share.

    It was a deal also made possible by the agreement from Isuzu Motors South Africa to come on board as the team’s title sponsor for three years. For a Kings franchise that has faced a series of debilitating setbacks since going in and out of Vodacom Super Rugby, they are now in a position of rare stability.

    Understandably, the Kings deal has also added to the ever-increasing debate over whether privatisation is the future for a South African rugby system that has been accused of falling victim to an outdated amateur-influenced model.

    To explore this subject further, SA Rugby magazine caught up with Stear, who played a considerable role in the successful Kings takeover.

    ‘We [the consortium] believed it was an absolute tragedy not to have a highly competitive rugby team in Port Elizabeth given the oft-quoted principle that it is the home of black rugby. You can look through the South African franchises, and there are numerous players who come from this part of the country, and we’ve always wondered just how good the Kings could be if we were able to retain these players,’ he explained.

    ‘It took a lot of time and work to finalise the deal, but make no mistake, this is a business investment that we’re taking very seriously. We’re trying to get into the weeds and work out what’s best. There will be some restructuring on the go, and we will have to divide the franchise from the amateur game and aim to make it commercially viable.’

    Indeed, there has been a concern in South African rugby for some time over the disconnect between the amateur and professional arms. Many believe it is a broken structure plagued by distrust and political agendas. With as many as 14 professional unions – each wielding equal voting power – revenue has also had to be widely dispersed, while there has been almost unanimous agreement that the pool of professional players is too big.

    The question that’s becoming increasingly prevalent is whether privatisation is the solution to wresting back control to prevent the (amateur) tail from continuing to wag the (professional) dog.

    ‘I think this is the direction it’s going,’ Stear said. ‘One thing is clear: financially the game is in terrible trouble, the product is in trouble, and we have to think about how we can make it an exciting product to retain the interest of the fan base.

    ‘Our position is that we are a professional rugby team, no more, no less. Financially we don’t want to lose money, but any surplus will go to improving the playing and coaching staff if required. We need to not just speak about ambition, but also be able to showcase it so that we can attract sponsors, investment and interest. It won’t be a quick-fix, but we have a multi-year vision to be successful and eventually to be able to win the Pro14 in a realistic time frame.’

    It’s believed there are plans for the Kings to revive a local rugby academy, while at the end of February they were on the verge of appointing a high-performance director and new chief operating officer.

    ‘In the past, there has perhaps been a perception that the Kings is a place for unwanted players from other franchises or those who are heading towards the end of their careers. That’s changing,’ Stear emphasised. ‘With a 74% shareholding, it’s given us absolute control, and while we will have the greatest respect for EP Rugby, we weren’t going to get involved without being able to make the big decisions. If we could have taken 100%, we would have.’

    It does raise the point over whether the next step will be for SA Rugby to allow for 100% private ownership. It’s a model seen in the successful Top 14 competition, where cash-flush owners have taken control of top French clubs and recruited an array of world-class players from around the world.

    Throughout South African rugby, unions are facing ever-increasing financial challenges, particularly when it comes to formulating a budget to retain and recruit players. The Western Province Rugby Football Union’s monetary issues have been well documented after accepting several multi-million rand loans from investment giant Remgro amid a financial crisis that ultimately saw WP’s professional arm liquidated.

    Remgro also has a significant stake in the Blue Bulls Company, with CEO Jannie Durand having made his views on the matter abundantly clear: ‘To lure more investors, our rugby has to become more professional. There are too many unions in the South African set-up, meaning the money is being shared among too many professional sides. We have more than 900 professional players when in reality we don’t need any more than 400. Privatising the game can help with that.’

    The concept of reducing the South African rugby player pool came sharply into focus towards the end of last year, with Alexander confirming that plans were under way to reduce the number of professionals to below 500. It could also lead to uncontracted players being placed in a draft system, whereby they could still earn a match fee if picked up by other teams.

    Businessman Stephen Saad, who also serves as the Sharks’ chairman, agrees that there are too many professional players on the books, which has led to the dilution of resources. However, he is not sure that privatisation is an all-encompassing answer in the current local rugby climate.

    ‘Investors are going to want to be associated with the top franchises. If I roll back five to 10 years, season tickets and suites were the largest source of revenue. Then it was sponsorships and then broadcasting revenue. This has changed and broadcasting revenue is now the largest source of income,’ he told SA Rugby magazine. ‘Where I am different is that I believe there is enough money received by SA Rugby to support rugby, and if used smartly, should be sufficient to retain players and leave South African rugby stronger.’

    Yet he emphasised that there needs to be a clear demarcation between what constitutes professional and amateur unions.

    ‘In making them all professional, we have too many paid players and then we can’t pay enough to retain our players. You have to invest money where you are going to get the returns. Any commercial model says if you want a business to be successful you need to put money behind your large brands. If you spread it too wide, you dilute focus and no one is successful.’

    Last November, the Lions confirmed that they would be offering severance packages to an undisclosed number of their contracted players as per the directives aimed at reducing the professional player pool. Altmann Allers, the Lions chairman and majority shareholder, said it’s essential for rugby to be run as a business to ensure that sustainability and succession planning can take effect.

    ‘Investors need to understand the business model before being willing to invest. Opening it up to 74% or even 100% in terms of what you can acquire is not the complete solution. What we need is the rugby model to change. We need to become totally professional, and a rugby franchise should be run like any business. A big expense is obviously the cost of players, but it’s not just in terms of monthly salaries; there is a huge investment in players. So if a player leaves after just a couple of years, he leaves with a massive amount of capital, for which the franchise doesn’t get compensation.’

    The concept of privatisation and third-party deals to boost the coffers in tough economic times is not new or unique to South African rugby. It’s a talking point that has even made its way into New Zealand rugby, where they are struggling to compete with overseas salary offers to some of their sought-after All Blacks. Increasingly, private funding appears to be the global way. England’s Premiership Rugby recently sold a 27% share to former Formula One owners CVC Capital Partners, while the Top 14 and Japanese Top League are privately owned. It’s expected that the Pro14 could be next to sell off a significant stake.

    All in all, what’s abundantly apparent is that the industry is changing, and South African rugby literally cannot afford to be left behind.

    – This feature first appeared in the March 2019 issue of SA Rugby magazine.

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    Craig Lewis