New Zealand Rugby, after receiving overwhelming support from its member unions late last year, opted to take another $62.5m of funding from US equity partner Silver Lake. But the decision to do so has divided the rugby fraternity once again, as not all stakeholders in the game believe it was either a prudent or even legal transaction. Gregor Paul details how this saga played out.
The tone of the press release on December 22 last year was celebratory, almost as if Christmas had come three days early for New Zealand Rugby and its provincial unions.
In a way it had, as the unions were being given the money they needed to set up their Legacy Fund, having voted four days earlier to take another $62.5m from US fund manager Silver Lake.
It was this vote that concerned the Rugby Players’ Association - it feels those who voted did so while not being up to speed with the latest financial projections and information - and that the decision to push ahead was a mistake.
This $60m Legacy Fund – essentially a ring-fenced endowment that will be open to transformative grassroots initiatives – has been portrayed by NZR and its voting members as the panacea to all the game’s ills.
But there was a more troubling story the press release didn’t detail. The financial projections that had been forecast two years earlier, when NZR was pitching the initial Silver Lake deal to the unions, had collapsed.
The provincial unions had supported the equity sale to Silver Lake and the creation of a Legacy Fund on the basis the US fund manager was going to deliver transformational revenue growth, but, by May 2023, NZR was looking at entirely different numbers that showed income would be significantly lower in the short-to-medium term, costs would be higher and the reserves built from selling the initial 5.7 per cent equity stake in its commercial assets will be mostly depleted by the end of the decade.
The decision to take more money from Silver Lake meant the unions were agreeing to sell a further 1.79 per cent of revenue forecast to return between 7 and 12 per cent after inflation, to instead lock it in a fund returning a likely 2.5 per cent.
It would also increase the annual interest payment owed to Silver Lake by $2.5m – a figure that will likely be higher still when the fund manager is allowed to convert its investment into equity from 2025.
While the unions were convinced that they had just saved the game, there were many others fearful it was a mistake that would have long and damaging financial consequences.
In 2020, when NZR started to consider bringing in a private equity partner, there began a PR war – a battle between those selling the merits of doing a deal against those opposed to it, trying to warn of the danger of going down such a path.
One story sold a vision of modernisation, of financial gurus using their connections with big tech to digitise the rugby experience, hike fan engagement and audience metrics to unprecedented levels and embrace Gen Z’s love of superstars.
The other story warned of a dystopian future where the game was burdened with unmanageable debt and forced into a never-ending cycle of selling more equity, all the while having its brand values distorted by people who knew nothing about and cared little for its heritage.
There was one thing both sides agreed upon – which was that the economics of the deal only made sense if Silver Lake could significantly grow NZR’s revenue.
Bringing in an equity partner was going to radically change NZR’s costs. A new company, New Zealand Rugby Commercial (NZRC), would be set up to house and manage all the commercial assets and it would require a $38m upfront capital investment, while, of course, Silver Lake would be due an annual distribution.
The maths was simple. Higher costs meant there had to be higher revenues, but the argument to sell proved persuasive, primarily because those voting for it were going to receive $37m between them as an immediate incentive, with a further $60m going into the Legacy Fund, and because NZR was forecasting that it would deliver the necessary income to stack everything up.
The sales pitch was that the Silver Lake cash would enable seven New Business Initiatives to be launched, which between them would bring in $76m accumulatively over five years.
In early 2020, NZR knew it had already secured a deal with Sky that when it came online in 2021, would see annual broadcast income jump from about $70m a year to $100m.
At that same time, NZR also had a proposal in the market to renew the All Blacks kit sponsorship and was confident the total value would rise from about $25m a year to $50m a year in 2022.
According to figures provided to major accountancy firm PricewaterhouseCoopers, which independently reviewed the Silver Lake deal in 2021, NZR was forecasting it would make total revenue of $1.146b in the period between 2022 and 2025.
That figure would be made up of $360m from broadcasters, $467m in sponsorship, $120m from match days, $76m from NBI and $122m from other sources such as government and World Rugby grants.
But now, it is believed that NZR could come up between $100m and $150m short of those revenue forecasts.
None of the NBIs, which included selling coaching expertise ($33.6m), running coaching clinics ($14.1m), Esports ($6.3m), virtual signage ($10.8m), merchandise ($3.4m), merchandise and e-commerce/social selling ($26.9m), and an inhouse broadcast channel, NZR+ ($20.4m), are thought to be anywhere near close to delivering what was forecast.
Broadcast income has been impaired by the decision to give $8m per annum to Rugby Australia as part of a retrospectively agreed Super Rugby broadcast revenue-share, and the one scenario everyone said would be disastrous – income not growing enough to cover the higher associated costs – is the scenario NZR was staring in the face throughout 2023 and continues to confront.
And it’s because the financial picture is not meeting expectation and is not forecast to fall in line with initial projections for several years, that the decision to sell more equity to Silver Lake has divided opinion and once again ignited friction between NZR and the New Zealand Rugby Players’ Association (RPA).
RPA boss Rob Nichol says the decision not only didn’t make any financial sense and breached a number of legal obligations NZR had made, but that it also illustrated the failings of the current governance structure which has already been deemed not fit for purpose by an independent review.
“What it came down to, was an inability of our governance structures to adapt to changing circumstances and make a different decision,” says Nichol.
“Even though circumstances had changed so much that the decision did not make sense, they [NZR’s board] had locked themselves into doing this – mentally and with a number of resolutions and expectations.
“It is once again a clear demonstration that our governance structures are not fit for purpose, and they do not work.
“In this instance it has manifested itself in a way where there has been a poor decision to sell revenue and it has gone forever and we don’t believe it should have happened.
“It is not a relationship problem we just have a fundamentally different view about what should have happened.”
NZR, on the other hand, believes it had a moral and contractual obligation to take Silver Lake’s money – a commitment that its members gave overwhelming support to press ahead with after being given the option to defer.
“Essentially that very proposition was put to them where we said we could defer this or go ahead with the commitments [create the Legacy Fund] we have already given you,” says NZR chairwoman Dame Patsy Reddy.
“We got overwhelming support in proceeding and so I don’t see the point in what we might or might not have done because one of the things I am aware of is that we have to work on building confidence with our members.
“And one of the things my colleagues were keen to do was to stick with the deal we had done.
“We didn’t think it was tenable to go back to the unions and tell them we were going to hold off on their bit of the deal.
“The more we look at it, the more we think that in the long-term, the [Legacy Fund] is a very good thing to have there.”
To better understand why the rugby fraternity is again divided over what is the right long-term financial strategy for the game, it’s imperative to rewind to September 2021 – a period in which the RPA was refusing to support a deal that would see NZR sell 12.5 per cent of its commercial revenue to Silver Lake for $387.5m.
Through a process of mediation, the RPA said it would commit to try to collaboratively negotiate a revised deal subject to two fundamental principles being agreed by NZR – that the new proposal would be a true and comprehensive partnership between a financial investor and New Zealand rugby (the entire ecosystem of administrators, referees, players, coaches, fans and volunteers).
RPA stated in writing, that to form a true partnership with a third-party investor: “New Zealanders need to have the opportunity to invest alongside any international investor on broadly similar financial terms and with the same opportunity for financial rewards.”
The second key principle was that RPA wanted a new and improved governance structure, as it felt, “the current governance arrangements are, in our opinion, manifestly not fit for purpose, and we need to deal with this”.
In February 2022 NZR and RPA agreed to sell a 5.7 per cent equity stake to Silver Lake for $200m, with a second capital raise to be implemented within nine months, which would offer New Zealand-based institutional investors the chance to buy into NZRC with a minimum of $62.5m to be offered, up to $100m if all parties agreed.
The provincial unions and Māori Rugby Board approved the deal at a Special General Meeting in June 2022, and six months later, as per the terms of the agreement, an independent committee was formed to review the governance structure.
But a year after signing the deal, there was limited clarity about how matters were progressing on the second key principle of developing a public investment opportunity.
Reddy says that at the end of May last year, 19 local institutions were approached about investing in NZRC.
She says that they all passed in on the opportunity, citing the relatively small size of the opportunity, the illiquidity of the fund and the difficulty of being co-invested alongside Silver Lake without having any ability to influence strategic direction.
RPA, however, contends that NZR followed a process that was destined to fail.
It says that following the resignation of acting chief executive Richard Thomas in April last year, NZRC had no management team, business plan or detailed financial forecasts to present to potential investors.
In correspondence to NZR last June, NZRPA wrote: “Without a finalised business plan and NZRC management team, or an acceptable set of current financial projections to share – all of which would be seen as required material by any prospective institutional investor – it was not possible to agree syndication terms with third parties within the timeframe we had prescribed ourselves.
“Under these circumstances any syndication attempt stood no chance of succeeding.
“We believe the process followed was, if not designed in a way that would result in any attempted syndication failing, sufficiently flawed such that it was inevitable it would fail.
“The good faith obligations of NZR to offer the syndication to New Zealand investors were not met.”
Having unsuccessfully engaged local institutions to raise more money, NZR’s board decided that the best course of action was to take Silver Lake’s offer to underwrite a further $62.5m of investment in NZRC.
“When it was communicated to us that NZR wanted to call upon the Silver Lake underwrite, we immediately challenged their right to do that legally, and we challenged it by applying for an injunction in the High Court,” says Nichol.
“We did this because we were a part of doing this deal together and we are incredibly conscious of the responsibility that we share to ensure this deal works for this game and for this country and we didn’t believe this was the right decision for the game.”
The injunction sparked a series of new agreements – Silver Lake said it would extend the deadline for the underwrite until the end of December, and NZR engaged a steering committee comprised of NZRC chair Ian Narev, NZRPA chair and former All Black David Kirk, Silver Lake managing director and NZRC board director Simon Patterson, and the highly respected fund manager and NZR board member Catherine Savage, to determine the best way forward.
Reddy says that the steering group felt there were viable alternatives to taking more money from Silver Lake but didn’t consider any of them were achievable before the underwrite offer would expire.
One of the options the steering group considered was the RPA’s Black Jersey Fund, that would buy units in NZRC and be open to retail buyers willing to put in a minimum stake of $2,500, as well as local institutions and high net worth individuals.
“The RPA were concerned that we had not considered all of the options, but we felt we had, and we felt we had acted in good faith,” says Reddy.
“We looked at all the options and didn’t say the RPA’s wouldn’t have worked, we said we couldn’t be sure it [and the others] would have worked by December.
“It was not an underwritten offer and there were some security exposures for NZRC so we got some external advice and we felt it was risky.”
Nichol agrees that the Black Jersey Fund and all the other alternatives could not be achieved before the deadline, but he disagrees that the deadline had any relevance in determining the best course of action.
He says that NZRC did not need more investment and that Silver Lake’s underwrite should have been left to expire, and that NZR could have deferred making any decision about raising additional capital.
But Reddy says that the board considered that it had both a contractual and moral obligation to create a $60m Legacy Fund, and Silver Lake was the only guaranteed means by which they could deliver what had been promised to the provincial unions.
“We had always anticipated that the third tranche [the institutional raise/Silver Lake underwrite] would give us the money for the Legacy Fund.
“Our voting members were a little disconcerted when we extended the time period [pushed the underwrite deadline to the end of December, 2023] asking us what was going on, and sent us a letter just before the World Cup, reinforcing that this was important to them.
“They wanted assurance we were proceeding with it and so we were under no doubt about their insistence.
“It was absolutely clear to us that our members expected us to fulfil our commitment.”
Nichol says that while the RPA remained adamant that taking more money from Silver Lake to park in a low-interest endowment fund was the wrong thing to do, he agreed that both NZR and the players should present their respective arguments to the unions and let them decide.
On December 17 Reddy sent an email to the unions ahead of a straw poll vote that would take place the following day via Zoom.
The meeting would see NZR explain the case to take Silver Lake’s money, which according to the email would provide context around: “The Boards [sic] belief that NZRC is in the formulative stages, and more time is needed for NZRC to develop an appropriate investment proposition; and committing $60m from NZR reserves to the Legacy Fund, without raising the additional capital, would deplete NZR reserves to less than 30 per cent which is well below the NZR reserves policy target.”
The RPA’s presentation advised against a sale to Silver Lake, citing a materially changed financial outlook from the time the Project Future deal was first agreed; a lack of economic sense in selling more revenue when the focus should be on maximising NZRC’s distributions to NZR, and the ability to pursue alternative capital-raising options once forecasts improve.
The unions had to lodge a yes or no decision 36 hours after the presentation. More than 90 per cent of the votes were cast in favour of taking the money.
Silver Lake paid the $62.5m in January, which means NZR now has an estimated $120m in cash reserves, with a further $60m sitting in a separate Legacy Fund.
There’s no question NZR has protected itself and its unions against unforeseen events such as another pandemic, but the RPA continues to question the costs associated with those rainy day investments.
Silver Lake will be due $10.5m in interest payments this year, and by 2025, if it converts its loan to equity, its distribution could be between $19m and $23m depending on final NZRC income generated.
RPA also fears that because NZRC’s revenue forecasts are lower than expected, NZR may not end up with sufficient income to pay the unions their annual dividend of 17 per cent this year and possibly next.
Selling more equity to Silver Lake against weaker revenue forecasts could result in the unions having to accept a lower payment from NZR with which to meet their operating costs in 2024 and 2025, at a time when most are already battling to balance their books.
“As a way to move forward, we said that that if we were given the opportunity to share our views, and then having considered those views, if the members supported the decision to proceed with the sell down, then we would have to suck it up and move on,” says Nichol.
“It was far from ideal there were a number of aspects that made us uncomfortable. One of the things that we were really disappointed in is that it became clear to us that the provincial unions and Māori Rugby Board were not up to speed with the latest financial projections and the latest set of information against which this decision was being made.
“Were we right to step back and let that happen? I don’t know, but we felt that was the best we could do given the circumstances, and it still doesn’t mean we don’t have a case for NZR breaching their obligations owed to us under both the collective agreement and some of the documentation associated with NZRC.
“It doesn’t mean we have changed our views, we haven’t. We think it was the wrong thing and it was a mistake, and we think time will demonstrate it was a mistake.
“But the reality is that it has happened and we have to recognise that the game made a different decision.”
Gregor Paul is one of New Zealand’s most respected rugby writers and columnists. He has won multiple awards for journalism and has written several books about sport.