THREE KEY FACTS
- New Zealand Rugby’s initial private equity deal with Silver Lake was rejected due to poor financial terms.
- Silver Lake paid $200m – in two $100 million tranches – for a 5% stake in NZR.
- New members will soon be joining the NZ Rugby board.
It’s apparent, say the education authorities, that young New Zealanders find complex mathematics confronting.
Their exam results say that they just don’t get it – that those of a generation held hostage by social media platforms will never themselves be able to write, renew or understand the algorithms that hold them captive.
It’s like there is a black hole where basic numeracy should be. While this is being sold as a new phenomenon, a consequence of the dumbed-down NCEA programme that treats being able to count to 10 or recognise a verb as the academic equivalent of climbing Everest, it’s apparent that New Zealand’s number blank may run a little deeper than Generation Snowflake.
There was a multi-generational board of directors at New Zealand Rugby who, since 2020, were bamboozled or seduced by a whole series of numbers they seemingly never understood.
So poor was the board’s collective mathematical grasp of the initial private equity deal it proposed with a United States fund manager in early 2021, that had it been approved, and not rejected by the professional players, NZR would be staring at a set of numbers that even those still prone to using their fingers to check the days of the week would be able to see were catastrophic.
The maths behind that first proposal was frankly mad. Silver Lake would buy a 12.5% stake in NZR’s commercial assets for $387 million and be entitled to receive a distribution on the revenue generated, not the profit achieved.
If that deal had gone ahead, Silver Lake would have pulled out $88m in distributions these past three years from a business that has lost an accumulated $50m over that period.
That’s some bad maths right there – but thankfully the country’s professional playing cohort could understand it’s not a viable proposition for a business to keep paying out a number that is bigger than the amount being paid in.
After the players refused to sign off on the initial proposal, the maths was dramatically reworked to make considerably more sense as a lower-risk proposition for NZR.
Silver Lake would pay $200m – in two $100m tranches - for a 5% stake that would operate as a loan for the first three years, paying a return of 4%.
There was an option for Silver Lake to invest a further $62.5m, which was triggered this year – and instead of taking out $88m in its first three years, Silver Lake took $4m in year one, $8m in year two and will be entitled to $10.5m in year three.
Paying out $22.5m to Silver Lake from a loss-making business makes better mathematical sense than paying out $88m from a loss-making business.
But the problem becoming apparent for NZR, now that a financial line of sight to the end of the decade has opened, is that the real question in 2021 when the first Silver Lake proposal hit an impasse, was whether the revised offer made better mathematical sense than not doing any deal at all.
It’s a question the board back then gave every indication it answered with a definitive yes, but only because it somewhat theatrically and erroneously portrayed the maths of no-deal as the veritable bogeyman: a colossus made from big, red negative numbers, welded together by lost opportunity.
Once the deal was done, and millions were paid to the investment bank advisers and law firms who pieced it all together, and with so many reputations staked on private equity saving the game from self-destruction, it was apparent everyone involved believed there was no going back.
It’s as if NZR had been sent to a Scottish boarding school and adopted an attitude that everything would ultimately come right if it could find the resolve to endure.
And maybe it will. Maybe the key to this whole deal is patience and Silver Lake has encouraged that by shifting its investment horizon from the typical three-to-five years to 10.
It’s told NZR it’s not going anywhere until at least 2031 when the next-but-one broadcast cycle begins. Sticking it out for a bit longer is a sign of its commitment to deliver a win-win that will see New Zealand rugby thrive and its investment boom, and as far as private equity partners go, Silver Lake seems more Nemo than Jaws.
Silver Lake’s willingness to hang around, however, can’t mask the fact that it doesn’t necessarily have a choice. It’s sticking in not so much for the greater good of the game, but because it faces significant reputational damage if it doesn’t.
Its one big chance to show itself as a smart and savvy sports investor was to help negotiate a new broadcast deal for the 2026-2030 period.
If it could knock that out of the park, and jump the existing $111m-a-year deal to $150m-a-year, its reputation and investment would be in good shape.
The deal, though, as the Herald reported, is tracking towards a settlement with Sky at around $85m a year – a $26m drop annually – and while there could yet be some add-ons to lift that figure, several sources have confirmed that the final amount will almost certainly be significantly less than $100m a year.
This is the investment equivalent of turning wine into water and, having had a swing and a miss, Silver Lake wants to stay on the mound to have another crack at hitting a broadcast home run for the 2031-2035 cycle.
Whether it should be enabled in its clean-up mission is the first question NZR’s new board will have to ask when it assembles in January.
An exhaustive process to move from a representative to an independent governance system has ended with a clean-out of directors and a new nine-person board that looks eminently better qualified to lead the game.
Critically, none staked their reputation on the Silver Lake deal: none is wedded to it, personally obliged to defend it, and one – new chair David Kirk – was instrumental in his role as chair of the Rugby Players’ Association in stopping the disastrous first iteration from being approved.
This new board, through an untainted, fresh lens, has to assess whether the maths that NZR is looking at through to 2030 presents a tolerable fiduciary risk to carry, just to keep gambling on Silver Lake proving it has the requisite capability it has so far shown no signs of possessing.
There are no new innovative revenue streams as promised – a sport that told everyone it would no longer be reliant on the holy trinity of broadcast, sponsorship and match revenue by selling a slice of itself to private equity investors, remains entirely reliant on the holy trinity of broadcast, sponsorship and match revenue.
Silver Lake signed off on spending almost $11m in 2023 on a content hub (NZR+) which delivered only a fraction of the forecast registrations.
Six months after launch, NZR+ dramatically changed direction to throw its lot in with YouTube, and as hard as everyone involved in that decision has tried to spin it as a demonstration of agility, it hardly inspires confidence that the weight-bearing pillar of Silver Lake’s investment thesis had to be rebuilt after six months.
And if the investment thesis is now to create content, put it on YouTube and use the audience figures to generate higher values for future sponsorship and broadcast deals, all this could have been achieved for free, by simply asking a teenager.
Income from broadcast looks likely to drop, executive salaries and directors’ fees are rising while provincial distributions are dropping, and a chief executive of New Zealand Rugby Commercial – the company formed to house all the money-making assets and where Silver Lake has its greatest involvement – hired a chief executive on a reported $1m salary, who didn’t even last 10 months in the role.
Being nice guys around the board table, dutifully turning up around the world to support the All Blacks and learn about the folklore, can’t be used as the argument to say Silver Lake is working out as an investment partner.
The assessment needs to be non-emotional and driven by the maths, which says, unequivocally, that this year, and most likely for the next five, the single biggest winner in New Zealand rugby will be Silver Lake.
The Blues could defend their Super Rugby title next year, but it will still be Silver Lake on the top of the podium. The Black Ferns could retain the World Cup next year, but it will still be Silver Lake on the top of the podium.
Because, while the maths of the revised deal was greatly improved from NZR’s perspective, it is still heavily stacked in Silver Lake’s favour.
When NZR signed the deal with Silver Lake in June 2022, it had several key revenue streams locked into lucrative long-term deals.
It had just begun a $240m, six-year, front-of-jersey sponsorship with Altrad, and a six-year, $60m deal with Ineos, whose name would be on the back of the shorts and training jerseys.
A broadcast deal worth $111m a year began in 2021 to run through until 2025, and NZR was forecasting that it would generate $270m of revenue in 2022.
Silver Lake did the maths, and worked out that NZR was likely, even in a worst-case scenario, to make about $270m a year for the foreseeable future.
That’s the beauty of longer-term contracts – they provide long-term security – and the separate beauty of the deal it signed was that it was being paid out on revenues generated, not profit.
So it did the maths. In 2022, 2023 and 2024 it could add up the interest payments it would receive, and then in 2025, it could be reasonably confident NZR would still be making $270m, which would net it $20m after it converted its loan to an equity stake.
The maths said it could bank $40m all for simply jumping into NZR’s boat which was on a rising tide. There was no financial consequence if it couldn’t definitively add any value, and really, there was only going to be one major opportunity to do that – the renegotiation of the broadcast contract for the 2026-2030 cycle.
This, so the investment rationale went, was the moment the maths would start to make sense for both NZR and Silver Lake. The numbers would jump, and NZR would have more than the $111m a year it currently has, even after it factored in the 7.5% share due to Silver Lake.
But the indications are that the numbers won’t end up working for NZR, which needs a deal worth $120m a year to pay Silver Lake’s share to retain what it currently has.
And here’s where the maths gets scary. Silver Lake could take $100m out of NZR in the next five years without any discernible evidence that it added any value at all.
Not really, not the way NZR said it would in 2021 when it was adamant private equity firms brought the sort of capability that would prove transformational.
NZR, without Silver Lake, negotiated a five-year broadcast deal with Sky worth $555m over five years. With Silver Lake, the deal may now drop to $425m over five years, so on a like-for-like basis, there could be $130m less coming in and an additional $100m going out.
For a business to be looking at a possible $230m negative swing like that, NZR has to at least consider the maths of extricating itself from Silver Lake.
This is where Kirk’s position as the chair-elect of NZR becomes fascinating. While, in his former capacity as chair of RPA, he was instrumental in restructuring the Silver Lake deal into its current format, that shouldn’t be read as proof that he believed an equity sale was the right course of action.
The RPA’s correspondence to NZR during that period was clear – it said that if NZR didn’t feel it had the capability within its own executive to successfully manage and grow the game financially, then those people should step down and it should hire people who could.
But RPA recognised that the decision on whether to raise capital was not its to make, and the pragmatic position was to try to shape and influence the deal NZR was so determined to force through.
Here we are, though, three years on and it is now Kirk’s decision to make and to determine whether the maths of getting out looks better than the maths of staying in.
NZR has, according to its 2023 annual report, $161m of cash and term investments.
Could it use that money – leave a sensible amount in reserve – and borrow whatever else it needs (from a bank, or mainstream financial institution) to pay back Silver Lake?
Does that make better, long-term financial sense now that NZR can see it’s not likely to undergo any transformational change in revenue until, at the earliest, 2031.
If NZR doesn’t get out now, it won’t ever again have the cash in the bank to buy itself out of a deal that has burdened it with only ever owning 92.5% of its revenue in perpetuity.
If it waits, and ignores the maths, it is facing a future where it will have to keep dipping into the money Silver Lake paid it … to pay Silver Lake.
And it’s a future where eventually – and looking at what’s happened with similar private equity deals in Europe, eventually is a lot sooner than anyone imagines – NZR has to do the full Oliver Twist, stick its bowl in front of Silver Lake and say, “Please Sir, can I have some more?”
If that happens the numbers will skew yet more heavily in favour of Silver Lake.
New Zealand, generally, has a problem understanding maths, but New Zealand Rugby, specifically, seems to have had a bigger one.
