Sometimes you just have to take the hit. Photo / Getty Images
NZ Rugby and Sky TV's relationship is now valued less by both sides - at least in blunt commercial terms.
Accounts released with the union's 2020 annual report say it took a $15.89m impairment, "due to the significant decline in Sky NZ's share price".
At the same time, Sky wants to claw back some of the cash component of the pair's latest five-year deal, which was reached in October 2019 and kicked off with the current season.
NZR accounts indicate that Sky and other broadcasters clawed back close to $6m for the 2020 season. And Sky says it's talking to NZR about a rebate for 2021.
When NZ Rugby first gained a 5 per cent stake in Sky (equating to 21.8m shares) as part of the "innovative" new Sanzaar deal reached in 2019, Sky was trading at 92c, and a Sky filing to the NZX valued the union's stake at $20.06m.
But the pay-TV broadcaster's shares fell sharply during the first half of 2020 as the pandemic bit, and have only recovered modestly since with its return to profit. Its stock was recently trading at 17c, valuing the union's stake at around $4m.
The share deal was further complicated in May 2020 when Sky announced a $157m rights issue to shore-up its balance sheet amid Covid uncertainty and its ongoing refocus on digital technologies.
Existing investors would see their stakes diluted if they did not buy some of the new shares issued for the raise.
Hamilton Hindin Greene adviser Grant Davies told the Herald that NZ Rugby would have to throw another $7.4m into the pot to stop its stake falling from 5 per cent (the NZX's disclosure threshold, making it a symbolic figure designating a heavyweight investor). The union did not, and its holding fell to 1.7 per cent.
Analysts have also noted a couple of unusual provisions with NZR's Sky shares. One is that they have to be held for at least two years, the other that the union has to give at least 10 days written notice before selling. NZR will also have to hold good-faith talks with Sky and give the pay-TV broadcaster the chance to line up a purchaser.
The new Sanzaar deal, reached with Spark Sport circling, saw Sky pay what the Herald understands was $80m a year or $400m total for rights to All Blacks, Super Rugby and Mitre 10 Cup games through to 2026.
Neither party ever comments on the value of broadcast rights, but NZR's latest annual report records the union received $51.8m income from broadcast rights during the Covid-hit 2020, v $57.5m in 2019.
During 2020, then Sky CEO Martin Stewart said his company would pursue discussions with NZR over a rebate as the pandemic decimated the sports calendar, citing English Premier League football clubs return of millions of pounds to Sky UK, BT and Amazon as a precedent. Both sides cited confidentiality clauses.
Today, external relations director Chris Major confirmed what is obvious from NZR's published accounts - the union did return some of its broadcast rights revenue.
However, Major noted that not all of the $5.7m drop in NZR's 2020 broadcast income was money clawed back by Sky. A portion would have been returned to overseas rights holders.
"We had constructive discussions with many of our sports partners, including NZR, and agreed equitable reductions in our rights fees to reflect the disruption to live sport during the Covid-19 lockdowns in 2020," Major said.
"The details of those negotiations are confidential, but we note that we sought to strike a careful balance between supporting our sports partners, acknowledging the alternative content that was created during the lockdowns - like Isolation Nation and the creation of the successful Super Rugby Aotearoa tournament - and the reduced schedule."
In February this year, new Sky CEO Sophie Moloney said clawback talks were also in progress about the 2021 season, given the scaled-back Super Rugby competition and the All Blacks' slimmer schedule.
"You'll appreciate conversations with a partner are always confidential," Moloney said, "but yes we are in a conversation about what are those impacts on value for this year in terms of the nature of the competitions," Moloney said.
Today, Major said Sky would not further on the possible 2021 clawback while the season was still in progress.
NZ Rugby was already in the red before the pandemic. In 2019, it booked a $7.4m loss.
The clawback talks with Sky are taking place against the background of the deal - approved by provincial unions but not yet top-tier players - for Silver Lake to take a 12.5 per cent share of NZR's net commercial revenue for $387.5m.
Two of three analysts polled by the Herald said the Silver Lake deal - or a similar cash injection from another outside investor - would change the NZ Rugby-Sky power balance in the union's favour.
Jarden's Arie Dekker said even though NZR had recently been open to new ways of delivering content - witness its 2019 Rugby World Cup deal with Spark Sport - its weak capital structure had limited its ability to fully exploit the arrival of new content delivery contenders.
Craigs Investment Partners' senior analyst Wade Gardiner also saw a Silver Lake-style deal giving NZR "a greater risk appetite to consider a direct-to-consumer offering in the future would be a major issue for Sky."
Fat Prophets' Greg Smith - who has remained a Sky bull through thick and thin - saw it as a positive for the pay-TV broadcaster.
"With rugby still the main game for Sky I think a deal which promises to potentially globalise the sport more, and effectively help run it better, is a good thing," Smith told the Herald.
The Fat Prophets analyst saw the Silver Lake deal as a potential boost for Sky's RugbyPass service, which streams to offshore customers. And in late February, RugbyPass did expand its deal with NZR as the Sky platform won rights to stream Super Rugby Aotea games to fans in the UK, Ireland and France.
NZR - whose board now includes ex NZVIF boss Richard Dellabarca and reality TV entrepreneur Bailey Mackey has already been displaying a propensity to break away from its traditional business models.
Late last year, the union took a stake in one of its sponsors - Nura, which has a three-year, "multi-million" contract to be the All Black's official headphone supplier. The value of the stake was not disclosed at the time, or in the just-released annual report. The maker of $549 high-end headphones has a private equity valuation of $74m.
Sky recently reported a 236 per cent jump in first-half net profit to $39.6 million as its streaming numbers jumped, but also said ongoing cost-controls were necessary, as well as possible price increases in the second half as its new, more expensive contract with NZ Rugby kicked in.
It recently increased the price of its Neon streaming service by 15 per cent to $15.99 a month, though offered to hold the line for those who moved from no-contract pay monthly to a 12-month term.
The industry faces challenges but hopes to bring newcomers and veterans together.