COMMENT:

The recently released New Zealand Rugby and Rugby Australia annual reports give an insight into the financial position of rugby union on both sides of the Tasman. The reports reconfirm that rugby, like most major sports, is a big business that has become more and more dependent on television revenue.

In other words, fans at home or in the pub have become more important than those attending games.

On the surface, Rugby Australia appears to be in a stronger position than NZ Rugby because it reported net earnings of A$9.1m ($9.7m) for the December 2018 year, compared with a loss of $1.9m for NZ Rugby.

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However, these figures are misleading for several reasons, including the fact that NZ Rugby has a far stronger balance sheet while Rugby Australia faces fierce domestic competition, particularly from Australian rules football (AFL) and rugby league (NRL).

The first point to note in the accompanying table is that the broadcast rights figures of A$60.6m for Rugby Australia and $73.3m for NZ Rugby represent 50.4 per cent and 38.7 per cent of revenue respectively.

NZ Rugby has a diversified range of income with sponsorship and licensing revenue of $68.1m in 2018 compared with only $29.9m across the Tasman. The All Blacks brand is a much bigger revenue earner than the Wallabies brand.

And Rugby Australia faces fierce competition, as demonstrated by the following figures:

• The AFL generated broadcast rights revenue of A$391.3m in the 12 months to October 2018, representing 50.3 per cent of its total revenue of A$778.6m

• NRL broadcast revenue surged from A$206.2m in the October 2017 year to A$318.0m in the latest period, or 60.7 per cent of total revenue of A$523.6m

• Football Federation Australia (FFA), which runs soccer, doesn't disclose its broadcast figure but in 2016 it signed a six-year deal with Fox Sports worth A$58m per annum. This A$58m represents 43.8 per cent of FFA's total revenue of A$132.5m for the June 2018 year

• Cricket Australia also doesn't disclose annual broadcast revenue but it has a contract with Fox Sports worth A$1182m, or nearly $200m per annum, over a six-year period.

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Consequently, Rugby Australia is a relatively minor sport across the Tasman as its broadcast revenue of $60.6m represented just 7.3 per cent of the total broadcast income earned by the four major football codes. It also earns much less than Cricket Australia from this source.

Considering this, the Israel Folau controversy is a major issue for Rugby Australia because it needs star players to attract higher TV audiences, to get better broadcasting deals.

NZ Rugby clearly dominates in terms of broadcast revenue in this country, as NZ Cricket, which doesn't disclose its individual revenue sources, had total revenue of only $55.4m for the July 2018 year.

The impact of the British and Irish Lions tour can be clearly seen in NZ Rugby's 2017-year figures, when it reported net earnings of $33.4m. The 2017 annual report noted: "We benefited from a significant increase, mainly from increased matchday takings and broadcast rights revenue. The All Blacks' global exposure contributed to a 14 per cent growth in sponsorship and licensing including new relationships with Amazon and Apple, as well as ongoing, and highly valued, support of our Principal Partner adidas and major global sponsor AIG."

Nevertheless, the game faces challenges as indicated by these comments in the 2018 annual report: "Although we are pleased with our latest financial result, under budget with a loss of $1.9m, these are still challenging times for rugby and our long-term financial projections still show us spending more money than we are earning.

"While the upcoming broadcast deal and advancements in digital technology will provide us with short-term revenue gains, the costs of our game continue to escalate," and "there are no silver bullets for rugby to thrive in this environment".

The key issue facing NZ Rugby is that broadcasters and digital providers are signing lucrative contracts with rugby union organisations in other countries and this money is being used to attract the best NZ and Pacific Island players.

Rugby Australia had a very difficult 2017 year because of the controversy surrounding the removal of the Western Australian franchise from Super Rugby and "Wallabies ticket sales — a barometer for fan engagement — were significantly poorer than forecasted".

However, Rugby Australia reported a surplus of A$20.6m for that year because of the inclusion of a A$21.6m government grant relating to the construction of a high performance and administration head office at Moore Park, Sydney. It also received additional government grants of $3.2m.

Rugby Australia's 2018 revenue dropped sharply, mainly because of the absence of the one-off A$21.6m government grant in the previous year, but broadcasting, sponsorship and matchday revenue also fell.

The recently released annual report noted: "Net expenditure decreased $14.9m in 2018, mainly due to reduced funding allocated to Super Rugby, player costs decreasing, and a reduction in administrative staffing and overhead costs. While the financial results from 2018 are generally positive, Rugby Australia will operate at a loss in 2019 due to the Rugby World Cup".

Rugby Australia and NZ Rugby expenditure figures are more difficult to compare because they use different classifications, except for corporate or administration costs.

However, we can say that Rugby Australia is in cost cutting mode while NZ Rugby has adopted a more progressive strategy as the decline in the latter's expenditure is mainly due to reduced cost pressure following the Lions tour in 2017.

Rugby Australia reduced its expenditure on matchday operations, Wallabies team costs, Super Rugby, player payments and administration costs in the 2019 year while NZ Rugby is conscious of costs but has adopted a less aggressive approach in these areas.

Another way to measure the strength of sporting organisations is their balance sheet or financial position. The following is the net current assets plus long-term investment position of several of Australasia's sporting bodies:

• NZ Rugby had net current assets and investments of $100.9m at the end of 2018

• Rugby Australia had only A$9.4m of these assets

• The AFL has A$147.8m of net current assets but it also has $176.7m of term loans while the two rugby unions have minimal debt

• The NRL has A$37.2m of net current assets and investments

• Football Federation Australia has only A$3.9m of these assets

• Cricket Australia has net current assets and investments of A$100.6m while NZ Cricket has $15.7m of these assets.

It would be easy to draw the conclusion from these figures that NZ Rugby is in a strong financial position, particularly when compared with Rugby Australia.

However, NZ rugby needs a strong Transtasman rival, both on and off the field, if it is to attract lucrative broadcast rights contracts and fans to the games. The escalating costs of player contracts is putting huge pressure on rugby union organisations, including England's Rugby Football Union (RFU). The RFU reported a loss of £30.9m for the June 2018 year and has a far less robust balance sheet than NZ Rugby.

The uncertain financial outlook for rugby union is leading to widespread speculation concerning new competition alignments and broadcasting deals. This speculation is likely to continue with the smaller Pacific Islands being left out in the cold because they don't have the wealth or population to attract major international broadcaster interest.

Brian Gaynor is a director of Milford Asset Management.