Gregor Paul: The many red flags in New Zealand Rugby's Silver Lake deal

The strength of NZ Rugby's faith in Silver Lake has been a source of concern, writes Gregor Paul. Photo / Photosport

OPINION:

On Thursday, New Zealand Rugby is expected to sign off on a $200 million partnership with US investment firm Silver Lake. In the fifth instalment of a five-part series, Gregor Paul looks at the potential red flags of the deal.

It is quite the story which Silver Lake have sold New Zealand Rugby and they have done so with the requisite flattery and deference to the brand.

Which is why the national body has gone a little giggly at the thought of being in partnership with Silver Lake — the US firm is the real deal, universally seen by Silicon Valley as an investment Svengali for the way they leveraged a buy-out at Dell and triggered one of Wall Street's greatest pay days.

Silver Lake are the guys who can wave a wand and produce money. They are smart and successful, a combination that has proven irresistible to NZR.

Intoxicating even and having a globally renowned investor fawning over the All Blacks while pitching a plan to help them lead rugby's digital revolution, has made NZR think they would be contemptuously stupid to turn them down.

Certainly, those who have cast doubt about the partnership have been labelled by NZR as destructive and almost heretic.

By having a beyond rational, almost fanatical commitment to doing a deal, NZR have, through the force of their conviction, been able to convert plenty of stakeholders into fellow believers.

But the strength of their faith has equally been a source of concern to those who have wanted to see a detailed business case as the basis to support the deal.

And herein lies the first of many red flags — NZR are aligning with Silver Lake not to fulfil a considered and aligned strategic goal, but largely out of fear.

NZR began kicking the private equity tyres when they saw the Northern Hemisphere doing it and when the Six Nations committed to a deal with CVC, fears grew New Zealand would be left behind.

But there is not a shred of evidence that CVC are proving transformational in the Northern Hemisphere.

This narrative of New Zealand moving to the back of the pack is classic fearmongering and works as a means of persuasion only on those who lack the acumen to ask for a single tangible example to show where private equity has added value in rugby.

New Zealand Rugby House building in Wellington. Photo / Photosport

The other motivational driver for NZR partnering with Silver Lake was to use it as a catalyst to lower fixed costs by reducing the professional players' share of revenue.

The new deal has left NZR with the same 36.5 per cent commitment to players and 17 per cent to the provincial unions, but now, also, another fixed cost in Silver Lake whose dividend will be directly linked to income.

NZR have exacerbated the problem they were so adamant last year was at the core of their ongoing balance sheet woes.

Chief executive Mark Robinson says that if the cash floods in, it will pave the way to renegotiate a new pay structure with the players and provinces.

But that is yet another red flag as it highlights that everything about this deal requires those supporting it to do so mostly on trust.

They have to trust that there are millions to be made by embracing digital technology. They have to trust that if there is digital gold, Silver Lake will prove to be exceptional at mining it.

The simple maths here is that NZR revenue, in 2025, will need to grow by 8 per cent, just to offset the impact of Silver Lake and local institutions taking their share of the profits.

NZR have been prepared to overlook that proposition, possibly because for the last two years they have sat with Silver Lake and heard compelling talk of fan-centric decision-making supported by technological innovations and multiple platforms this, data packaging that.

But those who haven't been exposed to Silver Lake's pixie dust fear this could be straight out of the private equity playbook — pitch the most compelling story to get in the door and once you are in, sit back, do nothing and enjoy the rising tide rugby may soon be about to experience given its growing popularity globally.

In their independent review of the deal, PriceWaterhouseCoopers note that Silver Lake believe they can double revenue in the next seven to 10 years.

This sounds impressive until you consider that NZR have achieved precisely the same outcome themselves, growing revenue from $133m in 2015 to a forecast $265m in 2022.

NZR appear to be asking their stakeholders to take a giant leap of faith just to land where they would if they did nothing.

And that is arguably the biggest red flag of all with this deal — it is being sold as a binary choice between going with Silver Lake and thriving or sticking with the status quo, falling behind and effectively dying, when it really isn't.

NZR have enough money to run the game. This year they will turn over more than $265m and if they implement the measures detailed in the McKinsey Report of 2020, they could add another $30m per annum to their bottom line.

They could find and hire the capability and expertise they need to exploit digital technology ventures and jump their revenue without selling equity.

Their financial problem is not an inability to generate money, it is the convoluted and non-sensical ways it is distributed and NZR do not need to do a deal with Silver Lake, they want to do a deal with Silver Lake, which is why there are red flags everywhere.