On Thursday, New Zealand Rugby is expected to sign off on a $200 million partnership with US investment firm Silver Lake. In the first of a six-part series, Gregor Paul looks at how we got here.
Professional rugby in New Zealand came to the realisation in the early months of 2018 that its business model was broken.
Expenses were rising faster than revenue and there appeared to be no means to reduce the former or increase the latter.
The biggest driver of costs was talent retention: rich Japanese and European clubs were aggressively trying to recruit New Zealand's players and hence were creating dramatic wage inflation.
A business that cost $134m to run in 2015, had total expenses of $169m in 2016 and New Zealand Rugby were forecasting those would rise to $194m by 2019.
The net result of more money going out than coming in meant that NZR lost $7.4m in 2016 and were forecasting losses of $1.8m in 2018 and $7.3m in 2019.
Against that rising tide, NZR's revenues were largely fixed. They were locked into long-term contracts with Sky, Adidas and AIG, which represented about 80 per cent of their income, had saturated the local sponsorship market, were mostly selling out their test matches and had no capacity to play more.
Which is why in March 2018, NZR chief executive Steve Tew, said: "Post 2020 we've got a deficit projected that we can't live with. That means we either change the expenditure model or find ways to generate more money."
He said this while announcing that NZR had made a profit of $33m in 2017 – but it was a one-off, exceptional year on the back of hosting the British and Irish Lions tour.
But the likelihood of the 2017 surplus offsetting the next 12 years was low. NZR could see that they were going to lose a combined $9.1m in 2018 and 2019 alone.
"We can have champagne today but we can't keep drinking champagne every year because we've got to spread the money out over a long period of time," warned Tew.
New Zealand Rugby hatched a plan to improve the balance sheet that was built on three strands: find and develop new revenue streams; grow and maximise traditional income sources and reduce administration costs.
On the new business front, a deal was struck to allow Amazon Prime unprecedented access to the All Blacks to make a documentary series called All or Nothing.
NZR also opened an All Blacks branded store at Auckland Airport in 2018, with tentative plans for more.
Given the global demand for New Zealand's players, there was no leeway to reduce what was being spent on elite talent.
But the number of NZR employees had climbed from about 100 in 2012 to 160 by 2019.
World-leading consultancy firm McKinsey was commissioned in late 2019 to identify ways the game could be better and more cheaply administered.
Their report, which was finished days before New Zealand went into its first Covid-enforced lockdown, identified cost savings of between $20m-$30m per annum.
The report was effectively put into cold storage once Covid hit and forced NZR into crisis mode.
But it was the big-ticket items of broadcast and sponsorship that NZR saw as their best opportunities to dramatically change their revenue profile.
By 2019, when they came to negotiate a new broadcast deal to start in 2021, there was real competition to long-term existing rights holder Sky TV, in the form of Spark Sport and perceived competition from the likes of Amazon Prime, Netflix and Facebook.
In October 2019, Spark Sport beat Sky to secure the broadcast rights for Black Caps cricket matches played in New Zealand, adding to pressure on Sky's share price.
That gave NZR leverage and just 10 days later they had agreed a deal with Sky, which was believed to be worth more than $500m over five years – almost double the existing contract.
NZR were also "given" a five per cent stake in Sky as part of the deal – which was worth about $23m in 2019.
And in June 2020 the decision was made to engage sports marketing agency TRN to begin a global hunt for a new lead All Blacks' sponsor.
US insurance group AIG were not going to renew their front-of-jersey $16m-a-year deal beyond 2021. Rather than sell all the real estate on the All Blacks kit to just one sponsor however, NZR opted to unbundle the offering and sell the naming rights to the front of jersey, back of shorts and training kit separately and forecast that the total value could jump to about $36m a year by doing so.
Even that valuation proved conservative. Between French construction group Altrad (front of jersey), British petrochemical firm Ineos (back of shorts) and Japanese firm Taisho Pharmaceutical, the All Blacks' kit is now worth in excess of $60m a year.
A model that was identified as broken in early 2018, appeared to have been fixed by mid-2021.
However, by early 2019 NZR had started to consider a fourth strand to their business plan - to find an investment partner. Tew flew to the US for a meet-and-greet with private equity groups and a few months later, NZR chair Brent Impey and board member (and now chief executive) Mark Robinson met a handful of the major players in the UK private-investment sector to discuss in more detail what a partnership could look like.
NZR had seen how the investment firm CVC had bought stakes in the English and Celtic rugby competitions and was starting to flirt with the Six Nations.
There was fear around the board table that New Zealand could be left behind: that the balance sheet, even though it had been strengthened, would not be strong enough to ensure the All Blacks could compete with the likes of England, Ireland and France if they were suddenly rolling in CVC's cash.
When the All Blacks were knocked out of the 2019 World Cup by England, it accelerated the thinking about a capital raise.
"We were of the view that something around a partnership had to be considered," says Robinson, who took over as chief executive in January 2020.
"It was in the latter half of the year that we crystalised what a model might look like and that was to take on a partner to look to do a couple of key things.
"One was to provide the necessary capital to stabilise the financial position of rugby as a whole.
"Two, to make an initial investment in the activities we felt we needed in the short term. And three, and most critically, for the long-term success, to invest in revenue-generating capabilities – get hold of the skills and competencies and capabilities that we thought were necessary to drive the business forward and aggressively grow revenues."
In early 2021, Silver Lake Partners, a US group specialising in technology and sports investments, tabled a $465m offer to buy a 15 per cent stake in NZR's commercial assets, which they had valued at $3.1 billion.
The attraction of Silver Lake was their access to capability, their relationships with technology companies and their experience in sports investing as they are stakeholders in Manchester City and UFC.
Robinson and the NZR board believe traditional revenues of broadcast, sponsorship, merchandise and match-ticket sales need to be supplemented by high-tech, digital initiatives that engage a wider audience, procure better customer data and ultimately monetise more fans.
"We will have some of the networks and insights that Silver Lake can bring to those not-so-traditional streams of revenue," says Robinson. "Because of the work they have done with UFC, they have an ability to create that connection relatively quickly."
The other factor that drove NZR into the arms of Silver Lake, was a desire to lower their fixed-cost structure.
NZR, through their collective-employment agreement, are obligated to give 36.5 per cent of their income to the professional players.
The revenue-sharing agreement has been in place since 2006 and although it is widely acknowledged as a critical tool in incentivising players to stay, NZR by 2020 felt the percentage being paid to the players was too high and they saw a deal with Silver Lake as an opportunity to lower it.
The sales pitch would be that the players should take a smaller cut of a bigger pie. Silver Lake were projecting that if they were brought in as a partner, revenue would grow to $270m in 2022, and up to $305m in 2025. So, NZR struck the deal on the basis the players would agree to a tiered, reverse-royalties revenue model where they took 36.5 per cent of the first $200m earned, 18.3 per cent of the next $50m of NZR income and 9.1 per cent thereafter.
This roughly equated to about 31 per cent of the revenue NZR was forecasting it would earn over the next three years.
It also meant that if Silver Lake exceeded all expectation in driving revenue, the players would not be the biggest beneficiary as only 9 cents of each dollar earned in excess of $250m would be going to the professional game, leaving more to invest in the grassroots.
The Rugby Players' Association categorically rejected the sales pitch, however, with their chair, former All Black captain David Kirk saying: "New Zealand Rugby is selling 15 per cent of their revenue, because that makes the game unprofitable, NZR are looking to reduce the player's share significantly in order to pay for, what we think, is a bad deal."
In January 2021, the RPA wrote to the NZR to say: "We have concluded that we will not grant approval for the restructure and sale proposed by NZR and believe we should communicate that conclusion to you now."
The RPA didn't have a veto to block the deal as such, but they were in collective bargaining with NZR and could refuse to negotiate a new employment agreement unless or until the terms of the Silver Lake deal were either changed or dropped.
The objections were not confined to the lower payment percentage. The players had concerns that the deal would be catastrophic to the game if Silver Lake were not able to achieve the ambitious revenue growth targets they were forecasting.
The RPA thought the scale of the deal was excessive, that the risk was too heavily weighted against the national union. They argued that Silver Lake were only a conduit to relevant and specific capability and did not inherently possess any and therefore were essentially just providing expensive capital.
RPA also didn't see that there was a burning need to seek additional capital, but that if NZR were determined to secure more funding, there were cheaper and better ways to borrow money than turning to private-equity investors.
Even when the deal was amended to a 12.5 per cent stake for $388m, the players still refused to give their blessing. The RPA was carrying what could be described only as a sense of betrayal.
As RPA boss Rob Nichol says: "While we understood the [NZR's] aspirations, we were of the view that we would only support a deal that was economically sound and was based on a truly comprehensive and mutually beneficial partnership."
The RPA could play the role of adversarial trade union when they had to, but they had a categoric sense of being in partnership with NZR – one built on mutual respect and a shared vision to grow the sport.
For 20 years the two organisations had worked together with open lines of communication, but in trying to pull off the most significant transaction in the history of the game, NZR appeared to be keeping the RPA at arm's length.
Certainly, it looked like NZR were following a strategic plan to win provincial and public support for the Silver Lake deal. This could portray the RPA as isolated and possibly misguided in their determination to stand in the way.
At NZR's annual meeting last year, Impey said the players would be "scoring the greatest own goal in the history of sport" if they didn't give their approval.
"It would be a terrible mistake if the players don't eventually support this deal; a really bad mistake." And when he was asked whether the players were being greedy, he replied: "I'm not going to use those words.
"It comes down to how the money is spent. In my view the need in the game is for clubs and teenagers."
If this was a strategy to pressure the RPA into caving to the terms of the deal, it backfired.
In early May, the RPA released a report they had commissioned local brokerage Forsyth Barr to undertake into determining the viability of raising capital through a stock market flotation.
Forsyth Barr valued the NZR's commercial assets at between $3.4bn and $3.8bn and said that they would underwrite a deal to offer five per cent in an Initial Public Offering (IPO) to raise up to $190m.
The intent of the report was to highlight that there were genuine alternatives to Silver Lake and to generate wider debate about the right path for the game.
RPA hoped it would pave the way for them to get around the table with NZR and talk amicably about ways forward, but the national body saw it only as sabotage.
"Through doing this, the RPA leadership has unilaterally taken a decision to attempt to destroy the Silver Lake deal – and the incredible financial and capability outcomes it would provide for all of rugby," Robinson declared.
"We are sorry that, for the players, their own union has put them in this position where the greatest opportunity for the future of all of rugby in New Zealand could be lost."
Robinson's rebuttal came days after Impey had accused Kirk of being "disingenuous" and talking "nonsense" – two acts that led to former players such as Richie McCaw, Kieran Read and Conrad Smith airing their concerns about doing a private-equity deal.
Civil war had effectively broken out and the internecine nature of the conflict reflected poorly on all parties.
As Robinson says: "I was sad the game got hurt through this process. I have only ever been involved to advance the interests of the whole game to the best of our ability and love all levels dearly.
"It was painful at times to have the game impacted negatively."
Those tense clashes in the middle of last year did, however, prove to be a watershed moment for getting the deal back on track.
McCaw became hands-on, working alongside Kirk and Nichol and, when NZR changed their chair, electing Stewart Mitchell to take over from Impey, there was a thawing of relations and essentially a new beginning.
The Rugby Players Association agreed to discuss a deal with Silver Lake on the condition NZR agreed that whatever outcome was reached, they would undergo an independent review of their governance structure and process.
RPA also wanted to have a direct line of communication with Silver Lake to better understand their capabilities, aspirations and strategic thinking.
Between June last year and this January, the initial deal was re-worked jointly between the three entities, with an agreement announced in February.
The new deal comes with a higher valuation of $3.5bn and Silver Lake will buy a 5.7 per cent stake for $200m.
For the first three years that $200m will effectively act as a loan, returning Silver Lake four per cent annually, before it converts to an equity stake in 2025.
The players' share of the revenue remains at 36.5 per cent and at an agreed date, there will be a second capital raise open only to New Zealand institutional investors, who will be able to buy up to a total value of $100m, with Silver Lake underwriting up to $62.5m.
In total, $300m could be raised with Silver Lake owning between 5.7 per cent and 8.5 per cent depending on the uptake of other investors.
"It is a proposal that is a little more complex, but it is one that we believe has the support of the entire game and can provide the basis for what we want to do which is grow revenues aggressively by having the investment capacity and the technical skills and capabilities," says Robinson.
He acknowledges that in preserving the RPA's revenue share at 36.5 per cent and the provincial unions' at 17 per cent, the new deal has failed to achieve one of the original goals of lowering NZR's fixed costs, but he says: "We believe we have to make a start on this journey around taking on a partnership and looking to grow revenues. It hasn't changed the broader financial framework of the game entirely.
"There are key junctures around when that happens – funding reviews and collective bargaining – but it sets us up to hopefully drive revenues more aggressively and in time we can hopefully come back to the table and have those conversations."
The RPA have given their blessing by agreeing a new collective employment agreement and now, for the deal to be ratified, a 75 per cent majority of provincial unions have to vote in favour of it at the NZR special general meeting on June 2.
Silver Lake's point man
Silver Lake's lead negotiator on the New Zealand Rugby deal has been Simon Patterson.
He is a graduate of King's College Cambridge where he received an MA Hons, before joining the world-renowned management group McKinsey as a business analyst.
He went on to hold management positions at the Financial Times in London, before joining Silver Lake in 2005 where he is now their European-based managing director, and co-head of all their activities in Europe, the Middle East and Africa.
He is a current board member of Dell Technologies and has previously been on the board of Skype.
He has been leading discussions with NZR and the RPA as he's believed to be a keen rugby fan with good knowledge of how the world game is evolving.
Who are Silver Lake?
Silver Lake are US fund managers who specialise in making investments in privately owned technology companies. They have about $90bn of assets under management, including stakes in Manchester City Football Club, UFC, IMG (a global sports and event management company) and the Madison Square Garden Group (which manages sports teams such as the New York Knicks).
What exactly is it that New Zealand Rugby are selling to Silver Lake?
A new company will be set up – called CommercialCo – and this will contain all NZR's revenue-generating assets, such as broadcasting, sponsorship, ticket sales, merchandise, licensing and digital properties. Silver Lake have determined the value of this company to be worth $3.5bn and they will initially invest $200m to hold what will be a 5.7 per cent stake in CommercialCo.
Why does a US investor want to buy a stake in NZR?
Silver Lake believe that rugby is a growth sport and the All Blacks brand has the ability to make considerably more money than it does.
They think they have the skills, connections and knowledge to help NZR squeeze more out of traditional revenues such as broadcasting, sponsorship, merchandise and match day, and also use their links into the tech world to create income from virtual signage, E-sports, gaming, e-commerce, content streaming and data packaging.
They are forecasting these new initiatives will bring in a total of $76m over the next five years.
How does NZR intend to spend their windfall?
A total of $37m will be distributed to provincial unions ($20m), Maori Rugby ($2m), clubs ($7.5m), the Rugby Players Association ($5m) and other stakeholders such as the Rugby Foundation. A further $38m will be invested as working capital for CommercialCo – money to hire personnel, explore initiatives etc. NZR will also invest and safeguard $60m in what it calls a Legacy Fund – which will be exclusively used to bolster and improve the community game.
NZR will put $120m into cash reserves and about $8m will be spent on the consultancy fees [legal and investment bank advisers] attached to the deal.
What return will Silver Lake get on their investment?
For the first three years, Silver Lake's investment will be a convertible note – which effectively means it will operate as a loan, returning them four per cent per annum. That note will then convert into an equity stake in 2025.
The final size of their equity stake and subsequent future annual dividend will be known only after a separate capital raise takes place with domestic institutions.
How will this second raise work?
NZR will try to raise a further $100m by offering local institutions such as KiwiSaver funds, ACC, community trusts and iwi the chance to invest. No date for this has yet been set. If less than $100m is invested, Silver Lake will have the right to make up the difference. Silver Lake will also underwrite this funding round to ensure that at least $62.5m is raised. In total, 8.58 per cent of CommercialCo could be owned by a combination of Silver Lake and local institutions.
Do we know how long Silver Lake will stick around?
Silver Lake will not be able to exit their investment for five years. When the time comes to exit, they can sell their stake back to NZR, or a third-party investor approved by NZR and RPA, or through a stock-market flotation.
Who will run and govern CommercialCo?
Global recruitment agency Egon Zehnder will be tasked with finding a chief executive of CommercialCo. The new CEO will then be responsible for hiring staff.
CommercialCo will be governed by a nine-person board. The chair will be independently appointed – Egon Zehnder will be engaged to find the right candidate.
Silver Lake will have two board directors, RPA one and NZR five, one of whom will be CEO Mark Robinson. At least two more of the NZR-allocated seats must be NZR board directors and the other two seats can be filled independently.
What does this mean for the existing NZR board?
They will continue to exist and govern the sport as they currently do. But a condition of the deal being approved is that an independent review of NZR's governance structure and process will be carried out to make sure it is fit for purpose.