Analysis: CVC money brings opportunity and risk

A CASH injection of over £100 million from private equity firm CVC in exchange for a minority stake in the Six Nations, plus as much as £40 million for a slice of the PRO14 pie, would be game-changing for the Scottish Rugby Union. A whole new world of opportunity will suddenly open up. But the arrival of such an eye-watering sum of money brings its own risks, and we must keep in mind that this is not a gift but an investment from a private equity firm who will be ruthless in their determination to exact maximum profit from their outlay.

“The Six Nations Championship should consider carefully who it is dealing with before selling itself to private equity group CVC,” wrote Alex Brummer, the respected City Editor of The Daily Mail, back in March.

“As handsome as the £500m bid from CVC might seem, private equity owners are not a benevolent society. Operating behind closed doors, they can use that status to build businesses, but are just as likely to be ruthless in decision making. The goal normally is to offload the assets in as short a time as possible at far higher prices.

“The Six Nations is the jewel in the crown of international rugby, much admired in the Southern Hemisphere. Handing over the franchise to private equity for short term gains would be a disastrous error.”

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Private equity is a tough, profit-oriented business and CVC is a money making machine. It was founded as the European spin-out of American global banking giant Citicorp in 1981 and was subject to a management buy-out in 1993. It is now one of the world’s leading private equity firms with approximately US$123 billion of funds committed worldwide. Its headquarters are in Luxembourg and it employs over 400 staff working across a network of 24 offices throughout Europe, Asia and the Americas.

A patchy track record

Big money is exciting but Brummer points to the experience of Debenhams department store chain as a cautionary tale which the Six Nations should heed as they decide whether to stick or twist.

CVC, acting in concert with TPG Capital and Merrill Lynch, bought Debenhams for £1.7 billion in 2003 and, having ripped out over three times their initial equity investment, re-floated it three years later for about the same equity value, but with long property leases and debt close to £2bn — 2,000 per cent higher than when they took control of the company. Hardly surprisingly, Debenhams filed for administration in April 2019.

“Retailers need to be run as retailers, by retailers, not as cash cows by financiers,” said Stephen Springham, head of retail research at Knight Frank, at the time.

And it is not only in retail that CVC has a patchy record. In 2006, the company bought a controlling stake in F1 motor racing for about £1.6bn. It was worth about £6bn when sold to Liberty Global in 2017, but the future prospects of the sport are now a cause of serious concern. Bob Fernley, former principal of the Force India F1 team, accused CVC of “raping the sport”.

“All their actions have been taken to extract as much money from the sport as possible and put as little in as possible,” he said in 2016.

The cost of profit

Giles Richards, the F1 and motor sports correspondent for The Guardian, was equally scathing in an analysis he wrote last September, blaming the teams for allowing themselves to become reliant on CVC hand-outs from TV deals which raised plenty of cash but damaged the sport’s visibility.

“From 2019, F1 will be exclusive in the UK to Sky for six years in a deal reportedly worth £600m,” he explained. “Good numbers for CVC but not so the dwindling worldwide audience that has fallen by 137m since 2010. A falling audience and exposure has its effect on sponsors, thus more had to be squeezed from TV and promoters and consequently the teams became more reliant on payments from these funds delivered by F1. There was nary a peep of disapproval from the teams after the Sky deal, taking jam today, over the sport’s future.

“CVC appeared to have no interest in that future. They appear to have spent very little on promotion, investment or attempting to engage with a younger audience.

“The pursuit of profit may also have led to failure of governance, so profound that in 2016 the drivers took the unprecedented step of openly criticising the way the sport was run in a statement describing the decision-making process as ‘obsolete and ill-structured’.

“It was management that had left payments between teams wildly inequitable and was responsible for the two-division haves and have-nots that now occupy the grid. Worse still in a sport awash with money, teams were still going bankrupt, though CVC denied responsibility for cash problems.

“There was pursuit of profit at every possible level but with apparently little interest in making the experience better or more popular. It was a distasteful, cynical process that left F1 tarnished.”

Haves and have-nots

Richards’ observation of a two-gear F1 competition split between “haves and have-nots” will resonate most loudly in the Southern Hemisphere, where there is already a structural imbalance between what is produced on the playing field and commercial performance – causing a steady flow of the world’s best players towards Europe.

The demise of World Rugby’s Nations Championship proposal last month left leading rugby figures in Australia, New Zealand and South Africa gnashing their teeth in anxiety over what the future now holds. News that the Six Nations Board is now “within days” of agreeing in principle to a deal worth half a billion pounds will have multiplied the angst-levels tenfold.

In truth, all rugby supporters across the globe should be concerned about what a deal so heavily weighted towards one cluster of countries will do to the overall fabric of the sport.

While CVC are reportedly buying only a 15 per cent stake in the Six Nations, they have already purchased a 27 per cent stake in Premiership Rugby and are in advanced negotiations for a £120 million stake in the PRO14 league. History tells us that they are unlikely stop there.

All of which provides invaluable context for those pondering the full significance of Sir Bill Gammell’s on-going review of “Scottish Rugby’s corporate governance and business structures”.

Six Nations Board takes step closer to £500 million private equity deal