The Best Way to Win at Sport? Buy the Tournament

(Bloomberg Opinion) -- If you want to make money from professional sports, trying to win a competition is a real punt. Far better to own the competition itself. Even better, own several competitions.

The surge in online streaming has prompted private equity firms to scramble for ways to get into the content game. Many seem to have landed on sport as a good opportunity: a quarter of the 20 teams in English soccer’s Premier League now have an owner in private equity. If you invest in a studio or production house, then you risk having films or shows that aren’t a hit. By contrast, sport has a captive audience — a loyal fan base. Forget Star Wars or Marvel: athletic teams are the original franchises.

But picking teams comes with an inherent risk. If you underinvest in a club, appoint an inept coach, or your star players get injured, then your team might not qualify for the premier competitions. Worse, it might get relegated: the lowest-placed teams get shunted into a lower division where income from broadcast rights, merchandising and ticketing is a lot lower. While a club in the UEFA Champions League can expect to make 475 million pounds ($609 million) a year in revenue, those in the Championship, England’s second tier, will make just 21 million pounds, according to a 2019 Deloitte study. Ouch. I’ve said it before: owning a European sports team seems little more than a vanity project for the errant super-rich.

Sports tournaments, however, can be a lucrative proposition if you get them right. Just ask CVC Capital Partners, which made at least a 500% return on its 2006 acquisition of Formula One, the world’s most popular motorsport. The private equity giant has now set its sights elsewhere: rugby.

Last year it bought a 27% stake in England’s Premiership, the top rugby division, for 200 million pounds. Now it’s trying to add to that with investments in Pro14, a club competition spanning Ireland, Italy, Wales, Scotland and South Africa, and the Six Nations, the annual round-robin tournament where the national teams of England, Scotland, Wales, Ireland, France and Italy compete. If those deals come off, then it’ll have invested 620 million pounds in the gentleman’s game. The 14% stake that CVC is reportedly seeking in the Six Nations will value the competition at some 2.1 billion pounds.

How do you make those investments pay off? Broadcast rights. Moving a sport from free-to-air television to pay TV can triple the income from broadcasting rights, according to Boston Consulting Group partner Jean-Paul Petranca. F1 revenue has almost doubled since 2010 as it has moved the broadcast to pay TV providers like Comcast Corp.’s Sky unit. Terrestrial broadcasters British Broadcasting Corp. and ITV Plc between them currently pay the Six Nations £90 million a year for the privilege of showing the tournament.

Oakwell Sports Advisory partner Andrew Umbers, who advised CVC on its Premiership rugby investment, wrote in the specialist publication SportsPro Media last year that fragmentation of broadcast rights made it harder to engage with fans. The implication is that selling bundled rights for as many rugby competitions as possible would be lucrative. And the shift to online viewing means there are more prospective bidders for rights. The fact that the Six Nations deal might fall apart if the rights are restricted to free-to-air, as the Guardian reported last month, hints at the rationale behind the deal.

“The scarce resource in the media industry used to be distribution” because there were a limited number of TV stations, said BCG’s Petranca. “Now there are lots of entry points, and the scarce resource is high quality content.”

Still, it’s not as easy as it seems. CVC has picked a vulnerable sport. For the same amount that CVC currently plans to invest in rugby, it would get just 21% of soccer giant Manchester United Plc. That’s because many of the top rugby teams are loss-making and desperate for a Hail Mary. They could use the fund’s cash injection to centralize a lot of functions such as merchandising. American sports leagues like the NFL administer merchandising for all the teams. They have licensed all global rights to SoftBank Group Corp.-backed Fanatics Inc. It’s a similar effect to collective bargaining over TV rights: the top teams might receive less, but the smaller teams receive more, making a bigger pot for everyone. Costs are reduced and revenue increased.

Dangers do remain for the sport itself. Yes, moving more content behind a paywall can result in more income, but it could come at the cost of fan exposure and rugby’s long-term health. And the teams must be wary of CVC’s appetite for debt. The reason the fund was able to turn its initial $1 billion cash outlay on F1 into a profit within two years was by saddling the organization with debt and extracting a dividend, Bloomberg News reported in 2016. When it sold control to Liberty Media Corp. that year, half of F1’s $8 billion enterprise value came from its debt pile. Fortunately the rugby teams will still have majority control of each tournament. As long as they coordinate, they’ll be able to fend off CVC’s debtor instincts.

That could make it harder for CVC to match its massive F1 returns. It had initially sought a majority stake in the Premiership, but was rebuffed by the clubs. Doing so would have made it easier to load the tournament with debt. There may be the opportunity to do so with the vehicle through which it invests in the sport, but the lack of control makes it a bigger risk. Even so, if CVC can improve merchandising and rake in more broadcast income, then it should make a success of rugby.

In the fight for high-quality content, putting money into a tournament might be the best way to stay above the scrum.

To contact the author of this story: Alex Webb at awebb25@bloomberg.net

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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