Silver Lake v Forsyth Barr – the pros and cons of two NZ Rugby deals

Less than two hours after the Herald revealed on May 14 that Forsyth Barr was proposing a partial flotation of NZ Rugby’s commercial business, the wealth management firm’s boss said the response was overwhelming.

“The feedback from our clients, from other NZX firms, from overseas, from people in the rugby community, all saying ‘fantastic, what can we do to help, we’d love to see this happen’,” said Forsyth Barr’s managing director Neil Paviour-Smith.

On the face of it, an alternative had been found to New Zealand Rugby’s proposal to sell 12.5 per cent of a new commercial business to private equity giant Silver Lake for $387.5 million.

While the Silver Lake proposal was unanimously approved by NZ Rugby’s provincial board and the NZ Māori Rugby Board this year, the New Zealand Rugby Players’ Association (NZRPA) has refused to bless the deal, raising the idea of a public float instead.

The Forsyth Barr proposal – mandated by the NZRPA -would see $170m-$190m raised by a special purpose company which would own 5 per cent of NZ Rugby’s commercial business.

Given the strength of the All Blacks’ brand, and the amount of cheap money in the capital markets these days, there seems little doubt that a float would be able to attract funding.

Leighton Roberts, a co-founder of Sharesies, an investment platform which had more than 250,000 customers at the end of last year, predicted its investors would be “hugely supportive” of a public offer of shares in NZ Rugby.

“Our investors show heaps of passion for companies they know and love.”

Grant Davies, an investment adviser at Hamilton Hindin Green, tweeted that he had “no doubt there’d be huge demand for this” and he would buy a “wee slice”.

But Davies also hinted that the rigours of life as a public company would pose challenges, adding that the All Blacks “won’t like continuous disclosure though”.

What are the two sides proposing?

NZ Rugby’s deal with Silver Lake would see a large cash injection into New Zealand rugby over three years, with the money used to boost its reserves (including working capital in a new commercial company), distribute $39m to provincial unions and the organisation’s Māori board and set up a legacy fund to back “longer term strategic initiatives” to ensure the game’s sustainability at all levels.

As well as providing a large cash injection, a deal with the US private equity giant would allow NZ Rugby to access its expertise and networks as a technology investor to help find the All Blacks’ international fans and earn revenue from them. This could include the creation of an All Blacks digital platform and a drive into e-sports. Silver Lake’s earlier investments include UFC, which has made mixed martial arts a global sport.

The NZRPA’s alternative proposal would raise less money but sell off a smaller stake at a higher valuation, possibly as soon as October.

NZ Rugby’s deal with Silver Lake implies the organisation’s commercial revenues would have a total valuation of $3.1 billion; a $170m-$190m sale of 5 per cent as outlined by Forsyth Barr implies a valuation of at least $3.4b.

It claims that demand of up to $650m could be created from institutional investors, brokers and also a public pool.

Forsyth Barr’s proposal, which uses assumptions from NZ Rugby, is that investors would be attracted by a dividend yield of 5 per cent, especially given the record of the organisation of growing revenue by 8 per cent a year, offering the prospect of growth.

Are the two proposals equivalent?

No. NZ Rugby is in the final stages of negotiating a contract with Silver Lake, after well over a year of negotiations.

The NZRPA proposal is a preliminary assessment, using forecasts provided by NZ Rugby on the viability of a float, created in a matter of weeks without proper due diligence.

The issue is the people that are making the decisions around the board table at NZ Rugby, and the executive level at New Zealand Rugby, are incapable of executing that deal.

In an interview with NewstalkZB host Mike Hosking on Tuesday, NZRPA chief executive Rob Nichol claimed the Forsyth Barr was fully underwritten and “a done deal”.

The presentation released by NZRPA made it clear that Forsyth Barr was making no commitment at all to the claims. The purpose was “to indicate, on a preliminary basis, the feasibility of a possible transaction”.

But the proposal has clearly gained significant attention, with a number of current and former players urging that it be considered.

What have the two sides been saying about each other?

NZ Rugby said it had already considered an IPO as part of its work with US investment bank Jefferies and decided it was not the best option. “NZR were not looking for passive capital”.

Responding to the NZRPA proposal, NZ Rugby chief executive Mark Robinson wrote that rather than simply wanting investment, it wanted a “strategically aligned investor” to assist it in “driving growth and fully realising our global potential”.

An IPO “was not seen as the most effective vehicle due to the increased execution risk, trading volatility, and increased burden of reporting and public scrutiny”.

NZ Rugby has also cast doubt on the idea that a float is likely to be as smooth as Forsyth Barr seems to think. “The realistic feasibility [of an IPO] was, and is, also questioned,” NZ Rugby said.

The NZRPA says it remains concerned about the long term impact a sale to Silver Lake could have on the game, selling a slice of the commercial revenues forever, and having a partner with power of veto over key appointments.

Its chairman, former All Blacks captain David Kirk, told the NBR this week that the transaction could mean the investment could end up being owned in the Middle East.

NZ Rugby has said it has “consent rights” on Silver Lake’s exit, giving it the right to veto sales to investors which could damage its reputation. “David Kirk’s statement that a shareholding could end up being owned in the Middle East is only true if NZR were to consent to that occurring.”

Could NZ Rugby build the capability it needs?

The implication of the Silver Lake deal is that NZ Rugby needs help to grow its business internationally.

Nichol said the advantage of doing the deal within New Zealand was that NZ Rugby would not be constrained by the need to use Silver Lake’s network, but could build its own business plan itself.

One private investor in rugby agreed that this was possible, but questioned whether NZ Rugby had the capability or the inclination.

Troy Bowker, who owns 12.5 per cent of the Hurricanes franchise through his company Caniwi Capital, said raising the money would not be a problem, given the amount of money in the capital markets, but an IPO added no “sports management brain power” to the organisation.

“That can be acquired internationally. That piece is simply a case of going to the market for the right people and bringing them into New Zealand Rugby and monetising that brand internationally,” Bowker said.

“The issue is the people that are making the decisions around the board table at NZ Rugby, and the executive level at New Zealand Rugby, are incapable of executing that deal.”

Has the NZ Rugby consulted properly about the deal?

A report by PWC examining the proposed transaction acknowledged concerns raised by some rugby stakeholders saying that with earlier and better consultation, more buy-in could have been achieved.

Former All Blacks captain Buck Shelford went further this week, discussing a call he was on where he said the NZRPA raised possible alternatives.

“Man, NZ Rugby treated them like little schoolboys [saying] ‘that’s wrong, that’s wrong, that’s wrong’,” Shelford told Stuff.

Day after day, current and former players have come out urging the two sides to talk and the NZRPA clearly feels it was not brought into the tent early enough.

NZ Rugby said given the scale of the deal and the nature of the rugby community, “some may feel we could have done more”, however it pointed out that the provincial and Māori boards “voted unanimously for this deal to proceed on the basis they had full understanding of the deal”.

Is it just a stalling tactic by the players?

NZ Rugby needs the signoff of NZRPA to approve the Silver Lake deal, something that is happening as the players continue to negotiate a new collective agreement.

In theory at least, that power is time limited. The collective agreement between NZRPA and New Zealand Rugby ended at the end of 2020 but because negotiations were underway at its expiry, the terms of the deal automatically rolled over into 2021.

But that rollover ends at the end of 2021. If a new deal has not been completed by December 31, the players will automatically go onto individual contracts, though the terms will be the same as the collective agreement,

Susan Hornsby-Geluk, a partner at employment law firm Dundas Street, said provisions of the collective which were not applicable to individuals do not carry over.

In theory this could free NZ Rugby from needing NZRPA approval.

Nichol told the Herald that even if the collective agreement was to expire, the image rights and commercial rights of the players still needed to be transferred into the new commercial entity for the deal to happen.

“Whichever way you look at it, the players have got to agree to it.”

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