Gregor Paul: NZR’s $60 million financial challenge

THREE KEY FACTS

OPINION

There’s a worst-case scenario looming for New Zealand Rugby (NZR) in which it potentially sees its income drop by almost $50 million next year and its costs jump by $10m.

For an organisation that lost almost $10m in 2023 and $47m in 2022, the possibility of a $60m black hole opening in the accounts next year has left New Zealand’s entire rugby ecosystem on edge.

If the income drops as sharply as some fear, the
consequences could be far-reaching and devastating — forcing NZR into an austerity plan that will likely impact almost all aspects of the national game.

On the question of how real is the risk this worst-case scenario will eventuate, it seems unlikely that even the most optimistic forecasters could project with any confidence that this will turn out okay.

There are three separate fronts on which the problems sit, none of which are going to be easy to fix.

The first major issue is that Ineos, the British petrochemical giant that bought naming rights to the All Blacks’ shorts and training tops, has terminated its six-year contract, three years early.

The deal is worth US$12m-a-year ($21m) to NZR – and so the accumulated $66m the national body was expecting to bank from Ineos in the next three years, has gone. Additionally, Ineos still owes $10.5m for services rendered in the second half of 2024.

The second issue is that NZR’s current $111m-a-year broadcast deal with Sky expires at the end of this year. The Herald understands the broadcaster is offering $85m-a-year to renew — a potential drop of $26m a year as of 2026.

The third problem is that Silver Lake, the US fund manager that has pumped $262m into New Zealand Rugby Commercial – the entity set up to house the game’s revenue-generating assets – has the right to convert its investment into equity later this year.

Based on the our understanding of last year’s accounts, the money currently sits as a loan on NZR’s balance sheet, paid back at 4% ($10.5m p.a). But in June, Silver Lake has the option of becoming a minority owner in NZRC and is entitled to claim 7.5% of the net revenue which, on last year’s accounts, would deliver a distribution of around $20m.

The war with Ineos

In 2020, AIG informed NZR it would not be renewing its All Blacks jersey sponsorship when the US$16m-a-year deal expired at the end of 2021.

That triggered NZR to begin the hunt for new naming rights sponsors and to also split the portfolio of available assets, by offering separate categories of real estate on the kit.

There would be a front of jersey option — which was bought by French building services company Altrad for €21m a year ($40m) — and the back of shorts and training tops package that Ineos bought for US$12m a year.

They were both six-year deals expiring at the end of 2027, and it meant the value of the All Blacks kit sponsorship more than doubled to $60m.

NZR’s accounts show that the total income from sponsorship jumped from $72m in 2021, to $113m in 2022.

The Ineos deal was not a typical sponsorship but a so-called performance partnership where the All Blacks would join a stable of other sports entities — a cycling team, Sir Ben Ainslie’s America’s Cup team, Mercedes Formula One and a couple of football teams.

The contract came with requirements for the All Blacks to share performance intelligence with their stablemates, and for Ineos personnel to be granted access to training.

Internally, the deal caused some friction. It is understood some NZR staff were disappointed that Ineos had been chosen ahead of Amazon.

The US-based conglomerate had been willing to offer $20m a year to promote its Climate Pledge initiative — a pact announced by Amazon founder Jeff Bezos in 2019 aimed at making signatories – major corporations such as Unilever, Microsoft and Mercedes Benz are on board – to meet the goals of the Paris climate agreement 10 years early.

Had NZR accepted the deal, it would have had to have complied with the pledge, and it was concerned it would not have been able to have met the criteria quickly enough and that compliance would have come at an unacceptably high cost.

It’s believed staff saw it as a lost opportunity to drive a sustainability programme and place the All Blacks as champions of the environment.

It’s also understood that the All Blacks coaching group were uncomfortable with the need to share intel and had to fight to ensure they could continue to visit ‘non-Ineos’ teams and entities as part of their professional development programmes.

As part of the due diligence process to gain the New Zealand Rugby Players’ Association approval to do the deal, various players asked questions about the appropriateness of the association but there were never any formal objections made or communication with Ineos about this.

Although the deal had elements that required coaches, management and players to adjust as they were outside the usual terms of sponsorship, and there were some players, staff and management who were not enamoured to be working with Ineos, the Herald understands NZR believes all contractual obligations were met.

Ineos never served — in writing nor verbally — any breach of contract notice, and it released a statement three days ago, saying: “Ineos has greatly valued our sponsorship of New Zealand Rugby, having contributed over US$30 million to the teams in recent years.

“Trading conditions for our European businesses have been severely impacted by high energy costs and extreme carbon taxes, along with much of the chemicals industry in Europe, which is struggling or shutting down. We are witnessing the deindustrialisation of Europe.

“As a result, we have had to implement cost-saving measures across the business. We sought to reach a sensible agreement with the All Blacks to adjust our sponsorship in light of these challenges.”

The admission that the agreement with the All Blacks was valued by Ineos and terminated on financial grounds could be significant in NZR’s quest to win an acceptable compensation package for the sponsorship being broken early.

It is understood Ineos first signalled a desire to pull out in July last year, citing financial issues as its reason for wanting to cut ties.

Formal written notice that Ineos was cutting ties is believed to have come in late-January this year, and it is this communication listed some areas where the former sponsor feels NZR fell short of its obligations.

The termination letter and Ineos’ failure to pay a $10.5m invoice on January 1 this year for services rendered in the second half of 2024, led to NZR filing legal proceedings at the High Court in Wellington suing Ineos for breach of contract.

Ratcliffe said in his statement: “We sought to reach a sensible agreement with the All Blacks to adjust our sponsorship.

“Unfortunately, rather than working towards a managed solution, New Zealand Rugby have chosen to pursue legal action against their sponsor. We remain in ongoing discussion with New Zealand Rugby.”

Multiple sources have said there is no evidential basis to support any suggestion there was a failure by NZR or the All Blacks to deliver on what was promised in the deal, and any attempt to do so now would be a retrospective attempt to rewrite history.

Whether Ineos feels the All Blacks lived up to the sales pitch of being the game’s most successful rugby brand — they won 70% of their tests between 2022 and 2024 — and whether they feel they were treated by NZR as they had expected to be, will undoubtedly be narratives packaged into the resolution process. But without any evidential trail to say these were concerns ever raised by Ineos before the termination, it’s unlikely they will carry much weight.

The national body is already actively hunting a replacement sponsor for Ineos, but given most big corporations will already have committed their budgets one would think there is a limited prospect of securing an agreement in 2025.

NZR is, therefore, likely hoping that if the matter does indeed end up going through the courts, Ineos will be ordered to pay the overdue invoice, and possibly, honour the full $21m payment for 2025.

It might also push for a settlement where Ineos is liable to pay any shortfall between any agreement it secures for the All Blacks in 2026 and 2027 if it is less than the $21m the petrochemical giant would have paid had it not terminated the agreement early.

But NZR has to consider the probable costs of a prolonged legal battle and the likelihood of it being successful, and the more pragmatic action may be to settle out of court — try to secure a one-off compensation payment and then hope it can bring on a new sponsor in 2026.

It says it has gathered considerable interest already from various, global consumer brands but its ability to command the same $21m a year fee it was getting from Ineos will be compromised by potential buyers knowing that NZR has found itself in a distressed state due to the early termination.

Either scenario — a mediated or in-court settlement — leaves considerable doubt whether NZR will bank the $66m it was forecasting to earn in the final three years of its Ineos deal.

Plugging the broadcast gap

In December last year, the Herald revealed NZR was close to agreeing on an extended broadcast deal with Sky, worth around $85m-a-year.

That sum would represent a $26m reduction on what NZR currently earns in broadcast rights, but there is some prospect of that figure being improved.

The Herald was told in December the deal was imminent, but 10 weeks on nothing has been signed.

In those 10 weeks, NZR has appointed a new board, one of whom, Greg Barclay, has experience in negotiating broadcast rights for sports entities and, the other, chairman David Kirk, has a strong grasp of the media sector having formerly been chief executive of Australia’s Fairfax Media.

Potentially the arrival of these two directors gives NZR a stronger line-up to influence negotiations.

Sky’s position has also been impacted by the significant adverse publicity it has suffered in the wake of satellite customers suffering connectivity issues.

The PR fallout has not enhanced Sky’s reputation as a customer-friendly organisation, but the deeper issue has been the focus placed on the company’s infrastructure.

When streaming platforms first launched, Sky’s greatest strength was the reliability of its satellite network at a time when there was still a lack of faith in using Wi-Fi to broadcast live sport.

NZR’s board in 2019 were ultimately drawn to Sky ahead of new entrant, Spark Sport, not just because the former offered a higher price, but because they had considerably more faith in its reliability and ability to be accessed in remote areas.

Now that the world has fallen in love with content streaming apps and that many have purchased live sports rights in recent years, it is debatable whether Sky’s legacy technology is the drawcard it once was.

The pressure Sky will be feeling is around its share price which continues to trade below analysts’ forecasts.

Securing the rights to rugby will give the market some confidence that the business has a core content offering that will be integral to keeping and growing subscriptions.

But while Sky may be feeling pressure from shareholders to adjust the price to get the deal over the line, it has the security of knowing that NZR will be feeling the greater pressure to secure an agreement as it has no legitimate alternative options to use as leverage.

The rights, it is believed, are being sold in three separate lots — the premium package, which includes Super Rugby and Rugby Championship, the soon-to-launch Nations Cup, and all other content such as the NPC and Farah Palmer Cup.

The Herald has learned that Pitch International, which is acting as the exclusive media rights distributor for the Nations Cup, has agreed terms with Sky, and as such it is unlikely that any other media company — local or international — will have the means or interest in buying just Super Rugby and the Rugby Championship.

Maybe NZR can work with TVNZ on picking up some or all of the NPC, or consider putting live content on its own NZR+ platform, but it’s unlikely the former will have the money or means to make a competitive bid, while the latter has no means yet to monetise itself.

If NZR is, therefore, to up its broadcast income from the predicted $85m-a-year it is facing in 2026, the opportunity lies internationally and selling rights to offshore broadcasters.

Pre-Covid, offshore broadcasters such as Sky Sports in the UK, paid about $40m a year for the rights to the Tri-Nations (it had to be split three ways with Australia and South Africa). Post-Covid, the bottom fell out of the market and NZR, and Sanzaar, now earn comparatively tiny fees from offshore media companies.

But to offset the Silver Lake equity stake and retain what it currently earns from broadcast revenue, the available figures would suggest NZR needs to bank $120m a year from 2026, and few commentators believe there is sufficient interest or capacity within foreign markets to ensure that what is earned between Sky and selling offshore rights will be enough to meet that target.

Silver Lake’s big decision

Silver Lake has given NZR assurances that it is in for the long haul and wants to hang around until there is demonstrable proof that the US fund manager has played a role in significantly changing the revenue profile of rugby in New Zealand.

Silver Lake came in to grow revenue, but the Ineos deal has gone splat and if it can’t drive higher value from the next broadcast rights deal, then there is an argument to say it will be duty-bound to forfeit its distribution entirely or only take a reduced portion.

Silver Lake could even defer its option to convert its loan into equity until the business is on a more solid financial footing.

But as much as Silver Lake may want to present as a supportive partner and protect NZR’s balance sheet, it also has to answer to its investors who expect returns on their money and may not have confidence that the venture into rugby has been a good idea.

Silver Lake’s journey into the national game has been bumpy. Its original deal in early 2021 was approved by NZR and the provincial unions but was rejected by the professional players.

That led to an almost year-long civil war between the players and their employer — a period in which the proposal was radically amended and then signed in June 2022.

Last year, there was a protracted and public fight over NZR’s governance structure, but what may have derailed investor confidence in Silver Lake’s rugby play, is the lack of control and influence it has been able to exert.

Silver Lake has two directors on the board of NZRC but for the 30 months that the entity has existed, it has only had a chief executive for about 60% of that time. Acting chief executive Richard Thomas was in the role from June 2022 to May 2023, with Craig Fenton taking over in January 2024 before leaving by mutual agreement in November last year.

For the past three months, NZRC has run without a boss, just as it did for the second half of 2023 and questions have arisen about who is driving the commercial strategy, who is being held accountable for delivering it, and has the revolving door been a factor in the Ineos relationship break-up and the Sky negotiation faltering?

Fenton took charge of the broadcast talks, but departed in November last year when they were at a critical stage and did anyone maintain close and regular links with Ineos and owner Sir Jim Ratcliffe to ensure they felt valued?

Former NZR chief executive Steve Tew made it a core part of his role to develop personal relationships with his equivalent at Adidas, AIG and all other key stakeholders in the game.

Silver Lake may have no choice but to restore investor confidence by converting its loan and taking its full distribution and adding another $10m of costs to the bottom line.

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Gregor Paul is one of New Zealand’s most respected rugby writers and columnists. He has won multiple awards for journalism and has written several books about sport.