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'IPL franchise ownership seems to be driven by celebrity rather than commercial reality' : Intangible Businesses valuation director Richard Yoxon

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The Indian Premier League (IPL) defied financial gravity at a time when the world was struggling to fight the menace of recession. Even as capital became scarce, the world’s hottest cricket property managed to renegotiate a nine-year broadcast deal in 2009 for a whopping $1.6 billion. The earlier agreement, signed a year ago, had valued the TV rights for $1.03 billion over 10 years.

The temporary refuge in South Africa was a welcome aberration, establishing the IPL as a global property. In 2010, the IPL became bigger and better as it attracted larger audiences, costlier sponsorship deals and fatter franchise bids, growing the cricket economy.

Then came the Lalit Modi saga and charges of match-fixing, rigging of bids, financial irregularities and betting. The architect of the IPL is now suspended and a clean-up exercise has begun.

A parallel has often been drawn between the IPL and the English Premiere League (EPL) that houses some of the world’s iconic soccer clubs including Manchester United.

The IPL, however, has a big mountain to climb. Its TV rights, the main revenue supply for the entire structure including the teams, went for much less. Last year the EPL‘s TV rights bundles were acquired for $2.6 billion for 3 years. And it‘s not just a big difference in value. More importantly, the EPL‘s TV rights will be renegotiated twice before the IPL‘s current deal expires.

But the IPL is just three years old and has seen a stupendous growth. It can learn important lessons from the EPL as it scales up, including doing shorter term TV deals in future as the property gets well established.

The IPL team owners should also be cautious in not repeating the mistakes committed by their EPL counterparts. Some of the EPL club owners have funded their acquisitions through huge debt and have gone on to pay unrealistic amounts to purchase players. In fact, the EPL clubs are popularly known as the ‘rich boys‘ toys‘ that appeal to the owner‘s ego and vanity.

In an interview with Indiantelevision.com‘s Sibabrata Das, Intangible Businesses valuation director Richard Yoxon talks about the challenges that sports properties face as they grow up to be run like big commercial businesses.

Excerpts:

 

 

Will it be right to compare the IPL as a potential sports property that can grow to the scale of the EPL in future?

I think the IPL has more in common with the American franchise sports such as NBA and NFL than with the EPL. The success of English football was built on interest from local communities and commercialisation came a lot later. American sports and the IPL, on the other hand, were created and driven by commercial objectives.

Football is the major sport in most countries. NBA, NFL and baseball are only major sports in the US while India is the only major economy where cricket is the number one sport.

 



 

Can the IPL leapfrog?

On the basis of global appeal, the IPL will never come close to the EPL. Commercially it‘s possible due to the size and growth of the Indian economy, but I think it‘s unlikely except in the very long-term as in a global context cricket is small beer compared to football.

In a renegotiated deal in 2009, the IPL‘s TV rights went for $1.6 billion for 9 years. In contrast, last year the EPL‘s TV rights bundles were acquired for ?1.7 billion ($2.6 billion) for 3 years. A very big difference. More importantly, the EPL‘s TV rights will be renegotiated twice before the IPL‘s current deal expires.

England has 3 professional leagues below the EPL and over 90 professional clubs!

The Indian economy (2009 GDP $1,235 billion) will need to be multiple times bigger than the UK economy (2009 GDP $2,184 billion) for the IPL to leapfrog the EPL.

 

 



Several EPL clubs are sunk in debt while the IPL has run into controversies very early in life. Do you see sports businesses being in trouble across the world?

 Not many football clubs currently or historically make a profit. It is often suggested that the clubs are ‘rich boys‘ toys‘ that appeal to the owner‘s ego and vanity. Football clubs are trophy assets rather than profit centres. This is a key similarity as I think IPL franchise ownership seems to be driven by celebrity rather than commercial reality.

 



 

Are the allegations of match-fixing, rigging of bids and betting going to impact the IPL as a brand?

The events are certainly not helpful but the impact will be minimal in the long-term if the BCCI acts promptly and transparently to address the problems. The Indian public loves Twenty20 cricket and the competition‘s format. This love affair with the game is not going to change as long as the game is cleaned up commercially. What‘s the alternative? I can‘t imagine the Indian public switching to football, hockey, kabaddi or even test cricket with equal fervour and enthusiasm.



 

 

What is the IPL worth in value after 3 years of existence and how does it compare with the EPL?

I think there is nothing wrong with the progress made to date by the IPL. I think the BCCI / IPL has done amazingly well in a short space of time.

But we haven‘t valued either brand. Brand Finance valued the IPL brand at $4.13 billion, but I struggle to understand how the brand of a business whose main source of income is a 9-year TV deal for $1.63 billion can be worth so much.

 



‘IPL franchises certainly do need to scale up to justify the high franchise fees. The amount they need to scale up in the time available appears unrealistic‘



 



But you have valued the IPL franchises and they are much below that of Brand Finance‘s estimates. Why?

Brand Finance is, perhaps, more optimistic than us. Regarding the IPL, they have more ambitious growth rate projections and are less conservative in discounting.

But if you look at our valuations, the top four teams are almost having similar values (Royal Challengers Bangalore at $37.7 million to Chennai Super Kings‘ $36.1 million). There can‘t be any particular team breaking too far ahead at this stage because there is no big difference among them. The difference is mainly due to the size and level of interest in the IPL franchise‘s catchment areas. Rajasthan Royals ($27.5 million) is distinctly disadvantaged compared to Royal Challengers Bangalore and Mumbai Indians (5th at $32.7 million).

 



 

Do you see revenue streams a big problem with the IPL teams?

They certainly do need to scale up to justify the high franchise fees. The amount they need to scale up in the time available appears unrealistic.

As far as licensing and merchandising revenues go, the IPL franchises can tap their growing fan base. There will be a limitation, though, if you compare it with EPL clubs like the Manchester United where the shirts are even bought by the Japanese or the Chinese. The IPL team merchandise will find it difficult to cross the global boundaries and communities outside the Indian diaspora.

 



 

What are the lessons the IPL needs to learn from the EPL?

The IPL needs to negotiate shorter TV deals. I suspect that the IPL‘s 10-year deal (renegotiated deal after a year is for 9 years) was driven by necessity as the concept was unproven at the time of the negotiation. A longer deal was probably needed to get to potential franchise owners on-board by providing the assurance of guaranteed revenues and media coverage over a sufficient period to justify the initial franchise setup costs.

The IPL is a closed shop. There‘s no promotion or relegation. Teams should earn the right to play in the IPL rather than buy their way in. The British public loves an underdog (hence I follow Rajasthan Royals in the IPL) and it is great for the sport when a small team gains promotion to the EPL on a shoestring budget and even beats one of the big names (Burnley won promotion to the EPL last year and beat Manchester United in their first home game).

It is equally interesting when the big teams face the threat of relegation despite significant investment in players (Newcastle relegated last year). Relegation also maintains interest for longer; once teams are out of contention to win the IPL there‘s little to play for. It would be good to see the IPL develop feeder leagues to give smaller cities the opportunity to develop teams and aspire getting a sniff of the big time.

 



 

When did the EPL commercialise?

Football is a fabric of British society; it has been developed over 120 years. But the first big step towards commercialisation was when TV deals were renegotiated in 1992. Twenty top clubs separately negotiated for TV rights, which became the main driver for their increase in revenues. Previously, the TV rights were negotiated collectively for all the 90 clubs.

Merchandising is a huge income for certain big clubs like the Manchester United. But for most of the clubs, the main income is from TV. Portsmouth, for instance, reported a total income of $60 million last season, out of which $40 million came from TV.



 

 

Why has the enterprise value of the EPL come down recently?

The same reason as any other market or business. Recession! Leisure and entertainment expenditure is cyclical. It‘s to be expected that consumers spend less on leisure and entertainment during recessionary times. In the medium and long-term, leisure and entertainment is a fast growing but highly competitive market.



 

 

Why have the EPL clubs amassed huge debt?

Two reasons. First, leveraged buyouts. Manchester United and Liverpool were bought by Americans using debt finance which was pushed onto the club‘s balance sheets. The clubs did not create these debts.

The second reason is bad management - spending more than the club can afford in the hope that any resulting success will pay for the gamble.

 



Is there a current crisis?

What crises? The EPL is as popular as ever. Football clubs going bust is nothing new. The fans suffer in the short-term but the club survives.

There are no major threats to the EPL. It‘s been going on since 1888 (rebranded in 1992); it‘s survived two world wars and hooliganism in the late 1970‘s / 1980‘s. The current exchange rate and increased income tax rates make playing in England less appealing financially for the world‘s top footballers. This has yet to have an effect but this summer I expect we‘ll see less big name players than usual moving the EPL in favour of Spanish, Italian and German leagues. This will not affect popularity in the UK but may have an impact on global interest in the medium term.

 

 



Have foreign owners contributed to the financial mess?

International investors have actually made the EPL economy much bigger. The problem has been with the buyouts being funded by debt and the purchase of players at a very high price. 

 



Does the EPL need a restructuring?

No. Some clubs need probably restructuring but the EPL is a profitable business. The supporters of several clubs would like new owners (Manchester United, Liverpool). Overtime, I suspect and hope that we will see more clubs owned by supporter‘s trusts, similar to the Barcelona model.

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