5 mins to read

Sports team cash cow or philanthropic feel-good?

The new owners of the Hurricanes plan to increase the rugby team's profits, but history suggests there is a level of charity involved in sports team ownership.

Caleb Allison
Wed, 14 Nov 2012

The new owners of the Hurricanes Super 15 rugby team will be hoping they can maximise the team's profits, but history is not necessarily on their side.

Owning a sports team is one of the least-secure investments, as a team's financial fortune rises and falls with its on-field performance.

Money is no assurance of success, either – the second-most valuable US Major League Baseball team, the LA Dodgers, are worth $US1.4 billion but haven't won the World Series since 1988.

Closer to home, non-All Black rugby is not known as a particularly profitable venture.

The Otago Rugby Union had to be famously bailed out or face liquidation, and the Waikato Rugby Union has slowly been chipping away at mammoth debts.

There is certainly profit to be made in rugby, but whether it is enough to satisfy private business investors remains to be seen. 

Will the new franchise model for Super 15 teams herald a new era of profitability and success, will investors wish they hadn't bothered or are they in there to feel good?

The Hurricanes' new regime

The new ownership structure for the Hurricanes is a joint venture between the Wellington Rugby Union and a group of private investors.

Those include former Hurricanes chairman Paul Collins, former board member Liz Dawson and Gareth Morgan, who is already one of nine Wellington Phoenix football club owners.

The team's owners take the revenue from ticketing and sponsorship, while the New Zealand Rugby Union retains broadcasting revenues, which go towards player salaries.

Gareth Morgan admitted on Radio New Zealand that while the Hurricanes is a profitable operation, investing in New Zealand sports franchises isn't exactly a cash cow.

"You would still look at the rate of return and it wouldn't excite you too much. So our job really is to try and increase that."

The NZRU has the most to gain from the new structure. Because it retains broadcasting revenues, which are relatively stable, it does not have to weather the fluctuations which come from ticket sales and sponsorship.

It has absolved itself of the biggest risk, while the new owners will be at the mercy of people attending live games and sponsors forking out big dollars to support the team.

Crusaders next

The Crusaders Super 15 team will announce a new ownership structure within the next month, chairman Murray Ellis says.

The structure will be different from that of the Hurricanes as there is no private injection of capital.

Instead, Canterbury's six provincial unions will collectively hold the franchise license and share any profits.

"We have a guy who's going to financially underwrite it," Mr Ellis says.

Speculation is that man is Roa coal owner Brent Francis, but Mr Ellis would not confirm this.

He says the underwriter will insulate the team from the financial risk involved in a venture such as this. 

The other three New Zealand Super 15 teams will also announce a franchise structure, but a timeline for this has not been announced.

The Warriors' deal

Owning a sports team appears to be an attractive proposition for businesspeople such as Eric Watson and Owen Glenn – well-known as a philanthropist – who recently bought into the Warriors NRL team.

Earlier this year the pair pledged to invest millions of dollars into the franchise, but said little about making a profit.

Instead, they highlighted plans to benefit the community through the new Warriors Charitable Trust and grass roots rugby league initiatives, suggesting there is a certain amount of a "feel-good" factor to the deal.

The overseas experience

Many major global sports teams have had experiments with private and public investments in the past, with mixed success.

The most high-profile recent venture is the public listing of Manchester United – for the second time.

It was first listed in 1991, but was brought back into private ownership by 2005.

Forbes estimates investors who bought shares in 1991 would have lost 64% by the time it was delisted.

Earlier this year, the team's owners tried again with a listing on the New York Stock Exchange, but the initial public offering fell flat.

Early trades valued the shares at $US14, less than the expected range of $US16 to $US20. Now they are trading at $US12.80.

Manchester United's latest offering is just the most recent example of why investing in sports teams is futile.

Three American professional teams have traded on US markets in the past: the Boston Celtics, Cleveland Indians and Florida Panthers.

According to Forbes, "an overview of their stock performances shows that sports teams generally under-perform the market, and even large upticks in share price before the teams go private again are rarely enough to overcome past poor performance."

The Cleveland Indians, for example, were bought back into private ownership after just one year on the stock exchange.

The virtue of private ownership

Private ownership, at least in the US, has proven far more successful than a public listing.

The average National Football League team has increased in value by 282% since 1998, Forbes reports.

However, they benefit from favourable leases to play in taxpayer-funded stadiums.

There is also no lower league in the NFL, so no matter how a team performs they remain in the highest division and reap the generous financial rewards that come with it.

In England, football teams fare worse. The Economist reports there were 54 insolvencies in England's top four divisions between 1992 and 2011.

For Manchester United, it seems its financial success hinges on its performance.

In the year to June it reported total revenue was down to between 3% and 5% that of the previous year.

It attributes the drop to not qualifying for the later stages of the UEFA Champions League, reducing broadcasting and lower stadium revenue, according to the Wall Street Journal.

New Zealand Super Rugby, however, does not enjoy the enormous revenues major global competitions like the Champions League generate.

There is a certain amount of philanthropy in owning a rugby team in New Zealand.

As the rugby unions well know, increasingly spectacular television coverage is hurting their revenues.

The Hamilton and Dunedin city councils have propped up their respective unions with massive loans and debt write-offs.

Super Rugby may attract a larger TV audience, but it is essentially still local rugby.

Perhaps the new owners of the Hurricanes believe the team's on-field success, and therefore its financial fortunes, can only improve.

The team has never won a Super Rugby title, making the finals just once in 2006.

But if the Hurricanes is profitable with only moderate success, then Gareth Morgan may be realistic in expecting that this can be increased. 

Caleb Allison
Wed, 14 Nov 2012
© All content copyright NBR. Do not reproduce in any form without permission, even if you have a paid subscription.
Sports team cash cow or philanthropic feel-good?