Business Today

Will cricket's new czars make money?

Hard-nosed and uber-successful tycoons like Mukesh Ambani,Vijay Mallya and others paid millions for their IPL teams and players. The revenues they earn by way of ticket sales, team sponsorships, merchandising, etc., are expected to rise each year, thus making it easier for them to become profitable as the years go by. BT's Shamni Pande and Tejeesh N.S. Behl report.

Shamni Pande and Tejeesh N.S. Behl         Print Edition: June 1, 2008

Solid strategy is what poster boy of flamboyance Vijay Mallya’s team Royal Challengers Bangalore (RCB) swears by, at least on its website, claiming, rather cheekily, that while a match here and there may be won by dash and verve, it is the strategists who will romp home with the trophy. Ironically, Mallya’s team has managed exactly that—a win here and there (read two) from its eight outings— prompting the “King of Good Times” to sack RCB CEO Charu Sharma when he was preparing to board a flight to Kolkata for his team’s next fixture. It’s a clear indication that the stakes are high, and that no quarter will be given or sought—not just to or from the opponents on the field but also within the ranks.

Who's got what 

Mukesh Ambani
Mumbai Indians
Paid: $111.9 million

Vijay Mallya
Royal Challengers Bangalore
Paid:
$111.6 million

T. Venkattram Reddy
Deccan Chargers
Paid: $107.01 million

N. Srinivasan
Chennai Super Kings
Paid: $91 million

G.M. Rao
Delhi Daredevils
Paid: $84 million

 Preity Zinta
Kings XI Punjab
Paid: $76 million

Shah Rukh Khan
Kolkata Knight Riders
Paid: $75.09 million

Manoj Badale
Rajasthan Royals
Paid: $67 million

If Mallya is feeling jittery, it is with good reason. He has already spent $111.6 million (Rs 446.4 crore) to buy the franchise, and another $5.4 million (Rs 21.6 crore) on his top 14 players. In graphics: Royal Challengers' business plan

And any chance that he may have had of roping in outside sponsors to lighten his burden— despite an earlier avowal of not doing so—would appear bleak now given the going price of $3-5 million (Rs 12-20 crore) for a season and the RCB’s performance.

So, does that mean Mallya has hit a financial nerve point? Probably not; he could still end up earning a decent return on his investment, but that is unlikely to be any time soon.

“The trouble with RCB is that it has overpriced itself in the sponsorship stakes compared to some other teams (like Mohali and Jaipur). Plus, it is just discovering that corporate strategies can’t always be implemented in cricket,” says a senior executive associated with an IPL team on condition of anonymity. But that is, perhaps, natural as this is the first attempt in India to formally marry sports and business.

The ‘King’ rules

The other high-profile IPL owner, Shah Rukh Khan, is in far better spirits. For one, his team, the Kolkata Knight Riders (KKR) has got six sponsors backing it, and two more—Airtel and Hyundai—are believed to be negotiating to board his bandwagon. In graphics: Kolkata Knight Riders' business plan

The savvy Khan, in fact, has leveraged his association with the brands he already endorses— Nokia, Tag Heuer and Belmonte, among others—to bankroll his team’s expenses. “It was a strategic decision to sponsor KKR as it cements our brand association with Khan. Plus, we are exploring opportunities for expansion in Kolkata; so it made sense for us to invest in the Kolkata team,” reasons Sarang Wadhawan, Managing Director, HDIL, one of KKR’s sponsors.

‘King’ Khan’s KKR, in which actress Juhi Chawla and her husband Jay Mehta of Saurashtra Cements are co-promoters, is expected to be one of only two or three teams to break even in the current season. Meanwhile, Manoj Badale, Chairman of Emerging Media, which owns Rajasthan Royals, is targeting profitability in the third or fourth year. In graphics: Kings XI business plan

Sarang Wadhawan, MD, HDIL
Sarang Wadhawan
Analysts, however, expect Badale’s team—and, of course, KKR—to actually show some profits in the first year itself. Others are expected to incur losses of varying magnitude. But IPL’s success has made franchisees optimistic. Mohit Burman, Co-promoter, Kings XI Punjab (KXP) and Director, Dabur India, expects his franchise to break even in two years, compared to the four years it had projected earlier.

“At the end of the next season, we don’t just expect to break even but even earn a small profit,” he says. That’s because several companies were initially uncertain about the success of this format and, so, were hesitant to come on board as sponsors.

“But given the eyeballs it has garnered, the performances of the teams and the new viewership segments— read: female viewers and children—it has attracted, companies are now more willing to loosen their purse strings. In fact, the success of the league has caught even the owners by surprise,” says Burman, candidly. In graphics: Delhi Daredevils' business plan

Tribal loyalties

Modelled on the English Premier League, IPL’s financial success will depend largely on the creation of a club culture—which may be easier in a city like Kolkata that is already home to the sometimes fanatical supporters of local football clubs such as Mohan Bagan and East Bengal. Even franchisees realise that it’s not going to be a cakewalk. “Realistically, it will take several years to develop a club culture.

Don’t expect it to happen overnight,” warns Badale. While merchandising will play a part in generating club loyalties, Badale feels CSR initiatives—like community outreach programmes by players within the franchise’s catchment area, supporting local charities and setting up talent academies— will be key. In graphics: Rajasthan Royals' business plan

According to Ram Tamara, Managing Director, Nathan Economic Consulting, an economic consultancy, the consumer—in this case, the cricket-watching public— will necessarily have to erase national identities in order to let regional or city-specific loyalties bloom. “The target audience here (for generating the ‘tribal loyalties’ that are the lifeblood of all big clubs worldwide) is not the 25-plus crowd; it is the 10-12-year-olds who will grow with the game and the format,” he says.

While Tamara’s long-term perspective spells good news for the league, the short term doesn’t look too bad for the franchisees. Player transfers will come into play from the next season, as will revenues from merchandising and sale of food and beverages. Then, franchisees will be allowed to sell stakes in their teams after three years. That’s when team valuations are expected to witness exponential growth, subject, of course, to their performance.

Lalit Modi, Chairman, IPL
Lalit Modi
However, Lalit Modi, Commissioner, IPL, says: “I have always maintained that franchisees are free to induct fresh funds as and when they feel the need to. And it is up to them to decide whether they want to walk down the private equity, IPO, or SPV route for this.” Private equity players such as ICICI Venture and Providence, and also venerable global financial giants like Deutsche Bank, which lost out in the first round of bidding, are believed to be waiting in the wings to buy out some of the current owners. Others, such as Alcazar and Engelfield, Macquarie Group as also hedge funds like DE Shaw, are also said to be watching the IPL closely.

Valuations to rise

Franchisee values can only rise. Says Balu Nayar, former Managing Director, IMG, which helped BCCI put together the IPL concept: “While revenues are important, they normally have a lower weightage in determining valuation in this category, relative to the typical corporate organisation. Secondly, intangible assets are accorded more importance in overall valuations than is normal. Most significantly, there is the indefinable factor of ‘ownership prestige’, which is very sig-nificant in sports franchises.” That means that KKR or KXP, by virtue of their associations with Shah Rukh Khan and Preity Zinta, respectively, may attract more investors than say, Royal Challengers Bangalore.In graphics: Mumbai Indians' business plan

Future valuations, therefore, hold the key to investor interest in IPL franchisees. “Very few media properties have the potential to break even in such a short time,” says Salil Pitale, Head, Media & Telecom, Enam Investment Banking.

And like any other business, the base valuation of each franchisee will be a function of revenues, profitability and growth—their “ownership prestige” notwithstanding. Says Deepesh Garg, Founder & Director, O3 Capital Advisors: “IPL and its franchisees will grow in phases. So, the franchisees will become hotter properties with every passing year.”

Yasmin Shah, Head of FMCG & Media Research, Alchemy Share & Stock Brokers, has the numbers ready. “I believe that the three most successful teams can easily notch up revenues of Rs 300 crore over the next three-to-four years, and report operating margins of 15-20 per cent.” The Alchemy report, in fact, singles out the Chennai Super Kings team and says it believes that the India Cements franchise will be EBIDTA-positive in the first year itself.

The world over, average teams, like the Tottenham Hotspurs trade at 1.5 times sales, while champions like Manchester United do so at 2.5 times revenues.

Here, Nayar has an interesting take. “It is my belief that the team that wins the finals will not necessarily be the most valuable one,” he says. Lots of intangible factors, such as team brand, city image, the number of potential buyers interested in that particular city franchise, etc. will play a role here.

For now, though, most team owners are playing the waitand-watch game—aware that team valuations will only increase with each passing game—and season. Both Burman and Badale admit having received feelers from private equity funds, but are too astute to sell cheap. India Cements, owner of Chennai Super Kings, which has also been approached by several private equity players, cites its public listing as a deterrent to such divestment.In graphics: Deccan Chargers' business plan

The bottom line

Most owners are high-flying corporate chieftains. So, bottom lines will always matter most—now and forever. “Local revenues will need to be maximised and sponsorship rates will also rise,” predicts Burman.

Of course, he, like other team owners, will get an assured annual sum of nearly Rs 35 crore from broadcasting and sponsorship shares—Rs 20 crore as share from Sony Television and nearly Rs 15 crore as share of central sponsorships, including the title sponsor DLF.

Chennai Super Kings, meanwhile, has raced ahead of others in the sponsorship game, having roped in 11 local sponsors. This should generate Rs 25 crore in revenues. This, along with gate receipts and its share of broadcasting rights and central sponsorships, is expected to leave it with a only small loss of Rs 0.2 crore.In graphics: Chennai Superkings' business plan

But it is teams like the Mumbai Indians—the most expensive in the league, at $111.9 million (Rs 447.6 crore)—which could remain in the red for a while. Its owner, Reliance Industries, has very deep pockets and the loss of a few crores of rupees a year will be like small change. Still, even a small loss is likely to be galling for a group that wears its Midas touch like a proud badge.

However, every franchisee has a built-in insurance policy, at least partially, in the form of inflation. The franchise fees, which forms the bulk of their expenses, will remain constant through 10 years. But the revenues they earn by way of ticket sales, team sponsorships, merchandising, etc., are expected to rise each year, thus, making it easier for them to become profitable as the years go by.

Given this equation, and the global hoopla that IPL has created, it is little wonder that the franchise owners are confident of receiving a payback on their investments sooner rather than later, notwithstanding fears of a cricket overdose killing the golden goose. No wonder, Modi says: “I’m no financial analyst, but given the huge success of the league, and its future potential, I would venture to say that franchisees bought assets that were heavily underpriced.” For the sake of the millions of dollars they have invested, franchisees will be hoping that he is right.

 How SET’s economics works

Sony can expect to earn a profit of close to Rs 1,000 crore over the 10-year IPL contract period.

Sony Entertainment Television (SET) is on to a good thing. TRP ratings of Indian Premier League matches, which have averaged 5.5 as per the TAM Peoplemeter, have ensured that. SET and the Singapore-based World Sports Group bagged broadcasting rights for 10 years for $1.026 billion (Rs 4,104 crore). Of this, $108 million (Rs 432 crore) has to be spent on marketing the game over 10 years. This brings down the actual cost to $918 million (Rs 3,672 crore). SET will have to pay $316 million (Rs 1,264 crore) in equal installments over the first five years and $608 milllion (Rs 2,432 crore) over the next five. That means SET has to pay about Rs 253 crore to BCCI this year.

The channel will make a neat packet on its investment. Ad rates, which started off at Rs 1.8-2 lakh per 10 seconds, went up to Rs 2.25 lakh. “We have already sold the entire inventory except for about 150 seconds that we are holding for the last 10 games. We will sell those at a premium. Our last few deals were at Rs 3 lakh per 10 seconds,” says Rohit Gupta, President, SET.

“If you take an average cost of Rs 2.25 lakh per 10 seconds, then the estimated revenue per match works out to Rs 4.5 crore. So, SET can expect to earn total revenues from the 59 IPL matches of Rs 265 crore. Add Rs 20-crore revenues from sponsorships and the total revenue for SET will be at least Rs 285 crore,” says Sathyamurthy NP, Joint President, Lintas Media Group. This is a conservative estimate, with revenues calculated at the lowest ad rates. If the premiums charged for the later stages is considered, then SET can reasonably expect revenues in excess of Rs 300 crore in the first year itself.

According to projections by equity research firm Alchemy, however, SET is projected to incur a loss of about Rs 15 crore in the first year, after factoring in promotion expenses of Rs 43.2 crore. However, the same report forecasts a profit of Rs 934 crore over the 10-year contract period.

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