When is a valuation fair and when is it overheated? Former IPL COO Sundar Raman weighs in
Interview by Nagraj Gollapudi05-Nov-2021On October 25 the Indian business conglomerate RPSG group and global private equity giant CVC Capital bought two new IPL franchises – Lucknow and Ahmedabad – for over Rs 12,715 crore (about US $1.69 billion). To help us understand how the valuations make economic sense, if they do, we spoke to Sundar Raman, who was the IPL’s chief operating officer between 2008 and 2016. Raman subsequently worked as CEO at Reliance Sports, whose portfolio includes Mumbai Indians. Currently he is an independent management consultant, and also serves as an advisor with Chennai Super Kings, the defending IPL champions.The winning bids for the two new franchises were Rs 7090 crore [$945m] and Rs 5625 crore [$750m]. Did you think the numbers would be so large?
Not to this extent. I would have definitely said upwards of plus or minus 10-15% of a billion dollars but not to the extent of $1.6 billion. The BCCI has done a good job of realising value with the levels of interest that they have been able to generate from the various parties.It is a question of demand and supply: if there are nine people who are willing to bid for the two cities, they will believe they have a better chance of winning if there are two teams rather than one.Related
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Can you break down these numbers – how these buyers can make them work business-wise?
In 2008 when the franchise rights were sold, the eight teams’ value was about Rs 2900 crore [$723 million, at Rs 40 to a dollar]. So the board sold the rights to the eight franchises for approximately Rs 285 crore [$72m] per year. In the current cycle you are talking about Rs 1275 crore [$170m] per year for just two new franchises.The IPL is an established product. People are coming in after 13-14 years of the product having well settled. It is like a guy who bought a house in Malabar Hill [luxurious locality in south Mumbai] when there was no Malabar Hill, and a guy buying a house there after the ecosystem is established. Obviously he will pay a higher price.The original eight franchises had a revenue share of 80% of the IPL central revenue [media-rights income, plus central sponsorship – essentially income from title sponsorship and associate sponsorship] in the first few years, which gradually went down to 60% and then to 50% over the ten-year period. Now it is at 50%. So the real appreciation [in the price of franchises] is even more.
“It is like membership of an exclusive club. You cannot get a membership because there are only a certain number of members. Now you are selling this membership and somebody who desperately wants to be a member will buy at whatever price”
Basically both the BCCI and the franchises get 50% of the central revenue, and then the franchises pay the BCCI 20% of their overall revenue [central revenue share, plus local revenue generated by the franchise through local sponsorships, gate revenues, etc]. That means you are giving back about 10% [of what you get as central revenue] to the board. That effectively makes it a 60:40 share of central revenue between the BCCI and the franchises.How does one go about valuing an asset like a franchise and arriving at a figure?
There are numbers floating in the media about what the value of the next cycle of IPL media rights [likely to be for five years, 2023-27] is going to be. I will look at it not as a five-year term but as a ten-year term because you are paying the franchise fee over ten years.What is the likely central revenue over the next ten years? Effectively you are going to get 5% of that figure as revenue. Because franchises get a 50% share and there are ten franchises, so 5% each. So 5% of that value, say 60,000 crore, is 3000 crore. So it is a simple derivative of the central revenue – media rights plus sponsorship, plus all the other stuff put together. If BCCI is going to give me 3000 crore over the next ten years, I’m willing to give back the same amount to them as franchise fee.The other costs and other revenue streams I have should set themselves off the way the central revenue sets off the franchise fee. If I bid anything above and beyond that, it’s my loss or the investment I make to acquire the asset.Raman (left) with the KKR management: “Teams need to make an effort to be a round-the-year brand, though the tournament may be for six weeks or eight weeks or 13 weeks”•Sandeep Shetty/BCCIWhen the IPL started, the player salaries purse for each franchise was about Rs 25 crore [$6 million], including uncapped players. Now in 2021 it is 85 crore [$11.3m]. [This has since been revised to 90 crore [$12m] for 2022.] That is more than a three times jump.Assume that player salaries are going to go up to 150 crore [$20m] per year over the next ten years. So let’s say the average player salary is about Rs 125-130 crore [$16-17m] per year for ten years, or Rs 1300 crores [$170m] in total.Now the support staff costs put together over ten years, if I take an average of Rs 20 crore [$2.6m] per year, is about 200 crore [$26m].Then assume my operating costs are 50 crore [$6.6m] a year. That’s another 500 crore [$66m]. So that comes to 2000 crore [$266m] over ten years for players, support staff, plus operating costs.
Can my local revenues add up to Rs 2000 crore over ten years? Assume my local sponsorship is, say, Rs 75 crore per year. Also, with the talk of simulcast of matches [matches being played in parallel], the general trend will be that overall audience is likely to increase. Assume Rs 750 crore [$10m] of [sponsorship] revenue over ten years. Plus ticket revenue, about Rs 30-40 crore [$4-5.3m] per year, that’s another 400 crore [$53m]. So that is about 1200 crore of local revenue. Plus, say you can put together another 20 crore [$2.6m] per year of allied revenue – merchandising, stadium concessions etc. So assume altogether Rs 1500 crore [$200m].That means I am going to lose about 500 crore over ten years. But let’s say there is Rs 2000 crore [$266m] of local revenue [and not 1500 crore] over the ten-year period – from data revenue, new platforms, fan loyalty. So all costs and revenues have evened out.Now, if someone has bid Rs 5000 crore [$666m] for a franchise and the central media rights share that they are going to get is 3000 crore [$400m], they are going to lose about Rs 2000 crore [$266m]. Plus any losses emerging from operating revenue and costs not aligning. Assume in a worst-case scenario, 2000 crore of loss on the franchise fee-central revenue side and 500 crore on the operations side. That’s a 2500 crore [$333m] loss over a ten-year period, or 250 crore [$33m] per year. That’s what, a $30 million per year loss? For a private equity company with tens of billions of dollars of assets under management, $30 million is nothing on an annual basis.
“If BCCI is going to give me 3000 crore over the next ten years, as the franchise’s share of central revenue, I’m willing to give back the same amount to them as franchise fee”
The second part of the value matrix is, it is a limited club of ten. It is like a membership of an exclusive club. However much money you give, you cannot get a membership because there are only a certain number of members. Now you have allowed the ability to sell this membership and somebody who desperately wants to be a member will be willing to buy at whatever price you sell. There’s an appreciation in the price of the asset. That’s bound to happen with IPL teams over time.How much of an impact has the next cycle of media rights, from the 2023 season, had on the valuation of the new franchises?
It is a very important aspect because a substantive portion of revenue is going to come from there. Bidders will have looked at it as a source of revenue which is not in their control, and local revenues do not have much elasticity. Bidders will have looked at it and said: what are the synergies I can bring with my other businesses and how do I monetise or add value to these assets through my other businesses? In the case of RPSG, which has a consumer business, there is a straightforward benefit. For CVC, it will be about backward and forward integration of businesses.Liverpool was bought for £300 million (about Rs 2100 crore) in 2010 and they play ten months a year. A layperson will wonder how Rs 7000 crore (£682m) for an IPL franchise for 14-16 matches per season makes sense.
It is a question of revenues to cost. The way I see it is, within the ecosystem, how has value appreciation happened? Let’s look at the NBA, which also plays for similar periods – long months, many games. How much did Steve Ballmer buy an NBA team for? [Ballmer bought LA Clippers in 2014 for $2 billion.] What is the value of an NBA team today? It’s not a question of how long you play, it is a question of the cost and revenue economics.Also, Liverpool, what are their player salary costs? Those will be more than the value of the ten-year franchise fee you are paying. So there are cost elements to it and revenue elements to it.Steve Ballmer (front row, extreme left) bought the LA Clippers for US$2 billion in 2014. The team’s current valuation is over $2.6 billion•Noel Vasquez/Getty ImagesFurther, theoretically any team in the UK could make it to the top tier through promotion and relegation. IPL is a closed league and that adds further economic value [for a franchise owner].The ownership of a Premier League team also comes with the fact that they own the stadium. The underlying asset value is also based on the price of the land. They are able to provide [fan] experiences and stuff like that.With the two new franchises, do you foresee three months of IPL a year, or is 14 games per side understood to be the right duration for fans?
There is no reason why it should not be 18 games: nine home, nine away – 94 matches.There are two ways to do it. Currently it’s seven games home, seven games away. From 60 to 74 matches, you are going to increase the window by a week, but there’s going to be no economic impact on the IPL franchises because they will all get the same revenue since the number of matches per team remain the same.
“You play a Pink Floyd song on Spotify today, the band still gets a percentage of the revenue. If KL Rahul goes and scores a hundred, why should he not gain from a fantasy league team’s revenue?”
The second part of it is, can I increase the number of matches to 94 or 84, and play them within a similar window, with a one-week extension, with many more simultaneous starts? That may be a short-term option. Over an eight-week period you play 94 games, so there are multiple starts that are at the same time. They experimented with that this year [2021] with the last two league matches. It will drive up digital revenues.Now the third part, which is ideal, is, have a 80-84-day window. And then play it on a home-and-away basis with a full-fledged schedule. That’s going to give growth for the sport also. That may be possible two years from now.Wouldn’t simultaneous matches drive the value of media rights down?
Simultaneous matches will help increase the subscription base – being on two different channels and/or digital platforms.In a year or two a number of legendary cricketers who played a part in establishing the IPL model are going to retire. How will that impact the franchises and valuations going forward?
Whether there will be depreciation because of a MS [Dhoni] retiring… the fact is, Sachin [Tendulkar] retired, MS came. MS retired, there’s Virat [Kohli], there’s Hardik [Pandya] and Rishabh Pant and Rohit [Sharma]. See, India has an abundance of talent. You will have quality of players coming through the ranks. I don’t see that as a constraining factor at all.”To me, beyond CSK, MI, and to some extent RCB, there’s very little fan culture that exists”•Arjun Singh/BCCITo me, it is about teams putting money into building fan bases. If fan bases are not built, there’s no reason for a sport to exist. If the fans are not being addressed, catered to or taken care of, it’s just a model where you are making up the numbers.To build fan bases you have to win, right?
Not necessarily. Some fans stand by you whether you win or lose. Yes, early successes obviously make a big difference, but it doesn’t mean you to win. Why does Notts County [FC] still have fans? Because there is a connection they established.That is part of a culture that has existed for long in the UK, where football clubs have strong fan bases.
It has to be built. It is 15 years [of IPL] – you have to build that.You could say franchises like Chennai Super Kings have built that fan culture. Mumbai Indians, Kolkata Knight Riders, even Royal Challengers Bangalore, are the others, I guess?
To me, beyond CSK, MI, and to some extent RCB, there’s very little fan culture that exists.What is the key motivation behind buying a professional sports club for anybody? One, it is strategic capital: it gives you access and leverage somewhere else. Two, it is economic capital, it’s a business. For CVC [Ahmedabad owners], it is more of economic capital. Third is cultural capital: there is a local owner, there is a local team, there are local supporters. It is community- and culture-led, as you pointed out. The fourth is a sort of a social capital. For example, supporters as owners themselves. In the German league [Bundesliga] it’s social capital, it’s like, “I own the team.” Those are what drive the value of a team.
“For us as management, we have to build an ecosystem, we have to build sustainability, we have to build value-creation models, we have to future-proof the business”
Why have these factors not taken off in the IPL?
There are multiple reasons. An eight-week tournament does not allow the fan to spend as much. For example, if you buy a jersey, you want to be able to wear it for six months of the year, to every match. Here you buy a jersey for two months.Newer models are evolving, digital is driving a substantial portion of it, and fan loyalties are going to come. Those are things that are changing the landscape.Local revenue – sponsorship, gate receipts, merchandise. How can franchises enhance that?
If you do a pie chart of revenue sources, about 70% of revenues for a team are coming from the central [IPL] revenue, which is not controlled by them. And 30% is coming from other sources, which are controlled by them. Teams need to make an effort to be a round-the-year brand, though the tournament may be for six weeks or eight weeks or 13 weeks.The big challenge is, what does it take for teams for local revenues to be comparable to central revenues, so there’s more like a 50-50 split? You look at football clubs: Manchester United will have a 33-35-40 kind of split between what they call commercial revenue, match-day revenue, and central revenue. Commercial revenue is jersey sponsorship; match-day revenue is all the ticketing, hospitality and food and beverage sales; and central revenue is what the Premier League gives them. But for lower-rung clubs it may be skewed 75-80% to the central revenue pool.”Much before anybody else, we created MI TV. The view was, let’s spend Rs 1-2 crores [$200,000] and get fan engagement going”•Faheem Hussain/BCCIHow can you accelerate the local revenue growth – whether it is by getting better sponsorship revenue or better fan activation? Fans are willing to spend money on the teams and clubs that they love. Look at the amount of money that is going to fantasy leagues. Who is making money out of it? The private investors who are backing fantasy league teams. Why shouldn’t there be ten cents on the dollar on the revenue being made by fantasy league teams off every player that is picked [in fantasy teams]? Because it is based on their performance, right?Look at economic value in the music industry. You play a Pink Floyd song on Spotify today, the band still gets a percentage of the revenue. Why is it not applicable in cricket? If KL Rahul goes and scores a hundred, why should KL Rahul not gain from the benefit of a fantasy league team’s revenue?Would you say it is time for IPL franchises to move beyond depending on the media rights pool income?
I don’t think it is about dependency. See what happens – a guy [advertiser] who has limited money enters through [sponsorship of] a team, realises cricket delivers growth, then he escalates and goes and spends money at the top level, at the league level. That’s how more and more advertisers come into the industry. Cricket is such a mass sport – you have a Rs 1000-crore advertiser and a 10-crore advertiser who want a piece of that action. Cricket can cater to that. The challenge is, how can we cater it round the year? It need not necessarily be while playing. That’s the challenge for the teams: what can I do to keep my fan alert and alive round the year?During your time at Chennai Super Kings and Mumbai Indians, would you say you managed to do it?
It is about putting structures in place. When I was in IPL, I believed I put in certain structures and systems which will last. The models are established, the ground rules are established, and it just keeps rolling over. Much before digital was so large, IPL did the first-ever fantasy league in India, IPL had an app ecosystem, IPL had a Twitter-Instagram-Facebook ecosystem of fans right from its early days. The same efforts went into the teams I have been a part of – to build a strong and stable structure to be best poised for growth.
“If fan bases are not built, there’s no reason for a sport to exist. If the fans are not being taken care of, it’s just a model where you are making up the numbers”
Basically, you created engagement which you could exploit later to derive monetary benefit?
You have to have that horizon of view to be able to deliver that. That is the challenge – to build your ecosystem over a sustained period of time. You don’t know how the world is going to grow in dimensions and technology. Newer and newer things will come, but are my principles and base levels of the business right?In the five years that I have spent between Reliance [Mumbai Indians] and CSK, I have been involved in four championships [title wins]: 2017, 2019, 2020, 2021. Not that I am claiming to have won the championship. It is the team that does it. It is about creating that environment where support staff and teams are able to do it. For us as management, we have to build an ecosystem, we have to build sustainability, we have to build value-creation models, we have to future-proof the business. All that is important.At MI, much before anybody else, we created MI TV. The view was, let’s spend Rs 1-2 crores [$200,000] and create a content engine, let’s do short-form content, let’s get fan engagement going, let’s do our own pre-shows.You have to take a bet ahead of the inflection. Success is not built in a vaccum, It’s built in partnerships, it’s built in consultations, it’s built with a certain amount of risk, it’s built with a certain amount of investment.
