BCCI makes a billion dollars in IPL deal, and while franchisees have their task cut out
With the high profile sale of 8 teams of the Indian Premier League (IPL), the business of sport takes a giant leap. So far, there was perhaps only one entity in India engaged in serious money making out of sport – and that was Board of Control of Cricket in India (BCCI). Now, almost overnight, eight new corporate entities will emerge in Indian sport.
From this exercise, the biggest winner remains BCCI. The way the deal is structured, BCCI seems set to make almost riskless income of around $1bn from IPL. This income will primarily come from the $723mn or so that the 8 team owners have bid to own the teams. BCCI will also get a minority share of TV rights, ranging from 20% in first 2 years, to 40% from year 6 onwards. BCCI will get 40% of tournament sponsorship money.
BCCI or more specifically the entity IPL that it has set up has largely an advisory role. There is no particular fixed cost it incurs. IPL is supposed to do things like award commercial rights, two big legs of which – the TV rights and the team ownership – are done. It also has to set up tournament schedule, provide umpires and match officials (the frachisee bears the cost).
Compare this with say a hedge fund or a private equity partnership and you realize how good the deal is for BCCI. The general partners get a 2% fees and 20-30% of profits. Here BCCI gets 20-40% of net incomes from TV and tournament rights, and it gets a whole lot of money from the teams for the right to play. Clearly BCCI benefits a lot from its monopolistic hold on the game.
The 8 teams take all the financial risk of making IPL successful. They have to bear 7 items of cost as per IPL franchise prospectus. The first one is franchise fee, which they have committed to now. These range from Rs 30 crore to Rs 45 crore per year. Next is player salaries. Each team will have 16 players, which in total could cost Rs 16-20 crore. Players are to be bought in an auction, which is yet to be done. Top players will reportedly get upto Rs 1.5 crore each. Total cost of players and their support staff could be between Rs 20-25 crore. The franchisees also bear stadium costs and matchday costs. The other 3 items of costs are totally franchisee related like costs of their own staff, offices and other overheads.
Total annual costs for the franchisees could be around Rs 70 crore or more. Take 15% cost of capital, then teams have to make another Rs 40-50 crore or so to justify investment. This means, total revenues have to exceed Rs 110-120 crore.
On the revenue side, the franchisees will earn at two levels – central revenues, share from BCCI, and local revenues. BCCI will share major portions of TV rights and sponsorship rights – this is the central revenue share. A rough estimate suggests these could amount to Rs 35-40 crore per annum. These revenues are largely fixed upfront, and distributed equitably amongst teams.
This means the franchisees need around Rs 40 crore per annum of revenues from local sources to break even, and Rs 80-90 crore from local revenues to cover cost of capital. The prospectus lists 10 sources of ‘local’ revenues, some of which will be marginal. The two large parts of local revenues could be gate collections, and advertising in local stadia. Team shirt sponsorship could be a big item too, but perhaps some of the winners like Vijay Mallya would like to put their own brands on the team kits. Items like merchandise would not amount to much.
Which team does best may depend on quite a few variables – ticket rates, attendance, player costs, and finally, how the team plays. Tickets will be steeply priced, and if stadiums fill up, then break even seems possible, but it is hard to see franchisees cover cost of capital in the first 1-2 years. It is not clear yet if any team can be hugely profitable unless it can develop significantly streams like merchandising, and franchisee media platforms.
The IPL prospectus also provides a lot of data on valuations of sports teams. It suggests that these command valuation akin to premium brands – a Price/Sales ratio of 3-5 on an average. If we take a Price to sales of 4, then the Mumbai team, which went for $112 mn needs to show annual revenues of $28mn, or Rs 110 crore. This would perhaps need Rs 75-80 crore from local revenues. Any valuation gains may come only when revenues significantly exceed this.
