M&A in Sports: has COVID-19 moved the goalposts?
Back in Q1 2020, the Linklaters Sports law team looked ahead with optimism at the potential for growth and investment opportunities within the sports sector for the rest of the year. Since then, COVID-19 has caused unprecedented disruption across the global economy and the sports sector is no exception. Fixture standstills and the financial uncertainty from disputes over broadcasting rights, player contract renewals and pay deferrals have taken their toll across various sports and jurisdictions.
The general downward trend in global M&A activity has also impacted the sports sector. It is reported that CVC's interest in acquiring a £300m minority stake in the Six Nations, one of rugby's flagship international tournaments has been put on hold for a general re-evaluation amidst the ongoing disruption caused by COVID-19 and that specific COVID-19 protections are being sought by CVC before that deal can reach the try line.
However, not all deals are being kicked into touch; the sector is showing signs of life and opportunities for purchasers which may not have otherwise made it to the starting line. This article examines some of the most exciting deal activity across the sports industry and shines a light on the novel legal challenges faced when contemplating transactions in the age of COVID-19. Specifically it looks at:
- Football – investment in Italian football
- Tennis - potential merger of the ATP and WTA
- Esports - the interest from private equity
Football – investing in calcio
“Football is the most important of the least important things in life" is a quote often attributed to legendary Italian football coach, Arrigo Sacchi. With COVID-19 bringing a halt to football earlier this year, many in Italian football – calcio - have been consumed by off-the-field matters in recent months. This trend looks set to continue as the season draws to a close and star "players" in the private equity and investment world increasingly focus on opportunities in the Italian league, Serie A.
On 17 August 2020, Italian club A.S. Roma and the Texas-based Friedkin Group announced the completion of a takeover by the American group of an 86.6% stake in the club for a reported €591 million. This final figure represents a significant decrease from the €750 million agreed between the parties prior to the onset of the pandemic. The new purchase price shows the impact that lost match-day, sponsorship and broadcasting income can have on valuations of sports clubs in the current climate. Beyond decreased valuations, it will be interesting to see what other COVID-specific payment mechanics are included in deals to protect potential buyers hoping for a quick return to the pre-pandemic years of growth in revenues.
Nevertheless, decreasing valuations may also incentivise private equity houses on the hunt for a bargain and/or sports clubs seeking alternative sources of finance. That the deal went ahead at all is a positive sign that many in the industry are expecting a return to form. The deal comes amidst increasing speculation that Serie A itself is looking to attract private equity investment - with interest rumoured from the likes of CVC, Bain & Advent - so that the league may relaunch by allowing clubs to go on spending sprees, improving stadia and enable the league to expand media operations.
Restrictions on ownership and investment into Italian football clubs are limited to meeting standards of integrity and financial stability and there are no restrictions on the nature or nationality of potential owners. This regulatory framework will only heighten the interest of private equity and international investors. Indeed, the large investment into one of the great football clubs of the Eternal City may well represent a crossing of the Rubicon for increasing investment into calcio.
Tennis – a mixed-doubles match-up?
In tennis, Roger Federer’s recent suggestion of a merger between the governing bodies of men and women’s tennis (the ATP and WTA, respectively), has already received public support from fellow professionals including Billie Jean King, Rafael Nadal and, most recently, Andy Murray.
The level of cooperation between the two remains to be seen and a full-blown merger seems unlikely given the logistical and political obstacles. However, in light of the cancelled tournaments due to COVID-19, we may see some form of joint venture agreement whereby the ATP and WTA collaborate on certain projects, such as the negotiation of media, broadcasting and sponsorship rights. Below are some of the key legal considerations taking centre court:
- Distributions: how profits will be shared between the ATP and WTA is a crucial factor for players, tournament organisers and the governing bodies themselves. Many joint venture agreements are structured so that the returns each party receives are proportionate to the amount they invested, and the ATP might argue that it will contribute more in terms of fan base and prize money. It may also point to its revenue increase to US$139.5m last year, in order to push for greater returns.
- Governance: how decision-making power will be allocated between the two governing bodies is fundamental from an operational perspective. The benefit of the ATP and WTA coming together are the synergies and cost-savings achieved by aligning rules, event calendars and even logos. The voting rights and board composition of the combined entity (e.g. whether the ATP will have the final say in a deadlock or the WTA will have veto rights over certain matters) will be crucial as to who actually has control when all parties are not aligned.
Tennis is one of the few major sports with different governing bodies for men and women. Perhaps a few successful friendlies could strengthen the resolve to navigate the challenges to pursue a mixed doubles match-up rather than maintaining a battle of the sexes.
Meanwhile, investors have been turning to esports, a booming industry with record audience numbers during COVID-19. Raven, a leading esports apparel company, has already secured US$1.4m seed investment from a US-based private equity fund. However, investors have been cautioned not to rush into esports deals as certain aspects around the industry’s broadcasting and sponsorship strategies simply cannot replicate those in traditional sports. In particular, concerns remain that the current demand is a temporary boom caused by the pandemic, and that broadcasters and sponsors may withdraw their support once traditional sports return. Below are some key legal factors to consider in such deals:
- Purchaser protections: Potential investors in esports may seek increased buy-side protections in transaction documentation to counteract uncertainties resulting from COVID-19. For example, deferred consideration and/or earn-out provisions linked to future revenues once normality resumes and the fans return may protect purchasers if demand for esports does disperse. What’s more, bespoke material adverse change (MAC) provisions may be negotiated to allow a purchaser to pull-out of the deal where it is no longer economically viable.
- Privacy and personal data: In addition, given the online nature of esports, investors should ensure they have sufficient protection against risks related to breach of privacy and personal data. This is particularly important when investing in esports platforms that process personal data. In light of the accelerated timetables that some transactions are proceeding on during COVID-19, it is essential that proper due diligence has been carried out and all applicable jurisdictions have been considered.
It’s clear that the disruption caused by COVID-19 will have both short and long-term consequences for M&A in the sports sector. In the short-term, many deals are ‘pens down’. Prudent purchasers and sellers should be alive to parties looking to rely on MAC clauses, force majeure or the doctrine of frustration to release themselves from obligations between signing and closing as a result of COVID-19.
In the long-term, the M&A engine will keep running. Despite sports competitions being suspended or played behind closed doors, M&A is likely to make a swifter recovery behind the scenes as investors pivot and adapt to the current conditions. Indeed, in addition to the interest in Italian football highlighted above, Germany's professional football association Bundesliga has reportedly been offered loans by Apollo Global Management and KKR secured against future media rights. With teams including the EPL’s Crystal Palace FC and the NBA’s Philadelphia 76ers already owned by leading individuals in private equity, and struggling teams such as Super Rugby’s ACT Brumbies potentially turning to private equity investment to ensure survival, it may not be long before we see more investors looking to deploy capital in the rapidly changing sports sector.
Looking ahead, we are likely to see a shift in deal structures. In particular, we can expect to see:
- i. increased equity funding as investors find it more difficult to secure debt finance;
- ii. increased regulatory intervention as the sports investment market continues to embrace private equity investment, alternative tournament formats and the growth in eSports accelerates;
- iii. industry related earn-outs to bridge the value gap; and
- iv. COVID-19-specific MAC clauses.
As yet, we are a long way from the final whistle.