Can Private Equity benefit college sports?

[FloridaCuse]

 

[bnoro]

This is going to be spectacular to watch. Will the PE group be allowed to strip the university for parts if the team isn't fulfilling their investment?

Will they sell the Utes' arena & stadium to themselves and force Utah to pay the rent?

 

[CuseCactus]

This is going to be spectacular to watch. Will the PE group be allowed to strip the university for parts if the team isn't fulfilling their investment?

Will they sell the Utes' arena & stadium to themselves and force Utah to pay the rent?

Agree. Will the PE group spin off Utah football along with other assets in a bundled IPO? Again, as with other things right now, I feel like we are in the Upside Down.

 

[HtownOrange]

I would love to read the agreements. UU being a state school, thus they likely enjoy the State's sovereignty, probably cannot be forced to sell or transfer property. The PE firm seems to have valued the deal at a very hight rate, offering UU $500M up front. To be clear, that is more than 20% of what the B1G was offered for the ENTIRE conference of 18 schools, for one school, not noted as a true power in athletics (yes, they have had decent success in football, but not sustained, not at the highest levels, not a huge TV draw, in the fourth highest conference, etc.).

The school had a $126M AD budget with $17M in deficit spending, or $109M in revenue. This sounds more of desperation and short term thinking in exchange for a chunk of the profits in perpetuity. There is never a break even point as UU will be in the hole from the beginning with no ready means of escaping the loss of revenue exchanged for the up front cash.

At some point, I see UU being forced to exercise sovereignty to stop the bleeding and then to hopefully get out of debt.

 

[AZOrange]

Otro seemingly didn’t get much control here and I don’t see where 500mm came from. The article alludes to potentially 9 figures…

Given the power dynamic feels more “loan to own” than anything

 

[HtownOrange]

Otro seemingly didn’t get much control here and I don’t see where 500mm came from. The article alludes to potentially 9 figures…

Given the power dynamic feels more “loan to own” than anything

Utah to enter landmark private equity agreement worth $500 million

The first-of-its-kind agreement could set a new precedent as universities seek competitive edges in college athletics' revenue-sharing era

www.cbssports.com

This is one source from which I obtained the $500M figure.

Assume Otro were 50/50 with UU. A share of the $109M revenue would be $54.5M in return annually. Payback of the initial $500M is 10 years, thereafter, Otro just cashes checks in perpetuity (which the law generally hates)

If Otro has a 20% share, they get paid $21.8M annually, or a 25 year pay back, after which Otro cashes checks in perpetuity.

UU is out a big chunk of change in the long run.

 

[AZOrange]

Utah to enter landmark private equity agreement worth $500 million

The first-of-its-kind agreement could set a new precedent as universities seek competitive edges in college athletics' revenue-sharing era

www.cbssports.com

This is one source from which I obtained the $500M figure.

Assume Otro were 50/50 with UU. A share of the $109M revenue would be $54.5M in return annually. Payback of the initial $500M is 10 years, thereafter, Otro just cashes checks in perpetuity (which the law generally hates)

If Otro has a 20% share, they get paid $21.8M annually, or a 25 year pay back, after which Otro cashes checks in perpetuity.

UU is out a big chunk of change in the long run.

Is there no cost to the revenue? I thought the AD was losing money? Seemed like otro is funding losses and I don’t see the profit stream

 

[HtownOrange]

Is there no cost to the revenue? I thought the AD was losing money? Seemed like otro is funding losses and I don’t see the profit stream

That's part of my point. UU is already losing money, now they will add the loss of a share of revenues to Otro. In exchange, they get a one time payment of $500M. The payback depends on the actual terms which I have not found in my limited search. Once the payback is done, there is no end to paying Otro it's share, unlike a loan which is paid back with interest and then done with forever.

From Otro's perspective, once they get their initial investment back, it's all gravy. From UU's perspective this is a "forever loan" that never pays off the interest. The net effect for UU is a permanent loss of Otro's share for the one time payment.

This is akin to selling a birthright for a bowl of porridge.

 

[rocklloyd]

for the schools considering this, it's really like the point of no return. would be hard to unwrap after you realize it's a bad deal 6 years down the road.

 

[bnoro]

for the schools considering this, it's really like the point of no return. would be hard to unwrap after you realize it's a bad deal 6 years down the road.

It's like the parking meters in Chicago. Fun rabbit hole to go down.

 

[FloridaCuse]

 

[AZOrange]

That's part of my point. UU is already losing money, now they will add the loss of a share of revenues to Otro. In exchange, they get a one time payment of $500M. The payback depends on the actual terms which I have not found in my limited search. Once the payback is done, there is no end to paying Otro it's share, unlike a loan which is paid back with interest and then done with forever.

From Otro's perspective, once they get their initial investment back, it's all gravy. From UU's perspective this is a "forever loan" that never pays off the interest. The net effect for UU is a permanent loss of Otro's share for the one time payment.

This is akin to selling a birthright for a bowl of porridge.

I guess my point was unless there is profit otro doesn’t get anything. Why would they get revenue? That’d be unlike any PE deal I’ve seen

 

[richmondcuse03]

I guess my point was unless there is profit otro doesn’t get anything. Why would they get revenue? That’d be unlike any PE deal I’ve seen

The stories say a percentage of revenue, which I agree is odd. It’s a confusing structure. But the percentage must be very very low because otherwise it would make no sense. Utah would be perpetually loss making and would go bankrupt before long.

So it’s probably say 2 percent or some small number of revenue per year and there’s an incentive for them to grow revenue so they get a bigger share and the school to cut costs. The investment may have payback periods or it could amount to more of a loan structure.

Lot of variables to what this could be. I suspect we only are seeing some high level terms.

 

[HtownOrange]

I guess my point was unless there is profit otro doesn’t get anything. Why would they get revenue? That’d be unlike any PE deal I’ve seen

They would own a share and would be entitled to the portion of any profits, which UU is not generating at this time. It is also presumed they would receive payments against the initial cash outlay, regardless of whether UU makes a profit.

The reality is that in most states, if not all, they cannot force the sovereign to sell assets to cover debts. Nor will they have final say in management, per the article: it is difficult to imagine where their profits will come from other than payments to repay the initial cash outlay. I think this is one reason the PE stoped talking with FSU, the State of Florida was not about to cover foolish debts and was not going to allow the use of assets as collateral.

Obviously, they know stuff we don't so they may have other avenues of recouping the cash. We do know that PE expects a profit, a big profit. My guess is that if they don't receive returns they would sue the school and ague a breach of contract and/or bad faith.

I don't see the real benefits to either party unless money rolls in. If the money does not roll in, one or both parties are going to regret the investment.

 

[AZOrange]

The stories say a percentage of revenue, which I agree is odd. It’s a confusing structure. But the percentage must be very very low because otherwise it would make no sense. Utah would be perpetually loss making and would go bankrupt before long.

So it’s probably say 2 percent or some small number of revenue per year and there’s an incentive for them to grow revenue so they get a bigger share and the school to cut costs. The investment may have payback periods or it could amount to more of a loan structure.

Lot of variables to what this could be. I suspect we only are seeing some high level terms.

99% of articles written in finance get about 90 percent of the concepts wrong…it’s so grossly misstated it’s comical…we literally have to correct “financial reporters” all the time their concepts are way wrong

 

[AZOrange]

They would own a share and would be entitled to the portion of any profits, which UU is not generating at this time. It is also presumed they would receive payments against the initial cash outlay, regardless of whether UU makes a profit.

The reality is that in most states, if not all, they cannot force the sovereign to sell assets to cover debts. Nor will they have final say in management, per the article: it is difficult to imagine where their profits will come from other than payments to repay the initial cash outlay. I think this is one reason the PE stoped talking with FSU, the State of Florida was not about to cover foolish debts and was not going to allow the use of assets as collateral.

Obviously, they know stuff we don't so they may have other avenues of recouping the cash. We do know that PE expects a profit, a big profit. My guess is that if they don't receive returns they would sue the school and ague a breach of contract and/or bad faith.

I don't see the real benefits to either party unless money rolls in. If the money does not roll in, one or both parties are going to regret the investment.

Yeah if UU is not making a profit and PE is still getting $$$ returned that sounds more “loan” ish to me. Could be some kind of convertible or PIK structure too. I just cannot imagine how they model cash flows in this structure such they see a good equity MOIC.

 

[FloridaCuse]

 

[bnoro]

This is not a good thing. At all.

If college sports weren't close to dead already with the conference re-alignment, this will be the thing that surely kills them.

 

[Forza Azzurri]

Utah to enter landmark private equity agreement worth $500 million

The first-of-its-kind agreement could set a new precedent as universities seek competitive edges in college athletics' revenue-sharing era

www.cbssports.com

This is one source from which I obtained the $500M figure.

Assume Otro were 50/50 with UU. A share of the $109M revenue would be $54.5M in return annually. Payback of the initial $500M is 10 years, thereafter, Otro just cashes checks in perpetuity (which the law generally hates)

If Otro has a 20% share, they get paid $21.8M annually, or a 25 year pay back, after which Otro cashes checks in perpetuity.

UU is out a big chunk of change in the long run.

That assumes that revenues stay flat in perpetuity.

The entire reason (or sales pitch from the PE side) is that private equity will help Utah to grow revenues, by finding new sources of revenue and/or increasing the revenues from existing sources.

Providing a simple theoretical example:

Assume Utah's revenues are 100MM per year. Assume the PE firm bought a 50% stake for 500MM. Assume a 10 year time horizon and I will not PV the cash flows for simplicity sake.

With no PE, Utah earns 100MM a year, With PE, Utah earns 50MM a year from the upfront payment and, if revenues stay flat, 50MM a year from the revenue split. So they break even on the deal for ten years and then start losing to the tune of 50MM a year in year 11. Bad deal.

However, if the PE is able to increase Utah's revenues by 20% a year (so 20MM - I will not compound the growth for simplicity sake), Revenues would grow to 300MM by year 10. Total revenues over the 10-year period would be 2.1 billion. Utah would get 50% of that: 1.05 billion plus the 500 MM upfront payment for a total of 1.55 billion. Divide that by 10 and you get 155MM a year. In year 11, they would earn 160MM (300MM + 20MM increase in revenues times 50%).

The question really boils down to whether the PE firm can help Utah increase their revenues enough to offset the fact that they are giving 50% of them to the PE firm. How much the PE needs to help Utah increase the revenues by depends on the percentage stake that Utah has sold to the PE firm for 500MM.

Without those details, not possible to understand how high the revenue bar is.

 

[javadoc]

That assumes that revenues stay flat in perpetuity.

The entire reason (or sales pitch from the PE side) is that private equity will help Utah to grow revenues, by finding new sources of revenue and/or increasing the revenues from existing sources.

Providing a simple theoretical example:

Assume Utah's revenues are 100MM per year. Assume the PE firm bought a 50% stake for 500MM. Assume a 10 year time horizon and I will not PV the cash flows for simplicity sake.

With no PE, Utah earns 100MM a year, With PE, Utah earns 50MM a year from the upfront payment and, if revenues stay flat, 50MM a year from the revenue split. So they break even on the deal for ten years and then start losing to the tune of 50MM a year in year 11. Bad deal.

However, if the PE is able to increase Utah's revenues by 20% a year (so 20MM - I will not compound the growth for simplicity sake), Revenues would grow to 300MM by year 10. Total revenues over the 10-year period would be 2.1 billion. Utah would get 50% of that: 1.05 billion plus the 500 MM upfront payment for a total of 1.55 billion. Divide that by 10 and you get 155MM a year. In year 11, they would earn 160MM (300MM + 20MM increase in revenues times 50%).

The question really boils down to whether the PE firm can help Utah increase their revenues enough to offset the fact that they are giving 50% of them to the PE firm. How much the PE needs to help Utah increase the revenues by depends on the percentage stake that Utah has sold to the PE firm for 500MM.

Without those details, not possible to understand how high the revenue bar is.

Assume that Congress finally figures it out and legislates a league, with salary caps, collective bargaining, etc. Does that cool the overall market for new revenues? In the current environment there is little or no control so money is being thrown left and right. Once regulated, does some of that wild-west cash tornado go away?

 

[HtownOrange]

That assumes that revenues stay flat in perpetuity.

The entire reason (or sales pitch from the PE side) is that private equity will help Utah to grow revenues, by finding new sources of revenue and/or increasing the revenues from existing sources.

Providing a simple theoretical example:

Assume Utah's revenues are 100MM per year. Assume the PE firm bought a 50% stake for 500MM. Assume a 10 year time horizon and I will not PV the cash flows for simplicity sake.

With no PE, Utah earns 100MM a year, With PE, Utah earns 50MM a year from the upfront payment and, if revenues stay flat, 50MM a year from the revenue split. So they break even on the deal for ten years and then start losing to the tune of 50MM a year in year 11. Bad deal.

However, if the PE is able to increase Utah's revenues by 20% a year (so 20MM - I will not compound the growth for simplicity sake), Revenues would grow to 300MM by year 10. Total revenues over the 10-year period would be 2.1 billion. Utah would get 50% of that: 1.05 billion plus the 500 MM upfront payment for a total of 1.55 billion. Divide that by 10 and you get 155MM a year. In year 11, they would earn 160MM (300MM + 20MM increase in revenues times 50%).

The question really boils down to whether the PE firm can help Utah increase their revenues enough to offset the fact that they are giving 50% of them to the PE firm. How much the PE needs to help Utah increase the revenues by depends on the percentage stake that Utah has sold to the PE firm for 500MM.

Without those details, not possible to understand how high the revenue bar is.

Agreed, that is why I am generally against PE involvement. A loan has a payback schedule and an end. PE ownership is indefinite and will include a buyback/buyout.

This is also why I am not sure how the B1G schools were conned into the scheme to begin with. My only guess is that they intentionally avoided including finance and accounting professionals from the review as well as the now known providing only high level glossy reports to the BoTs. People responsible to actually weigh in on the deal broke it up.

Compares to UU, I have no clue how anyone can consider that the UU personnel are properly and faithfully exercising their fiduciary duties.

 

[HtownOrange]

Assume that Congress finally figures it out and legislates a league, with salary caps, collective bargaining, etc. Does that cool the overall market for new revenues? In the current environment there is little or no control so money is being thrown left and right. Once regulated, does some of that wild-west cash tornado go away?

Just an opinion:

I think the "public servants" that are ADs, Coaches, staff, etc. enjoy the high salaries and little accountability. I think the revenue stays up (tickets, TV, merchandise, etc.) but the regulation and stability of player pay (I want tax attorneys and accountants to weigh in on whether players want to be "employees"), etc., transfers, commitments, etc., will be good. It would be better if the the sides could agree without the government involvement, but if government intervention is necessary, it is necessary.

 

[HRE Otto IV]

That assumes that revenues stay flat in perpetuity.

The entire reason (or sales pitch from the PE side) is that private equity will help Utah to grow revenues, by finding new sources of revenue and/or increasing the revenues from existing sources.

Providing a simple theoretical example:

Assume Utah's revenues are 100MM per year. Assume the PE firm bought a 50% stake for 500MM. Assume a 10 year time horizon and I will not PV the cash flows for simplicity sake.

With no PE, Utah earns 100MM a year, With PE, Utah earns 50MM a year from the upfront payment and, if revenues stay flat, 50MM a year from the revenue split. So they break even on the deal for ten years and then start losing to the tune of 50MM a year in year 11. Bad deal.

However, if the PE is able to increase Utah's revenues by 20% a year (so 20MM - I will not compound the growth for simplicity sake), Revenues would grow to 300MM by year 10. Total revenues over the 10-year period would be 2.1 billion. Utah would get 50% of that: 1.05 billion plus the 500 MM upfront payment for a total of 1.55 billion. Divide that by 10 and you get 155MM a year. In year 11, they would earn 160MM (300MM + 20MM increase in revenues times 50%).

The question really boils down to whether the PE firm can help Utah increase their revenues enough to offset the fact that they are giving 50% of them to the PE firm. How much the PE needs to help Utah increase the revenues by depends on the percentage stake that Utah has sold to the PE firm for 500MM.

Without those details, not possible to understand how high the revenue bar is.

I would worry that they would try to squeeze more money out of STHs, which IMO won't work. I think SU FB is overpriced already. I believe a few years ago they used consultants to guide these prices and it was obvious that they didn't understand the market. If prices go up much more, I am out. I can watch on TV and just go to a game or two.

I think that is the case all over college FB. In professional sports the ticket prices are crazy. But there is plenty of demand. That doesn't exist as much in college.

In the NFL you don't want to give up tickets for fear of not being able to ever get them again. There is also parity in the league, thanks to the cap and draft. When at least half the P4 is well under avg capacity, you cannot treat it like an NFL ticket.

 

[javadoc]

Just an opinion:

I think the "public servants" that are ADs, Coaches, staff, etc. enjoy the high salaries and little accountability. I think the revenue stays up (tickets, TV, merchandise, etc.) but the regulation and stability of player pay (I want tax attorneys and accountants to weigh in on whether players want to be "employees"), etc., transfers, commitments, etc., will be good. It would be better if the the sides could agree without the government involvement, but if government intervention is necessary, it is necessary.

Another angle I am curious about... I work in Revenue Management (hospitality), and when maximizing revenue you often lean on the biggest spenders, possibly at the expense of excluding lower-level spenders. Viewed as a whole, what would be the strategy for maximizing the revenue of a D1 football league? Keep only the fat cats and squeeze them? Boost overall revenue by distributing talent and promoting more even competition among a broader base? If PE starts getting involved team-by-team, how does that influence (interfere) with the goal of promoting a healthy league? At the same time, teams backed by PE would have a powerful (in theory) advocate trying to ensure that their investment does not get left out, left behind, or disadvantaged in any way. Too many variables, but shaky potatoes IMO.

 

[FloridaCuse]