Who is going to be Sport’s LVMH?

That splendid Kiwi in Madrid, Michael Sutherland sent me this podcast on the story of the luxury conglomerate LVMH. From nothing, Arnault pulled off the greatest roll-up strategy ever. I drank in the 3 hours of the tale with so, so many things upon which to reflect. Take the time, it’s glorious.

It got me thinking that, in recent weeks, in these Columns, we’ve had a look at sports valuations through the theory of the corporate financier.

Namely, what is the appropriate discount rate for sport now, as the risk-free cost of capital has moved significantly north, close to 5%?

And then, on top…

Are we pricing in risk, fully enough?

• Can broadcast rights grow, or even hold, value in the face of the challenges in the media sector, subscriptions fatigue: piracy, GenZ apathy for 90m, etc?
• Can the whole governance structure withstand the polarisation and arbitrage forces of Super Leagues?
• Does a Gerry Cardinale appreciate the full country volatility of, say, an Italy? He is now getting bogged down with politics.
• What about on-field variables like relegation and not making top 4?
• Has there ever been a more unstable geopolitical scenario?
• Has the collateral risk of the funding partners, like banks and VCs, been complacently ignored? CreditSuisse and Silicon Valley Bank.
• What happens if leverage needs to unwind?

All of this should be included in the Capital Asset Pricing Model (CAPM) of any professional investor assessing sport deals.

As should:

• Will the US betting market save the day?
• Will the shift to B2C?

The rate used in sport’s discounted cash flows (DCFs) is way too low.

But, like everything these days, one suit doesn’t fit all. There can not be a homogenous opinion. Sixty shades of grey.

It is however unescapable that some sports assets, be that rights holders, ancillary media/data businesses, or sporttech, will be taking a very significant haircut in valuation. Two examples I am using a lot these days:

1. Serie A broadcast rights aren’t going to hold the value assigned them last time by DAZN.

2. The valuation Bain paid for DeltraTre is way above today’s mark to market for that streaming supplier.

Both of these are good assets, be clear. But, perhaps, rather overvalued.

We are now in a Sport Special Situations market.

What does that even mean?

Special situations corporate finance describes companies or assets which, in that moment in time, are being traded lower than their fundamental value, for whatever reason. They may have fallen out of favour or have hit a road bump. They may be short of capital. But they are all a nice bargain. 90% of doing well in business is buying well, as opposed to selling well.

Finding these opportunities has always been called “value investing”, when you use your experience and skill to identify “situations”, where the markets seem to have gotten valuation wrong.

This is exactly how the investment world used to be, before everyone just bought a basket of shares in an index or an ETF. Today’s passive investing has dominated the last 25 years because everyone felt that all stocks were protected by Government Federal Reserve intervention (The Fed Put), and could only go up. This has become a meme called “buy the dip”.

The bible for the old stock pickers, value hunters, proper investors, is a book from the doyen Ben Graham.

“The Intelligent Investor”

This is the book that informed the life and career of many, including the famous Sage of Omaha, Warren Buffet of Berkshire Hathaway (the greatest conglomerate in the world). You can buy a zillion books on the Warren Buffet Way, his axioms and dos/donts. And they are all great. Get a library card and plough thru this stuff. Ps: get a library card in general. It’s the golden ticket to do well in life. Read books.

So, if we are now exiting this era of cheap money and Fed Puts, of the momentum meme stock, of the PT Barnum leaders like Musk, of fraudsters selling snake-oil on the back of easy and abundant capital, I’d be suggesting to sport, and indeed to all businesses:

Do a deep dive on Buffet, Berkshire and how they operate.

This Sunday morning, therefore, I would like to discuss the specific practicalities and likely outcomes of the Buffet way of thinking to a world of sports assets that are, or will be, undervalued, maybe severely distressed, short of cash. What’s gonna happen?

We need to return to the word above: Conglomerate. A word fallen well out of vogue, replaced in common parlance by “fund”. It’s now the PE and VC funds who invest, but it didn’t used to be. It was the conglomerates: holding companies of a group of different businesses, assembled shrewdly, normally by build-and-buy acquisition. The best conglomerates will have synergies and economies of scale, deploy finance across businesses that give a return, with hopefully a good balance of capital needs. It’s a bit like building a sport team. It’s the mixture and balance, as much as each player, that builds success.

LVMH in fashion is a stunning example of conglomerate thinking.

There are so many learnings, from LVMH, for the kind of markets we are about to enter. Especially for sport. And why it is the subject of today’s Column. This, I think, is our future.

Here is the simplified conglomerate playbook, often called a roll-up plan. Conglomerates for Dummies.

1.

You buy up companies in an established industry that is normally fragmented, lacking a dominant player (sport is ideal, so was luxury).

The acquisitions you make should be with clear governing criteria, looking for companies where you can eliminate duplicate costs, but also improve revenues and marginality, by unlocking in the new company better efficiencies, better distribution, a top brand, economies of scale, a common tech stack, CRM etc. You will also be looking for acquisitions that can allow you to capture more of the value chain with vertical integration. See Disney and Bamtech.

2.

You buy these companies well, at a “bargain”.

Often conglomerates will make these acquisitions paying in equity, with their own listed shares (which are usually very highly rated for growth). Eg: my conglomerate Roger PLC is valued at 20 times profits. If I can buy a target company at a valuation of 10 times profits (with my shares), then, that is immediately accretive. Sorry this is very “hard finance” but, what I’m conveying is that once you get going, your success feeds on itself, especially if you are listed.

3.

At the centre of the conglomerate, you are allocating capital and finding the best C-Suite operators for your subsidiaries.

You, moreover, build the best central services possible, to help those companies.

4.

Here is my favourite bit, the Buffett secret sauce.

You make sure you own a business that doesn’t consume capital but, ideally, generates it. Why does Buffet invest in insurance? Let’s hear him explain:

Insurers receive premiums upfront and pay claims later. (…) This collect-now, pay-later model leaves us holding large sums — money we call “float” —  we get to invest this float for Berkshire’s benefit.

In short, he uses the float to fund his other stuff at Berkshire. I’ll stop and let that sink in.

This old concept of working capital management and capital efficiency hasn’t been popular of late.

When you can get sovereign wealth, PEs and VCs to throw unlimited capital at you at zero cost, why bother husbanding your capital well?

Times have now changed. Capital is scarce and costly. There will now be a premium on businesses like insurance, like Amazon, like supermarkets, that all have a “float”. Eg: at Walmart, suppliers get paid in 45 days at best, but customers pay immediately. Successful investors like Buffet always look for businesses that, by their structure, require little capital. Here is what he was saying in 2017 about the FAANGs:

I believe that the five largest American companies by market cap (…) have a market value of over two-and-a-half trillion dollars (…). And if you take those five companies, essentially, you could run them with no equity capital at all. None.

People will need to know this finance stuff. The Buffett secret sauce is going to be a big theme in a world of costly and finite capital. Less focus on top line growth, more attention to EBITDA and cashflow positive. Ideally, all done with the use of as little capital as possible.

All this used to absolutely be a British core competence. You may remember, on the AYNE podcast, Elliot Richardson mentioning Hanson and White?

“Larry”, in this Wall Street clip, was modelled on Lord White.

 

Hanson PLC, James Goldsmith, Williams PLC were all amazing success stories for British business, almost always run by hugely skilled personalities, with gravitas the size of Jupiter. Read any obituary of them. Like Gianni Agnelli, playboys all, corporate pirates, strategists and visionaries, creators of empire and value.

Sir Francis Drake transplanted into the 80s finance world.

Check out this truly extraordinary interview, from 30 years ago, of Goldsmith by Charlie Rose. He saw what we have now lived through with crystal clear vision. A business genius.

So now we’ve done the set-up, how does all this apply to sport?

Firstly, we need to look at the assets we want to buy and ask what their capital needs are.
Take soccer. In Europe, investment is often required in a very costly stadium. Ask Roma, AC Milan, Chelsea, Tottenham Hotspur FC. In the US, conversely, franchises often require their host city to build the stadium, with the threat that if they don’t, they will up sticks and leave that city.

This is why Las Vegas is without many sports franchises.

It is convenient to have that town as the “threat of leaving” city.

There are also no big investments in players transfer fees in American sports. Thus, US sports franchises are capital-lite, compared to their European cousins. That’s a huge advantage.

Come back to DeltaTre, and any tech business. What is its “technical debt“? Defined as the fresh capital a business needs to deploy in order to get its tech stack up to pace?

We all need to look at the sports industry with these fresh eyes.
Balancing capital needs, full-risk profile, and product market-fit.

We need to be better, smarter, more PRO.

Use our advantages. Eg: Season tickets are upfront. TV money is up front. Sponsorship. Sport gets paid in advance, and SHOULD be a capital efficient business that has Buffett’s “float“. Something goes very wrong in how it pays players, sadly. Lord Sugar and prune juice.

But the point remains:

It is time for the sports conglomerate;
a Berkshire Hathaway of Sport, an LVMH of Sport.

Employing all these above techniques, with fully empowered strategic CFOs. Taking advantages of the imminent haircut valuations. Rolling up the best assets. Capturing synergies and economies of scale, improving them with the best central services, especially in rich data, vertical integration, brand, etc etc.

Interestingly, all this, in theory, is the PE playbook. They would say they are the modern conglomerates. The best ones maybe are, when they actually get their hands dirty in the businesses they buy.

But CVC and Nick Clarry have not applied this to sport, as far as I can see.

He is doing deals simply based on a punt on increasing sports rights. He has for example NOT rolled up his sleeves and knocked the crazy blazerati governance into shape. A major error. Our industry ponders confidentially (“off the record Rog”) whether he will learn next time.

His whole thing seems to be a bet on increasing TV rights and an opening US betting market. He’s betting on top line, not efficiencies. That is not what Arnault did.

The Americans have some examples of sports conglomerates, from Liberty, to Fenway, Kroenke, Glazers, Bruin, Redbird, Jerry Jones. But their assets are still pretty stand alone, as far I can see.

So I wanted to analyse a European example, but, frankly, they are very thin on the ground.

I went to an old mate for a chat to help me.

Y11 is run by former elite international athlete James Davies-Yandle. From the outside, the company is operating just like Berkshire or LVMH, with a good balance of capital efficiency. When it sees opportunity, special situations, it has easy access to significant backing via a very major financial institution with $5bn under management. You won’t find much else, as Y11 and James are very secretive. But James has been on AYNE, so I asked him a favour of some more insight, straight from the horse’s mouth.

He allowed me to put it on the record below:

All your conglomerate finance theory is true, Rog, but we need to start somewhere before.

Sport isn’t a normal asset class for a roll-up, as the product is too special.

The first attribute a sports conglomerate needs to have is empathy with the traditions of the product.
EQ with the passion of the owner who built that asset. We want the sellers of sports businesses to look at Y11 as the right custodian for what they have built, and take it forward.

We are good at spotting unrealised value in sports assets, bringing them into Y11 and helping them be bigger and better businesses, using our capital, services and expertise at the centre. Both through cost efficiencies and especially revenue uplifts.
Every asset we have bought is with an eye to grow it very significantly, as part of our family.

In rugby,

we want to take good clubs and franchises that are underperforming and help them, in a similar multi-club strategy to City Group.
Player pooling, central skills on recruitment and coaching, development paths. Group branding and commercial monetisation. We like rugby as a vertical, in that it is a unique sport with great values, and loads of room for improvement, which with CVC now involved, offers great potential for better structures and governance.

In our Endurance division,

we want to take heritage IP races and marathons and bring them into a bigger brand, “Challenge”. This is likely going to go beyond triathlon to represent a whole community of likeminded endurance and wellbeing participants. This will be a world-class brand and B2C business, if it uses the right skills and tech.
Races seems to want to be part of our vision and be part of a bigger group.

Our football division,

focusses on mass participation, youth primarily, rather than the top pro clubs. It targets new formats, inclusive camps/academies and utilises legendary players after career. We will continue to operate like this. And the opportunities are abundant.

We have got great backers and can move quickly. We believe that our main advantage is that we absolutely get sport, with passion and EQ. I never made the Olympics because I had a horrendous injury just before. Understanding the glory and pain of sport is essential for what I do. This is an industry that doesn’t really like the “suits”, so we don’t act like one. But when I’m with my backers, I know exactly what I need to be doing on the investment side. It is for sure finding the balance between sport and finance.

Forget the Netflix of Sport. Think the Berkshire Hathaway of Sport.

Or perhaps an even better analogy, given the special product James describes…

The LVMH of Sport. 

It may not be Y11 who claims this title, as George Pyne and Gerry Cardinale are superb talents also, but this is the model to take advantage of sport’s era of the Special Situation. And I’d have a little punt that

James Davies-Yandle is in the final conversation to be sport’s Bernard Arnault.