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The CVC La Liga Deal: David vs Two Goliaths

Private Equity is back in the news again, and more specifically back in the sporting news. Throughout the past COVID-19-stricken year, PE firms have made multiple inroads into some of the largest sporting markets in Europe, with the Spanish top-flight football division of La Liga being the latest in a growing line of leagues to be offered significant financial backing by Luxembourg PE firm CVC. With dwindling viewership, little to no ticket sales, and mounting transfer and wage debt, it is no secret that La Liga and its 20 clubs are becoming a distressed asset. Therefore, with CVC putting €2.1bn on the table, of which 90% is distributed between the 20 teams, almost all of the clubs involved see this deal as a major turning point in their collective financial fortunes. However, La Liga is far from a perfect democracy. In fact it’s almost a complete duopoly, with Barcelona FC and Real Madrid taking home a combined 23% of annual La Liga broadcasting revenues each year. With these two clubs being so disproportionately important to the stability of La Liga, any revenue package that aims to be proportional will evidently make these teams lose out. This is where the CVC deal becomes controversial, with its implications leaving the future of La Liga hanging in the balance.

The deal in detail

CVC Capital Partners has agreed to pay €2.1bn for a minority stake of around 11% in La Liga’s television rights for the next 50 years. The deal values La Liga at €24.2bn and will see a new company being formed to control the league’s commercial activities. This deal comes at a time where PE investors are rapidly increasing their exposure to sports markets due to the growing demand for alternative sports-related content in light of the pandemic. It also fits well with sports media providers who are desperate to find alternative sources of capital investment to boost revenue streams. 

The capital from the investment will be split three ways. 15% of the money will be used by La Liga to pay off existing debt, whilst another 15% can be used for player acquisitions in the transfer market. The remaining 70% will be dedicated to Capex for infrastructural improvements. According to La Liga, this includes sports strategy, international development, technology and data, content development for digital platforms and social networking. When it comes to La Liga’s management of the deal, a centralised committee including all clubs in the top two divisions was allowed to vote, with a 2/3 majority agreeing to the financing package CVC planned out.

The La Liga and CVC perspective

As pointed out in the deal details, the CVC financing for La Liga would lead to cash injections for all of the member clubs, regardless of their size and attractiveness for institutional investors. Therefore, the deal has bypassed a lot of the difficult and often impossible debt raising that small clubs must go through in order to maintain stability. This context is extremely important for La Liga teams as the impending risk of relegation and ensuing losses in media revenue has almost always deterred mainstream lenders. An even more important bit of context relates to the roughly €9bn worth of revenue that European football teams have missed out on throughout the last two pandemic struck seasons. Along with this, spending on players in the transfer market has been slashed to around €3bn in the biggest European leagues, highlighting that cost-cutting has been equally as important as finding capital. 

Within this climate it becomes evident as to why CVC and La Liga are itching to get this deal across the line. As the corporate MD of La Liga states, “Everything has to evolve to adapt to new ages”, highlighting that the mounting financial pressure of the pandemic requires intuitive, stable and new solutions. Moreover, bringing financial backing to lower-level clubs leads to broader financial stability which creates a ‘stronger security within football compared to case by case business’ as put by BDO consultant Ian Clayden, who assesses club’s financial health.

The Super League perspective

Despite the CVC deal seemingly offering a modern and collective solution to the financial misery being experienced in La Liga, the two biggest teams in Barcelona FC and Real Madrid have shown strong opposition to the deal. The first issue lies within the seemingly democratic voting process organised by the league, in which the two clubs have no more power than any other club. This makes them almost powerless to the major loss of equity they would experience if their own audiovisual rights are compromised by the deal. This is almost certain as the two clubs operate a system of exclusive audiovisual rights sales on a competitive basis every three years. Beyond this, the two clubs believe that CVC is getting a cheap deal, with the financial conditions of the contract giving CVC annual returns of over 20% as reported by the Real Madrid club statement. 

Despite the lack of clarity and competitive proceedings being held as the key complaints by the two clubs, it’s evident that there is a deeper and darker issue. Real Madrid and Barcelona FC are in financial crisis with eye-watering levels of debt, with the latter having around €1.35bn of debt and a negative net worth of €451m. With such a dire financial situation, dire solutions have to be put forward, and for the two clubs, the European Super League was meant to be the saving grace. This league, composed of 20 leading European teams, was set to trump the Champions League as the premier theatre for elite football, thereby drawing in massive media revenues for all members. However, as the league swiftly fell through, the main organisers in Barcelona and Real Madrid had to return to square one, sinking back into their pile of debt. Inherently, the CVC deal, by splitting money in a fairly equal fashion, would do little to claw these two clubs out of their debt. Therefore, the solution for the two clubs is far more in the direction of another standalone league where the clubs have full autonomy over their expenses and revenues, mainly at the expense of everyone else in the league.

Can David slay Goliath?

Having seen all elements of the deal, is it actually realistic that CVC and La Liga manage to stave off the huge opposition by the two big clubs? Seeing as Real Madrid have already launched civil and criminal lawsuits against the president of La Liga and the chief of CVC Capital Partners, the answer will not be confirmed for some time. However, the workings of the deal, and the popularity of it with smaller clubs suggests that similar financing structures might arise in other sporting climates, allowing for institutional investors to tap into the collective stability and revenues of major sporting media. Put simply, private equity has the potential to become a mainstay in sports finance.

Sources

https://www.skysports.com/football/news/11095/12378905/spanish-football-federation-brands-la-ligas-proposed-cvc-investment-completely-illegal-and-appalling

https://pitchbook.com/news/articles/cvc-capital-32b-for-spanish-soccer-la-liga

https://www.ft.com/content/ebe8923b-0c29-4d1e-8cff-677d46c76817

https://www.skysports.com/football/news/11833/12383071/barcelona-debt-up-to-1-15bn-as-joan-laporta-slams-josep-maria-bartomeu

https://www.theguardian.com/business/2021/aug/10/real-madrid-to-sue-la-liga-and-cvc-chiefs-over-proposed-27bn-deal

https://insidersport.com/2021/08/13/cvc-secures-laliga-approval-but-el-clasico-remain-opposed

https://www.sportspromedia.com/news/barcelona-real-madrid-la-liga-tv-rights-money

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