In my recent Twitter post I showed my apprehension regarding the 2 new teams getting sold for more than 3200M US Dollars. And After doing a bit of maths I have come to know that How correct I was. The total money raised by the 2 new teams are equal to the amount raised by all 8 teams combined 2 years back. On roughly estimates, The valuations of teams have gone 4 times in 2 years, at least the number suggests. As we don’t have a proper valuation method to calculate the value of each franchise, taking the value of two new teams we have come to a conclusion that the existing ones too have grown accordingly in last 2 years. And may be this is the fact that even the PE Players (Private Equity Players, fund houses those put their money in high growth business model) are very much interested in putting their money in this model.
Coming to the new buys of Pune and Kochi Teams, Its owner has paid staggering 370M US Dollar and 333M US Dollars respectively. The amount would be payable to IPL in equal installments for next 10 years. They will be in the action from next year onwards. One always wonder, after putting this much money just for getting the franchise, How would these owners would make money out of it? Well.. Stop thinking, It’s a simple arithmetic that will help us to understand How these owners will get money back and by what time they will reach their break-even point.
Let’s take the example of Team Pune that has been bough by Sahara-
Total Outflow For the First Year-
Heads Amount (US Million Dollars)
1. Franchise Fee --- 37 (370M dollars will be paid in 10 years)
2. Players Cost --- 05 (Taking out the average amount being paid by rest of the franchises towards the players buyouts)
3. Stadium Cost ---- 01 (For 9 matches that will each franchise will own in its home town)
4. Travel and Boarding ----0.5 (Again the average as per existing teams)
5. Coach, Support Staffs ---- 0.5 (Estimated)
Total Outlay for the First Year---- 44M USD
Now let’s talk about the inflow during the first year-
Major Source of Revenue Amount (in US Million Dollars)
1. TV/Media --- 7.2 ( Total divided now between 10 teams from 2011)
2. Central Sponsorship ---- 3 (60% of Share pool; Rest 40% to IPL)
3. Local Sponsorship ----- 2.75 (estimated average of past two IPL editions)
4. Gate Money ------ 1.8 (assuming 30000 paid tickets sold for Rs 300/- over nine matches @ an USD/INR exchange rate of 45/-)
5. In Stadium Ads ----- 1 (these are usually sold as package to local sponsors)
6. Merchandise ----- 0.25 (liberal Projection)
Total Inflow during the 1st Year----- 16
Total Loss 28M USD (For the First year after investing 44 M USD)
Even if we consider the number of matches getting to 94 in place of 60 in the current format nad we appreciate the inflow accordingly , It will give a loss of 19M USD. With the roughly calculations That I have, the new 2 teams will take a minimum of 7-8 years to break-even (that too being very optimistic). There are just few low priced franchises that is about to break-even (like KKR and Rajasthan Royals) but that also It will go to red once the revenue will be distributed among 10 teams in place of 9.
I think owners of the existing 8 teams would be feeling lucky with the kind of valuation they have. And I would not be surprised if they sell certain percentage of their stake to third party such as PE players or NHIs to improve negative cash flow. The IPL business model ensures that even after they break-even (after 5 years) they are unlikely to experience a significant growth in net profits as city-based teams have a limited market size of penetration.
With franchisees getting a declining share from the 6th year onwards, they will face financial pressures forcing sell-outs, either partial or fully unless their local sales are high, which is extremely unlikely. Part equity sale and new owners taking small stakes will happen for infusion of cash. Teams that continue to be laggards on the championship table will face huge financial crunch as they will not attract big advertisers.
There are those who argue that at the end of the 10th year the franchisee will be profitable as he will have no more financial obligations to IPL but by that time IPL will probably corner the central pool of revenues as well. So is the gestation period a 10 year wait for real profitability? How many owners are willing to fund a loss-making operation for just two months of ego-trip and Page 3 razzmatazz?
Perhaps the biggest risk that IPL, BCCI and Lalit Modi are taking is their arrogant belief that cricket can be sold and sold till the cash-counting machine collapses in India. It will. But by then there may not be enough to count.
Regards-
Nandlal
