The stark financial outlook facing regional rugby in Wales can be revealed under a proposed new funding deal with the WRU, with benefactors having to provide £25m of fresh equity investment and a huge cut in rugby squad budgets.
With the union in turmoil with allegations of sexism, racism and misogyny, it has been in talks with the four regions - Cardiff, the Scarlets, Dragons and the Ospreys, for around 20 months , via the Professional Rugby Board (PRB), over a new six-year funding deal.
If agreed the deal would be backdated to the original intended commencement date of July, 2022, and run to summer of 2028.
A copy of the heads of terms document, obtained by WalesOnline, shows that as well as a requirement for major benefactor investment, if the union has a retained profit deficit of more than £1m at year end, it could clawback the amount by reducing funding to the regions - although there is an upside distribution clause if the union’s retain profit exceeds £1m.
The last funding deal with the regions, so called Project Reset, was supposed to see an end to the regions being reliant on benefactors - with agreement that saw them converting outstanding debts in equity. However, the new funding model, as well as a requirement to inject millions, would also see them having to underwrite any underperformance in their respective regions on agreed revenue generation and cost-savings targets.
Any deal, for which the current heads of terms are not legally binding, is contingent on the WRU exiting its majority ownership stake in the Dragons or having received a binding buyout commitment.
The £18m of debt that the union secured for the regions during the pandemic - which initially came from the UK Government’s Coronavirus Large Business Interruption Loan Scheme (CLBILS) via NatWest Bank, and which was later refinanced with a 20-year repayment term with the Welsh Government - remains a liability for the regions. The cost of debt, with capital and interest payments, is around £400,000 for each region annually.
Assuming a deal can be agreed and backdated to last summer, rugby squad costs in the regions would be £28.7m this year (there is a current year £23m deal with the union) falling to £23.5m in 2023/24 and then remaining at £18m until 2028 - a fall of £10m. This will see a significant fall in salaries for players and in squad numbers.
Lots of players in the regions are currently in the final year of long-term contracts. Players in demand could seek to play elsewhere, whether in England, France or Japan.
A chart in the document shows funding across the four regions for squads, coaching, rugby operations and academies (rugby costs) of £42.9m for 2022-23, falling to £32.1m in 2024/25 and reaching £32.5m by 2028.
To make up projected deficits between revenues and costs, Cardiff and the Scarlets, would take on new debt from the union - financed via a bank - with a combined value £7.6m and repayable over the six years. That would push up their debt servicing costs - alongside the repayment on the Welsh Government debt - close to the £1m a year mark. The regions are also facing a fall in income from European competitions.
The regions would each have to put forward an approved regional investor - which could be more than one - who collectively over the six years would have to inject £25m of equity. Their investment stakes wouldn’t carry an option for dividend payments The biggest equity injection under the regional funding model would be £8.9m in 2023-24.
The document calls for a “direct contractual commitment for each region’s principal investor (s) to provide certain levels of equity funding to the region and to underwrite the commercial performance/cost targets of the region.”
The WRU’s funding for the regions would come in part from the proceeds it has received - with monies still to be drawn down - from private equity firm CVC Partners after deals to acquire minority stakes in the United Rugby Championship and the Six Nations.
Under its former chief executive Steve Phillips, who resigned over the weekend following intense criticism around the culture of the union, the majority of the CVC monies had mainly been earmarked for Ebitda (earnings before interest, taxes, depreciation and amortisation) capital enhancing projects such as a planned roof walk attraction at the Principality Stadium and an interactive rugby museum.
The union’s majority stake in the Parkgate Hotel, next to the stadium on Westgate Street, has been financed solely through long-term borrowing from financial services giant L&G.
The new funding model also identifies the regions having to significantly drive up their own commercial revenues - collectively £13.8m in the current financial year to just over £20m in 2028.
The regions could work harder in generating their own revenues, as well as creating greater diversity in the make-up of their respective boards and executive teams.
However, their close proximity along a 60 mile stretch of the M4, means they are often chasing the same business targets for sponsorship deals; compounded by the tough economic realities of a limited number of headquartered large corporates in South and West Wales with big discretionary marketing budgets.
They are also competing with three professional football clubs, Cardiff City, Swansea City and Newport County, and a swathe of commercial media organisations. The URC competition, with teams from Scotland, Ireland, Italy and South Africa, also does little for away fan support - apart from Welsh derby matches.
Cardiff, Scarlets, Ospreys and Dragons could work collaboratively on trying to secure cross-region deals and in recent years have competed unnecessarily against each other in signing some players and thus increasing wage costs.
However, the WRU, and this could be a priority for the next CEO, could look to reduce its running costs in all area. In its last financial year it had a head count of 376 - although nearly 100 came under the Dragons - which had carried of a cost £20m. It also has an £8.9m repayment to debenture holders in 2024 - despite in recent years reaching agreement with a larger number of debenture holders to push back maturity dates.
The CVC deals - which on the RBS element is still to be drawn down in full - provide the WRU with around £70m of funding.
The challenge will be ensuring that CVC, working with the unions, can grow future commercial revenues that will offset diluted stakes, and therefore reduced future revenues, for the governing bodies. The WRU could have opted not to have diluted its stakes in both competitions and instead sought to provide finance for all aspects of the game through securitised funding against future Principality Stadium income. However, the deals with CVC are done and both the respective unions and the private equity firm will need to deliver increased commercial revenue streams as a priority.
The funding model also provides for the regions being able to bring forward future contributions from the CVC monies from the WRU.
If a deal isn’t reached there is a danger of them - under the going concern fiduciary duties of its director - becoming insolvent.
What would happen then? There would unlikely be much new investor appetite to take on the regions with all the required investment. The WRU could be forced to intervene and create new rugby companies with players transferred across. It could then, with ownership of the Dragons, do what many in the game have felt for years - which is that Wales cannot sustain four professional sides.
The financial position of the game in England, in a report from the a DCMS select committee of cross party MPs in Westminster, was labelled unsustainable with two clubs recently having been put in administration, Worcester and Wasps.
PRB chair Malcolm Wall said: “Professional Rugby Board negotiations are currently at an advanced stage with verbal agreement reached and a heads of terms document signed on a new six-year deal for the professional game. This agreement has been signed off and endorsed by the WRU board and each PRB member.
“Whilst delays in reaching agreement have been regrettable it has been vitally important to get the detail right in the best interests of the whole game in Wales.
“Signing the heads of terms agreement has enabled our professional sides to begin contract negotiations with players now, on a conditional basis.
“Conditional contracts are now available, giving players details of their individual offer.
“The conditional requirement is included to provide reassurance to players in the time between the verbal agreement being reached as described and a full formal agreement being signed by all parties, endorsed by the WRU board, regional boards and relevant banking consents being received.
“There is still much to do, but the PRB will continue to work hard, together with the WRPA, for the benefit of all parties.”
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