New IPL Teams: Overpriced But Commercial Winners
Sanjiv Goenka understands IPL is a long-term valuation game, a test match of patience & not a swift T20 slog, writes Amrit Mathur.
Pehle context samajhiye.
Cricket is gloriously uncertain but cricket’s economy is dead stable—it has no surprises, suspense, or turbulence. The Sensex swings wildly, the box office ratings of Bollywood biggies move up and down, but cricket’s value creeps north all the time.
Economic gurus are baffled that Indian cricket is recession-proof and it experiences no slowdown. There is proof: Indian cricket has survived tsunamis of scandal and scams, controversy, and conflict issues. No impact, no damage. After every crisis, it comes out stronger... and richer.
How It Began
When the Indian Premier League was launched in 2008, DLF paid Rs 40 crore annually for the title rights. Once it left, Pepsi stepped in at Rs 80 crore, which later Vivo upped to a staggering Rs 440 crore. So, recession? Slowdown? Too much of a good thing? Banish the thought. Arre chhodo!
The IPL has hit commercial sixes from day one. In 2008, Lalit Modi cajoled (and coerced) friends to dish out millions to support a project that was only on paper. In a ‘what an idea sirjee’ moment, they bought a dream, an investment opportunity which was a tempting lollipop that promised riches. At the time, it was a leap in the dark, a blind chaal of teen patti. Team owners didn’t know the value of the cards they held in their hands.
The business has matured since those uncertain days and the IPL is now on autopilot, its commercial trajectory rising steadily. The IPL is a money-spinner, khara sauda with guaranteed fayda.
Eye-Watering Sums
Still, cricket’s economy was jolted by the price of the two new IPL teams. The IPL economics has defeated pundits and punsters and even the Board for Control of Cricket in India must be pleasantly surprised because the base price set was a modest Rs 2,000 crore. The successful bids of Rs 7,090 crore and Rs 5,625 crore were much, much beyond expectation.
At first glance, it appears the Lucknow bid—Rs 1,500 crore higher than the next-best Ahmedabad—is over the top and deeply flawed. The aggressive bid to beat the competition is a misjudgment of the market, and the new owners paid above the MRP.
The Rs 7,000-crore price will ensure the year-on-year balance sheet remains a splash of red for the first 10 years. By making a large financial commitment to the BCCI, both teams have ensured guaranteed cash losses for themselves.
The BCCI and IPL management, as bidding concluded for new teams, on Oct. 25, 2021. (Photograph: IPL/Twitter)
Doing The Math
The broad hisaab is this: The annual cost of operating an IPL team is around Rs 150 crore. Rs 110 crore (for players and support staff), the rest for match operations, marketing and social media, travel and stay, administration, and insurance.
Some facts: Each team pays Rs 60 lakh per game to the state cricket association for staging its seven home games. Each white Kookaburra ball used in practice costs Rs 14,000!
Given this broad economics, Lucknow’s annual expense next season is roughly Rs 850 crore: Rs 700 crore franchise fee to BCCI plus the Rs 150 crore or so towards the cost of operations. From year two to 10, there will be an annual inflationary increase of Rs 5 crore or thereabouts and extra spend on player fees if the salary cap (for the 25-member squad) is raised from the present level of Rs 90 crore.
While expenses are broadly fixed, determining revenues over ten years is somewhat tricky and requires educated guesswork. Tickets and uniform sponsorship bring in Rs 100 crore each year but estimating the share of central media rights (television and digital media) for each team is the tricky part. Currently, it’s about Rs 230-250 crore because Star India pays Rs 54.5 crore for a game. But these numbers will change as a fresh media rights cycle starts in 2023, and another renewal is due in 2028.
The value of central BCCI media rights holds the key to unravelling the suspense around the new IPL franchise team’s profitability prospects.
The market expectation, considering the explosive growth of digital value and new players in the broadcast space besides Star and Sony, is that price could easily double and fetch Rs 35,000-40,000 crore for five years.
Chennai Super Kings, after winning the 2021 IPL, in Dubai, on Oct. 15, 2021. (Photograph: IPL)
It is this hope of value doubling in 2023, and climbing once again in 2028 that has triggered the aggressive bids for Lucknow and Ahmedabad. But even if this is achieved, the cash shortfall for the high-priced Lucknow franchise could be in the range of Rs 2,000-2,500 crore over 10 years.
What The Future Holds
Why then is Sanjiv Goenka, the happy owner with the big pockets, bullish about his investment, announcing confidently he has done the math and crunched all numbers?
The answer to this Rs 7,090 crore question lies in the likely appreciation of the asset he now owns in perpetuity. After 10 years, his brand would be established and IPL’s annual business is expected to be cash positive. At that point, if he so wishes, he could easily sell and cash out with a fat profit. Or, wait patiently, and allow the asset to appreciate further.
Sanjiv Goenka with Virat Kohli, on Sept. 9, 2017. (Photograph: Virat Kohli/Twitter)
Still, unlike media rights and sponsorship income, team valuation is inexact and hazy but two recent transactions provide an indication of market sentiment. In 2018, GMR and Jindal Steel cut a deal valuing the renamed Delhi Capitals at Rs 1,100 crore. After that, ownership stakes changed hands at Rajasthan Royals when the team’s worth was Rs 1,800 crore. Kings XI Punjab has been in the market looking for Rs 2,500 crore but a deal hasn’t gone through. These established teams also have the option of offloading minority stakes to financial investors or the public markets. The two new owners are likely to wait for value to build before diluting their ownership.
So, is Rs 7,090 crore the new value of an IPL team? Of course, it isn’t—that is Goenka’s number, not of the market. But observers feel the value could touch Rs 5,000 crore as future revenues/profits are guaranteed.
There is a premium on owning an IPL team because it has a barrier to entry, and the league has a contractual cap of restricting it to 10 teams. Exclusivity and lack of supply will drive price, not to forget the enormous ‘non-economic’ benefits of owning a team.
IPL owners are an exclusive, entitled group who get media attention, image building and networking opportunities, and fantastic bragging rights that money can’t buy. It costs money to have Virat Kohli on speed dial!
Amrit Mathur is a sports administrator, having served as General Manager at BCCI; Manager of the Indian cricket team; Chief Operating Officer of Delhi Daredevils; and Adviser to the Ministry of Youth Affairs and Sports.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.