Cricket has never seen a salesman of the calibre of Lalit Modi, the Indian Premier League (IPL) chairman. But yesterday his efforts to sell two new IPL teams in an auction with a base price of $225 million (about £148 million) fell embarrassingly flat.
“The bids that were received were returned without being opened,” Modi said. He added little else in the way of explanation — an omission that will increase suspicions that the IPL has fallen short of the money-spinning bonanza its creator had promised investors.
It is likely that stringent bid conditions — participants in yesterday’s auction had to write a cheque for $100 million to participate — contributed to the lack of interest. Enthusiasm is likely to have been tempered by the knowledge that a side bought in excess of $225 million is unlikely to make a profit soon.
The creation of cricket’s brashest tournament in 2008 rested squarely on Modi’s success in persuading a group of Indian billionaires, Bollywood stars and international entrepreneurs to invest more than $700 million in eight untested city teams.
He pulled off cricket’s biggest coup in large part through flattery. The first wave of owners would be “regarded as pioneers in the greatest national sporting and entertainment adventure ever undertaken”, he promised in the prospectus for the original auction.
He also dangled more tangible carrots. Likely bidders were bombarded with data implying that the franchises would soar in capital value and make profits. The sales brochure referenced the world’s most valuable sports teams. One typical allusion was to how George Steinbrenner bought the New York Yankees in 1973 for $10 million, and has seen the baseball team’s value balloon to more than $1 billion.
For some owners, Modi has made good on his sales patter although no side is publishing accounts that would pass muster in the Square Mile. But piecing together the data available publicly — and combining it with what team owners will privately divulge — it seems that all, bar the ailing Kings XI Punjab, at least broke even last year.
The star performers were Rajasthan Royals, the 2008 champions and, at $67 million, the cheapest of the eight franchises. By one estimate, the team led by Shane Warne on the field made about $7.5 million before tax.
The profits owed much to Modi’s renegotiation of the TV rights package that dominates the IPL revenue. A new deal, agreed last March, doubled the sum the teams received — to about $15 million a year each. It came in the nick of time. Without it all of the franchises, bar the Royals possibly, would probably have plunged into the red.
The other indicator of the IPL’s growing value came a month earlier, when the Royals sold a 12 per cent stake for about $15.4 million to Shilpa Shetty, the Celebrity Big Brother winner, and her husband, Raj Kundra. The deal valued the franchise at a shade less than $130 million, nearly double the amount paid a year earlier to acquire it.
The two deals boosted confidence in the earnings power in the IPL — perhaps to irrationally exuberant levels. But even the most bullish of its supporters admit that the league faces a potentially brutal financial stress test, some fearing it has fallen victim, in part, to what has so far been its greatest asset: Modi’s ambition. The chairman is already increasing the number of teams from eight to ten. A further expansion to 12 franchises is likely soon.
Each franchise has two incomes: local revenues (from sponsorship, gate receipts and so-far negligible merchandise sales) and funds from the IPL’s central pot, which includes the most important source of cash: TV rights.
A proliferation of teams would mean that the central pot will have to feed more hungry mouths. Add more teams and the amount supplied to each would fall. Add four, and it would plummet by a third. Such returns from TV rights would have driven at least half the teams in last year’s IPL to a loss.
The portion of TV revenues to be distributed among the teams is due to fall to 70 per cent this year, from 80 per cent — the Board of Control for Cricket in India (BCCI), the owner of the IPL, will keep the rest — and in 2011, it will be 60 per cent. Under such a scenario it appears unlikely that any franchise sold in excess of $225 million would turn a profit in the near future and with each franchise licensed for a mere ten years, time is of the essence.
Mumbai Indians, the most expensive franchise at $111 million, paid about $11 million in franchise licence fees to the IPL last year. The new teams would pay at least double that. That burden seems sure to drive them into the red, unless they can earn far more than the present teams do from merchandise sales, sponsorship and ticket receipts — a feat that appears unlikely, since the newcomers will be building fan bases from scratch.
The diverging fortunes of the teams also threatens to mangle what Modi identifies as the central plank of his business model: the idea that all teams will be roughly equal in on-field ability.
“We didn’t want a Man U or a Chelsea,” he said, explaining how the IPL player auctions, with caps on the amount that a single player can command, have been designed to avoid one team buying all the best players.
But the most recent player auction smacked heavily of the scenario Modi has strained to avoid. Bidding for Kieron Pollard, the much fancied Trinidadian all-rounder, quickly surpassed the maximum offer level of $750,000. Sealed no-limit bids followed and he went to Mumbai Indians, owned by Mukesh Ambani, India’s richest man. People close to the process say Ambani paid $6 million, the surplus being split between the IPL and the BCCI.
Modi, it appears, may have created a Chelsea after all.
Source: Times Online