The IPL money tree

The recent fiasco with the IPL’s plan to introduce two new franchises sparked a discussion with a good friend, Vivek Shenoy, on Twitter [this is him; this is me].

The upshot [tangentially, Twitter is proving a great place to learn stuff, and to source content] is this guest post Vivek did for me, on the IPL’s bidding process and the various pros and cons:

Step 1 – To bid or not to bid

Prospective bidders need to pay Rs 5 lakh to obtain a tender document — in other words, Rs 5 lakh is what it costs him to know whether he is eligible to bid or not. And that makes this a nice way to mop up some pocket change.

It is also not clear whether the said document provides the prospective bidder with a sense of what share of central revenue he can expect if and when his bid is successful.

The IPL has said new franchises will be given access to the financials of existing franchises — which I’ve just got to see; I can so well picture a Mukesh Ambani or a Vijay Mallya sharing their account books over a cup of tea or a pint of Kingfisher’s best, as applicable. Add to that the BCCI’s — and IPL’s — track record for transparency, and it’s a safe bet that the prospective bidder is basically taking a flier with one arm tied behind his back, and a blindfold to make things more interesting.

The basic takeaway at this stage is that the IPL is planned as a rich boys’ club. Prior to last weekend’s fiasco, the basic requirement for prospective bidders was that they should have a net worth of $1 billion or over. According to Forbes, there are 52 billionaires in India, so on the surface there is a large pool to chose from. The question though is how many from that pool would, for reasons of business or vanity or both, be willing to go through this process and acquire a franchise? The answer is moot; anecdotal evidence can be accrued if you look through that list and see how many have actually bid for a franchise.

Put that thought in your mental parking lot; moving on…

Step 2 – I’m a wannabe rich boy, so let me bid:

This is when I find [having paid Rs 5 lakh for that information] that the eligibility criteria = $ 1 billion net worth, and  100 million guarantee (some say it is an advance deposit – that will make it even more worse – let us treat it as a guarantee )

That is to say, we need to get a $100 million bid bond in favour of the BCCI. A bid bond, in this context provides a guarantee to the BCCI that the bidder will pay the franchise fee (and float a franchise) if selected. The following factors come into play in this regard:

  • Bid bonds (guarantees) are generally priced anywhere from 0.75% to 1.5% annum depending on the creditworthiness (read quantum of credit risk arising to the bank from its relationship with you), the strength of the relationship, past history etc. The pricing will be higher in foreign banks and lower in public sector banks
  • Banks generally will ask for a margin (fixed deposit to be placed with them lien marked against the guarantee) of 15-20%
  • We will be submitting the bond for a non-core business activity which will therefore be regarded by the bank as a higher risk.
  • Also the question whether we are obtaining the bond as a corporate or as the promoter (most likely as a promoter)

Considering the above, let us assume that we will be able to obtain a bid bond for Rs 450 crores ($100 million X Rs 45) at 1.25% per annum with a margin of 25% (ie RS 135 crore). The tenure of the bond / margin deposit will be 1 week to mirror the bidding process (if the infamous BCCI efficiency were to be at work, one can imagine spending another week or two to get a release letter for our guarantee – but, let us give them the benefit of doubt). In passing, note that if we were bidding in 2008, we’d have had to put up a bid bond of only Rs 20 crores — so basically, the new franchises are being penalized for not taking advantage of an opportunity that did not exist then.

But never mind that. What the numbers mean is that compared to 2008, we will have to pay an additional guarantee commission of Rs 10.4 lakh. On the assumption that the Rs 135 crore we put up as margin money would have fetched an additional 3% return in the business as opposed to my margin deposit, I lose a further  Rs 7.4 lakhs. Another alternative approach is to assume that the working capital I diverted to put up the margin money now needs to be refinanced at 11%; the margin deposit yields 8% which means the spread is 3%.

It is normal for a tendering company to ask for 10% of your bid amount to prevent frivolous bids. The BCCI in its overzealousness to protect itself (refer LKM’s quote) has in the instant case asked a bid bond of 45% of the base price of a franchise. My bottom line has suffered by Rs 22.8 lakhs (10.4+7.4+5) just by deciding to bid. “

Step 3: Oops, I won!

So we manage to jump through the various hoops, circumvent the designs of sundry politicians and others playing back stage roles in the process, and finally managed to secure a franchise by bidding $275 million. Thank you for your condolences — this is when we really need them.

As opposed to a 10% of bid amount guarantee in 2008, now we need to furnish a 10 year performance guarantee for the bid amount of Rs 1,238 crores. Incidentally, no bank issues 10-year guarantees – so let us assume that it is a guarantee that will be renewed every year.

From a bank’s perspective, a performance guarantee is riskier than a bid bond, and that perception results in a higher margin. Also, the amount involved is substantial and well may surpass what our company had approached the bank for in the past. We convince our bankers somehow and obtain the guarantee @ 1.25% with a margin of 40%.  The additional amount we pay as guarantee commission is only Rs 13.92 crores, and the opportunity loss for the margin money @ 3% is another Rs 13.37 crores – ie a total of Rs 27.29 crores (what fun it is doing all this math on a theoretical basis, knowing as we do it that it would cost a pang if we were throwing away such sums even in Monopoly money].

In essence, by bidding and succeeding, we have spent an additional Rs 27.52 crores (27.29 + 0.228) due to LKM’s love for super-rich boys.  And please note that we are yet to appoint our staff, determine our team (remember the cricket?), our marketing strategy, spend on operational costs  and step out on to the cricket field.

Most of the existing franchises made thumping losses in year 1 (year 2 figures will be out only after March 2010) as seen below:

Franchise Revenues Expenditure Net profit
Royal Challengers Bangalore 4,730 8,100 (3,370)
Mumbai Indians 6,580 7,800 (1,220)
Deccan Chargers Hyderabad 4,880 8,000 (3,120)
Chennai Super Kings 6,880 7,200 (920)
Delhi Daredevils 6,650 6,800 (150)
Kolkata Knight Riders 6,880 6,800 80
Kings XI Punjab 5,980 6,640 (660)
Rajasthan Royals 5,830 5,100 730

Source: GroupM ESP

Add the above Rs 27 crores handicap to the IPL operating finances, and see where you stand. If one were to consider that the guarantee will be in force for each year of the franchise on a reducing balance (10% reduction as the franchise fee is paid out), then the second year’s guarantee commission + opportunity loss would be Rs 24 crores; in the third year would be Rs 22 crores and so on. At the end of this gestation period, long even by LKM’s own admission, what you get is a still born.

Interestingly — in a classic example of making up laws as you go along — there is a clause that says the BCCI can reduce the guarantee amount to be put up at its discretion. In the past, this clause has been used to favor certain parties [this is just one story that seeks to unravel the labyrinth that is the IPL franchise structure; here’s one that details the family tree that is the IPL — and the key takeaway is the number of different ways power players in the BCCI have insinuated themselves into the system, and are using the game they supposedly serve as guardians to, to make a nice nest egg for themselves]; today, it is the equivalent of saying, ‘Dude, drop your pants because I say so, and I will then decide whether to f*** you over or not’.

So that is the story thus far; one that hopefully sheds light on the underwhelming response to the IPL franchise auction last weekend. And now for the future — which is another story, for another day. Back with you soon.

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22 thoughts on “The IPL money tree

  1. dear ? thank you for posting the article with such in depth study. I found it informative. though I must say it is confusing. But relevant

  2. This is in details i am sure cricket is loved by most of us but person like me who never knew all this happens during the process of the event which we finally see. I am glad that i clicked on your page Through twitter.

    It takes a hell lot of effort not only to just read this amazing analysis however i’d imagine what research you might have done to come with this post.

    Greatly Appreciated !

  3. Pingback: The 3rd world view India: The IPL Extravaganza « The 3rd world View

  4. Pingback: Global Voices Online » India: The IPL Extravaganza

  5. A cogently writ analysis, tho giving a distinct feeling of sour grapes (n some gaffes like 2008 NW reqm of 20 crs n then 200 at another place).

    The 4 times increase in NW reqm or 20 times in bond shdnt come as a surprise – to a bull if he goes by the mkt worth increase of current franchisees as well to a bear if he considers the bleeding he shd be ready to suffer again going by the current owners cash out flow. Nor is it unfair given IPL growth curve in 2008 vs 2010.

    And the commy in us may feel bad about not being allowed to gate crash an A list party, but owning a sachin n jigging with a preity or backslapping an srk is not really for people who fret abt losing 5 lacs (incidentally .001% of the dreamers’ 1 bn NW)

  6. DLF Indian Premier League 2010 or IPL 3 schedule

    Fri-12 Deccan Chargers vs Kolkata Knight Riders DYP – Mumbai
    Sat-13 Mumbai Indians vs Rajasthan Royals Brabourne – Mumbai
    Sat-13 Kings XI Punjab vs Delhi Daredevils PCA – Mohali
    Sun-14 Kolkata Knight Riders vs Bangalore Royal Challengers
    Eden – Kolkata
    Sun-14 Chennai Super Kings vs Deccan Chargers MAC – Chennai

    Read More For IPL 2010 Schedule

  7. I have suggestion of a movie story. A village or town bids for an IPL franchise. Modi or his successor of course is the villian who does not want to give this said village any franchise. So this village creates a kirkit team and challenges the IPL winner with the prize that winner will get the right to brag and village gets entry in the IPL if they win.

    Hmm .. may be I can get Zee TV or someone to produce the movie .. that will be nice :-).

    I bet the movie will be hit.

    regards,
    – Shekhar

  8. Is the net worth of 1 billion a requirement for an entity or an individual?

    In other words, can normal Joes like you and me form a consortium of sorts and increase our net worth to 1 billion and bid for a franchise? (In the US Green Bay packers is one such organization).

    • The criteria should be applicable to the consortium as a whole. But practically, how would you prove this to the IPL general council when let us say 100 guys each have $10 million networth? For more clarity on how to prove whether or not we are eligible, we will have to first source the Invitation to Tender document at Rs 5 lakhs. I quote from the article itself “The basic takeaway at this stage is that the IPL is planned as a rich boys’ club”.

      And at even 1000 X $1 million networth each, the investors can hardly be categorised as normal Joes. Right?

  9. The franchisees will first decide what is the maximum amount that they can pay.

    With expenses of 25 crores per annum going to the bank, the franchisees will factor this into their total costing and will correspondingly reduce the amount that they can bid to IPL.

    i.e. the 100% bank guarantee will reduce the bids to the IPL to the tune of Rs 250 -350 crores.

  10. The only 2 teams that are above the water are the ones not owned by Billionaires. The owners are just lowly Bollywood Millionaires and they simply cannot be afford to be in the red.

    On the Other hand for a Ambani Or a Mallaya the IPL losses is hardly the worst thing that is happening in their lives. Their accountants would have their creative juices flowing in finding out ways to use these losses to avoid paying taxes on their many profit making ventures. ‘

    In Addition no amount money can buy the Publicity that an IPL ownership attracts to the Business and In case of Mallya on himself. IPL team is the modern day version of Polo teams owned by Maharajahs.

  11. The BS article is the tip of the iceberg. Check this out – Global Cricket Ventures (Singapore/Mauritius) owns the internet & mobile rights to IPL, BCCI and Champions League. IPL rights were originally with another entity (Live Current Media), but some mergers / transfers of rights later, bottomline is that GCV owns these rights now. The original fee for IPL+BCCI rights was $50 Mn. (The deal, by the way, was done without any bidding) The rights was subsequently renegotiated downwards. To what, nobody knows. GCV recently raised $10 million from a fund called Elephant Capital for a 50% stake (no idea who owns the other 50%). Elephant Capital – is run by, (heh heh!) Gautam Burman (and Mohit Burman is a Director at Elephant). Names ring a bell? Now, last year LKM is rumoured to have gone around talking to cricket boards around the world for cricket rights in the USA. It may have sounded strange then.. not so now. GCV recently acquired Willow Inc, which is a major cricket distributor in the USA.

    More tips, more icebergs… anyone know about the LKM link with Crown Entertainment…?!

  12. The joke doing the rounds has been that the IPL ‘rules and regulations’ are only available on LKM’s Blackberry. Now it seems more likely they are written on a blackboard–much easier to wipe out and re-write as when it pleases him.
    We are constantly told the model for the IPL is based on US-based franchises. But it would be unheard of for the commissioner of the NFL, MLB, etc. to have family links to franchises. The government would have its financial regulators step in and stop that kind of insider-trading.

  13. I have a feeling the average brand worth of an IPL team will be a lot less at the end of this season. CL 2009 proved that the IPL teams were no good compared to domestic teams from Australia, South Africa and West Indies and killed off the interest in IPL to some extent.

  14. Interesting post – I agree with much of what you say. I don’t see why any sane person looking to get in on the game would bid for a new team, rather than buy a stake in an existing team. An arm’s length commercial transaction would offer far better terms than Mr. Modi would ever deign to grant!

    That having been said – I had some questions on the post. (1) It is possible to get very different numbers by adjusting downwards the numbers you think banks will offer (which won’t be too unlikely); (2) An interesting factor to consider is the number of bids that are made by consortia including banks or banking group companie; (3) Bids may not always be made by individuals – large companies are more likely to participate, given the amounts involved – and therefore, the Forbes India list becomes less important.

    Your point, though, is well taken. This is an awful bidding process and are far worse than the (admittedly one-sided) bidding processes that are usually undertaken by our government. For example, tenders for power projects are based on bidding documents in a prescribed format (changes to which are approved on a case by case basis by the government), clarifications are publicly sought and given etc etc.

    I personally think the IPL should be “nationalised” and used to fund the Ranji trophy matches.

    • Anand, let us just pull back a bit here.

      One needs to also take into account that, the only publicly available information on the 2010 IPL auction prior to BCCI/IPL publishing the invitation to tender on 22 February was that the base price would be increased from $50 million in 2008 to $225 million in 2010. A reasonable investor would have made his projections/ preliminary decision to bid based on that information and the process that was followed in 2008.

      On 22 February, the invitation to tender was published and the said document comes to hand on 23 February. The bids were scheduled to be opened on 7 March as per the press release http://bit.ly/cNyuvu That leaves me with exactly 12 days to satisfy the new and absurd eligibility criteria that has now been imposed on me. If memory serves me right, the networth criteria in 2008 was Rs 2,000 crores which widens the field.

      Let me now answer your questions keeping in mind the above:

      1. You are right. But given that I have exactly 12 days (11 days if I exclude the day of submission of the bid) to work things out, the bankers have got me by the balls so to speak. Also, getting an approval from a PSU bank, which will offer a lower rate, in that sort of time frame will be next to impossible unless I cough up significant margin money. It’s a foreign bank then or the private sector banks – will they squeeze? Your guess is as good as mine. Even then, assuming 1% guarantee commission and 20% margin, I am left with a 18 crore dent at inception which is not a small sum of money by any stretch of imagination (Rs 15 crores at 0.75% – impossible to go lower).

      2. Right again. But what are the odds that 1 or more of the consortia members will balk at the new conditions that ultimately will result in the not so small matter of a 18 crore+ loss at inception? And then I have to find replacements, in 8-10 days, who are willing to take that kind of risk? Not to speak of the lawyers who will start pouring over the fine print and start billing merrily. And speaking of banking groups or large companies, there will also be the small matter of explaining all this to the shareholders in the annual general meeting.

      3. For reasons 1 & 2 stated above, it is obvious that I need to be a rich boy or at least a wannabe rich boy who either can cough up the money myself and/or influence other investors and my shareholders to sort of take my word for it. Hence the Forbes list.

      Hope the thought process behind those numbers is clearer now.

      Vivek

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