CVC Capital Partners will be targeting approval from the ATP and WTA board later over a $600m deal that would combine the men's and women's pro tennis calendars under a single commercial group, One Tennis. CVC would hold a minority interest in this entity. The merger of the two tours is believed to have been on the minds of tennis executives ever since the pandemic.
The private equity giant has a lot of experience in the sports sector, particularly with its decade-long ownership of F1 before selling it to Liberty Media in 2017. From the Six Nations rugby tournament to the International Volleyball Federation, the firm's track record in the sector reflects the growing sentiment that the global sports industry is an attractive opportunity for private equity.
CVC is looking to acquire a 15% stake in the new commercial group (One Tennis), which will manage both the media and data rights (commercial rights) for both tours. One Tennis would also retain the right to sell data to gambling companies. The men's ATP tour has a commercial contract in place with IMG for betting data, and the WTA has a separate agreement with Stats Perform. The current value of the deal is $4bn.
The deal will not include grand-slam events including Wimbledon, as they are organised and run by separate governing bodies, such as the All England Club.
If completed, CVC Capital Partners will become a major powerbroker in three sports.
CVC believes that it can extract significant value by combining both the men's and women's tours, which will also help accelerate the sports recovery from COVID-19.
The firm's expertise in media and broadcasting and provision of liquid capital will enable the tours to receive critical investment to develop and expand its fan base. As well as increasing investment in the ATP/WTA tournaments, CVC might also improve the digital broadcasting platforms to widen access to the sport, or bundle media rights packages to sell globally.
CVC also benefits from the lower-priced valuation as a result of the pandemic and low-interest-rate environment.
Why is a low interest-rate environment beneficial?
Firstly, it's important to remember that PE firms invest in companies that show signs of growth potential. Whilst the particular structure of the deal may vary, the most common form is a leveraged buyout (LBO). They do this by taking on large amounts of debt to meet the cost of the acquisition. This means that there is a higher ratio of debt to equity.
The benefit of an LBO here is that there is a higher return on equity than with other methods because CVC can use the tour's commercial profits to pay for the financing costs.
The low interest rates mean that CVC will make smaller payments, which will help them achieve a higher internal rate of return (the profitability of a potential investment). This rate is highly dependent on the interest rate because the higher the interest payments to the lender are, the lower the profits will be.
CVC had previously acquired their stake in Formula One in 2006 through a leveraged buyout financed with $1.1bn of debt from RBS and $965.6m from one of its investment funds.
Why sell a minority stake?
Despite the global appeal of tennis, the tennis tournaments for both ATP and WTA are struggling to increase the sport's popularity, particularly among the younger generation. Serena William's coach, Mouratoglou raised concerns after admitting he is "seriously worried" for the sport's survival if it didn't adapt and improve.
The deal will bring in strategic expertise in broadcasting and technology to improve the sport and help drive growth. For example, through the centralisation and monetisation of fan data. Following the ATP chairman's criticisms of the way tennis media rights are currently structured, the deal allows CVC to restructure the tour's commercial assets in a way to boost profitability.