Why IPL is bad for shareholders

Markets have never rewarded companies who have diversified into businesses unrelated to their core activities. Even the largest pharmaceutical company, Sun Pharmaceutical, was also not spared when it decided to invest in wind power. The company ultimately decided not to go ahead with its plans.

But there are still a few promoters who continue using their listed companies to diversify into unrelated businesses. The latest being electric utility player CESC and its group companies. CESC on Tuesday said New Rising Promoters Private Limited, a CESC subsidiary, has won the bid floated by the Board of Control for Cricket in India (BCCI) to acquire rights and obligations to operate Pune franchise of the Indian Premier League (IPL).

This is not the first time CESC has diversified in unrelated businesses. Being a utility company, CESC generates a steady cash flow which keeps on accumulating. The company has used this cash to diversify into software by acquiring Firstsource and retail through Spencer’s.

However, the RP Sanjiv Goenka group seems to have outdone itself by buying the Pune franchise. Broking firm Antique in its client note terms the purchase as a negative development for the company as it expects cash outflow of Rs 100 crore per annum for this team. Topline will be heavily dependent on team winnings, says the report.

There is a jinx around listed companies buying out IPL franchises. India Cements, Mallya group, Deccan Chronicle have all suffered after directly investing in these franchises. Though Mukesh Ambani’s Reliance group owns the Mumbai franchise, the investment is not in the listed company.

Not only have stocks of companies owning sport franchises been affected but also their financial performances. IPL investments are a big distraction for the companies. They take the focus away from the management. Further, the company’s fortunes are also related to the performance of the team. A well-performing team usually attracts sponsors, and money is  not a problem for them. But the owner of an average performing team has to keep its players in good spirits and pamper them by using the company’s money. We have seen this happening in earlier cases where exiting assets of the company was used to leverage and finance the cricket team.

Long-term investors start leaving the company while banks turn jittery financing ventures placing bets which have nothing to do with their normal business.

As for CESC, Chairman Sanjiv Goenka in an interview tried to clarify that CESC will not see any cash outflow due to the IPL team, but Philips Carbon, a group company, will be part financing the purchase and associated costs. However, a notice given to the BSE announcing the purchase is in the name of CESC as its subsidiary bought the franchise. There are no notices by Philips Carbon about its relationship in the purchase. Little wonder market has not responded well to the announcement, and the stock fell nearly 5.9%. 

Sanjiv Goenka in the interview said only Rs 16 crore a year will be given to the BCCI, and that too for only two years. The reason the outflow will be for only two years is because the 10-year period set by BCCI at the time of starting IPL gets over in two years. After two years, all franchisees will have to rebid for their teams. Buying a team for only two years further defies logic as it will add little brand value to the group.

Very few sports franchisees globally have made money on a regular basis. High cost of maintaining the teams and non-predictable nature of the business attracts few investors in such ventures.

Companies or corporate houses buying expensive sports team serve little purpose to the shareholders apart from elevating the status symbol of the promoters. India’s largest poultry company Venky’s is paying the price for buying European football club Blackburn Rover. Its purchase has affected liquidity of the company’s business.

It is high time Indian promoters realised the importance of keeping their hobbies to themselves, and not making shareholders pay for them.