Low-ball bid caused Setanta to unravel

From rumours of a £1bn bid for it last year through to its current crisis, the Setanta project has been ambitious and stormy, writes CIARÁN HANCOCK

IN MID-FEBRUARY 2008, staff at Setanta Sports were told by management that the company was not for sale. The announcement followed reports in British newspapers that Setanta had received an unsolicited offer from a European media group before Christmas 2007 that valued the business at an eye-watering £1 billion.

In an e-mail to staff, company founders Michael O’Rourke and Leonard Ryan said: “There is frequently speculation of this sort regarding Setanta – our continued progress has made us an attractive proposition and a valuable asset. But we have not put the company up for sale, and remain focused on continuing to build the business through further subscriber and content growth.

“If we receive offers we will look at them – our adviser and shareholder Goldman Sachs will act for us in this regard – and we will let you know of any significant developments if and when they occur.”

Sixteen months on, Setanta is on the brink of collapse and O’Rourke and Ryan are working around the clock to save a business they founded in 1990. One source close to the company said its chances of survival were “less than 50-50”, and that it is lurching towards administration.

Whether a rock-solid £1 billion bid was ever made is debatable. “There was interest, but whether anyone would have paid that type of money I’m not so sure,” said one source close to the company.

O’Rourke and Ryan, and Setanta’s private equity backers – Doughty Hanson, Balderton Capital and Goldman Sachs – took a calculated gamble that, by hanging on, renewing its Premier League rights and getting to profitability, Setanta would be worth substantially more in a couple of years.

The failure in February of Setanta to retain one of its prized rights packages for the English Premier League looked to have undermined that ambition.

Setanta secured 23 Saturday evening games for £159 million, but lost out on Monday evenings to bitter rival Sky. Sources at the Irish broadcaster said Setanta lost out on the rights by just £5 million. The company gambled that its low-ball bid would win, and failed. The move followed a disagreement between the executives at the station, including Ryan and O’Rourke, and its large shareholders, specifically Steve Bowman of Doughty Hanson and Barry Maloney of Balderton Capital.

From that moment on, Setanta’s business model began to unravel. In March, it missed a £10 million payment to the Football Association relating to its deal to screen live FA Cup matches and England internationals.

Earlier this month, Setanta missed a £3 million payment due to the Scottish Premier League. About 30 per cent of its subscribers live in Scotland, and it is an important market for the company.

The group recently went cap in hand to Sky for a £50 million bailout. The approach was rebuffed. Earlier this week, Jeremy Darroch, BSkyB’s chief executive, said: “Our job is not to fund other companies.”

Sky was a broadcaster, not a banker, he added.

In private, Sky executives speak of their admiration for Setanta, which has pulled in 1.2 million subscribers in just over two years. However, the Irish company needs 1.9 million customers to justify the vast sums it has spent on various rights – probably more than £1 billion over the past five years on current and future deals.

Losing 23 Premier League games from August 2010 meant it was likely to lose rather than gain subscribers. The business had to be restructured, and raising the funds for a much-needed cash injection became extremely difficult.

Setanta’s board went to work on renegotiating its various rights deals, seeking discounts of up to 25 per cent from rights holders.

It achieved some success, but the Premier League and the Football Association in England have so far refused to budge.

It also sought to downsize the business and raise about £35 million from investors. The broadcaster is believed to have made good progress on the fundraising front.

A shortfall of €6 million was believed to be outstanding at one point this week. Irish law firm Maples Calder was among those beating the bushes with high net-worth individuals here.

One informed source said new money was not the crux of the problem. “The real difficulty is that we can’t make the numbers work and get to an Ebitda-positive figure,” he said. “At the end of the day, we have to do that.”

Concerted efforts to sell all or part of the business to a bigger industry player have also taken place. Talks were held with ESPN and BT recently. These came to nothing.

Latest accounts for Setanta illustrate the cash-hungry nature of the business. It was contracted to spend £666 million on sports rights at the end of 2007. It also negotiated a £12.5 million three-year revolving credit facility with Barclays Bank in Britain in January 2008 for working capital purposes.

The accounts show that Setanta had accumulated losses of €165 million at the end of 2007.

The company has €225 million in payment-in-kind (PIK) loan notes outstanding. These carry a coupon of 12 per cent and are due to be repaid in November 2010.

On a brighter note, its 2007 revenues rose to £118.7 million from £42 million a year earlier.

Sources indicate that the company has edged closer to breakeven in the intervening period, but it remains loss-making. The Irish business is said to generate a small surplus on revenues of close to €40 million. About 200 of the 450 jobs in Setanta are based in Ireland.

There is huge regard in Ireland for O’Rourke and Ryan. They started the business 19 years ago by showing the Ireland-Netherlands World Cup finals game to expats at a pub in London. This business model was expanded to other parts of Britain, the US and Australia before softly launching an Irish channel in the middle of this decade as a precursor to trying to break Sky’s vice-like grip on sports rights in the UK.

The pair were helped by the European Commission, which ruled that the Premier League in England had to split up its lucrative football rights and end Sky’s monopoly.

In 2006, Setanta scored a big win, landing two packages of rights to live Premier League soccer. For £392 million, it was given the right to show 46 live matches a year – half the amount awarded to Sky. Crucially, however, Sky retained the rights to all of the matches between the Big Four, Chelsea, Arsenal, Manchester United and Liverpool.

With those rights in the bag, Setanta won other rights to fill out the schedule. Subscriptions costs just £9.99 a month and there was no contract.

In the space of a handful of years, Setanta has come from nowhere to become a Premier League player in major sports rights in the UK.

Over time, O’Rourke and Ryan have sold down their stakes to a estimated current level of about 15 per cent combined. “The job that Mickey and Leonard have done is fantastic,” said one rival television executive here.