FYI: Article from The Australian Financial Review
For the information of South Sydney fans who may not read The Australian Financial Review, we have posted this story published in The Australian Financial Review on Friday, August 5, 2005. Following this, News Ltd Chief Executive John Hartigan responded with a letter to the editor, and in response to this, South Sydney DRLFC Chairman Nicholas Pappas also penned a letter to The Australian Financial Review.
Lachlan’s legacy: $560m lost on Super League
As Lachlan Murdoch heads back to Australia his role in the war that split rugby league still dogs News Ltd. Neil Chenoweth investigates.
Ten years after Rupert Murdoch set out to conquer rugby league News Corporation has finally revealed the bill for its unhappy Super League adventure - a staggering $560 million.
It’s a figure that News has never wanted to talk about, but today rugby league is run by numbers, and most of them are red.
Rugby league inspires an intense passion that brooks little commercial logic. Professional rugby league today is a $250 million a year economy, the working man’s game now reserved for those with strong nerves and deep pockets. And no pockets are deeper than those at News Corp.
While the company that controls rugby league now operates out of New York, News Corp’s fixation with the game has always been a personal affair, beginning with Lachlan Murdoch, the man credited - or blamed - with driving the media group’s investment since the days of Super League.
When Lachlan heads back to Sydney after stepping down from News last week, he returns as No. 1 ticket holder for the Brisbane Broncos and will no longer be watching satellite feed of their games in New York.
In fact he may be wrestling for control of the remote with his wife, Sarah O’Hare, who is a signed-up supporter of Manly, a Sydney northern beaches club.
Last month when the News Ltd owned Melbourne Storm were fighting to match Manly’s ultimately successful offer for Matt Orford, Storm chief executive Brian Waldron made a point of discussing the matter with both News Ltd chief John Hartigan and Lachlan Murdoch.
When Australian half-back Andrew Johns from the financially struggling Newcastle club was pondering a switch to rugby union last year, Hartigan galloped to the rescue with a lucrative offer to write a column for News’s Daily Telegraph.
When Canterbury-Bankstown Bulldogs players were being investigated for rape allegations last year, News executive Malcolm Noad parachuted in as the club’s new chief executive.
But if Lachlan Murdoch’s passion for the game has driven the News commitment, what will happen now that he is gone? News insiders are openly speculating on what New York bean counters will make of the greatest game of all.
Murdoch’s involvement dates back to the night a decade ago when Super League was launched as a breakaway competition to the Australian Rugby League. It was supposed to cost only $60 million.
The true cost came to light only when News Corp shuffled its Australian companies for tax purposes after the group moved to the United States last November. A series of filings tallied up the $560 million in accumulated costs, although even this total doesn’t include other direct losses by News Ltd.
It’s the final indignity for the game. A decade of passion, intrigue and backroom deals that has tied successful clubs to big-money interests and left the last independents, like the Rabbitohs and the Newcastle Knights battling to stay solvent, is finally reduced to a tax strategy.
Lachlan Murdoch was at the first bungled Super League meeting in the Atanaskovic Hartnell offices in Sydney on the night of March 30, 1995, when he and former Broncos chief John Ribot signed up leading Bulldogs players on the wrong documents.
John Singleton called Lachlan Murdoch a “spoiled brat” after Singo and Gerry Harvey made a cheeky $10 million bid in 2002 to snaffle the Broncos away from News, and News played hardball to block it.
Today Singleton says he has a “great personal relationship” with Rupert Murdoch, Lachlan and John Hartigan. “It goes back 40 years,” he says.
Singleton has his own obsession with league. After the tilt at the Broncos, he went on to sponsor the North Sydney Bears in their move to the NSW central coast and ended up owning a football stadium instead.
He has been offering Sydney teams up to $10 million to locate there, while trying unsuccessfully to have a central-coast team admitted to the NRL.
“Having a team on the central coast is only so that Singo can make money from his stadium,” one club chief scoffed. “He doesn’t get involved in anything that doesn’t make money.”
For 30 weeks of the year, 1 million people watch three league games on pay TV and 2 million watch two games on Nine - although those are cumulative totals that can double-count viewers.
NRL chief executive David Yallop (sic) says that Nine and Premier Media, which provides programming for Foxtel, have offered more than $500 million for a five-year escalating contract to maintain that coverage from 2008 - a deal that includes a substantial upfront payment in 2007.
How does such a staggering sum begin to make sense, given the losses that Foxtel makes already on its NRL coverage? The answer lies in the history of Super League and the NRL, and in understanding just where the money goes.
The Murdochs’ basic mistake in setting up Super League in March 1994 was to underestimate how hard and how quickly Kerry Packer and Optus pay TV chief Geoff Cousins, who held programming contracts with the Australian Rugby League, would fight back. Their counterattack began the morning after Lachlan Murdoch and Ribot kicked off the war in the Atanaskovic Hartnell boardroom, when Optus and Nine reached for the chequebook to fund a counter-bidding war by the ARL.
The result was more money than rugby league players had ever seen. By the end of the 1997 season Nine and Optus had advanced $93.4 million and promised another $33 million to NSW Rugby League, which for nearly a century had been the heart and financial powerhouse of the game in Australia.
Super League broke the NSWRL. When the war began, the NSWRL had net assets of $16.4 million. When the smoke cleared, that figure was down to $2 million, barely enough to run the game for a week.
In January 1997, Packer and Rupert Murdoch negotiated a deal on Murdoch’s yacht in New Zealand’s Bay of Plenty, for Nine to replace its ARL games on Sunday nights with Super League.
Packer was the big winner. He had lost the least from the Super League war. Most of the ARL funding had come from Optus and now Nine emerged with a 10-year free-to-air programming contract for rugby league. News also agreed to sell half of its shareholding in Foxtel and in Fox Sports to Nine at cost price.
And that was the ball game. “I would be telling a lie if I said I didn’t feel wounded and bitterly disappointed,” ARL chairman Ken Arthurson told journalists at the time. “It’s a pity they couldn’t have made the bloody deal in the first place. Then none of this would have happened.”
In December 1997, the ARL and NSWRL bowed to the inevitable and signed a peace agreement with News to merge the two competitions into a new partnership, the National Rugby League, with News promising to inject another $ 130 million into the partnership.
News Corporation had to be hurting badly from its Super League adventure, but there were few clues in its accounts. For 10 years, on its company filings at least, Super League Pty Ltd remained a $2 company.
News Corp group accounts show it has a $160 million investment in NRL, a figure that has not changed since 1998.
An American News Corp executive, Bill Sorenson, told analysts in 1998 that the group had written down $100 million from Super League, including tax benefits. However, the true position was much worse than this.
Last November, a week after reincorporating in the US, News began the process of converting $560.2 million in loans to Super League Pty Ltd into shares – this finally was a more realistic measure of how much the rugby league wars had cost News.
News Corp spokesman Greg Baxter confirmed that the changes were loans that had at last been capitalised. “The changes occurred in order for the entities to conform with the new requirements of the consolidated tax regime whereby in order for the accounts to be consolidated each had to be assigned a cost base based on its assets,” he said.
He denied the moves were related to News Corp’s move to the US. The Super League investment included $130 million that News agreed to pay into the NRL as part of the 1997 peace agreement, through a News subsidiary, NRL Investments Pty Ltd.
However, this total is an understatement, because it doesn’t include ongoing direct payments that News continues to make to former Super League clubs, which are channelled separately, and which take total costs for News well over $700 million.
Even after the 1998 write-off, News appears to have more than half a billion dollars in undisclosed losses from rugby league, an accounting treatment that puts it on a collision course with the game - that is, the News accountants believe the company can extract this money back from the NRL, in one form or another.
After the 1997 peace deal, News imposed a blackout on financial details for the NRL, the ARL and NSWRL for the next three years.
What can be said, however, is that in the NRL era, money has flowed in a series of neat circles, each of which is dominated by News.
The media group owns half of the NRL partnership, which reports some but not all of its finances through its operating company, National Rugby League Pty Ltd.
The NRL partnership currently receives more than half its budget from Premier Media Group (formerly called Fox Sports), which is owned by News and Nine. In addition, Nine pays about $18 million a year for free-to-air rights and Telstra $7 million a year for naming rights to the Telstra Cup and for internet rights.
Other sponsors reportedly provide another $9 million, up from $4 million two years ago.
Premier Media Group is a highly profitable operation that provides NRL programming to Foxtel, which is owned by Telstra, News and PBL.
Even back in 1998, when the league was doing it tough as it faced the need to reduce players’ salaries, News was making a killing from selling Fox Sports programming to Foxtel for $62 million a year - that is, for more than the NRL’s total income.
The Fox Sports contract with Foxtel was in US dollars, which reaped large profits for News and PBL as the Aussie dollar slumped, none of which flowed to the NRL.
News also has the right under the peace deal to take $8 million in dividends each year from the NRL partnership for 20 years, to recover its start-up costs.
It’s believed that News has taken this dividend several times, probably in 2000 and 2001, when the cost of the NRL competition dropped with the merger of several clubs and the decision to expel the South Sydney Rabbitohs.
In 2000, the NRL announced a huge new programming contract with Fox Sports worth $65 million a year, totalling around $400 million over six years. It was a bonanza that unfortunately didn’t go to rugby league.
The real cash figure paid to the NRL was approximately $34 million, and that included GST. The rest was contra in various forms, including the cost of producing the programs, and a series of two-minute “Stories of League” ads on Fox Sports channels where, as NRL marketing director Paul Kind told The Australian Financial Review this year, “we have an enormous amount of contra.”
Fox Sports, however, continued to report profits of more than $43 million a year, shared by News and PBL, from its coverage of league and other sports, while Nine continued with its soft 10-year free-to-air contract.
Last month’s new NRL programming deal, like most of the closed-doors decisions that dictate the way that rugby league is played today, offers precious few details.
“Contra is a much smaller component of the total, the vast majority of the deal is cash,” an NRL source insists.
That may be so. But then that’s what they said last time.
On the face of it, Nine and Premier Media will be paying $33 million a year more than they are now. Taking the contra out, the rise is probably $20 million a year or less, in return for an extra free-to-air game and moving a pay TV game to Monday night.
The NRL has already announced that it will sponsor a new Gold Coast club, and by 2007 will lift club grants to $3 million a year, decisions that will cost a total $10.5 million.
The clubs want the NRL to match grants to the $3.25 million salary cap. Players, on the other hand, want the salary cap lifted. In the United States, 75 per cent of increased revenue flows to players.
News Corporation has continued to funnel money to its former Super League clubs after the 1997 peace deal and the formation of the NRL. In just one example, News provided $10 million in grants and forgiven loans to the Cronulla Sharks in 1998 and 1999, in addition to the grants given to each club by the NRL.
Today the Sharks struggle along with a $1.5 million annual grant from the Cronulla-Sutherland Leagues Club.
The News-sponsored clubs are also struggling. In April last year, News bought its minority partners out of the Melbourne Storm. Its 2003 accounts showed a management fee - that is, sponsorships and grants - of $9 million.
This included the $2.5 million grant that all clubs receive from the NRL, but volatile sponsorship levels resulted in the NRL fining the Storm $120,000 earlier this year, the fourth season in a row that the club has been fined for breaching the salary cap.
While the contribution from News is not disclosed, directors noted: “Each year the successful continuation of the business is dependent on the financial support of News Ltd.” Cowboys Rugby League Football Pty Ltd, News Ltd’s North Queensland franchise, has not filed annual results since 2001, when News forgave loans of $1.8 million and provided an interest-free loan of $6.3 million.
Brisbane Broncos, the listed company that is 67 per cent owned by News, reported $1 million profit last year, but found most of the $1.8 million increase in ticket sales was eaten up by higher rental fees in its move to Suncorp Stadium.
More than three quarters of the company’s net assets of $16.8 million are capitalised start-up costs from the Broncos NRL franchise.
Rugby league turns over about $250 million a year. The NRL budget for 2004 was $66 million, and the 15 NRL clubs cost up to $12 million apiece each year to run.
Outside of support from News, the bigger NRL clubs have become dependent on poker-machine receipts from registered clubs that are associated with them.
Under former News executive Malcolm Noad, the Bulldogs Rugby League Club group reported a stunning $19.8 million turnaround in net profit in the year to last October.
Sponsorship was down $450,000 in the wake of the controversy last year in which Bulldog players were cleared of rape allegations, while legal and consulting costs were up to $1.5 million, but poker-machine revenue at the Leagues Club powered the group through.
The previous year, the Bulldogs group wrote off $7.8 million from its interest in the Oasis stadium development, and a further $2.7 million in amortisation, most of it linked to a write-down of its West Sydney Razorbacks basketball franchise. The accounts note that treating the Bulldogs Rugby League Club as a going concern is ‘dependent on [an] undertaking by Bulldogs League Club Ltd to grant $4 million and [a] $1.5 million bank guarantee.
The Canberra Raiders received $2.35 million in grants from the Queanbeyan Leagues Club in 2003, plus other income of $3 million.
While the Bulldogs were still celebrating their grand final win last October, the South Sydney Rabbitohs’ auditors were qualifying (* See footnote 1) the latest accounts as to whether the club is a going concern, noting continuing losses, net assets of only $53,000 and its dependence on support from South Sydney Junior Rugby League Club.
By comparison, South Sydney Junior RLC, which helps fund the Rabbitohs, was expressing concern that the lift in poker-machine duty last September would cost the club $1 million in the first 12 months, wiping out its profit, and this would rise significantly in the next six years.
“In order for the company to continue in its current form and to maintain donations [and] sponsorship payments ... at current levels, it will be necessary to undertake large reductions in its operating costs and increases in revenues from non-gaming sources,” directors said.
It (sic) supporters point out that the Rabbitohs have more support than any other club, and raise $2 million from corporate functions.
However, the club’s saviour has been a lucrative deal with Telstra stadium, which guarantees a gate of $70,000 a game if one fan walks in the door, as opposed to the $30,000 the Rabbitohs were paying to use Sydney Football Stadium.
As a result, with each game at Telstra Stadium, the Rabbitohs are $100,000 ahead of last year.
Talkback king Alan Jones, who has been pressing for Souths to relocate to the central coast, was outraged at the deal, and even raised questions as to whether Telstra Stadium was able to meet its commitments.
The Bulldogs, who are facing lower grants from the Leagues Club which has been affected by the higher pokies tax, are on the same deal. “Having that guarantee from Telstra is extremely important so you can budget effectively,” Noad says.
The Telstra money enabled Souths to offer Matt Orford and their former star Braith Anasta six-year contracts of $550,000. Both stars turned down $3 million pay packets, ostensibly for much lower deals elsewhere, sparking outraged claims from Souths supporters that other clubs are breaching the salary caps with secret payments.
The Telstra option isn’t open to Newcastle Knights Pty Ltd, which by 2003 had sunk to a position of having negative net assets of $1.1 million. Its auditors noted: “Uncertainty exists as to whether the company will be able to continue as a going concern without continued support of the company’s members, crowd attendance, sponsors and the honouring of the NRL funding contract.”
Penrith District Rugby League Football Club Ltd, by comparison, received $16 million in the past two years from a property trust set up by Penrith Rugby League Club Ltd, a huge conglomerate with net assets of $194 million, which paid poker-machine tax of $25 million last year.
Penrith wrote off $1 million in costs, most of it paid to its lawyers, from the inquiry into the club’s finances by the Department of Racing and Gaming last year. It has also been hit by the Australian Taxation Office, which is claiming that it has not paid GST on transactions between subsidiary companies since 2000.
“The directors do not expect to incur penalty payments as the ATO have indicated that they consider the issue to be an honest error,” the latest annual report states.
The Bulldogs have also run into tax problems over the salary-cap scandal in 2002. The ATO has issued penalty notices on Bulldogs Rugby League Club, Bulldogs League Club and almost certainly leading Bulldogs players, claiming incorrect tax returns, failure to keep proper records and issue correct pay-as-you-go tax statements for the 2001 and 2002 tax years, when eight Bulldogs players received as much as $700,000 more than the salary cap in secret payments channelled through the Oasis Development Corporation.
Without accurate payment summaries, Bulldogs players would not have been able to file accurate income tax returns, and consequently could be liable for substantial penalties for the 2000, 2001 and 2002 seasons.
If so, this could have added an extra dimension to the pay deals behind recent transfers of Bulldogs players.
A Bulldogs spokesman declined to comment. The club’s 2004 annual report states: “The directors of the consolidated entity are vigorously defending the claim made by ATO and do not believe a liability will be incurred in respect of this matter.”
- with Angus Grigg and Jason Clout
In a league of its own
Not surprisingly, Neil Chenoweth's hatchet job on Lachlan Murdoch and rugby league fails to mention any fact that would detract from his doomsday thesis ("Lachlan's legacy: $560m lost on Super League", August 5). Perhaps he should have been at Leichhardt Oval a few weeks ago to witness an all-time record crowd savour an 11-try thriller between two of the great clubs from the game's heartland.
While News Ltd is routinely blamed by the Fairfax press for any ills facing rugby league, the game has never been in better shape. The evidence is record crowds, record television ratings, and record levels of sponsorship and merchandise sales, including the club jerseys treasured by millions.
Lachlan Murdoch's resignation from his executive roles at News Corporation does not alter the company's strong commitment to rugby league. Channel Nine and Fox Sports - which is part-owned by News - recently acquired broadcast rights for the next six years in a deal worth 40 per cent more than the present arrangement. Why? Because rugby league is successful and the rights are valuable.
This year television ratings for Fox Sports are up 20 per cent. More than 3.5 million different people have watched league on Fox Sports this year, even more on Nine. The TV deal is a winner for fans; every game is broadcast every week on Fox Sports, including up to five matches live. The coverage has never been bigger or better.
Despite Chenoweth's claims, the major beneficiary of TV funding is rugby league at all levels, including grass roots, where funding for community based development programs is at a record high. Over the next two years, state governments will invest more than $200 million in new and upgraded stadiums.
People who care about league are happy for Chenoweth to sit on the sidelines constructing a mire of accounting minutiae that bears no resemblance to its financial health.
John Hartigan, Chief executive, News Limited, Surry Hills, NSW.
Heartland clubs remain league lifeblood
News Ltd chief executive John Hartigan's swift response to Neil Chenoweth's piece on the sad legacy of Super League is comforting in a number of respects (Letters, August 8).
I am heartened that Hartigan cites the wonderful match between South Sydney and West Tigers at Leichhardt Oval on July 24 to show that rugby league could not be in better shape. To have South Sydney described by him as a "great" club that represents "the game's heartland" is, I am sure, a source of considerable reassurance for supporters of the Rabbitohs.
It is also pleasing to see News Corp's commitment to the sport reaffirmed by News Ltd's chief executive. While Hartigan's reply contains such welcome observations, it omits any reference to the undoubted financial and emotional pain that Super League brought to league. What is now generally accepted as a flawed vision for the game created an environment of hostility and dispute. Community was forsaken in the interests of so-called "sustainability", while club loyalty was overlooked in favour of corporate allegiances.
Hartigan was not responsible for any of this and has done much to assist in the healing process. Nevertheless, we should not be hasty in forgetting that, not so long ago, a 14-team competition was advocated as the only workable model for the future of rugby league. South Sydney was the unfortunate victim of this misconceived contention. And yet, 16 teams are now readily embraced as the preferred model.
If the game is to be truly successful again (beyond mere financial statistics) there needs to be an express acknowledgement that "great" clubs like South Sydney, and the "heartland" they represent, remain the lifeblood of the sport. Oblique references to joyous afternoons at Leichhardt Oval do not go far enough.
Nicholas Pappas, Chairman, South Sydney Rabbitohs, Sydney, NSW.
* Footnote 1: As per the South Sydney DRLFC Annual Report of 2004, the Club’s accounts were not qualified.
We thank Neil Chenoweth, The Australian Financial Review and Fairfax for allowing us to reproduce these articles.