Takeaways from the PGA European Tour 2023 financials
PGA TOUR tightens its grip on DP World Tour
Takeaways from the 2023 financials of PGA European Tour (“ET”) published last week:
The losses being incurred by ET in operating the DP World Tour continue to be a serious concern.
$25 million (£19.6 million) of support was provided by PGA TOUR for the ET total prize fund of £144 million in 2023 the majority of which was covering shortfalls in existing purses.
The 2023 results benefitted from the proceeds from the home Ryder Cup match at Marco Simone. However the upside to ET profit was less than might have been expected.
PGA TOUR now has a financial stranglehold over ET, courtesy of loans totalling £53 million at the 2023 year end, an increase of £18 million vs 2022.
The PGA TOUR’s 2021 deal to acquire 15% of the European Tour’s phenomenally successful production arm seems to be in limbo. A payment scheduled for January 2023 was not made by PGA TOUR.
The European Tour has several critically important media rights and sponsorship contracts which are due to expire at the end of 2024. No mention was made of the status of these negotiations by the Board.
Here is the current group structure of the PGA European Tour:
1. ET operating losses
Looking back at the operating profits of ET since 2006, there’s an obvious trend of ET only making money in years where Europe hosts a home Ryder Cup match.
In 2021 ET generated its first profit in the year of an away match (at Whistling Straits). However the profits from the 2023 match in Rome were not sufficient to prevent ET tumbling to a £20 million operating loss.
The ET Directors report that, “The Company's strategic alliance agreement with PGA TOUR has continued to deliver significant additional benefits to the Tour's members including $25m (£19.6m) of financial support for the record $144.2m prize fund on the DP World Tour.”
It looks like ET had to dip into its reserves to boost its prize fund for 2023. That triggered an additional loan from PGA TOUR which ET management calls “Underpin Funding”. There’s no free lunch here folks….the Underpin is a loan which will eventually have to be repaid. Clearly the DP World Tour is living beyond its means, propped up by the PGA TOUR.
2. DPWT Prize Fund
The prize fund for 2023 totalled £144.2 million, an increase of £7.7 million ($9.5 million at the 2023 average exchange rate) vs 2022. The 2023 prize fund was supported with $25 million of PGA TOUR money which effectively means that $15.5 million was covering shortfalls in existing purses…not good.
3. Ryder Cup profitability
Although revenues from the 2023 Ryder Cup increased 40% versus the last home match at Le Golf National in France in 2018, profits were 40% down. This resulted in notional profits foregone of around £12 million:
The commentary from the Directors on this disappointing outcome was: “The staging budget for the Ryder Cup experienced significant macro-economic pressures, driven by post COVID supply chain challenges and the disruption caused by the war in Ukraine, with inflation running at +22% compared to Paris 2018.”
This explanation doesn’t come close to explaining how the profit margin could collapse from 20% in Paris to only 9% in Rome….
4. Loans from PGA TOUR
At the 2023 year end, loans from PGA TOUR to ET totalled £53.2 million (approx $67.7 million). The loans are reported in the ET financials as falling due after one year but the specific terms of the loans are not disclosed. Hypothetically speaking, if the PGA TOUR demanded repayment of these loans ET would have its work cut out to find alternative financing sources given its consistently loss-making operations.
Effectively this loan gives the PGA TOUR a stranglehold over ET. If there is eventually a full merger between PGA TOUR and ET, it would provide significant leverage over the ET membership, 75% of whom would need to vote in favour for the merger to proceed.
5. PGA TOUR acquisition of 15% of PGA European Tour Productions in limbo?
The 2023 ET financials state, “PGA TOUR acquired a 15% stake in ETP on 29 January 2021 for a fee of $85m, $30m of which was paid on 29 January 2021 and a second instalment of $13.75m was paid on 28 January 2022.”
This is odd. There is a legally-binding investment agreement dated 29 January 2021 which requires PGA TOUR to make 4 annual payments of $13.75 million with the final payment due in January 2025. PGA TOUR has only made 1 of the 4 payments. The payments due in January 2023 and January 2024 appear to be on hold.
One scenario is that there might have been a subsequent agreement that in return for the “Underpin” loan funding, PGA TOUR would suspend payments due for its ETP stake. It’s hard to understand why the ET Board would agree to this. Also, it’s surprising that no mention was made in the ET financials of the payment that was due in January 2023 and not received.
The wording in the ET financials regarding the proposed increase in PGA TOUR’s stake in ETP from 15% to 40% is unchanged between the 2022 and 2023 financial statements, i.e. “The Company is continuing to work closely with PGA TOUR as it looks to expand its investment from 15% to 40%. The details of the investment structure are, at date of signing, yet to be concluded.”
6. Important ET contract renewals at the end of 2024
The PGA TOUR due diligence on ET came to light in a Florida court case last year. This was the document which described ET as “an underinvested and borderline distressed asset.” Specifically the PGA TOUR DD identified the following:
“Key Financial Risks. We found the largest sources of risk are 1) the near-term contractual expiry of guaranteed revenues in Media and Sponsorship; and 2) the relatively weak foundation of the DPWT events themselves. With respect to the former, virtually no Sponsorship or Media revenues are guaranteed post-2026, and most contractual revenues fall away by end of 2024.”
The DD document listed the key contracts with renewals scheduled from the end of 2024, i.e.:
This is a period of high risk for ET, especially since the loss of its top 10 players each season to PGA TOUR reduces the attractiveness of ET to media rights holders. Clearly there are renewal risks although ET management will be in a better position if they can count on the support of PGA TOUR during the various negotiations.