Deal in focus: KKR nets Hertha Berlin

Brokered by sports-focused investment management firm IM 1872, the deal was initially discussed while KKR worked on a senior-secured loan deal for the Football Association of Ireland.

Despite its recent yo-yoing between German football’s top tier, the Bundesliga, and the second league, the club’s market share is strong. Hertha is the sole football club in Berlin, which has a population more than twice the size of nearest rival Hamburg. The club plays at the Berlin Olympic Stadium, which seats 74,244 spectators, usually at two-thirds capacity. On a fixed-cost basis, the revenue potential is large. And with 12 football fields in the centre of Berlin under its stewardship, the club has a near monopoly on youth football in the city, ensuring talent flows steadily onto its field at a lower price than that paid by rival clubs clamouring for talent over the transfer season.

Despite its foothold, the club’s recent history has included serious and well-documented financial difficulties. Future financial hopes were traditionally pinned on the sale of upcoming revenues, from the securitisation of future television rights to the sale of its catering rights or long-term contracts with sponsors. As a result, the recent injection of long-term patient capital will have been welcomed with open arms from board to dressing room, and is expected to stand the club in stronger stead when it comes to renegotiating contracts.

Game changer
Nevertheless, the deal structure involves enough liquidity for the club to support itself through any potential relegation, even given the impact on revenues from television rights. With Bundesliga television rights based on a weighted average of results across the last five years, with the highest weighting given to the most recent season, Hertha’s promotion to the top tier twice in the last four years will lead to a strong uptick in television revenues nonetheless.

Indeed, KKR’s strategic plans to grow the club places an increased focus on media rights. And with its recent experience with German media company ProSiebenSat.1, which it fully exited earlier this year, the GP appears well-placed to leverage its knowledge of local media rights to strong financial advantage.

In October 2013, after KKR signed exclusivity on the deal but before the transaction closed, 21st Century Fox signed a deal with the German League Association to make the top flight of German football available across Europe, the US, Brazil, Indonesia, Japan and Thailand. The deal is expected to increase international revenues by more than 50%. Sky Deutschland is also predicted to bid aggressively for Bundesliga rights, following the hit to BSkyB’s shares when it lost the rights to Champions League and Europa League matches to BT Sport last year.

Limitations imposed by the German Football League stipulate that only the club’s members can be majority shareholders. As a result, KKR is unable to take control of the club, though the stake could be increased to 33.3% as part of the agreement. For now though, the investor’s 9.7% minority shareholding remains.

Own goals
No doubt the focus will be to spurn the historically poor results seen from the match between private equity players and football clubs. Past transactions include Charterhouse's £15.6m commitment to Sheffield Wednesday and Electra's acquisition of a 25% stake in Derby County, both of which were written off. Colony Capital proved a fair match for Paris St Germain, which was sold to Qatari investors in 2012, but a windfall in the sector remains elusive. The title is there for the taking.

Advisers
Equity – EY (Tax); Taylor Wessing (Legal).

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• Topics
• DACH
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• Expansion
• Germany
• KKR