It’s October 2001 and Geoff Brown, chief executive of Sportsworld Media Group, is in bullish mood as he announces the company’s latest figures. Pre-tax profits have risen from &£4.1m to &£12m for the year to June 30 and a quarter of the current financial year’s expected revenue has already been booked. The advertising downturn, he says, has not affected his operation.
Fast-forward to the present day and you will see a different story altogether. The company has issued two profit warnings since January 28 and says that profits will now be “substantially below” the &£9m to &£10m predicted. Shares, which had been as high as 695p in 2000, sank to 2.75p earlier this month and, at the time of writing, stand at 10p. To add to the company’s woes, Sportsworld non-executive director Chris Akers – also chairman of Sports Resources Group – has stormed out, claiming he has “no confidence in the management and the way the company has been run”.
In stark contrast to his bold statements in October, Brown now claims that the health of the sponsorship industry is the worst it has been for 20 years and blames advertisers for moving to other below-the-line disciplines to market their brands.
Where it all went wrong is not yet clear. The Financial Services Authority is conducting an investigation into the share-price collapse and Sportsworld and its auditors have launched an “operational review”.
What many in the industry have criticised is the way that Sportsworld has secured media rights (including TV and sponsorship) by making minimum income guarantees to the holders. These are said to include $3m (&£2.1m) for 15 per cent of the Australian National Basketball League, a $25m (&£17.5m) deal with the Association of Surfing Professionals and a contract with the International Triathlon Union, which is also based on a seven-figure guarantee.
Nigel Currie, a director of the European Sponsorship Consultants Association, says: “In the late Nineties and early 2000, sponsorship got a bit silly. People were desperately trying to get their hands on rights. The people who have been worst affected are those who are sitting on major, high-profile rights.”
Sportsworld management does not seem to have learnt from the mistakes of others. Just last year, ISL Worldwide – FIFA’s marketing agency for the World Cup – went bust after guaranteeing the Association of Tennis Professionals (ATP) &£85m a year for ten years from the sale of worldwide media rights for tournaments.
Wisely, Octagon, which is owned by advertising giant IPG, pulled out of a joint bid with ISL for the ATP package when prices spiralled out of control.
Octagon regional director for Asia and the Middle East Tim Moufarrige says: “In the past few years we have seen a lot of smaller operators finding capital from venture capitalists and other investors. In order to build their businesses, they’ve had to pay a premium for rights and the rights holders did well.”
But he says that a combination of increasing caution from broadcasters and a softening of the sponsorship market has hit these younger companies hardest.
However, Sportsworld managing director Keith Impey says comparisons between his company’s situation and ISL are “not relevant”. He maintains: “Most of the work we do is on a commission basis. In a few instances there are some guarantees.”
He concedes that guarantees may be something that Sportsworld will have to avoid in the short term, but adds: “I am sure that, in a few years, when things pick up again we will be in a situation where we can put guarantees down.”
Nevertheless it is these deals, which rely on gambling on the future value of a property, which have caught the attention of the City. One analyst comments: “There is very little earnings visibility in the group, especially over sponsorship where it is hard to predict when the money will come in.”
Sean Jefferson, managing director of sports marketing agency Arena, says that where sports marketing is concerned companies sometimes abandon business sense in favour of gut feeling: “It’s easy to get caught up. Sponsorship has not always followed robust independent objectives.”
Jefferson rejects the belief that rights prices will come down considerably: “The good deals will still be done at good prices. What it might mean is that properties will be valued more sensibly.”
Currie agrees, and says that the problems of Sportsworld and ISL should not be used as a barometer for the health of sports marketing companies: “These are exceptional cases. By and large, the sponsorship industry is holding up very well.”
He says rights holders may also become more responsible. “Governing bodies will try to work more closely with sports marketing agencies. FIFA is now desperate to make sure that it controls the rights to the World Cup more carefully.”
The future of Sportsworld is uncertain. One industry insider claims a bid for a 51 per cent stake in the company is already on the table. He does not rule out Akers as the potential buyer.
“Watch him like a hawk. He’ll have known that his statement would bring down the share price,” the source comments.