The rise of Saudi-backed LIV Golf to compete with the PGA Tour has been dizzying in its speed and effectiveness. But in a key facet, the showdown is an outlier among competing sports leagues over the years: football’s AFL vs. NFL, basketball’s ABA vs. NBA and hockey’s WHA vs. NHL, for example.
In those cases, the league with the most financial wherewithal survived, and the upstarts either (a) went out of business wholesale; (b) failed, but certain franchises merged into the surviving league; or (c) simply merged into the surviving league. But the constant in each such situation was that the surviving league was the one with the deepest pockets, and – this is critical – heretofore was always the established league.
With LIV, it’s the reverse, even with the big news Wednesday about the U.S. billionaires making a $3 billion commitment to the PGA Tour’s new for-profit enterprise (“‘Monumental deal’: Consortium to pump billions into PGA Tour,” February 1 GGP+). No question but that this news is positive for the PGA Tour and, even with all of its unanswered questions, could well be impactful. Especially since it provides the “golden handcuffs” of profit-sharing for some players. Had it been done a couple of years ago, it might have made a much bigger difference. But importantly, the Saudis still are offering cash today, not upside tomorrow, if they want to continue to fight and poach.
So many important questions remain unanswered, and until that happens, the upstart tour is still by far the wealthier, backed by seemingly unlimited money from Saudi Arabia’s Public Investment Fund, which is estimated at more than $700 billion. The established PGA Tour is, by comparison, “financially distressed” despite having reported $1.9 billion in revenue in its 2022 tax filing, up from $1.6 billion a year earlier, although, again, its new financial supporters are certainly helping to try to shore that up.
That financial distress has been magnified this year as the PGA Tour boosted prize money beyond its – and more importantly, its sponsors’ – ability to pay, squeezing tournament backers in an effort to stop the defection of players to LIV. As a result, some longtime sponsors have been lost, and others are grumbling.
The established PGA Tour is, by comparison, “financially distressed” despite having reported $1.9 billion in revenue in its 2022 tax filing, up from $1.6 billion a year earlier...
Throughout its history, the PGA Tour failed to create a monied, stable financial platform – access to substantial credit or equity capital if needed for emergencies or existential threats – because it did not see the need. When LIV forced that need, the tour was not in a position to address it quickly, constructively or effectively.
This financial threat from LIV and the Saudis should have been obvious from the start, but tour leadership and players failed to recognize their weak position relative. The dismissive game plan proved to be disastrous: try to outspend the Saudis in litigation and wage an attack on Saudi/LIV morals.
It is not just the incredible disparity in the respective war chests that distinguishes this situation from competing leagues historically. It’s also that LIV apparently cares little for economic gain. Rather, its goal is to take over golf, or at least use the PGA Tour and golf sponsorship as a way to “sportswash” the Saudis’ human-rights reputation.
The PGA Tour thus entered a war it could not win through traditional means. It failed to appreciate the situation: an attempted hostile takeover of a financially vulnerable entity (the PGA Tour) by a financially stronger entity (LIV and the PIF). The tour spent huge sums of money litigating – reportedly $50 million before halting the legal losses with the June 6 “framework agreement” – and was caught wrong-footed consistently because it failed to understand which side held the leverage.
Convinced of their own invulnerability and having developed no game plan, tour players and leadership offered only a steady barrage of epithets decrying a lack of morals, ethics and principles of LIV defectors. When the PGA Tour finally waved the white flag on June 6, its players expressed shock because they had no voice in it. They have since stopped lobbing insults toward LIV players and are much more accepting of the new reality, which includes LIV and the Saudis and now $3 billion of new American investor commitment.
In a hostile distressed-takeover attempt, or any recapitalization of a financially distressed entity, it’s axiomatic that success is best achieved if the target early on develops a range of viable options to pursue. The goal is to develop the best negotiating leverage possible via a concept “options and optionality”: do not simply go down one path with one putative counterparty.
In distressed situations, it’s not the lead bid but rather the cover bid that determines value. Had the PGA Tour moved timely, it could have developed creative options to at least give the appearance of competition, instead of leaving itself vulnerable to the financial wherewithal behind LIV.
So here we are, in the wake of Jon Rahm’s stunning departure in early December and one month past the PGA Tour’s self-imposed deadline for a deal, and notwithstanding the new investment in the tour, needing to recognize that the Saudis still hold significant if not insurmountable cards. Further poaching by the Saudis still can lead to no deal – meaning continued hostilities – or to a deal where the Saudis control. It’s impossible to imagine a minority Saudi investment in the PGA Tour.
Saudi Arabia and its PIF are the leading investors in U.S. private-equity firms – and in that capacity, they certainly wish to make money. Their sheer size and reputation combine to engender trepidation all around, including amongst major private-equity firms and uber-wealthy Americans. It’s usually viewed as bad business to cross the Saudis.
Private-equity firms, simply put, raise money and invest it, aiming for superior returns. They return the capital to investors, then rinse and repeat. The “hold” period, which is how long a firm retains an investment, is usually 3-7 years, and investors count on those firms to be good stewards of their money, e.g., to make a big return from their investments.
Any private-equity funds in a deal controlled by the Saudis will find it challenging because of three key precepts of PE investments: 1) a defined, near-term investment period; 2) an ability to exit the investment; and 3) a sponsor interested in financial gain (returns on investment).
Conversely, a Saudi-controlled deal with the PGA Tour would mean that the money stays for an indefinite period of time. And, the Saudis’ investment goal is a non-economic one. There would be no glide path to exiting the investment, and no intuitively obvious way of achieving returns. Of course, the $3 billion of new U.S. individual investor money faces the same challenges, and while the new investors are highly successful people, it’s certainly unclear how they intend to address these challenges.
Meanwhile, the U.S. government continues to investigate PIF relating to the PGA Tour negotiations. And despite no one seemingly watching it, LIV is doing anything but going away. Absent a deal with the Saudis and PIF, the PGA Tour still will be competing for players with LIV. Though $3 billion is a lot of dry powder in the abstract, it still pales in comparison with what the Saudis can deliver. And who believes the Saudis will be cowed by the $3 billion investment and simply slink away?
Peter S. Kaufman
Westchester, New York
(Kaufman is president and head of financial restructuring and distressed M&A at the Gordian Group investment bank in New York and a member of the Metropolitan Golf Writers Association.)
Yes, the PGA Tour was in a precarious position because it allowed the players to have their way in Delaware, which is when I learned just how greedy and self-serving professional golfers are on both sides of the PGAT/LIV debate. They, amazingly, voted to drain the tour’s bank account, knowing that it would put the tour on precarious financial footing and threaten its long-term future. And yet they still said, “Show me the LIV money!”
And now we have Rory McIlroy singing LIV’s tune (“Pebble Beach cliffhanger,” January 30 GGP+). Why? In my opinion, simply because his beloved Ryder Cup team is being poached. He showed his true colors. He can go back to Europe where he belongs. He’s just another in a long line of European golfers who come over here for our money, but their loyalty remains with Europe. Even, in his case, after marrying an American girl, having a baby in America, making it an American citizen, and both he and his father joining an iconic American golf club. Now, back to Europe they go. Why? Because they are European, especially when it comes to golf loyalties.
Same is true with PIF/LIV. They aren’t just poaching American tour players. They are acquiring U.S. assets. America is sick and tired of being ripped off, only to be lectured on how wrong we are about everything. Now, it’s even happening in golf, my escape from reality.
Sadly, golf is broken. Permanently. When I now look at images of professional golfers or read their words, anger wells up inside me. The only golfers I give a damn about now are those who have kept their mouths shut and remained with the PGA Tour.
I am through with professional golf, and when the founder of the Golf Nut Society is through with professional golf, it is in a very bad place. I am (was) the poster boy for their superfan.
Thanks, Greg Norman and Phil Mickelson.
Ron Garland
Prescott Valley, Arizona
(Garland is the founder of the Golf Nut Society.)
Three members of the PGA Tour Policy Board – Adam Scott, Peter Malnati and Webb Simpson – were given sponsor exemptions into the no-cut, limited-field “signature event” AT&T Pebble Beach Pro-Am. Two days before the start of the tournament, these three otherwise not eligible players voted to approve this “monumental deal” (“‘Monumental deal’: Consortium to pump billions into PGA Tour,” February 1 GGP+).
Has the pay-for-play world of politics infiltrated professional golf? You can bet the “monumental deal” will be overwhelmingly slanted toward the elite players, thereby significantly benefiting Scott and Simpson. Malnati is not an elite player, so they probably threw him a bone. Also, because the AT&T is a no-cut event, Malnati will get a made-cut credit in the tour’s pension plan. It’ll be interesting to see whether he receives sponsor exemptions into other signature events.
The PGA Tour is making it easier for me to become a LIV fan. At least they’re transparent.
Charlie Jurgonis
Fairfax, Virginia
Global Golf Post welcomes reader comment. Write to executive editor Steve Harmon at saharmon83@gmail.com and provide your full name, city, state and country of residence. If your comment is selected for publication, GGP will contact you to verify the authenticity of the email and confirm your identity. We would not publish your email address. We reserve the right to edit for clarity and brevity.
