Can Setanta snatch a win from the jaws of defeat?

With a possible US tycoon saviour waiting in the wings, John Hearne follows the roughest week in Setanta’s 19-year history, a week it seems to have survived — for now.

DEFYING the obituary writers hard at work in the last five days, the Irish pay-TV company got to the weekend without being placed in administration.

All attention is now fixed on the €35 million payment due to the Premier League on Monday. If Setanta can’t come up with the money, it’s game over.

It’s no accident that the company’s fate should hang upon a Premiership deadline. Ever since Setanta broke Sky’s stranglehold on the league in 2006, its business model has been predicated on securing a viable share of the season’s broadcasting rights.

Three years ago, €460m was sufficient to buy the rights for 42 games a season in a three-year deal. But when that deal came up for renewal in February, a cash-strapped Setanta cut its bid and lost one of its two Premiership packages to Sky. The intervening period had seen Setanta collect a series of lesser broadcasting rights, albeit for greater and greater sums.

The Scottish Premier League got €146.5m in a four-year deal starting in 2010. The English FA got €175.8m for four years of FA Cup matches and English home internationals, while the PGA Tour scored an estimated €150m in a six-year deal starting in 2007. By the time the Premiership rights came back on the table, Setanta had gone to the well one too many times.

“Setanta’s failed because they misjudged the auctions,” says one City analyst. “They overpaid for some rights, inflated their cost base, and underbid for the key premiership rights. The result of that is they don’t have a good product to offer next time and so their shareholders aren’t willing to put more money into them now. They’ve been the architects of their own misfortune, I would say. The economic situation hasn’t helped, but I don’t think it’s been the root cause, I think they’ve just made too many big mistakes.”

The buoyant credit market and low interest rates that financed the spending spree for the nice-to-haves had disappeared when mission-critical rights came up for grabs.

“I think it’s overpayment for rights.” says another analyst. “It’s the cost side which has gone wrong. If you look at the revenue side, subscriber numbers held up relatively well. What they’ve got wrong is the cost equation, and that has left them too little flexibility on borrowing. When small things go wrong like the advertising downturn, there’s basically too little wiggle room on that cost base.”

As far as the pay-TV market is concerned, it’s all about the Premiership. Some 90% of Setanta’s 1.2 million premium subscribers also have Sky. With consumer sentiment as depressed as it is, you’ve got to conclude that when Setanta loses half of its Premier League games next year — leaving it with just 23 — subscribers are going to see an obvious saving staring them in the face.

To put it another way, even with its growing stable of additional sporting rights, even with the two full Premiership packages its been carrying since 2007, Setanta wasn’t turning a profit. Nobody really knows exactly how much the broadcaster is losing per year but experts put the figure in the order of €117m. Financial consultants Enders Analysis have said that subscriber numbers need to grow by nearly 60% before anything like break-even point is reached.

But, in the aftermath of losing half its Premiership privileges, two of Setanta’s biggest shareholders — Doughty Hanson, which owns TV3, and financial services group Goldman Sachs — are reported to have written down the value of their stake in the business to zero.

Up until this point, investors like Goldman Sachs, Doughty Hanson, Balderton Capital and Davy private clients had been willing to underwrite Setanta’s losses on the assumption that the company would hit profitability once it achieved the right market share. Since this is not now going to happen, Setanta has responded by trying to raise more cash, by slimming down the organisation and most particularly by trying to coax better terms from rights holders.

This has yielded mixed results. The Scottish Premier League (SPL) agreed a renegotiation, while talks have also progressed with many of the other minor rights holders. But not the Premiership. The subtext here is that, while the likes of the SPL know that the economic conditions which prevailed when they signed their deal are now a fading memory, the Premiership have the luxury of a little schadenfreude. “I don’t think you’re going to see an aggressive fall off for the high-end rights,” says another City analyst. “The other rights will fall away sharply but the Premiership ones will hold their value.”

Subsequent attempts to raise cash and liquidate parts of the business have also met with limited success. Setanta aren’t talking about it, and management consultants Deloitte, who is advising the company, also refuses to discuss the future.

Michael O’Rourke and Leonard Ryan, who founded the company in 1991, are reported to be looking for buyers for their US and Irish operations, and are considering management buy-out options. The possibility of Setanta ditching its retail operation and adopting a wholesale model flared briefly last week, but talks with Sky foundered on pricing issues.

By Tuesday, visitors to the website found they could no longer sign up for services, being met instead with the painfully appropriate message: “Oops! Something has gone wrong.” Callers met a similar response over the phone. At an emergency board meeting that night, it’s reported that a number of live options were discussed.

The following day, the company’s 430 staff, 200 of whom are based in Dublin, were briefed on the fight that lay ahead and there was a public announcement: “As has been widely reported in various media channels, the management of Setanta Sports is in the process of attempting to secure the future of the business. The company has not gone into administration. All our channels are still broadcasting across all platforms and our subscribers can continue to enjoy our programming. However, in the current circumstances, we have decided to suspend temporarily the acceptance of new subscriptions.”

With that Premiership deadline now only 48 hours away, it’s all about the cash. If they can deliver on Monday, the company has a chance of survival. If not, Deloitte is standing by to put the company into administration.

If the worst happens, it’s expected that the Premier League will take back the rights to the 2009/10 season and sell them on to the highest bidder. Under competition law, no single organisation can operate any more than five of the six Premiership packages on offer, which means that ifSetanta does go to the wall, there will necessarily be a new entrant to the market.

“The only alternative talked about,” says football financing expert Tom Cannon of Liverpool University, “is whether ESPN will come in... That’s been talked about, though not by them, and my guess is they would be a bit wary.”

As Cannon points out, all this has happened before. In 2002, ITV Digital went up against Sky and lost — heavily. “You can either take Sky head on, which is very, very expensive, or you can try to come in on the fringe, which is even more expensive. If Setanta do fold, it’s been basically twice somebody came in on the fringe to get into the television rights market and failed.”

Arguably, it’s a failure of competition law. The five out of six rule might preclude Sky from ruling the entire roost, but one measly package — invariably the least attractive one — leaves precious little roost for anyone else. The analysts, always wary of regulation, don’t buy it. “I don’t think Setanta has demonstrated that it doesn’t work, I don’t think that’s the case, and, therefore, I don’t think the regulator will or should change emphasis,” one analyst says.

So can anyone compete on an equal footing with Sky? “Sky have got advantages,” he says. “They’ve got a massive subscriber base, they’ve lots of other sets of rights, and they’ve got relationships with the league, so equal footing is quite a leading phrase. Sky are always going to have an advantage compared to a newcomer, but could another company come in and bid and make a go of it? Yes, because the advantage that another company has is that there is at least one other set of rights for the Premiership that Sky can’t have. But it’s not going to be easy.”

If Setanta’s experience has proved anything, it’s proved that.