Spending wisely?

Scotiabank, a Canadian-based bank with significant business in Latin America and the Caribbean, recently announced a twenty-year, $800M CAD ($645M USD) arena naming rights sponsorship in Toronto where the bank has its head office.

The deal is between the bank and Maple Leaf Sports & Entertainment (MLSE).  MLSE is the owner of several sports franchises including the Toronto Raptors (NBA), Toronto Maple Leafs (NHL), Toronto FC (MLS), Toronto Marlies (AHL), Raptors 905 (NBA G League) and the Toronto FC II (USL).  MLSE also owns the 18-year-old Air Canada Centre, the 19,800-capacity venue that is home to the Toronto Maple Leafs and the Toronto Raptors as well as a broad slate of concerts and special events, and that through this deal is to be renamed Scotiabank Arena in July 2018.

MLSE is also a real estate company (condo and office tower developments), the owner of a high-end Toronto restaurant (e11even), one of the largest sports bars anywhere (Toronto’s Real Sports Bar and Grill), a sports soft goods retailer (Real Sports Apparel) and MLSE owns three specialty sports channels.  Estimates place the value of MLSE, a privately held company, at $3B USD.

While the annualized rights fee that Scotiabank will be paying to MLSE would have an escalator as part of the financial terms (hopefully, no more than 2.5% year-over-year), averaged – the $800M CAD deal is worth $40M CAD ($32M USD) per year over 20 years.

On face value, this makes for a record setting naming rights deal. In comparison:

  • MetLife spends $28M USD per year for MetLife Stadium in the New York area
  • Barclays pays $20M USD per year for Barclays Center in New York
  • AT&T spends $19M USD per year for Cowboys Stadium in Dallas
  • Reliant Energy pays $10M USD per year for Reliant Stadium in Houston
  • Royal Philips Electronics pays $9.3M USD per year for Philips Arena in Atlanta
  • FedEx spends $7.6M USD per year for FedEx Field in Washington, DC.

The incumbent naming rights partner for the MLSE owned and operated arena in Toronto is Air Canada (The Air Canada Centre opened in 1999 and its name was immediately acronymized to ‘ACC’ – a clear example of when attribution goes wrong).  Air Canada currently pays MLSE $1.7M CAD for naming rights to the ACC, or about 23 times less than Scotiabank will be paying with its averaged $40M CAD per year spend.

Maybe coincidentally, likely not, Scotiabank’s stock price rose by 0.46% the two days following the announcement of the MLSE deal.  Scotiabank’s market cap is $93.23B CAD, the bank runs on a 30% net profit margin and its last four quarters combined net income was $7.78B CAD.  For Scotiabank, $40M CAD per year in rights fees is almost a rounding error.

Objectives

If you’re a Scotiabank shareholder, one of its nearly 90,000 fulltime employees or a Scotiabank customer, what about the optics of this deal?  A bank would probably want to appear to be prudent.  Is buying into what might be the largest venue naming rights deal in North America prudent?  Well, it depends.

It depends on Scotiabank’s objectives.

Building naming rights are an expensive way of buying awareness.  There are only three sound reasons for buying major sports venue naming rights:

1/ Your brand has an awareness issue in the market you’re buying into (i.e., Sun Life Stadium in Miami in 2010 – Sun Life has since exited the US market and naming rights of Dolphin’s stadium now sits with Hard Rock Cafe)

2/ Your brand is in a category where top-of-mind awareness drives purchase consideration and/or purchase intent (like financial services, insurance) (i.e., TD Garden in Boston)

3/ You’re in a hometown market, you have a significant number of employees, you pay a significant amount in taxes and being seen as local is important for business/relationship reasons (i.e., AT&T in Dallas)

When we measure the brand health impact of sponsorship for Lumency client brands we always measure the impact of the other sponsors within the property our client is sponsoring.  This helps us understand the relative share of voice and the relative emotional connection that our client’s brand is earning over the other sponsors present.  In a sponsorship context, your competitor isn’t your category competitor, it’s the other property sponsors.

Consistently, we find the venue naming rights sponsor earns the highest awareness and almost as consistently, the naming rights partner earns the lowest emotional connection and the lowest engagement with fans.  The name on the building on its own doesn’t enhance fan experience, elevate game time or even earn much in the way of associative benefits between what’s happening on the field, the court or the ice and the naming rights sponsor’s brand.

The naming rights sponsor might even receive negative brand health impact, particularly if the venue predates the naming rights deal.  Fans can see the new naming rights sponsor’s brand as taking a position at the venue their favorite team plays at without the brand earning the moral right to do so.

Consider the Hard Rock Stadium in Miami mentioned earlier.  Since the start of the 1996 NFL season, this venue has had ten different names, five of which have included naming rights with brands.

Then there is legacy and delay in transfer of association.  It can take three years before a brand’s association with a venue will take hold.  In Toronto, the MLSE arena will likely still be referred to as the ACC, a name it’s had since 1999, for some time after it’s renamed Scotiabank Arena in 2018.

Scotiabank isn’t a Lumency client and we’re not privy to the business terms of Scotiabank’s naming rights deal with MLSE.

From a package perspective, we’d estimate the portion of the naming rights spend by Scotiabank for the MLSE venue to be in the $15M CAD range, averaged over the 20-year term.  The rest of the rights fee spend would be against what is likely a very robust asset package.

The asset list for Scotiabank’s naming rights deal with MLSE would include a significant weight in media inventory through MLSE’s specialty sports channels.  It would include significant digital inventory.  The deal likely gives Scotiabank naming rights to regional broadcasts for the NHL Toronto Maple Leafs, and includes commercial inventory on those broadcasts.  There would be a significant amount of hospitality assets through the deal, in-building visibility assets and fan engagement opportunities.

The deal likely supplants Scotiabank’s competitor BMO as the banking partner of the MLSE owned NBA Toronto Raptors. The deal may also offer options on banking category rights to the MLS Toronto FC, with naming rights to BMO Field (the open-air city-owned, MLSE-operated stadium where the FC play) when BMO’s current term for BMO Field and for the Toronto FC comes to an end (BMO’s naming rights at BMO Field runs to the end of the 2026 MLS season).

Direct Business

But what about the business relationship that comes with Scotiabank’s new naming rights sponsorship deal with MLSE?

Bank of America, with its sponsorship of Major League Baseball and nine MLB clubs writes enough direct business through those deals to cover its rights fee investment.  Any marketing and brand health benefits are incremental.

Scotiabank is likely looking at strong direct business opportunity with MLSE.  MLSE is a $3B USD business.  With financing needs, cash management needs, payment processing needs across its businesses and venues, investing, MLSE would be a valuable direct customer for Scotiabank.

MLSE is majority-share owned by a joint venture between Rogers Communications and Bell Canada, Canada’s two largest media companies.  This deal may provide Scotiabank with additional access to business opportunities there. Those companies have a combined market cap of $68.98B CAD.

All that said, a $800M CAD deal over twenty years is a significant commitment, and depending on how you slice the sponsorship asset list that is attached to the deal, one of the most expensive naming rights deals in North America- multiples higher than what naming rights sponsors are spending on most venues.

Guard Rails

As part of its valuation process in advance of negotiation with MLSE and then revaluation at each stage of the negotiation, there ought to have been guardrails on spend set; opening position, desired settle position and on the top end, walk-away position.  It’s difficult to imagine that $40M CAD averaged per year wasn’t well above the bank’s walk-away position and even with a strong asset list and the business opportunity with MLSE that the deal may bring, well above any of Scotiabank’s competitors level of interest.

At $40M CAD averaged per year, at some point the team negotiating the deal on Scotiabank’s behalf must have, or should have, reached a point where they recognized the spend was going to be beyond significant and well above what other naming rights deals are worth.

With the velocity of change in 2017, a pace that is only increasing, three to five year business planning is challenging.  Few of us can imagine where our industries will be in seven to ten years.  Business today calls for flexibility and nimbleness.

The way fans are consuming sports is changing and its early days of a significant disruption that’s coming in professional sports.  Declining viewership, declining gate attendance, a generation on Snapchat.  The way brands can find value through sponsorship in professional sports is changing.

Will the Scotiabank internal marketing teams that will inherit what will be a legacy naming rights deal with MLSE see the necessary flexibility in the deal to adapt to changing business and brand needs in years to come?  Will those marketers look back and believe the bank acted prudently when it negotiated and signed a record setting naming rights deal with MLSE in 2017?

We wonder.

 

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