16 Dec 2009 - SAGA buyout of NGN / Club Agreements: Communique

Background

The objective of the SAGA Handicap Server, from the outset, was to establish a central repository for all scores of affiliated golfers and a single source for the verification of official SAGA handicaps.

With this in mind it was essential to get all golfers onto the SAGA Handicap Server as soon as possible.

Once it became clear that NGN would not be a willing participant in this process the SAGA set about trying to find a model for implementing the SAGA Handicap Server that would enable the SAGA to fulfil these objectives from the outset.

An SAGA-appointed working committee, which involved the Womens Golf South Africa (WGSA), on the matter eventually determined that there were only two options open to the SAGA, namely, (1) a ‘phased-in’ option and (2) a ‘forced-onto-the-SAGA Handicap Server’ option. However, neither of these two options would have led to the achievement of the stated objectives behind the implementation of SAGA Handicap Server.

In the case of the’ phased-in’ option, the SAGA would instruct clubs through their respective unions that, as soon as each club’s contract with a service provider providing handicap services came up for renewal, that club would be obligated to sign onto the SAGA Handicap Server. That club’s service provider would be required to enter into a service provider agreement with the SAGA or cease to offer handicap services.

This option created a number of challenges for the SAGA, one of which was that Albatros Datenservice GmbH (Albatros), the company appointed to manage the SAGA Handicap Server on behalf of the SAGA, would not be in a position to operate an expensive system with perhaps only 20,000 golfers on the server. Other challenges of the option were that there would be no handicap card with cross-swiping facilities across all golf clubs in South Africa and that it had the potential of putting clubs into conflict with provincial unions and, in turn, provincial unions into conflict with the SAGA.

In the case of the second option, the SAGA would instruct all clubs that by a certain date all affiliated golfers would have to be on the SAGA Handicap Server if they wanted an official handicap to participate in both SAGA- and provincial union-sanctioned tournaments, irrespective of any agreement the golf club may have with a service provider.

This option created even more challenges for the SAGA. Such a directive from the SAGA, through its member unions, would present a golf club with a choice between adhering to the SAGA’s directive and being held in breach of its existing contract with its service provider, NGN, (Club Agreement) , or disregarding the SAGA’s directive and adhering to the terms of the Club Agreement it had entered into with NGN, thereby making all its member golfers’ handicaps unofficial. Another issue with this option, was the legal path that the SAGA would have to follow in response to any challenge to its directive. The consequences ranged from being instructed by a court to suspend the project until it was resolved legally (which could take not only months but years), to spending a lot of money on legal fees that could have been spent on the project.

With both options proving difficult, the common thread of legal advice the SAGA received, including that from Senior Counsel Adv Freund, was that the SAGA would be best served by seeking a commercial solution to resolve the situation in relation to the existing Club Agreements between golf clubs and NGN for the provision of handicapping services.

Some two months ago NGN and the SAGA met and agreed to start working on a solution which would result in:

a)Eliminating the possibility of conflict between the SAGA and golf clubs (through provincial unions) in implementing the SAGA Handicap Server,

b)achieving the SAGA Handicap Server objectives in a cost-effective manner, and

c)NGN becoming a willing partner in the process.

This solution would be achieved through a contract buy-out of the Club Agreements by the SAGA, in relation to handicap services only.

From the outset the SAGA informed NGN that it did not want to purchase the company, it was interested in handicap services only in the Club Agreements that NGN had with golf clubs. The SAGA’s viewpoint was that it had already undertaken, after a thorough and transparent tender process, to appoint Albatros to develop, manage and maintain the SAGA Handicap Server. Furthermore, the technology applied in the NGN system was deemed by the SAGA-appointed committee working on the tender process to be less suitable for the implementation of the proposed SAGA Handicap Server.

Against this background, negotiations continued to take place, culminating in a ‘memorandum of understanding’ between the SAGA and NGN on 11 November 2009. The principal terms and conditions of the ‘memorandum of understanding’, as approved by the SAGA National Executive Committee on 6 December 2009, are as follow.

A: The principal reasons are:

•The SAGA will be providing a tangible service to club golfers for the first time; these are the people who regularly pay their affiliation fees that have sustained the SAGA and WGSA throughout the years gone by;

•To consider incorporating the handicap and affiliation fee as this project creates linkage between every affiliated golfer and the SAGA/WGSA in terms of delivered value;

•The SAGA Handicap Server, with all affiliated golfers on it, provides an important link to the new SAGA website offering golfers a dynamic and convenient tool for viewing handicaps, building communities and viewing golf related news, views, etc;

•The SAGA’s operating costs, from 2014, will no longer be dependent on one source of revenue (affiliation fees), creating a more sustainable future for the SAGA.

A: It is estimated that just over R14,3 million will be raised in revenue in the first year after the conclusion of the Proposed Agreement, primarily from the Handicap Fees payable by affiliated golfers. It is further expected that the project will have expenses, over the same period, which includes a part repayment of a loan, of R13,4 million thereby generating a profit of just less than R1 million. With the interest payable on the loan amount the SAGA’s final position, at the end of 2010, is estimated at a loss of R600,000.

In the second year a similar loss is forecast. However in year three a smaller loss is forecast, namely R200,000. The fourth year it should generate a profit of just over R60,000.

However things change quite dramatically from year five (2014) following the Proposed Agreement, the SAGA is estimated to make a profit of R3,1million. In addition, by the end of 2014 it is anticipated that the SAGA would have paid back at least a total of R6 million of the loan taken out at the beginning of the project to pay NGN. Furthermore, the SAGA will be required to support cash flow, over the first four years, to an estimated R1,6 million. This too will be paid back in full by the end of 2014 from the year’s profits.

The following year (year six or 2015) there should be enough revenue to settle the balance owing on the loan. Thereafter all profit will be at the disposal of amateur golf to be dispersed as it agrees for the benefit of the sport.

In these calculations other possible revenue-generating projects, such as possible membership/official handicap opportunities for non affiliated golfers and the new SAGA website have not been accounted for.

All financial numbers have been calculated on the basis that there are 160,000 affiliated golfers. According to NGN, they have 190,000 affiliated golfers on their database, while SAGA and WGSA have 152,000. Thus, the number of golfers used for financial projection purposes has been deemed prudent.

A: This is the most asked question around this project, which is understandable.

As most people are aware, NGN has run a successful business for some years now. Their business was funded by the handicap fee each affiliated golfer paid to NGN annually. This project is no different.

As in similar commercial projects, the SAGA has had to go out and raise funding to fund the project. On the basis of the estimated revenues to be generated by the SAGA over the following years it is anticipated that such funding can comfortably be repaid through revenue generated by the project.

The SAGA has a number of options at its disposal in relation to funding. It is reviewing two offers from two companies on terms to be negotiated with the SAGA. In addition, the SAGA is looking at funding by unions, private individuals, a merchant bank or a mix of these options. At the time of writing this article, the SAGA has confirmed funding by more than one of the above-mentioned options.

It may be pertinent to point out how the split of each golfer’s SAGA Handicap Fee is being used to fund this project. In 2010, the SAGA Handicap Fee will be R87.72 (excluding VAT). Of this amount R40 goes to paying Albatros (for cost of providing the SAGA Handicap Server, handicap services (including a call centre), SAGA Affiliation and Handicap Card (excluding replacement cards) and setting up and managing the network of golf club terminals), approximately R33 is used to pay NGN out for its Club Agreements, in terms of the Proposed Agreement, and the balance (approximately R14) is used by the SAGA to fund its operational costs and purchase of hardware to golf clubs.

A: No. The SAGA intends honouring the terms of the Club Agreements. Thus, what is contained in these Club Agreement is the status quo which will be retained.

A: There are a number of reasons for this. They are, in no particular order:

•The SAGA determines the SAGA Handicap System (method of calculation of Handicaps). However, previously it has had no control over how the calculation is applied to the scores that affiliated golfers record. The introduction of the SAGA Handicap Server provides a single source for the verification of official handicaps.

•More and more companies are offering integrated computer services at golf clubs. These companies compete with each other and each have separate servers on which player data is stored that do not communicate with each other. The SAGA has identified that by introducing an SAGA Handicap Server and one handicap card (being the SAGA Affiliation Card) it will enable cross-swiping capability at every affiliated golf club. This means that a player’s handicap can be verified at any club he or she plays.

•A number of countries have adopted this approach (including Wales, Scotland, New Zealand and in Europe) successfully, thus it is a case of best practices.

•The SAGA, like the governing bodies of amateur golf in other countries, are looking to secure their new media rights.

A: In order to understand this it is important to review the current position.

NGN has all but a handful of golf clubs under contract. All these golf clubs were bound to NGN for both handicap services and other integrated services. Thus if another service provider wanted to provide back office services to a golf club, it could do so only if that club terminated its agreement with NGN.

In the new environment this will not be the case. The SAGA will provide handicap services exclusively and in accordance with the Club Agreements. Service providers will now be free to enter into agreements with golf clubs in terms of which they can provide software products and integrated systems (excluding handicap services) without the golf club contravening any term in its Club Agreement with NGN.

The only proviso is that should such a service provider want to provide an integrated service that communicates with the SAGA Handicap Server (for example to open a round), then it will be required to be approved by the SAGA and enter into an agreement with the SAGA setting out the basis and requirements in terms of which the service provider will link to the SAGA Handicap Server. This requirement is primarily to ensure that the way in which a service provider communicates with the SAGA Handicap Server is controlled.

A: No. As has been explained in this document, the introduction of the SAGA Handicap Server faced a number of challenges. The final solution is as outlined in this document, namely the buy-out of Club Agreements by the SAGA. This has changed substantially from how the SAGA first envisaged operating the SAGA Handicap Server and its related services.

Very briefly, the original plan was to operate in an environment where every club was encouraged to have a service provider providing integrated services at golf clubs, including handicap services.

However, in taking over the Club Agreements, the obligations the SAGA is now required to fulfil include the provision of hardware and handicap services at golf clubs. The earlier model is no longer applicable.

By doing the buy-out, the SAGA is not giving up on its original model. It intends seeing out the contract period in terms of the existing Club Agreements with NGN and will then review its position on service provider involvement in handicap services.

The one thing that is clear to the SAGA, is that, at present, service providers are limited in their offering in the current market as a result of NGN’s dominance. Their opportunities will be greater once the SAGA Handicap Server has been implemented. Most service providers in the current market have openly advocated free handicap services, meaning they did not foresee a revenue stream in their business models from the provision of handicap services. This will remain the case, and will be for at least the next four years

A: The legal position is that the Club Agreements may not be assigned by NGN to the SAGA (or any other party) without the prior approval of the golf clubs.

So in each case where approval by the golf club is required for the assignment of NGN’s obligations in terms of the Club Agreements to the SAGA, there will be such communication in the very near future.

However with 462 clubs under contract, the first step has been to ensure that agreement with NGN is indeed possible. Now that this point has been reached, golf clubs will be approached individually in cases where their approval for assigning the Club Agreements to the SAGA is required.

A: All Club Agreements, that relate to handicap services only, will remain in force until the contract period terminates.

All golf clubs are to act in accordance with the terms of these Club Agreements.

Club agreements, that cover both handicap and back-office services, will also remain in force until the contract terminates. However, for these contracts, SAGA will accept responsibility only for entry of scores and the subsequent calculation of a player’s handicap.

Back-office service and support, including round registration which is usually automatically triggered as part of green fee collection, must continue to be provided by NGN.

All payments due up to and including 31 December 2009 are payable to NGN, including amounts in arrears paid after 1 January 2010.

All invoices issued from 1 January 2010 and payable in 2010 are to be paid to the SAGA.

It should be made clear that any golf club that is in arrears, as at 1 January 2010, will still be liable for the outstanding money. The SAGA is not positioned to provide any kind of reprieve to a golf club in arrears.