Analysis

Football for sale – can investors save clubs from insolvency?

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  • Sport and Major Events Risk Management
Jonathan Brown

Jonathan Brown

Football for sale – can investors save clubs from insolvency?

 

There are few industries that have been worse hit by the impact of COVID-19 than sport, and few sports that have suffered more than football (soccer). As leagues around Europe came to a juddering halt matchday revenue evaporated overnight, leaving many clubs with bloated payrolls and empty coffers. While play ultimately resumed in several of the top leagues, the vast majority saw seasons cancelled prematurely and are facing the prospect of resuming in next few months for the new season without crowds.

For many clubs, this means their very survival is at stake. As I set out in an earlier article, outside of the “Big 5” leagues (the top divisions in England, Spain, Germany, France and Italy) where substantial TV revenues are shared, matchday revenue makes up a significant (and in many cases overwhelmingly significant) proportion of income. Put simply, without matchday revenue, the vast majority of clubs are loss-making and are facing severe financial distress or, worse, insolvency.


But all is not lost. Football clubs remain attractive investments to an array of potential suitors and in the coming months I expect to see many change hands across Europe.  So, who might those investors be, where might they come from and is there any other way out of this for the clubs teetering on the brink?

The Wealthy Benefactor

In 1995, Jack Walker – a local businessman – famously bankrolled Blackburn Rovers’ ascent from the relegation zone of the second tier of English football to Premier League title winners, spending GBP 25m on players and breaking the British transfer record twice. Walker was an old school benefactor, who had made his fortune in industry. He was determined to give something back to his town and to give the club he had supported since childhood a shot at glory.

And there remain other wealthy individuals out there looking for trophy investments. While a healthy bank account can smooth the path to success, not every club needs, or is looking for a billionaire investor like Roman Abramovich - who rescued Chelsea from the brink of insolvency in 2003 and led them to multiple league titles and a Champions League win in 2012. Many fans would simply be happy with their club continuing as a going concern and winning the local derby. A benefactor able to pay the wages would therefore be enough to earn their respect and gratitude – conquering Europe is optional. 

The Sovereign Wealth Fund

The two most high-profile examples of this type of investment are Manchester City (Abu Dhabi United Group) and Paris Saint Germain (Qatar Sports Investments). With pockets as deep as their oil wells, they allow fans to delight in their clubs’ new-found ability to invest heavily. And money apparently attracts more money if these clubs’ Financial Fair Play submissions are anything to go by, with sovereign wealth funds’ investments typically followed by exponential growth in income from sponsors (usually located very close to home). 

Many other football fans consider that the effective state-ownership of clubs causes severe distortion to the competitive landscape. However, Newcastle United’s fans were able to see past these concerns  when they were recently subject to a takeover attempt by Saudi Arabia’s Public Investment Fund. Many, not only the cynics, would argue that the same will be true of supporters at several clubs if this type of investment promises financial stability and future success. 

The Profit Seeker

Believe it or not, there are investors that feel they can turn a profit from football. To do this successfully a solid business plan is required with a clear angle on how to make money. For many, this means exploiting an underperforming team and doing whatever it takes to return it to former glories with minimal costs. This can mean a high pressure environment and cuts to expensive non-essentials such as overseas training camps, cryo-chambers and other luxuries that result in clubs “just spewing money” (Donald Stewart, Sunderland FC’s former Chairman), while at the same time striving for promotion into the top division, or reaching the qualification places for European competitions.

Value seekers investing below the top divisions will know that promotion turbo charges revenue and will look for clubs that can quickly challenge for a place in a higher league. The 2020 Championship play-off for a place in the English Premier League is the prime example of getting it right: victory in the Brentford v Fulham match was worth an estimated GBP 160m over the next three years to the winner (Fulham), earning it the title of the “richest game in football”. Remarkably, had Brentford won that game, the additional GBP 160m of revenue would be more than the club has earnt in its entire history to date since being founded in 1889. 

The Collector

The long-term target when taking over a team is to “create value”, essentially a sustainable return on investment. Incremental improvements – upgrade the coaching staff, buy new players, build better infrastructure – are the steps to achieving that. But real success for investors is a share, or bigger share, of the riches that come with TV money in the major divisions – either through local rights, international rights, or shares in the spoils from UEFA competitions.  

It’s no coincidence that investors who already have sports ownership experience believe they can bring their knowledge to bear in a new venture – whether that’s Liverpool’s Fenway Sports (also owners of baseball’s Boston Red Sox), Arsenal’s Stan Kroenke (with interests in US clubs in the NFL, National Hockey League,  Major League Soccer, National Lacrosse and even the eSports “Call of Duty” league) or Fulham’s Shahid Khan (NFL).The US bias in those names is not surprising.

The US is well ahead of Europe when it comes to operating clubs (franchises) as businesses and exploiting TV rights. US investors believe the value of football TV rights still have some way to go in Europe, with a real focus on streaming matches across the web into homes across Asia and other football hungry markets. They are scouting for deals accordingly.

The PE House

Private Equity investment in football is nothing new and that investment in many ways mimics the methodology of the profit seeker – PE Houses are not known for their altruism. The current climate leaves PE investors looking to capitalise on the distressed assets that a raft of clubs have become. Current owners of many clubs are experiencing pain in their other business interests and, at such a time, running a football club may become a (costly) distraction they can do without. Enter the PE house with cash to burn.

There are examples of PE investment across European football already. In England this includes Aston Villa and Crystal Palace, in Italy Roma and AC Milan (by a hedge fund), with rumours of far more on the horizon. The key for Private Equity is to identify and maximise value and improve operational structures without losing sight of potential exit routes along the way. Indeed, it is fair to say that, in the main, football clubs are poorly run businesses and therein lies the opportunity.  

The Asset Sweater

It would be remiss not to mention Manchester United, owned by the Glazer family. Experts at sweating their assets, the Glazers have taken over USD 1bn out of United since their leveraged buyout in 2005 in the form of dividends and interest repayments, stunting United’s on field success in the same period in which the team’s neighbours Manchester City effectively won the lottery.  

The good news for struggling clubs is that they are unlikely to suffer such a fate. You need assets to be able to sweat them.

The Company

Who would not want to hang on to what is surely one of the most reliable pillars of stability? Large, highly profitable, multinational companies willing to make long-term investments in football clubs without expecting much (or any) return. Freed of financial headaches, this concept has allowed several German clubs owned by the likes of Volkswagen (VfL Wolfsburg) or the Aspirin-producing pharmaceutical giant Bayer (Bayer Leverkusen) to operate with peace of mind. Other clubs have agreed “strategic partnerships” with minority corporate shareholders promising steady flows of funds and security, including FC Bayern Munich (Allianz, Audi and Adidas), BVB Dortmund (Evonik, Signal Iduna and Puma) and VfB Stuttgart (Daimler). 

However, while companies or other investors are free to invest and hold as much share capital as they want, the “50+1 rule” ensures that German   clubs’ members, ultimately its fans, keep the majority of voting rights and thus control of the board. This is the German Bundesliga’s attempt to shut the door to the types of investments and its side-effects described above, mostly with success. Except for newcomers Red Bull Leipzig, who have sought compliant, albeit crafty ways round the rule, corporate investors have made their peace with it. In return, they hope for the loyalty of their local population and workforce – who often created the teams in the first place - and high levels of brand exposure, especially at international level. After all, even Wolfsburg fans drive a Mercedes.   

Far from jamming on the brakes, this model has gone hand in hand with an increase in German clubs’ revenue and financial sustainability. Last year, Germany’s 1st and 2nd Bundesliga “enjoyed total solid stability” with 28 out of 36 clubs, including most of those (partially) owned by corporates, turning a profit, according to the Leagues’ boss  . A low appetite for financial risk, high levels of accountability to investors and fans, and a commitment to long-term economic viability at both league and club levels are likely to have contributed to this development. 

However, the COVID-19 crisis may also threaten these clubs’ strong financial base, as other sources of revenue fall away and even the largest businesses are forced to cut costs and raise cash. Still, a dash of hope remains for everyone: the German government only recently agreed to rescue Schalke 04 from insolvency by guaranteeing a loan of EUR 35m at the very last minute. 

Crowd Funding

Bear with me here. Yes, this is an option for a struggling club and one that a number have already opted for. An unexpected facilitator is former Juventus and Chelsea hero Gianluca Vialli whose Tifosy (Italian for “fans”) crowdfunding platform allows supporters to invest in football clubs looking to raise capital for specific projects. This has helped clubs across Italy, Spain and England and the concept has spread further afield – in a separate effort struggling US club Detroit FC recently raised USD 1.2m in a matter of days to tide it over from COVID financial ills with the unlikely assistance of rock legend Iggy Pop. Monetising the enthusiasm of fans who are less concerned with shareholder value and financial returns on investment may well become a recipe for recovery, if not the future.

Initial Public Offering

Why not go the whole hog and offer the club to fans in its entirety? Tottenham Hotspur was the first club to do this in 1983, with others following, including Manchester United in the early 1990s before the Glazer family took them off the market (though they have returned in part). It is within the gift of a club to offer its shares to supporters in this way and to set the initial price. Perhaps a supporter of a club with an uncertain future could be persuaded to pay a little over the odds for shares to save it? 

In summary

With options comes hope for supporters of clubs that are teetering on the brink. But be careful what you wish for. Football history is littered with disastrous takeovers or attempted takeovers – from the money launderers, through the asset strippers, to the utterly incompetent owners that will send your team crashing down through the divisions in no time at all. 

A potted history of some of the most heinous examples of how club ownership can go terribly wrong will follow in part three of this series. And to my fellow Manchester United fans pining for a change at the top – just remember that the other bidder for the club in 2005 was Colonel Gaddafi.

 

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