Article, Accountancy Age – May 2007
Corporate / Transaction Advisory
Do investors falling over themselves to buy football clubs know something that we don't? James Stanbury explains why everyone wants a piece of the action.
Often described as a funny old game, football is now a serious business. The recent round of Premiership club takeovers (Manchester United and Liverpool, with a bid for Aston Villa in progress) has not faltered, with reports of buyers in pursuit of other clubs (Manchester City, Arsenal and Charlton). So why are investors so interested in the football business all of a sudden? Where, to be blunt, is the value?
The balance sheet is a poor starting point. Financial statements only give a ‘true and fair’ assessment of value relative to accounting rules. The traded price of shares in football clubs is usually well in excess of the clubs’ net asset values; one of the main reasons for this is the unrecorded asset value of the team.
Accounting rules dictate that the cost of acquiring players’ registrations can be recorded as intangible fixed assets (to be amortised over the length of their contracts) but the internal value of home-grown players (think of Liverpool and its Academy graduates, Michael Owen, Steven Gerrard and Jamie Carragher) does not appear on the balance sheet.
That makes the balance sheet of passing interest only to investors. The value of football as a business, as with any business, lies in the positive net present value of future income streams. And football is currently awash with such streams. A Premiership team can expect around £40m from the television rights deal for next season. For promoted clubs, the financial bonanza is said to be around £60m over three seasons, even if they are relegated straight back to the Championship in their first season – that’s £30m in television payouts, £10m in more lucrative sponsorship deals and bigger gate receipts, and parachute payments worth £11m over the following two seasons.
This is why takeover activity is not confined to the Premiership. With these glittering prizes in prospect, Championship clubs are also attractive. Microsoft co-founder Paul Allen is said to be interested in Southampton – for £50m. Promotion to the Premiership, although it won’t now happen this year, could recoup the outlay and represent an investment for Allen. (Note to Paul: go west and you’ll find my club, Plymouth Argyle, a good bet and with a chartered accountant as chairman!)
The interest in English clubs has historically been driven by TV deals and pay per view contracts. Clubs with small debt and guaranteed income streams are also relatively low risk. Clubs tend to be controlled by one or two shareholders, who are easy to tackle. Although TV income is important, there are other income streams. For US investors (who have sniffed around the ball the most), clubs present opportunities not apparent in American football’s NFL, where a club is only allowed to undertake football business – it cannot, for example, sell a branded credit card.
So what did the Glazers get for the £790m they paid for Manchester United? The plan leaked to the press included an increase in the volume and prices of tickets sold, a doubling of catering revenues (more prawn sandwiches?), a new sponsorship package (the AIG deal brings in £14m a year, compared with £9m from Vodafone), and planned sponsorship events such as an annual exhibition match in Tampa, Florida, the home of the Glazers’ Buccaneers NFL team.
Most commentators thought the Glazers paid too high for United, but their leaked plan is that of a sweat value strategist. What the pundits may have missed is the potential for revenue expansion in the Far East, with China the biggest trophy of all (see how much Real Madrid netted from David Beckham shirt sales).
The security of the income stream for any business is key and for a football club with a loyal fan base (and a healthy season ticket waiting list to boot) plus a strong brand, such as United, the downside risk is minimal. Indeed, unbroken success on the pitch is not even critical to the Glazers’ financial vision – the business plan only relies on the club finishing third in the Premiership.
But success on the pitch is still important, as the sad fate of a club like Leeds demonstrates. Indeed, it is instructive to track the share price of quoted clubs against their match day success or failure. What emerges is a weaker correlation for the bigger clubs: win or lose, the value of the club’s brand rides the result.
For investors, football is a game of two halves. There are those who buy into the club they supported as a child (David Dein), and those who want an interest in a viable business without the personal allegiance (Malcolm Glazer). Of course, the former type should be subdivided into those who also view the club as an investment vehicle and those for whom loyalty obfuscates normal investment criteria.
The latter is arguably the case with Chelsea owner Roman Abramovich. With breakeven only planned or hoped for by 2009/10, the traditional match of value and cashflow has yet to be played. It’s the financial equivalent of Chelsea playing a long-ball game.
But football remains a funny old game and one not always known for its rationality. At the end of the day, value is only what someone is prepared to pay for something. Looking at the prospective income streams flowing into football, investors are understandably queuing up to realise that value. And for those US investors still looking for the ideal club, just remember that it was from Plymouth that the Pilgrim Fathers sailed to America!
As appeared in Accountancy Age, May 2007.