What does private equity see in football?
It’s difficult to fathom the interest of investors supposedly focused on returns in an industry that looks like a giant money-sucking vanity project
It's easy to understand why super-wealthy individuals or oil-rich nations might want to buy football clubs. There's the glamor of associating with a sport followed by billions of fans and, for governments with a challenging public profile, the chance to project a softer, more cuddly image. The appeal for hard-nosed dealmakers focused on financial returns is harder to explain.
Consider the English Premier League. The world's most popular domestic soccer competition is a morass of profligate spending with an out-of-control cost structure. The 20 elite-tier clubs posted aggregate pretax losses of £1.66 billion ($2 billion) in the pandemic-disrupted seasons ending in 2020 and 2021. The league as a whole pays unsustainable wages, based on the European football regulator's estimate that these costs shouldn't go above 70% of revenue if clubs are to break even. The president of Spain's La Liga has denounced record transfer-fee spending bankrolled by rich owners of money-losing Premier League teams as financial "doping."
Yet the league has had no trouble in attracting interest from professional investors, particularly from the US. Clearlake Capital joined with billionaire Todd Boehly in the £2.5 billion acquisition last year of Chelsea Football Club, which broke the British transfer record in January and had a 76% wage-to-revenue ratio in 2021. RedBird Capital Partners bought a stake in Liverpool FC's US owner in 2021 and has been mooted as a potential acquirer. Crystal Palace Football Club (wage-to-revenue ratio: 95%) is part-owned by Apollo Global Management Inc. co-founder Josh Harris. Fortress Investment Group founder Wes Edens is a co-owner of Aston Villa Football Club, which has added more than £200 million to its accumulated losses in the past four years. There are others.
The price of entry to this festival of wealth destruction is hardly cheap, either. Take Manchester United Plc. Bids from a member of the Qatari royal family and British industrialist Jim Ratcliffe have been deemed not high enough by the US's Glazer family, which owns the club, according to the Financial Times. The Qatari offer was expected to value the company at about £4.5 billion, the newspaper said. An offer of that size would be a markup of around £700 million to Manchester United's current enterprise value of £3.8 billion — comprising a £3 billion market capitalization and net debt of £833 billion.
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For this, the lucky winner (if the Glazers finally decide to exit) will get a club that has posted three consecutive annual pretax losses totaling £194 million, on revenue that increased a paltry 1.8% in the five years through June 30. On the bright side, the team won the League Cup on Feb. 26 to end a six-year trophy drought; on the other hand, a 7-0 drubbing by rival Liverpool the following week cast doubt on the strength of the team's revival.
Manchester United offers a useful prism for considering the level of sanity, or otherwise, in Premier League financial operations. For one thing, the club is publicly traded, so the level of disclosure is higher. Moreover, it is a premium asset: a franchise with a storied history and an unrivaled global following. Manchester United has won 20 English league titles since 1889, more than any other (including a leading 13 in the Premier League era that started in 1992), and claims 1.1 billion fans and followers worldwide. In short, if this outfit can't turn a profit, what hope can the rest have?
There are multiple ways to value a business. Discounted cash flow is arguably the gold standard, though it has its drawbacks, particularly for volatile and often money-bleeding enterprises such as football clubs. DCF valuations are highly sensitive to changes in assumptions, meaning you can easily ramp up the figure by building in more optimistic estimates. Still, you'd need a heroic view of the future to get to the £4.5 billion value rejected as too low by Manchester United's owners. An analysis by Kieran Maguire, an accountancy lecturer specializing in football finances at the University of Liverpool, produces an enterprise value of only £2.7 billion even after using a generous 15% rate of revenue growth over the next five years. That's 40% less than the club's current enterprise value — which already includes a substantial bid premium. Manchester United shares have surged 67% since late November when the Glazers signaled they might sell.
Given the distortions caused by negative cash flows, the use of revenue multiples has proved a popular tool for valuing football clubs. Tom Markham, a football finance specialist and director of Wigan Athletic, developed a refinement that also factors in profitability, the level of stadium usage and the ratio of wages to revenue — a critical metric given the inflation in player salaries. The Markham multivariate model has been highly accurate in forecasting actual transaction values. It suggests Manchester United is worth about £857 million, based on its most recent full-year results.
Optimists might argue that the club is poised for much faster growth. We are in a gold-rush period for the European football industry, with the value of broadcasting rights climbing relentlessly. One way to make sense of investment firms' interest is to look at this as akin to the internet boom. These are the go-go years, when building market share to secure a place among the elite is paramount; profits are something to worry about later.
But the gold rush has been going on for a while, and there's precious little sign of it in Manchester United's top line. Meantime, the club has under-invested and its Old Trafford stadium needs refurbishment or rebuilding — a project that might cost upwards of £1 billion.
Moreover, the company's commercial potential is hardly unexploited. It has its own TV channel, app and club-branded products from luxury watches and children's toys to bedspreads. Even so, the size of the global following suggests scope for more. The University of Liverpool's Maguire points out that Manchester United's £583 million revenue represents only 55 pence per follower per year. Advances in technology such as, for example, the ability to sell virtual tickets to watch games in 3D as if you were there are an opportunity to further "monetize" (read: wring more cash out of) the fan base.
Such calculations may help to explain private equity's enthusiasm. The eyeballs, the revenue and the growth potential are there; the industry just needs to sort out its dysfunctional cost structure. In effect, it's a turnaround situation — and that's what private equity firms do, rationalizing operations and squeezing out inefficiencies to improve profitability. Indeed, there are already plenty of signs that the industry is moving in the direction of greater financial sustainability.
It's a logical wager. After all, what is more likely: that this large, socially and culturally important industry continues to spiral into a black hole of out-of-control spending and widening losses, or that somehow it is pulled back to a sustainable path that enables rational investors to profit? The Qatari consortium's reluctance to overpay for Manchester United is another potential sign of this process taking hold. US investment firms may also still harbor hopes of importing the closed-shop franchise system that has undergirded the profitability of American sports teams, though in the UK's case at least this is probably a pipe dream, given the backlash that the short-lived European Super League inspired.
Ultimately, though, this is still a bet on a future that hasn't yet arrived. Every sports fan loves a dramatic comeback. But as the Manchester United players trooping off dejectedly at Liverpool last week know, some deficits are insurmountable.
Matthew Brooker is an editor with Bloomberg Opinion. He previously was a columnist, editor and bureau chief for Bloomberg News. He is a CFA charterholder.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
