What is the Value of Football
Article, Sport business – July 2007
Corporate / Transaction Advisory
James Stanbury, Partner in RGL's London office, discusses the rationale behind investment in English football clubs.
I don’t remember whether I thought football was a "funny ol’ game" when I saw my first match, Plymouth Argyle ν Halifax Town in 1974, but as the recent round of Premiership club takeovers demonstrates, there is 110 doubt that in 2007 football is a business. But what value do those that invest in football see in clubs? Or are clubs just the ultimate new accessory for successful businessmen?
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 is usually significantly in excess of the net asset value, one of the main reasons being the unrecorded asset value of the team.
Accounting rules dictate that the cost of acquiring players' registrations can be recorded as intangible fixed assets (amortised over length of the contracts) but the internal cost of homegrown players does not appear on the balance sheet. So the balance sheet is only of passing interest 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 at the moment, for Premier League teams at least, football is awash with cash. It is estimated that a Premier League team can expect to receive around £40 million from the TV rights deal next season.
The interest in English clubs has historically been driven by various factors;
- New TV deals and pay per view contracts
- Relatively low risk - clubs with small debt and guaranteed income streams are an attractive risk
- Clubs are controlled by one or two shareholders who are easy to tackle
- Although TV income is important, reliance thereon is obviated by other income streams
- For American investors, football clubs present opportunities not apparent in the NFL where a club is only allowed to undertake football business, it cannot sell, for example, a branded credit card.
So what did the Glazer Family see in Manchester United? What did they pay £790 million for? The plan leaked to the press revealed various plans for the club to give that 110 per cent (or even more). These included an increase in the volume and prices of tickets; a doubling of catering revenues (more prawn sandwiches?); a new sponsorship package (the AIG package is worth some £14 million per year, compared with Vodafone at an annual £9 million) and planned sponsorship events such as an annual exhibition match in Tampa, the home of the Glazers' NFL Buccaneers' team.
Most commentators thought the price paid was too high but the Glazers' plan, as shown above, was that of a sweat value strategist. The potential for revenue expansion in the Far East, with China the trophy, was not to be missed.
The security of the income, for any business, is key and for a football club with a loyal fan base (and a healthy season ticket waiting list to boot) and a strong brand, like United, the downside risk is minimal. Indeed, optimal success on the pitch was not even critical to the Glazers' financial vision - the business plan only relied on the club finishing 3rd in the league.
But success on the pitch is still important and it is instructive to track the share price of quoted clubs against the match day success or failure. What you find is that there 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 and those who want an interest in a viable business without the personal allegiance. Of course, the former type should be sub-divided into those who still view the club as an investment vehicle and those for whom loyalty obfuscates normal investment criteria. And the latter is arguably the case with Roman Abramovich. With a breakeven position only planned or hoped for by 2009-10, the traditional match of value and cashflows has yet to be played - the financial equivalent of Chelsea playing a long ball game, I would suggest.
But football is a funny ol' 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 the game, investors are understandably queuing up to realise that value.
As appeared in Sport Business, July 2007.