Friday, June 01, 2007

Roll Up, Roll Up

Roll Up, Roll Up! It's the Great English Football Club Sale!

- Consistently underperforming club in deprived part of the country, and without a major domestic trophy since 1955? Just £133m!

- Perennially outshone club with inordinate managerial turnover, who played in English football's third tier just seven seasons ago? Just £100m!


English football clubs are changing hands at unprecedented rates, and at unheard of prices. In the past year alone Liverpool, Villa, West Ham, and Sunderland have been sold, whilst bid speculation continues to circulate around Man City, Newcastle and Arsenal.

An alien arriving in England, and viewing the feverish activity would presumably conclude that something drastic must have occurred. In at least one sense they would be correct; the Premiership TV deal announced in May 2006 saw BSkyB and Setanta agree to pay over £1.7bn over three seasons, beginning 2007/08. Charlton's relegation could not have been so poorly timed it seems.

As someone who believes that markets are somewhat efficient (or at least tending towards efficiency), it is thus reasonable to conclude that the football club investors have rationally assessed the value of the new TV deal, and incorporated it into the price they would pay. So long as their teams were not relegated during 2006/07, those readies would begin flooding in, and voila, the investment would make sense. It was not for nothing that Eggert Magnusson looked so terrified during the final weeks; conspiracy theory anyone?

But as someone who has a reasonable grounding in investment, then amongst the middling Premiership clubs, the amounts paid seem extravagant, even taking into account the new TV deal. Alan Sugar called it the 'prune juice effect' - it goes in and comes straight back out again (into the hands of players and their agents). Or alternatively, to steal some wisdom from another notoriously unprofitable industry, Richard Branson taught us that the fastest way to become a millionaire was to start as a billionaire, then to buy an airline.

Thus I am inclined to think that one of three factors are at work (or some combination thereof):

1. Investors are extrapolating even higher TV deals in the future (unexpectedly high).
2. Investors intend to tap previously unchartered income sources (or less realistically, to reduce costs)
3. Investors view football clubs as 'positional goods', and thus as an ultra-luxury hobby.

It is certainly possible that the prices paid for TV coverage over the next three seasons are merely the tip of the iceberg, albeit improbable in my view. BSkyB for example generated total revenues of £4.0bn in 2005, and net profits of £425m with 76% of their income generated by TV subscriptions. Whilst the security of the Premiership rights drives some additional sales, the scope for further material increases in broadcasting rights, in the absence of punishing subscription price rises, is unclear.

There has been a tendency to view Sky's payment for football rights as being a temporary 'loss leader' during its quest for domination of the UK's digital TV market. As of June 2006, BSkyB had 8.1m direct satellite subscribers, and was providing 3.9m further non-BSkyB subscribers with Sky channels. In a country of just 25m households, the penetration of both digital TV generally and BSkyB specifically is pretty well-established. With the market effectively won, it is unclear whether the Premiership's overwhelming reliance upon a single powerful customer will be a sensible strategy. Who would you back around the negotiating table in 2010? Richard Scudamore or Rupert Murdoch?

The impact of foreign television rights has become more important. In Jan 2007, it was confirmed that the Premiership had sold rights overseas for the next three seasons, for a total of £625m. Speaking only from personal anecdotal experience, in my opinion when commentators wax lyrical about the global appeal of the Premiership, they really only mean Manchester United and Liverpool, and to a lesser extent, Chelsea and Arsenal. In New York for example where there is a solid underbelly of support for 'soccer', the local pub was rammed for Liverpool vs Manchester United, yet strangely quiet (deserted) for Charlton vs Reading.

It is well-known that the big clubs would like to negotiate their own television rights. For example in New York, the Sportsnet New York channel which largely broadcasts live coverage of the New York Mets, is co-owned by Time Warner, Comcast and of course, the New York Mets. The Premiership is ultimately fighting a losing battle in its 'all for one' approach to negotiating TV rights; the rights to watch Manchester United are potentially worth billions; those to watch Charlton are almost worthless. And the clubs know it (and so it appears did the Glazer family).

The second possibility in my view, concerns the development of previously untapped (or undertapped) income sources. It is difficult to imagine that admission prices could be raised much further, particularly in a softening consumer economy, without threatening to reduce total revenues. Corporate hospitality is a well-worn source, and again in the bifurcated Premiership, inviting a client to the Wigan fixture is a polite way to terminate a corporate relationship.

Sponsorship and branding partnerships (credit cards etc..) are also well-travelled paths, and again with the exception of the big handful of clubs, what are such marketing partnerships really worth? For example if Newcastle United have perhaps 200,000 UK-based supporters who would declare an allegiance, surely this is small fry compared to those (temporarily) obsessed by Big Brother or the X-Factor.

One area of potential untapped income would perhaps be the club websites. Internet advertising is clearly a hot sector right now, and I wouldn't claim to be able to calculate what they could be worth, except to observe that it all feels a little bit 'like 1999' as Prince might have said. It is also notable (not surprisingly from my standpoint) that football club-oriented blogs have grown in popularity, and I am probably not alone in having the official Charlton website along way down my priority list, almost to the extent of rarely looking at it. If you want to 'play' the Internet theme, just buy Google, not a football club.

As far as potentially cutting costs, it's a non-starter aside perhaps from some administrative fat; talent industries simply don't work that way. Just witness the bloated salaries not only in football, but in movies, fashion and finance. No football fan will ever accept a second-grade striker if they know their club could afford Thierry Henry. And just as the big clubs know that their revenue potential is enormous, so too do the best players.

The third possibility concerns the topic of 'positional goods'. A 'positional good' is one whose value is mainly measured in comparison with possible substitutes (as opposed to a 'material good'). In other words, their value is best understood in a 'relative' sense not an absolute one. In the case of football clubs, the concept of a 'positional good' is best understood in terms of, "...they don't make them anymore." Coastal waterfront is a 'positional good'; likewise access to an exclusive members club, or a Picasso painting. If you want to buy a football club, you have to buy one already in existence; you can't just create one.

This possibility makes the most sense to me, especially in the current euphoric economic environment. Global interest rates are low, economic growth is strong and credit creation is at extraordinary (ie. dangerous) levels. All of that money sloshing around has to find a home somewhere, and if you are a billionaire satiated by 'material goods', and scared off from the lofty levels of financial assets, why not tuck into some tasty 'positional goods'?

By definition, 'positional goods' cannot be valued using normal metrics. If you share my view that all but the biggest football clubs are inherently unprofitable, then like a piece of art (or a UK buy-to-let property), they have a 'negative cost of carry' (owning them generates cash outflows, unlike a bond for example). During the year to 30 June 2006 for example, Chelsea lost £80.2m, having lost £140m during the previous equivalent period.

If the new club owners intend to own them in perpetuity, then like Roman Abramovich, they might need extraordinarily deep pockets (though Chelsea is an extreme example). Alternatively, if they intend to sell it on to a greater fool for a profit in the future then they will need to hope that a) the current global asset boom does not roll over, and b) their club is not relegated (see below).

A key difference between say a Picasso painting and a Premiership football club, is that the former will always be a Picasso (and he's definitely not making any more of them), whilst a Premiership club might conceivably be a Championship club.....or a League One club. And at least when as Picasso owner accidentally elbows his artwork, he has some reasonable recourse to an insurance company.

Meanwhile, perhaps 12 or 13 Premiership clubs will begin next season with a non-negligible chance of relegation, a scenario which would see potential valuations plummet. I'm not sure that insuring against relegation is even permitted (I suspect it isn't), but even if it were, the premiums would be extortionate.

The word 'bubble' is bandied around haphazardly, and if you believed everything you read, one could point to bubbles everywhere from Chinese stocks to modern art, and from UK property to emerging market debt. But I am struggling to escape the conclusion that the current football club frenzy is indeed a genuine bubble, blown up by a 'wall of money' and exhuberant assumptions. The fear should be that the buyers will come and go, the players will take their exhorbitant salaries, and the fans of the beloved clubs (whose very permanence was so attractive) will be left to pick up the pieces. To repeat the most valuable words ever said about investing, "It's never different."


At 8:35 AM, Blogger Wyn Grant said...

Pleased to see you using the concept of positional goods as developed by my old colleague, the later Fred Hirsch. The ultimate positional bid is surely Paul Allen's bid for Southampton where one of the main attraction is a parking place for his gigayacht. What I think you are overlooking under the second heading is the capacity for a smart investor to work the assets harder. A number of clubs have undeveloped land, e.g., Newcastle, Aston Villa, which could generate a significant income stream if properly handled.

At 9:21 AM, Blogger charlton north-downs said...

NY have you seen the Andy Hunt blog post about buying a football club.
Someone is hoping to get 35,000 football fans to invest £35 each, to have 1 share in a football club. Might just about buy Bromley for £1.25 mill. There is a great Harry Enfield clip by the way.

At 1:37 PM, Blogger Chicago Addick said...

Insuring against the downside of relegation & loss income is possible. Expensive for some (Derby), possibly a bit cheaper for others (Man U)!

This is football's very own tech bubble, the investors will bugger off but the customers will hang in there.

The fairer allocation of this cash sploshing around to the lower divisions would at least sustain the game in our country when the people with big yachts and no interest in the game sail off.

At 5:30 PM, Blogger charlton north-downs said...

This comment has been removed by the author.

At 11:25 AM, Anonymous Chris said...

Another very interesting piece. Perhaps a fourth factor is also worth considering; sometimes even rational investors make mistakes. This often happens in situations where the fundamentals of an industry appear to be very good but where a basic lack of capital discipline spoils the party. This can come about for a number of reasons but in the case of Football it is very simple. A number of investors/owners are in it for the glory not the money. Roman Abramovich is the best example, of course, but Charlton Athletic also illustrate the point very well. The Club is clearly very well run but I’ll bet that the terms Cash Flow Rate of Return on Investment (CFROI) or EVA don’t get used much at Board meetings. The management are focused on success on the pitch, pure and simple, not on growing dividends. The business strategy seems to be to maximise revenues and then to recruit the best available players up to the point where their wages lead to a break-even result. Very sensible and long may it continue!

I was surprised when the Glazers bought Manchester United. I can’t see how equity investors in Football Clubs can win unless there is a dramatic shift in the typical focus of owner/managers. Perhaps the Glazers are now beginning to see it this way, explaining their apparent interest in selling? It is perhaps highly significant that the Hedge Funds that helped to finance the Glazers’ takeover of Manchester United invested in attractively priced debt not unattractive equity; football generates cash, the problem for shareholders is how it gets used.

The winner-takes-all dynamic you refer to is a major cause for concern. If financially motivated investors own most of the big clubs, then the pressure to concentrate TV money into the hands of the very few will intensify still further. The challenge then will be to retain even the semblance of competition we have today.

At 10:38 AM, Anonymous Noel said...


surely Paul Allen could tether his boat to the Thames Barrier?


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