Ever since Tottenham Hotspur listed on the London Stock exchange in 1983, a host of football clubs followed. There is even a football index, the DJ StoXX Football Index. But do they make good investments?
This is a relevant question now that arguably one of the biggest clubs, Manchester United, has just listed on the New York Stock Exchange. So it's time to kick the business models and see what we got.
At first sight, it seems like big football clubs might provide a good investment opportunity. Football is certainly the biggest sport around, and it has seen an infusion of money from various sources. Money is pouring in from TV rights, merchandising, sponsorship and, increasingly, wealthy owners with near limitless ambitions and means. The latter has given erstwhile provincial clubs like Manchester City and Chelsea a serious shot into the traditional football elite.
What does it take to produce a winning team?
Well, a couple of things. Good players is an obvious requirement. To be able to buy and keep the best players, a club needs money. There is a pretty good correlation between the amount of money that clubs can avail off and the success on the pitch.
But no matter how good the players, a winning team is almost always more than the sum of its parts. That means that the team must have complementary capabilities (requiring a good coach) and be able to coordinate routines. Routines are coordinated behavior not requiring little explicit communication or command.
A team needs to be able to stay together for a long time in order to develop and perfect a repertoire of routines. The coming and going of players is disruptive to the routine building.
How the EU destroyed football
Money and continuity (which often depends on money) are therefore the necessary requisites to building winning teams. However, in the mid 1990s, the EU opened up national players markets and the European Court of Justice (ECJ) freed up players from clubs in the so called Bosman arrest. This drastically altered the level playing field in European football.
Suddenly, players had much more power versus the clubs, and restrictions on movements between countries disappeared. Previously, competitions could restrict the number of foreigners clubs were able to employ, not any longer. This led to the following developments:
- The best players started to move to the richest competition, most notably the English Premier League (EPL)
- Teams were formed that consisted almost exclusively of non-nationals, a new phenomenon.
- Money (TV rights, sponsorship, rich owners, competition gains, merchandising, etc.) followed the best players to the richest league, creating a virtuous cycle where the rich clubs in the rich countries could even buy more of the best players.
Location, location, location
This is perhaps a pretty long introduction, but one thing to note as an investor in football clubs is where they are playing. Even clubs with the pedigree of Ajax (4 times winner of the European Cup) or Porto (twice) are some of the main victims of the new order. Why?
Simple, they come from relatively small markets (The Netherlands and Portugal), where money (TV rights, merchandising, etc.) is limited, while they compete on a European market (in competition and for players).
As a result, their budgets are a mere fraction of those of the big clubs in the bigger countries (England, Spain, Germany, Italy, France). This means they always lose their best players to those clubs. This is something of a zero-sum game, it's the loss of the clubs in the smaller competition going directly to the clubs in the bigger competitions.
What's more, seeing the best players leave to the competition is bad enough, but this also complicates building and perfecting the routines necessary to create a winning team.
This changes the business model of a club like Ajax (which is listed on the Dutch stock exchange). In essence, it now just produces youth players and tries to hang on to them for as long as possible before selling them on to bigger clubs.
This is a bit of a hit and miss business, and worsened by the Bosman arrest. The Bosman arrest ensured that at the end of their contract period, players can walk out the door for nothing. In 1995 Ajax won the Champions League with a team full of teenagers, most of them left in the two years subsequently, many for nothing and the club has never really recovered from this.
This isn't a terribly solid basis, needless to say, even if you've got as an acclaimed youth system as Ajax. The mirror image of that is that just about all of the clubs in the English Premier League have bigger financial budgets than the big clubs from the smaller leagues. But whether these make better investments remains very much to be seen (insofar these clubs are listed anyway, few are).
Even within the big leagues, money flows to the biggest clubs, as these are the ones with the global brands and fan base. So it's the likes of Real Madrid, Barcelona from Spain; Juventus, AC Milan and Inter Milan from Italy, Bayern Munich from Germany, Paris St Germain from France, and Manchester United, Manchester City, Chelsea, and perhaps Arsenal and Liverpool from England that are the 'eternals,' the clubs that will always be there or thereabouts. The European Union created a veritable oligopoly.
The difference between the national markets is captured in the figure below:
Only a small minority of football clubs are listed. Here is the DJ StoXX Football Index:
The returns of the DJ StoXX Football Index aren't particularly good:
A body of literature focuses on the efficiency of football clubs on the stock market. Renneboog and Van Brabant (2000), Palomino et al. (2009), Bell et al. (2009) namely find that football clubs' stocks are strongly affected by sporting outcomes. Palomino et al. (2009) even show that investors in British football should use information from the betting market to implement short-term stock strategies because the bookmakers' odds are particularly accurate to predict the games' outcomes. [Aglietta et.al.]
Football clubs have three types of revenues:
- Ticket sales,
- TV and other media deals
- Merchandising and sponsoring.
All of these are dependent on success on the pitch. However, clubs are managed very differently, so lets look at the 'business' models of some familiar clubs:
Present day Barcelona (and by extension the Spanish national team) is to a large extent the creation of the rather singular visionary genius of Johan Cruyff. He (not his coach Michels) introduced 'Total Football' to the world at the end of the 1960s at his home team Ajax Amsterdam.
Total Football is a system based on passing, possession, and interchanging roles (Cruyff, nominally a center forward, used to pop up all over the place), pressing and keeping the field small when losing the ball, and making the field big when in possession.
This team philosophy transformed Ajax and then Dutch football from complete obscurity to a world force and was transformed to Barcelona by Cruyff. First as a player in the 1970s but more especially in the late 1980s, early 1990s when he served as a highly successful coach at Barcelona, responsible for winning their first ever European Cup in 1992.
But Cruyff did far more, he:
- Established the Barcelona youth system ('La Masia') and ordained that all youth teams play in the same system, with the same philosophy
- Selected players mostly on their technical, rather than physical ability. This enabled small technical players like Pep Guardiola (hand picked by Cruyff and later an extremely successful coach at the club) to play for the club, players who would have had no chance at other clubs
- Ordained that where possible, the club should draw players from La Masia, rather than buy them. The team and its philosophy are more important than individuals.
Barcelona also bought big players for big fees though (Ibrahimovich, Fabregas, Henry, Song, Villa, etc.). If they would rely even a little more on their own capabilities and a little less on those big players it could, together with financial discipline in salaries, provide for the best business model in modern football.
However, Barcelona doesn't exist in isolation but it has to compete with clubs that spend big bucks on players, none more so than their arch rivals Real Madrid, which runs the club in quite a different way.
Real Madrid's Galacticos
Dressed in its emblematic all white, this is undoubtedly the most successful club team of all time. It has won the European Cup (or Champions League, as it's called from 1994 onwards) a record 9 times. It is the club with the most revenues and the second most valuable club in the world.
Santiago Bernabéu, who became president in 1945 established the early genes of what became a later model, the signing of foreign stars, most notably Alfredo Di Stefano. With the likes of Di Stefano and Puskas, the club won the recently established European cup five times in a row between 1956 and 1960.
The signing of foreign established stars raised to its zenit under Florentino Pérez in the first decade of this century, signing such luminaries as Zidane, Beckham, Figo, Ronaldo en Roberto Carlos (the 'Galacticos' or world stars). Many of these players were signed for record transfer fees. Some of the thinking behind this, apart from having the best players at it's disposal, is to conquer foreign markets with merchandizing efforts (shirts and lots of other stuff).
It is quite possible that the huge signing fees (and salaries) of these transfers have had a positive return in the form of titles (and thereby money) and merchandising and other promotional income. Even if the economics behind it is sound, it seems a business model that is suitable to the very few only.
Neither Barcelona nor Real Madrid are listed on any stock exchange. Luckily enough, just recently a club pertaining of comparable strength and fame did just that, it listed its shares on the New York Stock Exchange.
It's hard to think of a football club that would, in principle, make a better investment than Manchester United (MANU). Manchester United is one of the worlds biggest club and a global brand, rapidly expanding in Asia especially.
They've just signed a new sponsor deal with General Motors (GM) promoting the Chevrolet brand, for seven years (2014 onwards) for $559M, a rather astounding amount by any means. In the last five years, they've been in the Champions League final three times, while winning it once.
However, the hotly awaited IPO was a bit of a let-down. They cancelled plans to list in Asia and then they quite significantly reduced the IPO price (the target was $16-$20, but the shares eventually listed for $14). The IPO delivered the club $233M, despite the lower introduction price this was nevertheless the biggest sports listing of all-time, valuing the club at $2.3B dollars.
We have strong doubts that investing in one of the biggest club with the biggest brand name in football will pay-off. We see quite a few problems:
- There is a substantial amount of legacy debt on the books (much of it the result of the Glazer family delisting the shares from the London Stock Exchange in the last decade), over 600 million pound at the end of March this year.
- It remains to be seen whether the club remains as successful in the English Premier League when iconic trainer Sir Alex Ferguson retires. Three Champions League finals in five years is an achievement that is difficult to repeat (and indeed, last year the club lost at the preliminary group stage).
- It remains to be seen whether the club can compete financially with the likes of Chelsea and Manchester City, both of which have billionaire owners throwing money at their clubs like there is no tomorrow.
- We don't see much in the way of what the club can do to prevent players from reaping most of the rents created jointly by them and the club.
On the positive side, this is the best brand in football and the marketing and merchandising opportunities are plentiful. However, it's difficult to see how increased revenue won't be extracted by increasing player salaries in a bid to remain at the top.
It turns out that it is possible for the shares of listed football clubs to perform quite well. FC Copenhagen did just that, but it did so by diversification. It branched out, in order to stabilize it's earnings and make them less dependent upon sporting success (which they nevertheless achieved, as multiple champions of Denmark in the last two decades).
A crucial step has been the buying of the Parken stadium and using it for concerts and other events. The club also diversified into stuff like fitness clubs, electronic ticketing and media production companies. Football income is now only a fraction of total income, which has grown quite spectacularly:
Perhaps this provides a model for the bigger clubs, although it's somewhat ironic that financial success was achieved by moving away from football.
- Business models suggest football clubs rarely, if ever, make good investments
- This is also what available evidence tells us
- It's no surprise, financial success depends to a great deal on success on the pitch, which can't be guaranteed
- Football is far from a level playing field. In Europe, only the big clubs from the big countries have access to big money necessary to attract and retain the best players and achieve a level of continuity that enables to build and perfect routines.
- But even the big clubs financial position is eroded by increased player power and competition from clubs with rich owners throwing money at them (the UEFA financial fair play initiative could put a dent in the latter).
- There are too few big clubs listed anyway and the smaller ones are rather illiquid.