Olympique Lyon: This Profitable Business Has A Discount Of 52% To Its Real Value

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Includes: AFCJF, ASRAF, FBLQ, GOFPY, JVTSF, MANU, MLFB, OXFC, RNGFF, TFBN
by: Tristan De Blick
Summary

Enterprise value of €406M represents just 48% of the underlying value of the club.

Olympique Lyon only made an operational profit once in its last four seasons, but is profitable when accounting for transfers.

With the second best youth academy in Europe, combined with rising transfer prices, management is able to carry out a lucrative transfer policy.

Massive dilution underway in 2023.

On the 23rd of July, Olympique Lyon (OLG.PA) will post its semi-annual trading update. I expect the results to be very profitable, resulting in a significant increase in the share price. Even with an enterprise value at a 52% discount, the business itself is profitable. With a consistently growing top- and bottomline, the club is on the way to having another very profitable season.

The valuation

31/12/2015 31/12/2016 31/12/2017 31/12/2018 10/July/19
Cash € 39M € 32M € 20M € 9M € 85M
Receivables € 58M € 95M € 101M € 72M € 72M
Debt € 331M € 459M € 365M € 368M € 368M
Market cap € 116M € 163M € 165M € 173M € 195M
Enterprise Value € 351M € 495M € 410M € 460M € 406M

With a market cap of 195 million euros, and a roughly calculated 211 million euros net debt as of today, the enterprise value of Olympique Lyon (OL) stands at 368 million euros. The total market value of the first team of Olympique Lyon, stands at 376 million euros. Even more, as Olympique Lyon has sold Mendy and Ndombélé for a combined total of 108 million euros, the net transfer income this Summer so far is +74 million euros. Furthermore, OL has the full ownership over its stadium, which it values at 400 million euros. A sum-of-parts thus brings us at 376+74+400= 850 million euros. The enterprise is therefore valued at a 52% discount!

The operating business

2014-2015 2015-2016 2016-2017 2017-2018
Revenue (excl. player trading) 96,349 160,004 198,261 164,178
Operating Income excl. player trading -14,375 -480 2,605 -36,775
Operating profit incl. player trading -18,073 26,991 30,586 25,221

The revenue excluding player trading has grown by 71% over the last four seasons, even though it dropped by 18% this season. As one would expect, it is dependent on the sportive results. Not only do better results attract more fans to the stadium, the club also receives higher prize compensations from the competitions it participates in.

Excluding player trading, Olympique Lyon was only once profitable in the last four years. This was in the season '16-'17, as the team reached the Semi-Finals of the Uefa League.

Olympique Lyon's lucrative transfer policy

However, the operating profit excluding player trading would be an unfair and incorrect yardstick to measure the profitability of OL. In this measure, only the costs associated with youth academy, player training, ... are incurred, while the benefits are ignored.

Over the last 10 years, player trading has generated revenue of €398 million, or nearly €40 million p.a. on average, and capital gains of €316 million, or more than €30 million p.a. on average. It should be clear that Olympique Lyon consistently generates extra profit from its trading activities.

A significant portion of player trading revenue derives from the performance of the OL Academy. The academy of OL is ranked at third place for European academies, after Real Madrid and FC Barcelona in 2017 (source: CIES Football Observatory – October 2017). Over the last 10 years, 63% of the proceeds from the sale of player registrations and 79% of the capital gains have derived from players trained at the OL Academy.

source: Olympique Lyon, "la stratégie de l'OL Groupe", page 13

What I do not like

The debt includes €192M worth of convertible bonds (book value). These bonds are called 'OSRANEs'. Each OSRANE can be converted into 63.231 new or existing OL Groupe shares plus an extra remuneration of 28.103 new or existing OL Groupe shares. At the current share price of 3.32 euros a share, these convertible bonds are worth at least 210 million euros, if we do not take the value of the extra remuneration into account.

At the time of issuance, on 27 August 2013, the share price was 1.16 euros. The issue comprised 802,502 bonds with a total par value of €80,250,200 or €100 per bond, maturing on 1 July 2023. Management has calculated that at max, a total of over 91 million new shares will be issued. Compared to the current outstanding 58 million shares, this is an immense dilution. source: Olympique Lyon, annual report 2017-218 page 105.

Furthermore, there is no interest paid on the bonds, but each bondholder receives 2.81 shares a year. At the current share price of 3.32 euros, this is an interest rate of 9.33%! Unsurprisingly, the OSRANEs trade way above par value, at 240 euros.

Outlook for the season 2019-2020

As Olympique Lyon finished third after PSG and Lille this season, it is qualified for the group stages. This brings along a lot of extra income:

15 Million euros because it qualified, 2.7 million euros per victory and 0.9 million euros per draw in the group stage, where a total of 6 games are played.

If Olympique Lyon manages to finish in the top 2, out of the 4 teams, in the group, it receives an additional 10 million euros and proceeds to the last 16 teams in the Champions League. If it finishes third in its group, it gets half a million euros and participates in the easier Europa League. If it finishes last, it has to exit the European competitions.

This season, OL participated in the group stages of the Europa League and proceeded to the round of 16. Coming season will be more profitable, even if OL loses every game in the group stage and finishes last.

You can do your own scenario-analysis, based on the following prize money: source: Olympique Lyon, annual report 2017-218 page 30.

In the national league, I expect PSG to be victorious once again. Olympique Lyon will have to combat Lille, Marseille and Saint-Etienne for second place which gives right to the champions league group stages. Best case, Olympique Lyon finishes second, while in worst case it finishes fourth and is excluded from the Champions League.

Conclusion

The business is significantly undervalued, while making a good profit when accounting for the transfers. Next season, profits will come up even more, as OL has qualified for the group stages in the Champions League. Keep in mind that the stock price will follow largely the sportive prestations of the team and that disappointing results on the pitch, will lead to disappointing results in your portfolio. However, as time goes by, the business itself will continue to prove itself very profitable thanks to the excellent youth development programs. You should also account for the dilution that will take place in 2023. This is why I base my calculations on the Enterprise Value, instead of calculating on a per share basis.

This article is the first one in a series about publicly listed football clubs that I am writing. If you wish to keep updated, feel free to follow me!

Disclosure: I am/we are long OLG.PA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.