Based on interviews with
Alberto Francese, Head of Corporate Broking Research, Intesa San Paolo
and Baptiste de Leudeville, Equity financial analyst, Kepler Cheuvreux

Even if you are not interested in football, the acquisitions of big clubs by American, Russian or Middle Eastern billionaires, the dizzying amounts of transfers of star players or the considerable turmoil caused by the recent « Super League » project have certainly not escaped you. But did you know that some clubs are listed on the stock exchange? has interviewed two financial analysts whose areas of expertise relate to football clubs. Alberto Francese follows among others Juventus Turin, and Baptiste de Leudeville the Olympique Lyonnais (OL). They explain to us here how clubs are not like other businesses and how the very principle of their quotation is not so natural.

Variances: How do football clubs differ from other types of businesses you follow?

Baptiste de Leudeville: First, we can stress the importance of the wage bill. For professional clubs, the payroll, mainly linked to players, is very significant, as it can represent between 50 to 80% of income excluding transfers. Admittedly, the sale of players can generate large cash inflows but this is a random flow, despite the efforts of clubs to build a recurrence model based on the quality of training and the search for talent (“scouting”). The big club model is highly capital intensive and the margins are slim to accumulate and distribute capital to shareholders.

Add the inevitable uncertainty of sports results, the deterioration of which is likely to lead to lower incomes. For example, not participating in the Champions League can represent a significant annual loss of earnings of several tens of millions of euros. Certainly, the evolution of the format of European competitions in recent years has significantly reduced this uncertainty, by implicitly allowing bigger clubs to qualify for the Champions League more regularly, but it has not disappeared.

Also, unlike other sectors where large companies can achieve economies of scale, big clubs have no other choice but to continue investing in expensive players to maintain their sports performance and market appeal. In addition, the big clubs are confronted at the end of the chain in the transfer market. They consume players more than they develop them, unlike small and medium-sized clubs which can hope to generate substantial capital gains by making nuggets emerge and selling them at a fairly high price to bigger clubs.

V.: Can you explain the methods you use to value the clubs you analyze?

Alberto Francese: The income comes from television broadcasting rights, ticketing and sales of related products, while the main expenses, as we have seen, come from player salaries. On the balance sheet side, the liabilities are fairly straightforward. The main tangible assets are the stadium, if the club owns it, and the training center; intangible assets, in the form of amortization of player contracts, can be significant. because a transfer fee is recorded as intangible capital on the balance sheet and depreciated over the term of the player’s contract.

Football clubs are generally valued based on the multiple of revenues (normally considered excluding player transfers) method. The main clubs (Tier 1) are valued 4 to 5 times this income excluding transfers, the second tier clubs (Tier 2) 2 to 3 times the income. We can add a small bonus for very well managed clubs, such as OL whose salary costs represent « only » 45% of income. As an illustration, the acquisition of AS Roma by the American Freidkin in August 2020 was made on the basis of an enterprise value of approximately EUR 600 million, i.e. a multiple of 2019-2020 revenues (which were € 144 million), around 4.2, while in October 2020 Juventus traded in the market at a ratio of 3.5 times 2019-2020 revenues: as in any business, transactions are usually carried out at higher valuations than the market.

The discounted cash flow method (DCF) can also be applied with a normalization of long-term cash flows, even if it is marred by a high degree of uncertainty about future income linked in particular to sports results.

In the case of Juventus, I project the estimates over a three-year horizon, specifying the underlying assumptions. In terms of revenues, sponsorship, defined in contracts, merchandising, and stadium revenue – almost all tickets to Juventus matches are sold as “season tickets” – are not too difficult to estimate. The same applies to most of the television rights: those linked to national championship matches and European competitions; for the latter, I assume that the club will reach the round of 16, then I adjust according to the course achieved. In terms of expenses, salary costs and depreciation are also easy to predict. The most difficult part is capital gains. To estimate them, I usually project a recurring value based on historical data, excluding outliers (for example in connection with the sale of a star player in a given year). I finally do a check using a peer panel, with clubs like Manchester United or Borussia Dortmund.

V.: You mention player transfers, can you explain to us how they work and the objectives?

A. F.: Clubs engage in transfer transactions as soon as they can because a transfer fee is recorded as intangible capital on the balance sheet and depreciated over the term of the player’s contract.

In the case of domestic transfers (at least in Italy), unlike international transfers, there is a form of compensation between purchases and transfers of players, so no cash moves from one club to the other. However, these transfers in some cases may generate capital gains, with a positive effect on P&L (Profit&Loss).   It is therefore a good financial transaction even if its effectiveness in terms of sports results is more difficult to predict.

V.: It seems that the commercial brand is an important part of the valuation of clubs. Tell us more.

B. L: The valuations of football clubs on the stock market are mainly linked to the brand, and this is built over the long term. The brand is a source of recurring income through revenue from ticketing, sponsorship and derivative products. We can distinguish global brands such as Manchester United, Juventus Turin, and others more local, such as Olympique Lyonnais, Dortmund or Porto. Large clubs, in general, generate much higher commercial revenues due to their attractiveness to the public, advertisers and sponsors. The « second category » clubs generate less commercial income but can, if they are well organized for this, make significant capital gains on player transfers.

The acquisition of Cristiano Ronaldo by Juventus Turin is the most significant investment made by a listed football club. At the time, Juventus, although they have always been an extremely popular club around the world, were left behind by English and Spanish clubs. This transfer has been a great way to put the Juventus brand back in the center of the game.

V.: What are the strategies of football clubs in the face of this uncertainty in terms of income?

B. L.: The main strategy is through diversification. OL, for example, defines itself more as an « entertainment » company than just a football club. Its objective is to maximize the revenues linked to the brand and to the infrastructures and, ultimately, to reduce dependence on simple sports results. By way of illustration, the club has an Arena project for the organization of sports and musical shows. The club also acquired a women’s football club in the United States[1] to further capitalize on its brand abroad. It is the same reasoning that led OL to license its brand in exchange for royalties for opening a hairdressing salon (OL Coiffure), a driving school (OL Conduite) or a record store (OL Musique) among others.

V.: What are the expected benefits of listing on the stock market, and what causes some clubs to withdraw from listing?

A.F.: The main advantage expected from a listing, as with any other company, is the opening of the capital to minority investors interested in supporting its development. If we consider football clubs as brands or producers of content, these investors should benefit through more favorable sponsorship revenues. In addition, the contribution of these minority investors can help the development of the company, for example to build a distribution network in Asia or America, to finance the production of expensive content, or by buying a more renowned player.

B. L.: In the case of OL, the listing was also an opportunity to help finance the new stadium, while a single recourse to bank debt was not necessarily obvious for this operation. The quotation can therefore theoretically be a virtuous process.

V.: Apart from the stock market, who are the owners of clubs generally? And how do you anticipate the evolution of their detention?

A.F.: The ownership structure of clubs has changed significantly in recent years. Today the owners of football clubs are essentially billionaires (Manchester United, Arsenal, AS Roma) who seek an image effect, or certain advantages for others of their activities (such as real estate in the case, according to rumor, of the owner of Olympique de Marseille), and attach less importance to sports results. We can also cite Qatar, which through ownership of Paris Saint-Germain is trying to build “soft power”.

In Italy, apart from Juventus which is an atypical case because for a long time owned by a family group, many clubs are owned by entrepreneurs who see this investment as one of the components of their group, be it international (in the case of Inter, AS Roma, Bologna, La Spezia) or Italian (Napoli, Lazio, Genoa, Sampdoria, Torino). International owners are generally more inclined to invest in their club, in particular because football is for them a means of strengthening their group’s development strategy on the European market (see for example the acquisition of Inter Milan by the Chinese group Suning), or because it contributes to the development of their brand or their real estate activities (Friedkin for AS Roma). Italian owners are doing more to balance the books, including selling players. Some may even achieve great deals, such as entrepreneur Aurelio de Laurentiis who bought the Napoli club (the former club of Diego Maradona) when they were playing in the third division. Now Napoli are once again one of the main Italian clubs, building on the great potential of the city of Napoli and enjoying a large fan base and international notoriety.

Football clubs could in the future be increasingly the target of private equity funds and international entrepreneurs, at least in the case of large clubs or those located in countries where these entrepreneurs already have economic interests or expansion plans. We have already seen speculative funds take an interest in football clubs in France, for example with Colony Capital at PSG until 2011, King Street in Bordeaux, Merlyn Partners in Lille.

V.: Who invests in listed football clubs?

A.F.: Institutional investors are rarely interested in this type of investment. Some of them are nevertheless obliged to invest as part of their passive management activity. This is the case for Juventus which is part of the representative index of the Italian stock exchange (currently the FTSE MID index of mid-caps). We can also mention that the British investment company Lindsell Train, already the largest private shareholder of the Manchester United club, currently holds more than 10% of the capital of Juventus as part of a strengthening of its investments in the leisure sector and in « entertainment ».

Another market segment is made up of wealthy private investors, who usually operate through administered bank deposits. Thus, the rapid advance of the Juventus title following the purchase of Cristiano Ronaldo resulted in inflows from these types of investors. Finally, there are « small » individual investors, who hold few securities but are, under the influence of emotion, able to move the share price depending on sporting results. With the acquisition of Cristiano Ronaldo, the stock price of Juventus was able to benefit from a strong liquidity, with a volume of transactions higher on certain days than that recorded on the oil company ENI or the automobile group Fiat Chrysler, allowing it to temporarily enter the FTSE MIB, the index of the 40 largest Italian capitalizations, the composition of which is adjusted monthly

The reason why many clubs have delisted is probably related to the low liquidity of the stocks, due to their small capitalization and their unconventional business model. Listing is also fraught with complexity in terms of reporting and transparency. On the other hand, we can underline that the listing encourages transparency, and that this can make it easier to attract sponsors. In the current context of the enthusiasm for ESG investing, the social inclusion role played by football clubs can also, admittedly to a limited extent, be valued by some investors.

V.: What about the rules of « Financial Fair Play »?

A.F.: I am no expert on Financial Fair Play rules, but I think they have had little impact. They can be easily circumvented, for example through sponsorship contracts instead of capital increases.

V.: A few words about the Super League project?

B.L: The biggest clubs are well aware of the fragility of their economic model. They fail to consistently generate profits that live up to their international brand status. The “Super League” project was a way for the big clubs to create a league that would seem more attractive to the public and to partners and thus to capture a larger share of the pie. On the other hand, a closed or semi-closed league format would have had the advantage of greatly reducing the uncertainty related to sports results. The project has encountered negative reactions from the media, supporters and governments, but will they be able to prevent the emergence of elitist football in the long term for a long time if nothing else changes, in particular through a cap on salaries or a limitation on player transfers?

It is very likely that the project will reappear soon in one form or another, as part of this inevitable evolution towards elitist football. The current formula of national championships interests less and less people. We can see it in France with the drop in audiences and the problems we are experiencing in the distribution of League 1 TV rights.

[1] OL Reign based in Tacoma in Washington State

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