Interesting Article On Football Finances

[SMP]

Beautiful game but an ugly investment

By Nick Louth, MSN Money Special Correspondent
September 05 2006

Football, the beautiful game which has a significant slab of the world’s population in emotional thrall, is the ugliest investment known to man.
Watching Thierry Henry or Wayne Rooney lashing in a last-minute 25-yard screamer has lifted millions from their seats in ecstasy. But when football investors scream, it usually reflects pain as intense as a Zinedine Zidane head butt. Ouch!

This is an industry which has on average turned a £100 investment into £50 in the last decade, including dividends (if any), while the average UK share would have turned £100 into roughly £200 over the same period.
According to the 2006 Deloitte survey of football finances, the top 92 UK clubs lost a total of £65 million before tax on revenues of £1.8 billion. Even in the Premiership, which attracts the overwhelming bulk of TV and sponsorship money, losses totalled £78 million before tax. Matters were even worse a year ago when the Premiership clubs lost a collective £128 million.

The fact that both Newcastle United and Aston Villa are currently on the end of takeover bids hasn’t changed the underlying arithmetic.
The 547p offered for each share in Aston Villa is half what they were worth when the club listed in 1997. Exactly the same is true of Newcastle, whose current 60p share price is half what it was worth in 1996. Even these clubs, established Premiership performers with massive support bases, have been such a poor bet that you would have been wiser to stuff your money in a biscuit tin or under the mattress.

Hammers under the hammer
Even news last weekend that West Ham are under offer from a group thought to include Russian oil oligarch Boris Berezovsky doesn’t change the rules. Men like Berezovsky, Chelsea owner Roman Abramovich and the like can run soccer clubs as hobbies. To them, £100 million here or there is loose change down the back of the sofa.

The problem, in a nutshell
While football sucks in hundreds of millions of pounds a year in broadcast fees, sponsorship money, season ticket fees, and all kinds of other cash, clubs spray money around like water when it comes to players salaries. In fact, few have much choice.
They bid against each other for scarce talent, and are unable to retain much of their income as profits. The arrival of billionaires like Mr Abramovich at Chelsea and now US sports mogul Randy Lerner at Aston Villa has raised the cost of being in the industry for all other top clubs who have to compete for star players.

In the last couple of years there has been a little discipline, with a cap of no more than 60% of income to be spent on player salaries set by the Football League for League One and League Two sides. That is an improvement from the 70% that was seen five years ago.
“Wage discipline has improved,” said Brian Sturgess, publisher of Soccer Investor. “This probably won’t hold though, once new money starts to flow back in,” he added.

The new money is set to start next season after satellite broadcaster BSkyB paid £1.3 billion to win four of six packages of rights auctioned for live Premier League soccer matches from 2007-2010. That is 30% more than it is currently paying.

Hefty assets, poorly used
The sad truth is that the average football club is worth more as housing, more as a leisure complex, more as a car park and sometimes more as sewage recycling facility than it is as a sports business.
Football clubs have hundreds of millions of pounds tied up in players. They can’t put them on the balance sheet as assets, yet they are a liability. They get injured, they fail fitness tests, they throw tantrums and sulk, and some of them get in trouble with the law. While they may appreciate in value up to the age of 23 or 24, most go downhill after that. By 32 or 33, most are on the soccer scrapheap, though if they saved any of their earnings, they are unlikely to starve.

Capital in land
A study by City University found that only 16 out of the 92 league clubs generated enough money to justify the value of the land they are occupying. The bar is set highest in central London, where prime property costs £3 million an acre and a club would need to attract gates of 60,000 to justify the land value. Successful northern English clubs on low-priced sites had the least difficulty.

The study calculated that in 2003, league clubs held £1.1 billion of property assets on their balance sheets, accounting for 90% of their tangible assets. At a typical construction cost of £1,200 a seat, their stadia would cost £2 billion to rebuild. To finance that use of capital, they had a gross revenue of £1.5 billion, made a pre-tax operating loss of £213 million, and they already had debts of around £1.2 billion.
It doesn’t add up. The reports authors had a solution: clubs should share their grounds. Arsenal and Tottenham, Everton and Liverpool, Aston Villa and Birmingham, Chelsea and Fulham were suggested pairings. Somehow, I can’t imagine it happening. Just imagine the scenes in the club bar!

A sector like no other
In any other struggling British industry such as shipbuilding, textiles or car manufacture there would be mergers, which would cut capacity lower unit costs and match the level of demand. But football isn’t like that. No-one wants to see their local team go down the pan, or merge with a hated nearby rival. That’s when the trouble starts.

Football has a well-known track record of parting soft-headed investors from their fortunes, perhaps most famously and rapidly in the case of Mark Goldberg who lost his £22 million fortune on Crystal Palace in less than three years. When it comes to glamour, nostalgia or ego, business common sense goes out of the window, and due diligence is forgotten.
That may not matter if you are Roman Abramovich, with billions elsewhere to cushion your indulgences. But it surely matters if you are an ordinary investor.

Whatever your allegiance to a team, it is wisest to limit your investment to the cost of a season ticket. That way, whatever happens on the pitch, the beautiful game won’t turn financially ugly.
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