Beautiful game but an ugly investment
By Nick Louth
Football, the
beautiful game which has a significant slab of the world’s male
population in emotional thrall, is the ugliest investment known
to man.
Watching Patrick
Viera or Michael Owen gracefully planting the ball in the net
has lifted millions from their seats in ecstasy. But when
soccer 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 £65m before tax on revenues of £1.8bn. Even in the
Premiership, which is the highest division and attracts the
overwhelming bulk of TV and sponsorship money, losses totalled
£78m before tax. Matters were even worse a year ago when the
Premiership clubs lost a collective £128m.
A game of two
halves
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, within shouting distance of the top of the
premiership, 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 this
weekend that West Ham is 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
their like can run soccer clubs as hobbies. To them £100m here
or there is loose change down the back of the sofa.
The problem, in a
nutshell
While soccer
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 U.S. 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 divisions one and two. 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
£1.3bn 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 soccer 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 are downhill after that. By 30 most are on the soccer
scrapheap, though if they saved any of their earnings they would
be
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 £3m an acre and a club would need to attract
60,000 per spectators match to justify the land value.
Successful northern clubs on lowly-priced sites had the least
difficulty.
The
study calculated that in 2003, league clubs held £1.1bn of
property assets on their balance sheets, accounting for 90% of
their tangible assets. As a typical construction cost of £1200 a
seat, their stadium would cost £2bn to rebuild. To finance that
use of capital, they had a gross revenue of £1.5bn, made a
pre-tax operating loss of £213m, and they already had debts of
around £1.2bn.
It doesn’t add up. The report's 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 scene in the club bar!
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 (often-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 £22m 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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