This article was originally published in the Brand Finance Football Annual 2020.
What is the allure for foreign investment and why is football becoming the most lucrative choice for those looking to expand their portfolios? We look into recent deals that became key for the industry.
On the 27th of November 2019, The Abu Dhabi United Group announced they were selling a 10% stake in City Football Group (CFG) to US private equity firm Silver Lake Partners. The deal placed a value on the group at $4.8 billion (€ 4.4 billion).
The City Football Group owns the English Premier League side Manchester City, the Major League Soccer’s New York City FC as well as Australia’s Melbourne City FC. The group as a whole earned approximately €700 million in revenues in the 2018/2019 season, which places the valuation at a 7x revenue multiple. The majority (89%) of group revenues are earned by Manchester City, who reported revenues of €625 million. For context, we have calculated the enterprise value of Manchester City as €2,7 billion, which represents a revenue multiple of 4.3x.
The announcement of the deal highlights two key trends in the world of football: firstly, the increasing appetite of foreign investors into European football clubs (particularly from US investors), and secondly, the financial viability of a football club as a sound investment.
Foreign ownership can be a contentious subject for all stakeholders of a football club, but particularly so for football fans. The promise of investment into a club in the form of stadium expansion, improved training facilities, and increased spending in the transfer market is a lucrative proposition. However, the counter-argument for foreign ownership often cited is that the investors lack an in-depth understanding and respect for the traditions and history of a club, a lack of financial transparency, and poor relations with fans and other stakeholders. According to the latest UEFA club benchmarking report; 40% of Premier League clubs are majority-owned by foreign investors, with an additional% of premier league teams having foreign investors as minority stakeholders.
Focussing more closely on Manchester City’s latest financial results gives a good indication of the case for the successful investment into the club with increasing returns year-on-year. Despite, the club facing the prospect of no European football for 2-years, the initial ruling was subsequently overturned with a €10m fine representing a minor blow compared to what was at initially at stake.
Since 2015, Manchester City has grown its revenues at a compound annual rate of 38%. 2019 was a record year in terms of revenue, with the club reporting total revenue of €590 million (£535 million). Revenue growth over this period is largely attributable to excellent on-field performances which generated a higher share of premier league broadcasting revenue and has ultimately attract better commercial deals from sponsors, such as the lucrative 10-year Puma deal with a reported £650 million.
Manchester City have recorded a profit for the 5th consecutive season, after sustained losses occurring at the onset of Sheik Mansour’s investment into the club. Despite such a significant increase in revenues and excellent on-field performance, profitability is still relatively low. This is largely due to the increasing wage bill as a result of new signings, the extension of player contracts as well as large player bonus payments.
Silver Lakes has a history of Investments in both the technology and sporting sectors, having previously invested in the likes of Alibaba, Skype, and the Ultimate Fighting Championship (UFC). The firm believes there is a strong convergence in entertainment, sport, and technology, and could leverage its involvement within technology and entertainment to potentially grow the Manchester City brand across various platforms and geographies, particularly in non-traditional markets. Undoubtedly the Abu Dhabi United Group found this prospect enticing when the agreement was made to part way with 10% of CFG.
Another club making headlines for a potential change of ownership is Newcastle United. The current owner, Mike Ashley has had a tumultuous tenure since he acquired the club in 2007. Rumours have been circulating of a potential deal with the Public Investment Fund (PIF) of Saudi Arabia, that would value the club at between €330 million and €390 million. For reference, Brand Finance values Newcastle United at €457 million. A closer look at Newcastle United’s financials explains why the Saudi Arabian PIF is potentially interested in acquiring the club.
The club reported revenues of €195 million (£177 million) for the year ended 2019. Over 70% of the revenue earned is attributable to broadcasting income as a direct result of playing in the Premier League, which highlights the importance of Newcastle’s continued participation in England’s flagship league.
Commercial revenue has been stagnant in recent years. A prolonged period of time playing Premier League football and challenging for European football could see renewed interest from commercial sponsors and partners, and further improve Newcastle’s revenue prospects and development in the future.
In a year where Newcastle finished 13th in the Premier League, 3 places lower than the previous season, their profit before tax improved by £18m. The year on year profit increase is largely attributable to the shrewd sale of players during the transfer window. Newcastle have been consistently profitable over the last 5 years, with the exception of 2017 when they were relegated to the championship.
Newcastle’s EBITDA, which strips out player sales and non-cash items to give underlying profits, fell from a record high of £61m to £56m. However, this is still the 6th highest EBITDA in the Premier League. This makes the club a lucrative prospect to potential owners.
The Newcastle brand has arguably been underperforming relative to the stature and history of the club. An injection of money from the vast wealth of the PIF, which could be used to invest in the infrastructure of the club as well as bring in some world-class talent on the pitch, could prove to be beneficial for both the club and the PIF in the future.
The high-profile takeover of Manchester United by the Glazer family in 2005 was not without controversy, particularly among some fractions of the fan base. However, despite recent on-field performance struggles, the club has unquestionably been the predominant financial power in English football.
Being one of only two publicly listed football clubs operating in England, Manchester United’s enterprise value is currently valued at €2.6 billion. However, like many listed entities, Manchester United suffered a shock to their share price at the onset of COVID-19, falling from a 2020 high enterprise value of €3.5 billion in early January. We currently calculate Manchester United’s Enterprise Value to be €3.8 billion.
Despite finishing 6th in the 2019-20 season, Manchester United became the first Premier League club to report revenues in excess of £600 million, generating £627m (€694m) in total. Revenue growth was largely driven by an 18% increase in broadcasting revenue generated through the new European broadcasting agreement.
Despite an ever-increasing wage bill, the club has managed to maintain a healthy level of operating profit. However, this figure is greatly reduced when accounting for the interest payments made on a large amount of debt incurred as a result of the takeover by the Glazers.
Manchester United has the highest EBITDA of any team in the Premier League, which serves as a testimony to the value of the Manchester United brand and the club's ability to leverage that to generate ever-increasing commercial partnership fees all over the world.
The general perception of football clubs is that they are a volatile business and one, which investors should be wary of. Indeed, according to activity around publicly traded football clubs, the share price can fluctuate substantially based on short-term on-field performances or transfer market activity. However, the likes of Manchester City, Liverpool, and Manchester United are indicative of the fact that a long-term investment at the right price can yield excellent financial returns for those willing to take the risk.