Forbes magazine today puts Manchester United back in the top-spot for wealth, valuing the club I’ve supported all my life at $2 billion. It then lists a Top Twenty, and concludes that “the news continues to be good for investors”. Right there in that conclusion you have the problem with outsiders valuing all sectors anywhere, because the chances are they don’t know what they’re talking about.
Examine first of all the business model of many of those clubs – a ridiculously high number of which play in the English Premier League. The ratio of staff wages to income is far too high in all but the top three or four earners. Even at Old Trafford – which made $150M – players’ salaries are 40% of that. Transfer fees plus salaries are roughly equal to net income. Imagine a commercial concern outside sport in which salaries and headhunters’ fees were equal to net revenue. Ah, right – the banks. I knew that sounded familiar.
Now look at how they’re funded -not from paying customers on the whole (that represents a minority income stream in all but the poorest clubs) but from four main sources: TV revenues, replica kit and associated memorabilia, competition/sponsorship – and sugar daddies. Take the sugar daddies away after too many sugar daddies, and you get Portsmouth: playing in the FA Cup Final – and bankrupt. Without sugar daddies writing off over a billion dollars of debt and Chelsea and Manchester City, they too would be joining Portsmouth in insolvency.
There is of course no shortage of engorged egos like Aboramovitch and assorted Thais, Arabs and Americans to replace those who lose money and interest. But if they go bust, they tend to do so suddenly – and/or load the company with debt. This has happened at both Anfield and Old Trafford.
The TV (aka Sky) revenues are a different matter. In the last fiscal, without the Premiership income Murdoch’s Newscorp would’ve made a loss. His MySpace users are being decimated, and not many in the media sector have faith in his ring-fenced charging for premium content model of how internet news works. If Sky went under or pulled the plug – or even dramatically cut the revenues offered – the Premiership would collapse like a pack of cards.
The final income stream involves those who run the Big League competitions (chiefly the European Champions League) and all the sponsorship that comes therefrom. But the rules here are very strict, as Portsmouth have already discovered: on the continent, people are rather more careful with their money, and will refuse entry to any club failing the debt-to-liquidity rules. This isn’t like the EU and Greece: if you don’t fit in, you don’t get in. Leeds United represent the obvious example of how a club gambles everything on the income from that source – and then loses bigtime as the income disappears: three years in, they are still battling back from demotion to the lower leagues.
Of the twenty teams listed in Forbes, fifteen have seen their values decline. The average decline in valuation across the piece was just under 9%. Perhaps this is why the magazine thinks the time is right to invest. But Forbes is wrong: this isn’t a short-term blip that has bottomed, it’s a long-term bubble about to burst. And as ever, the needle is called ‘debt’.
In the last two months, directors at Wolves, West Ham and Wigan have argued that the soccer authorities must step in and stop the profligacy. The most obvious case is that of Liverpool, where their debt of £237M is now falling behind so badly, the owners are running scared -literally. The club is up for sale….and the lender is worried. Guess who the lender is – RBS. Well I never.
Just like the Greeks, Man United have had to turn to an increasingly demanding and nervous bonds sector. Their latest issue has to be paid back over seven years – a terrifyingly short term compared to Arsenal. They too have borrowed big (and have a messy property portfolio) but the North London club has twenty years to get the repayment together. The lack of confidence in United’s owners the Glazer family is further evidenced by the rate the club is paying on the debt: an eye-popping 16.5%.
Big business never learns, and neither do banks. I have argued for many years that remote shareholders and ill-informed analysts are the two biggest things (alongside banking greed) that capitalism needs to shed if it is to prosper in the long term. The facts suggest strongly that cooperative and private ownership are more stable and productive models than neurotic bourses dominated by periodic takeover mania. Diversifying the finance of capitalism away from public share markets will be the number one priority when the dust settles on our current epoch. It won’t happen yet of course: the deranged 0.8% will always want more and more sooner or sooner. But Premiership soccer is an extreme-sports accident waiting to happen. For Forbes to recommend it as a promising investment area shows a laughable degree of ignorance and incompetence.