Aug 12 2012

What is Soccer’s Business?

Posted at 12:56 pm under Europe,Italy,Players,Soccer Business

The business of a soccer club is to produce a winning team. At the end of the day sports are a form of entertainment. Too often, though, actions taken place in the board room or at the negotiating table take away from the entertainment displayed on the field. At times, the aggressiveness and sometimes greediness of clubs leads to failure on the field. Specifically, the mountains of debt some European clubs have amassed in recent years often do more harm than good for a club. Last year, players in La Liga — one of the world’s richest leagues — nearly went on strike when one club failed to pay wagesEarlier this year, Rangers FC entered administration after they could not pay some $77 million the club owed in taxes. I visited Rangers when I was younger on a European tour and since that time have considered it one of the oldest and most notorious club in Europe. The same has happened to F.C. Portsmouth for the second time in as many years. In both cases, the financial problems were the result of poor management decisions. When clubs with such great histories are suffering in this way, we have to ask ourselves whether there are fundamental problems with the way the business of soccer is being managed in many places.

In 2005, Malcom Glazer used the financial tool of a leveraged buyout (LBO) to purchase Manchester United for $1.5 billion and make the company private. In the end, I would argue, this action ultimately hampered the team’s ability to keep or purchase new star players. A leveraged buyout is where the takeover artist will borrow the majority of the cost to purchase the new company against the company’s future cash flows and current assets. More often than not in a LBO the new owners will have to sell key parts of the new business to pay down the debt. In the case of a soccer club their assets are their stadium and training grounds as well as their players. Manchester United, for instance, sold Cristiano Ronaldo to Real Madrid for a record transfer fee of  $132 million. Even with the sale of Ronaldo, United has been unable to manage their mountainous debt payments and recently reissued shares of the club on the New York Stock Exchange for public purchase. Glazer raised $300 million dollars in the IPO, half will be used to pay down the $663 million in remaining debt. NYT blogger Graham Ruthven claims Sir Alex Ferguson may even benefit financially from the IPO. The IPO took place on Friday August 10th, with a $14 price. A price that was significantly supported by the underwriters of the IPO throughout the day.  But what if the $800 million spent on interest payments and banking fees could have instead been spent on increasing the player and fan experience at Manchester United? Even with the new issuance, control of the club will be retained by the Glazer family as they will retain 67% of B shares which have voting power, so little will likely change in the general approach taken to the finances of the club.

As you can see from the photograph below, the actions by Glazer have outraged many fans of Manchester United, who consider that he has in some ways taken the club from them. They have a point. After all, as a “brand” a club is not only made up of it’s players and managers, but also of the fans and the tradition they carry with them.

Another instance of over spending and debt damaging a club is Leeds United, formally of the Premier League. Rather than piling on debt through a LBO , the club borrowed to purchase players. Leeds were a big club in the 1980s and 1990s, culminating in a Champions League semi-final place in 2001. But the club was ultimately undone by their Chairman Peter Ridsdale’s idea to go for it. He proceeded to use shady financial products to purchase players with borrowed money using future ticket sales as collateral. Essentially the fans loyalty. Ultimately it failed and the club had to sell assets at a blistering pace as the club entered administration: the stadium Elland Road (pictured below), training ground at Thorp Arch, and any player that was worth a nickel, including some considered to be part of England’s golden generation. Great players were sold at a severe discount due to the team’s financial troubles. The club also suffered demotion to England’s third tier and have since had to claw themselves back from the brink of extinction.

The idea of corporate borrowing is nothing new. Most companies must borrow to fund future growth. But there is a line between intelligent borrowing and getting caught in a credit crunch. Just like the many U.S. home owners who over-extended themselves between 2003 and 2008, soccer clubs may soon find themselves unable to pay their debts. In Europe, several countries — Spain, Greece, Ireland, Portugal and Italy — are desperately trying to reorganize its debt in order to make payments. Fiorentino Perez, the Chairman of Real Madrid and creator of the “Galacticos” is in the midst of de-leveraging in his real business, A.C.S., or Actividades de Construcción y Servicios. The company is one of the largest building services companies in the world. As he has done with Real Madrid, Perez has orchestrated huge loans, creating $12 billion in debt that the company has since had to sell assets to cover. Real Madrid, meanwhile, is currently $500 million in debt because of the money it has spent creating the “Galacticos” (pictured below). Many in business have believed that  borrowing to fund instant success is the winning formula.But the formula only works as long as growth outpaces debt obligations.

The authors of the book “Soccernomics,” Simon Kuper and Stefan Szymanski, make a compelling argument that the outlandish transfer costs that have become the norm in professional soccer are not the way to success. “We studied the spending of forty English clubs between 1978 and 1997, and found that their outlay on transfers explained only 16 percent of their total variation in league position. By contrast, their spending on salaries explained a massive 92 percent of the variation” (48). They conclude that the market for player wages is efficient while the transfer market is well not efficient. You can see this inefficiency at work in many cases. Tottenham Hotspurs, for instance, transferred Jermaine Defore to Portsmouth and Robbie Keane to Liverpool for a combined $52 million only to bring them back a year later under new manager Harry Redknapp. Soccernomics provides the ultimate example of transfer market inefficiency. “In 1983 AC Milan spotted a talented young black forward playing for Watford. The word is that the player Milan liked was John Barnes, and that it then confused him with his fellow black teammate Luther Blisett.” Milan bought Blisett. This type of almost comical folly may be why, down the road, Milan has had to sell two of their most valuable players this summer to pay down debt — Zlatan Ibrahimovic and Thiago Silva (below), both to now super-wealthy club Paris Saint-Germain. AC Milan has run a total deficit of  245.4 million euros in the last 5 years. The spending of some of the biggest football clubs in the world is out of control.

Many clubs feel that they must take on such debt to keep up with the “Jones’s” — clubs like Manchester City and Chelsea, whose  billionaire owners are not worried about the bottom line of the clubs they own. Sheik Mansour from Qatar bought Man City for a measly $330 million but then proceeded to spend close to double that on stocking his team with talented players. He was only following the lead of Chelsea owner Roman Abramovich (pictured below). UEFA reported that more than a quarter of the 650 soccer teams in Europe are spending $16.50 for every $13.50  of revenue. Running a deficit is fine for the super rich owners who care about nothing else than winning. Unfortunately not every team is owned by an owner with bottomless pockets. The massive television contracts in Europe are giving clubs increasing revenue. In June 2012 the English Premier League signed a record $4.7 billion/3 year television deal and the German Bundesliga signed a $3.2 billion/4 year deal. The deals were a 72% and 52% increase over the previous deals respectively. Compare those numbers with the $115 million Rupert Murdoch’s News Corp. paid for the television rights to the Premier League in 1992. But even with the rising revenue teams are still forced to borrow to compete with the billionaire owners of the world. European teams currently run a collective $1.5 billion deficit.

Some are trying to stop the process. Michel Platini (pictured below) has launched the Financial Fair Play (FFP) plan, which is meant to force European clubs to balance their books by the 2013/14 season. If clubs fail to balance their books they will be excluded from UEFA competitions.But what if Real Madrid, Inter Milan, Manchester United, Chelsea, Barcelona, Bayern Munich, Manchester City refuse to follow the rule and are kicked out of the Champions League. Mr. Platini, what happens then? Riddle me that?

Perhaps clubs will have to start running teams like my namesake, Arsene Wenger. Are we related? I  guess we will never know. He is a fantastic manager though. It is said Wenger uses statistics to judge a players future output on the field compared rather than over-evaluating a player’s past performances. He has a degree in Economic Sciences from the University of Strasburg in France: from an economic perspective, this player evaluation model makes much more sense than the approach taken by other clubs. It is similar to judging a blue chip stock. You don’t make your decision to invest on the stock’s previous performance but attempt to judge its future performance by looking at the fundamentals of the company presented in their financial reports. As players, our statistics are our financial reports.

Perhaps the Financial Fair Play plan will alter a shift in professional soccer in Europe. Barbara Berlusconi has underlined the need for change: “Soccer teams will have to transform into proper companies. If you can only spend what you get, then you have to keep costs in check and increase revenue. It’s a challenge that can become an opportunity.” This change in soccer will be a positive one if it improves what is produced on the field, or simply forces owners to be smarter with how they spend their money. The thing is soccer clubs are not like regular companies. The authors of Soccernomics say it best: “The business of soccer is soccer,” they note, and clubs “are more like musems: public-spirited organizations that aim to serve the community while remaining reasonably solvent.” The irony of what is happening today in so many clubs is that running a soccer club with pressure to make money may ultimately contradict its stated goal of winning on the field!

8 responses so far




8 Responses to “What is Soccer’s Business?”

  1. […] the world’s richest leagues — nearly went on strike when one club failed to pay wages.” Soccer Politics Share this:StumbleUponDiggRedditLike this:LikeBe the first to like […]

  2. […] original here:  Soccer Politics / The Politics of Football » What is Soccer's Business? « VIDEO – Podolski Scores Second After Amazing Arsenal Move … Italian Soccer Serie […]

  3.   Jasonon 14 Aug 2012 at 10:44 pm 3

    Well-written article once again, the explanation is always what gets me.
    I think the next question to ask here is about MLS. It’s very interesting how we use the franchise model, tying each team to the league, which is unlike maybe any other league in the world.
    How does MLS compare to those teams that are in massive debt? In this economic recession and in the early years of MLS, how did we remain financially stable?
    Meanwhile, there are many negatives as well. Players have been moving steadily from MLS to Scandinavian leagues for the bigger paycheck. Fans don’t get to see the best players.
    And, of course, we must always ask ourselves what changes will be made in the future to advance the league.

  4.   Soccer Potpourri | OverLapping Runon 17 Aug 2012 at 4:02 pm 4

    […] Soccer Politics: What is Soccer’s Business? […]

  5.   Dave | Football Shirtson 24 Aug 2012 at 11:10 am 5

    I agree that the Glazer family have definitely hampered the progress of Manchester United for years; milking the club for all it’s worth. However the alternative of an Arsene Wenger’s “financially sound” club has resulted in empty trophy cabinet for Arsenal.

  6. […]  Andrew Wenge, What is Soccer’s Business?, Soccer Politics-The Politics of football, 12 August 2012… Social Share […]

  7.   Ethanon 19 Sep 2012 at 9:34 pm 7

    Cuz….enjoying your posts very much. Thanks for the insight into the business side of your sport. Have you seen “Moneyball”? Similar thinking as Arsene Wenger for judging future success based on statistics. Hope all is well and keep em coming.
    Ethan

  8.   raefon 08 Oct 2012 at 3:20 am 8

    thnx for sharing

Trackback URI | Comments RSS

Leave a Reply

css.php