The Anglo File: Taking Stock of Soccer Clubs

To get their stock off the bench, football clubs are considering IPOs and Murdoch synergies.
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There's no questioning the importance of soccer in Europe. But like publicly traded sports franchises in the U.S., the stocks of most English soccer clubs are languishing at or below their offering prices, and there is little hope that these investments will score goals anytime soon.

Last month, the

Liverpool Football Club

confirmed it had hired the investment bank

Schroders

to look into various financing alternatives, including an initial public offering. If Liverpool did decide on a flotation, it would join a growing roster of football clubs from Manchester to Milan soliciting the market's money to aid them in their dogged pursuit of trophies.

The stocks of listed teams appear to have divided into the big and not-so-big leagues. The

English Premier League

, or EPL, appears to offer the best investments. According to a recent survey by the U.K. accountancy firm

Deloitte & Touche

and the soccer magazine

FourFourTwo

, the EPL is the fastest-growing league in the world, and five clubs from that league are among the top 20 most-profitable clubs in the world.

The richest club in the survey was

Manchester United

. In the fiscal year ended July 31, 1997, Manchester United's $145 million in revenue was almost 50% more than that of the second-largest club in the survey,

Barcelona

.

Profits remain a struggle. Manchester United's pretax profits for the half-year ended Jan. 31 fell 28% to $18.3 million from the same period a year earlier, even as revenue rose 10% to $93.2 million. In fact, for the 1997-1998 fiscal year, only five of the nine publicly traded clubs made any pretax profit.

This Stuff Doesn't Kick

The problem with soccer teams is they suffer from spiraling costs and constraints on revenue-raising.

Soccer is no different from U.S. sports in that "player power" prevails. Top players in the EPL earn from $50,000 to $65,000 a week, and there is no sign of moving toward a U.S. system of salary caps. According to London-based consulting firm

Fletcher Research

, during the 1996-1997 season EPL clubs spent an average of 48% of revenue on salaries.

"I believe that shortly it won't be possible for any one rich individual to bail out a club and buy success because the numbers involved are becoming ridiculous," says Neil Bradford, a director of Fletcher Research.

At the same time, the ability of clubs to raise ticket prices to meet these crippling wage demands is constrained by a mixture of public pressure and infrastructure limitations. Raising ticket prices usually results in vociferous opposition from supporters, vigorously backed by the tabloid press. It is also difficult to enlarge stadiums because many are built in residential districts.

As a result, gate receipts are expected to fall as a percentage of a clubs' total revenue. Fletcher Research estimates that revenue from gate receipts will fall to 27% in the 2005-2006 season from 40% in the 1996-1997 season. The lion's share of revenue will come from television, which is expected to increase to 49% from 13%.

Signs of this trend can already be seen. According to

Merrill Lynch

, Manchester United's revenue from television rose 14% to $15 million in the first half of this fiscal year.

How Can I Score?

Much to the fans' dismay, football clubs that are tied to big business are likely to be more financially sound than independent clubs. A good partner can be media companies because of the obvious synergies.

Rupert Murdoch's

British Sky Broadcasting

(BSY)

is

trying to buy Manchester United, and the government is expected to rule on whether to allow this in the next few weeks.

Also, some clubs like

Chelsea Football Club

in London are located in prime real estate areas and well placed, literally, for property development.

Finally, clubs could make more use of ticket-price differentials. The most expensive tickets for soccer matches are usually only about twice as much as the cheapest tickets. Opera houses avoid charges of elitism by offering cheap seats and gouging the more affluent audience members with sky-high box seats.

One of the advantages of shareholder capitalism is that it gives people a say in how a company is run. For soccer clubs, you might as well just buy a ticket and shout with the rest of the fans over which manager/board member/player should be sacked. As well as being cheaper, the latter method is probably more effective, too.