AIMing For a Winner

Gambling on Football, English-Style

Want to be a sports mogul? It’s difficult in the United States where there are no pure-play, publiclytraded sports franchises. Unless you have enough cash to buy out The Boss, you are doomed to watch the Yankees as a common spectator.

Not so in England, where a number of professional football clubs trade publicly. The London Stock Exchange’s Alternative Investment Market (AIM) boasts at least eight clubs that play at various levels within England’s complex Football Association (FA) league structure. And while individual investors may not actually qualify as real life moguls, there is a definite chance they may be bought out by one.

Over the past several years, there’s been a rush by foreigners to seize ownership of English clubs. Russian oil magnate Roman Abramovich started the latest stampede in 2003 when he paid €195 million to acquire London-based Chelsea. Americans got into the act in 2005 when Malcolm Glazer, owner of the Tampa Bay Buccaneers, paid over €1 billion for Manchester United. Cleveland Browns owner Randy Lerner followed a year later when he spent €110 million for Aston Villa. Most recently, Tom Hicks, who owns the Texas Rangers and Dallas Stars, teamed up with George Gillett of the Montreal Canadiens to acquire Liverpool for €317 million.

In all, seven of the twenty teams playing in Barclay’s English Premier League—the top tier of FA football— have been acquired in the past decade. And the fever is spreading. It’s difficult to find a top rank, publicly-traded team where there isn’t talk about investor interest and potential acquisitions. “The band wagon is rolling,” says Paul Rawnsley, director of Deloitte’s Sports Business Group. “The market is very active at the moment.”

Why play pick up on the British football pitch? That’s where the money is. The biggest sport in the world isn’t NASCAR. It’s not even football—at least American football. It is soccer, the football watched by billions of fans throughout the world. The sports business group puts revenues for the European professional football market alone at €12.6 billion in 2005-06, a €1 billion increase over the previous year. A full €2 billion of this revenue is generated by the 20 teams of England’s Premier League (PL).

PL teams play a 38-match season from August to May. The “big four” PL teams—current champs Manchester United, Chelsea, Arsenal and Liverpool—brought in an average $288 million last season. The revenues come from the PL’s jointly negotiated media package, rights to participate in an extra series of tournaments among European clubs, and massive international merchandising sales.

Soccer truly is the world’s game and the PL, like the other big five European leagues, imports the greatest players from across the globe. This gives teams from British mill towns like Birmingham and Newcastle extraordinary appeal all over the planet. “The English Premier League is now televised in over 200 countries around the world,” says Rawnsley. The league is particularly popular in Asia, where television audiences for league broadcasts range from 100 million to 350 million in China alone.

People are even taking notice in the United States. “The Premier League is our most-viewed property, and we expect its audience to continue to grow as our distribution increases and the sport becomes more popular among casual sports fans in the US,” says David Sternberg, executive vice president and general manager at Fox Soccer Channel, now available in about 31 million households throughout the US and Canada. Fox recently signed an exclusive deal to broadcast PL games in the US.

While sports franchises are notoriously risky investments, the large majority of PL teams are profitable. Manchester United, champions for the season just ended, took the profitability title as well, earning operating profits in excess of $80 million. They were followed by Liverpool with approximately $40 million in profits.

These bottom lines are expected to swell again during the 2007-2008 season, largely due to a new package of three-year television contracts. “Broadcasters were prepared to pay a hell of a lot more than they were previously,” says Rawnsley.

“It has just transformed the economics,” says Richard Feigen of the investment banking firm Seymour Pearce, which serves as nominated advisor for a majority of the publicly traded clubs. “If you were a mid-table club, you were looking at getting £20-30 million from the Premiership in TV money. Now you will be getting £50 million. That’s $100 million.” As a result, the sports business group is projecting that total PL club revenue will rise by £300 million, or 20%, from £1.465 billion to £1.865 in 2007-2008. At the moment, only a handful of PL clubs have publicly traded shares, a number that could drop to zero by press time.

Shares in Tottenham Hotspur (TTNM.L), which finished in fifth place, opened the season last August trading at just 49p. In June, leading shareholder Enich International offered to take out all other holders for 113p, a gain of 131% for the year. Similar deals appear to be in the works for both Newcastle United and Manchester City. At Newcastle, an offer of 101p is on the table, more than twice the stock’s level last May.

One beauty of the PL, however, is that, unlike shorefront property, they are making more of it—or at least moving it around. Each year, three top performing clubs from the oddly named Coca-Cola League Championship (the 24-team second tier of the FA league structure) are promoted to the Premiership. They replace the three last place PL teams which are “relegated.” That’s right; it’s not just lousy players who get sent to the minors. They demote the whole team!

This promotion/relegation cycle offers several advantages. It keeps fan interest strong for the entire season. And from an investment standpoint, it holds out the hope of future glory and riches for teams striving to make the step up.

The payoff in terms of revenues is enormous. The gap between average clubs in the Premier League and the Championship was a record £56 million in 2005-06, according to the business group. It’s likely to increase to more than £70 million in 2007-08. The annual playoff game for League Championship clubs, which determines the final promotion spot to the Premiership, is said to be the highest stakes competition in all of sports.

Birmingham City (BMC.L) was promoted from the Championship to the Premiership at the end of last season. The club’s AIM-traded shares mirrored its success on the pitch, more than doubling from an opening of 15p in August 2006 to 31p the following May. They jumped by another 75% to a high of 54p a month later with the June announcement that the club had been approached about a possible acquisition.

Are there any publicly traded clubs left to buy? Yes, but they’re all in the Championship or points further south— not necessarily a bad thing, according to experts in football finance who feel that is where the next wave of buyouts may occur.

“I think you will start to see people looking at clubs in the Championship on the basis that they can buy them for a quarter of the price, inject some money into them and then have a really good shot at getting promoted,” says Feigen.

What are the investment possibilities? Sheffield United (SUT.L) and Watford (WFC.L), both re-relegated to the Championship after a year in the PL, have AIM-traded shares. With significantly strengthened “parachute payments” for relegated teams, both may also have a financial advantage in the struggle to get back up.

Southhampton (SOO.L) is another former PL regular hoping to fight its way back to the Premiership during its second consecutive year in the Championship.

Preston North End (PNE.L) was the very first English Football League champion in 1888 but hasn’t achieved anything near that level of success for some time. With their 7th place finish in the Championship last year, however, they are certainly in the hunt and could be another buyout candidate. Their market cap of just £4.9 million with only £11 million in debt makes them a real bargain if they ever reach the big show.

Further down the FA structure is AIM-listed Millwall (MWH.L) which was relegated from the Championship to League One. Far to the north is Celtic (CCP.L), which, together with Rangers, dominates the separate Scottish League. On par with top-tier FA clubs, there’s long been talk of bringing these two clubs into the FA/PL structure, something which would rocket Celtic’s revenue and profitability potential.

Shooting to score an investment winner via on-field performance or an anticipated buy out is certainly speculative. That doesn’t mean it can’t be profitable or at least fun. “For some people, the pure excitement and exhilaration of being in the world’s no. 1 game is payback as well,” says Rawnsley.

And, as with any soccer match, the time for a winning score may be running down.

— By FRED SCAGLIONE