‘Finance Football’ is a semi-regular column that tackles the economic aspects of the world’s favorite pastime, taking a closer look at the commercial side of the game. In the inaugural edition, we bring Shahid Khan’s purchase of Fulham FC under the scanner, while deeply analyzing an extremely pertinent question – what does it take to be successful today?
The European football landscape is quickly turning into a playground for billionaires. English Premier League side Fulham FC are the latest club added to an ever increasing portfolio of business ventures of a high net worth individual. Sahid Khan, a Pakistani-born businessman, assumed control of the London based outfit just a couple of weeks ago. Though the exact details of the transaction haven’t been disclosed it is assumed Khan paid around £150 – 200 million (€175 – 230 million) for the Cottagers.
Yet, this isn’t Khan’s first foray into professional sports, having bought NFL team Jacksonville Jaguars in January 2012 for $770 million. However, the results during his first year of ownership were far from pleasing; horrendous actually. The Jaguars posted a losing record of 2-14, the worst in the history of the franchise.
One of the unique distinctions of American sports leagues is the absence of a relegation system to a lower division. Apart from financial implications, as in TV or match day revenue, the worst performing teams don’t face any greater repercussions. On the contrary, they’re given an advantage in the annual draft proceedings where the best and most promising talents are recruited into the league. Essentially, the lowest ranking teams have a better chance at signing the most sought-after rookies in the next year.
On some level the logic behind it is understandable. The worst teams are given the chance to rebuild or start over, and it prevents the lopsided allocation talent within the championship (though there are ways to work around it).
Sports leagues anywhere else in the world function different, the worst performing teams are being relegated to a lower division, thus making the acquisition of top level talent harder in the subsequent season. While such a system appears to be unfavorable in regards to a more balanced league at first glance, it nonetheless contributes to a more interesting competition for the audience.
Either way football’s latest billionaire owner doesn’t have the luxury of adjusting his learning curve over the course of a full year.
Given that most billionaires have more money than they can ever spend in a lifetime it stands to reason that running and owning a football club, or any sports organization for that matter, is more or less a passion of theirs.
Sure, professional sports can be profitable, but the truly lucrative ventures are usually found outside a stadium. The €200 million or so Khan paid to buy Fulham FC is not necessarily a bad investment but it’s definitely not a solid one either.
Khan is the latest but probably not the last billionaire owner of a European football club.
Billionaire Boys Club
The table above features the majority of billionaire backed clubs in Europe but not all of them. Some are excluded like Anzhi Makhachkala (Russia) or Vålerenga Fotball (Norway).
Looking at the list many of the names are unfamiliar to the regular football fan. Apparently the fourth richest man on the planet (according to business magazine Forbes), Amancio Ortega, is co-owner of Deportivo La Coruna. Save for the Qatari Investment Authority, and its estimated $100 billion in assets, Ortega’s personal wealth dwarfs the fortune of his peers on the list by a significant margin. Nevertheless, the Galician outfit’s future is far from prosperous which feeds the assumption that Ortega’s involvement (and stake) in the club is minimal at best.
Arsenal on the other hand has no less than three billionaire owners, Alisher Usmanov and Farhard Usmanov who own 30% through Red and White Holdings, plus principal owner Stan Kroenke who controls a 67% stake in the London club. Based on the net worth of these three individuals, Arsenal are the biggest game in town, but the Gunners ‘fractured’ ownership hasn’t translated to any sort of financial advantage, much less silverware. Usmanov has been quite vocal about providing Arsene Wenger with extra funds if given the opportunity whereas Kroenke is vague at best.
To his credit the American isn’t a newcomer in operating a sports club, owning several teams through his Kroenke Sports Enterprises, among them franchises in the MLS (Colodrado Rapids) and the NBA (Denver Nuggets).
Interestingly enough London is the city with the largest share of billionaire owners. In addition to the Gunners dysfunctional trio of owners, Queens Park Rangers is partly owned by Lakshmi Mittal, while Chelsea FC’s Roman Abramovich can arguably be credited with billionaire’s fascination with football.
Whereas London has the highest ratio of billionaire owners, their fascination isn’t just limited to the English capital. After Abramovich bought Chelsea in 2003 the English Premier League experienced an influx of wealthy owners over 4 consecutive years (2005 – 2008).
In 2005 Manchester United were subject to a leveraged takeover courtesy of the Glazer family. Randy Lerner took over Aston Villa in 2006. While a trio of Premier League clubs (Newcastle United, Liverpool FC and Manchester City) were sold in 2007. Manchester City’s current owner Mansour bin Zayed Al Nahyan took the Sky Blues off Thaksin Shinawatra’s hands just one year after Thailand’s Ex-prime minster acquired the club. Liverpool FC also found new owners in the form of American-based Fenway Sports Group.
Though he has been dominating the news cycle for all the wrong reasons lately, it’s easy to overlook Silvio Berlusconi’s contribution to football. Abramovich may be the person who rekindled the interest of high net worth individuals in the sport but it’s Berlusconi who started it in the 80’s. He laid the blueprint for superstar teams. His AC Milan, under the tutelage of Arigo Sacchi, were the most dominant team of their era and one of the finest in the history of the game. Unfortunately, he’s more known or rather infamous for his eccentric behavior.
Over in France, though not technically controlled by billionaire, Paris Saint-Germain, were acquired by the Qatar Investment Authority in 2011, also make the cut. The same year Dmitry Rybolovlev bought AS Monaco. Stade Rennais are owned by Francois Pinault through his Artemis Holding.
It’s safe to assume that the individuals featured in this analysis aren’t in dire need of money or a new business venture. Still, even a billionaire’s willingness to invest in their latest acquisition has its limits. This however is determined by the passion and the ambition of the respective owner(s).
Sometimes the owner’s ambition isn’t reflected by their investments. Sometimes it’s the other way around and the owner’s investment doesn’t lead to an improvement of the clubs fortunes on or off the pitch.
Nevertheless, although these individuals have been very successful in other areas their expertise and skillset aren’t necessarily applicable in the sports industry. Though having amassed experience in addition to enormous wealth isn’t a disadvantage either.
Treating it solely as a passion project can lead to uncontrolled and excessive spending. Conversely, by just focusing on the economics and the financial viability of the club the sporting aspect is likely to be affected by it. Ideally there’s a balance between the expenses and the success of club, albeit tipping slightly in favor of the sporting aspects of the endeavor. It is, after all, a football club.
As such winning the domestic league is one of the top priorities of any club, closely followed by qualifying for the Champions League. Not only is the Champions League Europe’s most prestigious and best club competition, it’s also its most lucrative. Besides, teams that regularly qualify for the Champions League are the preferred destination for top players across the globe. It’s probably the biggest football tournament after the World Cup, and even that’s debatable.
The graphic below offers a comprehensive overview for the English Premier League, Spain’s La Liga and France’s Ligue 1 and their respective top 4 rankings from 2003 – 2013.
Due to the UEFA co-efficient the EPL as well as Liga BBVA have three automatic Champions League places plus a play-off spot for the 4th ranked team in their leagues. Ligue 1 only has 2 automatic Champions League places in addition to its 1 play-off spot, the fourth being one of the Europa League slots.
The final standings for the top 2 positions in the English and Spanish leagues are remarkably similar. For the past 10 years the eventual champions in both competitions averaged 89 points, runners-up still accumulated 82 points. The only real difference is found at 3rd place. English sides average 76 points whereas their Spanish counterparts can only muster 69 points. It’s probably because the wealth is more evenly spread in the EPL than it is in Spain where La Liga’s top 2 account for more than 50% of the TV-Revenue alone. As a result though the Premier League is a financially more attractive proposition to potential investors, it’s also a more congested competition.
France’s Ligue 1 is a less lopsided championship than both. The average total of 80 points for French champions indicates that Ligue 1 is far more competitive than assumed, though the margin between 1st place and 2nd place, or 1st place and 4th place remain more or less than same.
At any rate, qualifying for the Champions League should and must be the target for all clubs. Therefore it’s important to shed some light on the state of affairs before some clubs changed ownership.
Technically, Arsenal hasn’t been subject to a takeover yet but for the purpose of this analysis Stan Kroenke’s majority stake in the London-based club will be considered as such. If it weren’t for the animosity between Kroenke and Usmanov the Gunners would have much more clarity in regards to their ownership.
As mentioned earlier, several clubs have been excluded from the analysis because their takeover has been executed before the relevant timeframe (2000 onwards).
Unsurprisingly, none of the clubs that were acquired by a billionaire/high net worth individual have won the domestic league or even finished 2nd in the season preceding the takeover. Nonetheless, they finished as high as 3rd place (Manchester United), which was also reflected in the valuation for the Red Devils, a staggering £790 million which adjusted for inflation and current exchanges rates amounts to a little under €1,2 billion.
Apart from topping the Deloitte Money League for the 2002/2003 season, the team from the red half of Manchester also had the best 3-Year Point Average (78) before the Glazers assumed control of the club. Curiously enough, it’s Liverpool FC that has the second best 3-Year Point Average (75) ahead of Arsenal (72). Yet the Reds weren’t a Champions League club when US-based Fenway Sports Group acquired the Merseyside outfit in late 2010.
The other Premier League clubs (Aston Villa, Manchester City and Newcastle United) were mid-table teams that averaged around 48 points per season when they were bought, while Queens Park Rangers just accomplished the promotion back to the English top flight.
On the continent, France to be specific, Paris Saint-Germain averaged 57 points a season (for a 2 year period) when the Qatar Investment Authority acquired the club. Good enough for a top 4 finish but not good enough to qualify for the Champions League. AS Monaco accumulated 48 points on average but were already relegated to the 2nd French division when Dmitry Rybolovlev completed his takeover.
Before Sheik Abdullah bin Nasser bin Abdullah Al Ahmed Al Thani assumed control of La Liga outfit Malaga CF in 2011, the Andalusian side averaged 46 points a season and peaked at the 8th place in the league table.
Save for quotes or written statements one can only assume that the reason why the majority of investors favor mid-table clubs is because they are less expensive than their Champions League counterparts. Money that isn’t tied in the acquisition of the club can be used to other areas, right?
Only Chelsea, Liverpool, Queens Park Rangers and AS Monaco turned a profit from player sales in the year prior to the takeover. The rest had invested rather heavily in recruitment even before the arrival of a billionaire benefactor.
A single year of spending doesn’t offer any insight about any trends or even willingness to invest, but looking at a greater timeframe (3 Years, exceptions are noted) does.
Chelsea FC had an annual net expenditure (revenue from sales minus outlay) of €17,1 million, Manchester United averaged €36,8 million, Aston Villa spent €9,6 million, Newcastle United €23 million, Manchester City €17 million, Liverpool €24,2 million, QPR €2,5 million, PSG €6,3 million and Malaga CF €13,8 million.
It must be noted that Manchester City’s expenses were inflated due to the 1 year tenure of former owner Thaksin Shinawatra, himself a billionaire.
Two clubs however went in the opposite direction and generated profits through player sales: Arsenal and Monaco. The Gunners gained €23 million over a two year period or €11,5 million per annum. Monaco’s profit is only a fraction of Arsenal’s at €2 million but it’s a profit nonetheless.
All but one club has increased its revenues after a takeover. Ligue 1’s Paris Saint-Germain leads the pack with an increase of 120% (€222 million; €101 million), Chelsea FC 65% (€221 million; €134,1 million), Manchester City 63% (€169,6 million; €104 million), Manchester United 32% (€324,8 million; €246,4 million), Aston Villa 18% (€99,3 million; €84,4 million), Arsenal 16% (€290,3 million; €251,1 million) and Liverpool whose turnover only grew an underwhelming 4% (€233,2 million; €225,3 million).
One can’t help but wonder how Paris Saint-Germain, Chelsea and Manchester City achieved their miraculous increase when even Manchester United revenue ‘only’ gained 32% over a 3 year period.
Still, not every takeover can be a success. Liverpool and Newcastle United have actually worse statistics after their takeover, particularly the Reds have disappointed. Since FSG took control of Liverpool the club has not peaked higher than 6th place and accumulated 18 points less on average. The Reds underperformance is quite irritating, especially since Liverpool has increased its net expenditure over 43% (on top of what the club was already spending before) in comparison to the 3 years prior to the takeover.
The Reds decline can actually be attributed to a series of bad decisions courtesy of their new administration. First FSG’s naivety in their conviction that their sabremetrics-based success in Baseball could be replicated in a Football arena. Buying Andy Carroll for a reported €40 million after half a solid season at Newcastle wasn’t so much a letter of intent but a grandiose miscalculation. Liverpool’s new owners also made a mistake when they hired Kenny Dalgish on a permanent basis. The Scottish manager, though a certified Kop hero, hadn’t worked in that capacity for more than a decade when he was installed in the Liverpool dugout. Entrusting him to oversee the Reds transformation would’ve been adventurous even under optimal conditions.
Newcastle United performed even worse under the ownership of Mike Ashley. The Magpies were relegated a year after he bought the club which explains why the clubs transfer policy was designed to be self-sustainable from then on. Except for his first year in charge of the club he didn’t make any extra funds available, the club actually generated €20,5 million in profits from player sales. The Geordies are also the only club whose revenues declined €98 million (-24%).
Somewhere in between the two extremes are Arsenal and Aston Villa who haven’t really improved upon their previous benchmarks in the league table but not underperformed either. The Villans couldn’t peak higher than 6th place (-). But the Gunners non-improvement is the real head-scratcher here. On top of being unable to improve their league standings and their point haul, the London-based club new hierarchy failed to provide additional funds besides the revenues generated through player sales.
Nominally, Arsenal did spend a lot more than in previous years, 239% (€123,2 million) than in the previous period (€37,5 million) but the Gunners revenues also ballooned 133% to €136,7 million, meaning the clubs increased outlay was covered by player sales as opposed to fresh investments.
These are the clubs that have managed to qualify for the Champions League or maintained a place for Europe’s most prestigious club competition after change of ownership. Except Arsenal and Manchester United and to a lesser extent Malaga, the rest has spent obscene amounts of money to accomplish that. However, one has to consider the circumstances on a case by case basis.
Arsenal averaged around 72 points per season before and after the takeover which all but guarantees the qualification for the Champions League thus also preventing an impetus to heavily invest in squad recruitment. Why fix something that isn’t broke?
Manchester United has actually spent less than the Gunners but they didn’t have to match the Londoner’s outlay to be successful. Unlike their London rivals the Red Devils aren’t and haven’t been a selling club. Furthermore, Sir Alex Ferguson never allowed his best players to leave the club whereas Arsene Wenger made it a habit selling his at a huge profit. In 2011 Wenger sold Cesc Fabregas to FC Barcelona and Samir Nasri to Manchester City while Robin Van Persie left the Gunners in 2012 for Ferguson’s Red Devils.
Despite spending -17% less (€85 million) than in the previous period (€110,3 million), the Manchester outfit had increased its average annual point haul to 86 (78). It’s a vindication of Ferguson’s judge of talent and United’s scouting department. Measure twice, cut once. But even that didn’t prevent the Red Devils from making the odd mistake like signing Juan Sebastian Veron who was ill-suited for the Premier League. Luckily for Manchester United the Abramovich-funded Blues revolution took him off their hands, keeping the loss at an acceptable level.
Conversely the trident of Chelsea FC, Manchester City and Paris Saint-Germain spent ridiculous amounts of money breaking or establishing themselves as top sides. But one has to put the spending of these three clubs in some perspective.
Though the Blues did qualify for the Champions League play-offs when Roman Abramovich bought the club, Chelsea only averaged 64 points per season – some way off an automatic Champions League spot and far away from a credible title challenge. An investment was absolutely vital in order to bypass a 20 point gap if the Blues were to become a force in England and in Europe. If the total net outlay had to be increased by 862% (€464,3 million) is debatable. It couldn’t have hurt, that much is certain.
Manchester City had an even worse starting position. The Sky Blues averaged 57 points, mid-table no man’s land. Therefore, the Citizens €430,3 million outlay to gain 16 points and 6 spots in the league table shouldn’t be considered a failure in light of the Blues success. The conditions were hardly the same, hence making a direct apples-to-apples comparison impossible. In 2003 the field was not so crowded and the market less inflated than in 2008 when Sheik Mansour bin Zayed Al Nahyan assumed control of the club.
If anything the framework Paris Saint-Germain find themselves in resembles Chelsea ca. 2003 the most – and even that’s a stretch. At any rate, the Paris side too covered the same 24 point spread the Blues have, and also finished at fourth in the league prior the arrival of the cash-rich Qatar Investment Authority. Yet there are notable differences. Les Parisiens missed out on a Champions League spot and are about the only side in France with financial muscle, which will change after this summer due to the promotion of AS Monaco to Ligue 1.
The Paris club has also spent significantly less (€249 million) than Chelsea (59%; €397,2 million) and slightly below the level of Manchester City (8%; €270,2 million). Spending-wise they’re similar to the latter, but the success draws parallels to that of Chelsea’s. That’s probably down to the level of competition or lack thereof in Ligue 1. Whatever the reason, it’s doubtful le Parisiens would’ve accomplished their success in the English Premier League.
Malaga’s owners are the horror of fans because they quite literally lost interest in the project overnight. Therefore it’s not surprising to learn that the La Liga side went from one its biggest spenders to a selling club within 12 months after Sheik Abdullah bin Nasser bin Abdullah Al Ahmed Al Thani bought the club. The less is written about his tenure the better.
Taking Arsenal out of the equation, and assuming City’s inflated €26,9 million per point stems from an increased competition within the Premier League, plus their unfavorable starting position, the Sky Blues did receive an acceptable return on investment. On the other hand Manchester United’s low €10,7 million per point reflected the Red Devils favorable starting position. It’s probably not implausible to suspect that Aston Villa’s €9,6 million per investment is an indication that that’s the amount of money required to maintain one’s position in the league table, which falls in line with Chelsea’s €19,3 million per point investment.
Dividing the sum of Manchester United’s low €10,7 million per point and Chelsea’s €19,3 million equates to exactly €15 million per point (for clubs in the top 4 of the EPL) gained. Adjusting the calculation for clubs outside the top 4, the Red Devils value should be exchanged for the Citizens massive €26,9 million per point investment which would equate to €23,1 million per point.
Football is perceived to be a blue collar sport, which is true to a certain extent. On the surface of it, it’s not as costly as, say, Motorsports but it’s not cost-friendly by any stretch of the imagination. Sure, footballer’s equipment isn’t as expensive as tires, engines, or even Lacross gear. Nevertheless, there are other costs affiliated with the sport than just boots, shorts and jerseys. Though the exploding wages are quite concerning they have yet to hit the levels of American sports like their version of Football, Basketball, Baseball even Ice Hockey where $100-million contracts are not the exception. For instance, Baseball superstar Alex “A-Rod” Rodriguez has twice (!) signed a contract worth north of $200 million.
Still, a lot of investors underestimate the importance of transfers. Perhaps it’s not so much that they underestimate it but try to impose a cost-effective (read: self-sustainable) model from the start. Buying a club is expensive enough, yet making further investments available for recruitment is paramount if the club is to improve upon previous results. That’s where some owners lose the plot. One or two years of generosity aren’t nearly enough to establish a club that mingled in the lower regions of the top flight as an elite side. Even if the club manages to qualify for the Champions League in Year One after the takeover it shouldn’t serve as an excuse to cease investing in recruitment. Qualifying for the Champions League once doesn’t make it an outright success or a top side. If anything it indicates that the club is on the right track.
To pick up on an earlier sentiment, Fulham FC’s new owner, Shahid Khan, doesn’t have the luxury of time. European football is nothing like the one promoted in the NFL. The London outfit may have just finished 3 points off a Europa League playoff place but 32 points and 9 places off a guaranteed Champions League position. Though the former is a continental competition it’s the latter that is by far more lucrative. The winner of the Europa League stands to earn 8 figures in the low teens, in contrast just qualifying for the group stages of the Champions League guarantees almost as much.
There’s virtually no way Fulham can cover this massive spread without massive investments courtesy of its new owner. With the exception of Queens Park Rangers or France AS Monaco that both were relegated at the time of the takeover, no club has been in a worse position when a new owner took charge, perhaps not financially but in a sporting sense.
Chelsea, Manchester City, as well as Paris Saint-Germain serve as the prime examples for aggressive expansion of sorts. At a premium, sure, but in the long run one can expect the owners to gradually cease their investments. Though Roman Abramovich’s Chelsea are still not there yet, the Blues are close. Incidentally, the London outfit probably would’ve been self-sustainable by now if it wasn’t for the ambition of the owner. Manchester City is likely to establish themselves as a genuine heavyweight in England and abroad. The Sky Blues certainly made the right investments and hired the right people at key positions in their administration. Same goes for Paris Saint-Germain who have unmatched spending power and long-ranging connections in an array of business and industry sectors.
If Khan intends to position the Cottagers as a top team he’ll have to exceed Chelsea and City investments during their initial 3 years under new ownership. Applying the model he’ll have to spend just under €700 million (€693 million) to push Fulham in close proximity of Champions League football. In reality the final price-tag will probably much higher due to the increased competition in the Premier League alone (Arsenal, Chelsea, the Manchester sides, even Liverpool). Especially in football it’s either spending big or to not spending at all. Queens Park Rangers’ investment of €75 million over two years was, well, insufficient to put it mildly. Neither was their ill-conceived strategy to buy fringe players and have beens instead of going after top quality talent. The Hoops outlay can’t even pass as letter of intent.
Conversely, if Arsenal’s new owners had just been more aggressive the London club would’ve been closer to the title than they have been in years gone by. Statistically the London outfit is just 17 points removed from winning the league. Applying the formula on the London side it would require a €255 million investment over a three year period, or €85 million per season in additional funds IF it was possible to buy the title (the success of Chelsea, Manchester City and Paris Saint-Germain suggests it is). Given that Chelsea FC and Manchester City have each spent around €100 million annually in the last couple of seasons, it’s entirely possible that this formula somewhat close to being valid. To prove a point, newly promoted Ligue 1 side AS Monace have already spent €142,5 million after winning back the promotion to the French top flight. Keep in mind, the French championship only features one other big spender in Paris Saint-Germain, or in other words, there’s less competition than in the Premier League.
It’s literally go for broke.