Finance in sport: should we invest in football clubs?

Football and the first billion-pound player

Football is booming right now. You might have noticed. The amount of money being spent on young people that are good at kicking round things has grown exponentially over the past two decades.

The £12.5m paid for Gianluca Vialli in 1992 (the year the Premier League began) through to the £200m shelled out for Neymar in 2017 represents a compound annual growth rate of 20.3% in world record fees.

If this rate of growth is maintained, that means we are nine years away from a £1bn footballer. Even excluding Neymar’s 2017 transfer fee, we get a compound annual growth rate of 15% between 1992-2016. That would give us a £1bn transfer in 11-12 years’ time...

But football as a sector - is it really worthy of investment? Isn’t it characterized by desperate swings in profitability and littered with bankruptcies? Doesn’t most of the profit go straight to players and agents?

Tottenham Hotspur, Aston Villa, Birmingham City, Charlton Athletic and Newcastle United have all taken themselves off the stock market in the past.

The changing face of football finance

Established fund manager Nick Train holds shares in Manchester United, Juventus and Celtic across the Lindsell Train global and UK equity portfolios. He views the clubs he holds as ‘national icons’. There is a case to be made for investing in unique assets - especially if they are increasing profit and revenue, as appears to be the case at these clubs.

Deloitte starts off its 2018 Annual Review of Football Finance by saying: “The financial results for the 2016/17 season may well be viewed in the future as the defining moment in the delivery of sustained profitability by football clubs competing in the Premier League.” The game is evolving and so is the case for investment.

Gone are the days in which top clubs’ main source of revenue came from filling up seats and selling pies. Broadcasters are flooding the game with cash as more established operators do battle with deep-pocketed new entrants such as Amazon. High-quality sports content is valuable.

The total value of the rights to show Premier League matches on television for 2019-2022 reached £4.55bn. In its recent second-quarter earnings update, Manchester United reported a 37.9% increase in broadcasting revenues for the three-month period and 26.3% for the six-month period.

Should we all be going football mad?

Clash of titans: Manchester United, Celtic, BVB and Juventus

Using Stockopedia’s compare tool, we can get a breakdown of four of the largest listed football clubs in the world: Manchester United (NYQ:MANU), Celtic (LON:CCP), Borussia Dortmund (ETR:BVB) and Juventus (BIT:JUVE):

Manchester United is the largest of the four by market cap. According to its enterprise value, it also carries around £300m of debt on its books. Juventus, the second largest, also has some debt. Celtic, the smallest, actually appears to have c£14m of net cash. At a glance, then, these companies do not have dangerous capital structures.

The fact that Juventus and Borussia Dortmund (BVB) are loss-making on a trailing twelve-month basis harks back to the initial concern about the sustainability of earnings. Juventus’ Income Statement page shows it has been loss-making in three of the past six years, although BVB has been profitable every year.

Here is the page for Juventus:

And for BVB:

This instantly suggests that, of the two, BVB is worthier of further investigation. It is more consistently profitable, has higher operating margins, and has a cleaner set of income statements in general. Juventus has reported substantial unusual expenses year-in, year-out.

The StockRanks financial summaries of Manchester United and Celtic show a couple of years of net loss but nothing overly concerning. For Manchester United:

And for Celtic:

So, not spotless, but not quite the car crash in terms of financial statements I had feared.

Celtic stands out for its net cash position and position in Scottish culture (although its shares are quite illiquid), while Manchester United is one of the most powerful brands in sport. If I had to rank these teams in order of interest right now, I would say: 1) Manchester United, 2) Celtic, 3) BVB, and 4) Juventus. 

Let’s see if the StockRanks agree:

From a factor investing perspective the list is more like: 1) Celtic, 2) BVB, 3) Manchester United, and 4) Juventus.

The cash flow statements for these clubs bring some interesting insights. Manchester United consistently invests more than it generates from operations:

Celtic prefers to generate more than it invests:

As does Borussia Dortmund:

While Juventus is, frankly, as erratic as ever, with wild swings in spending:

Conclusion

This cursory delve into some of the world’s most recognized football clubs has yielded some interesting insights and suggests that certainly, Manchester United, Celtic and Borussia Dortmund are worthy of deeper investigation.

The branding, social standing, networks and expertise of these top clubs are hard to replicate in my view and give the clubs moat-like characteristics, although the performance of a football team is much less certain that the performance of other businesses. That said, football is the world’s sport and its dominant teams are likely to profit from increasing demand in the years ahead.