The real Champions League winners

Football clubs fall into the ‘Consumer Discretionary’ category of businesses. I’m not entirely sure I would want to tell a Cardiff City fan that their support is discretionary. Regardless, football clubs are a fairly niche investment, with business models significantly different from a regular business. After all they have two measures of success which don’t always align: performing well in leagues and cups, and making money.

The costs of acquiring and paying talent often outweigh the prize money that can be directly attributed to that spending. At the same time, don’t spend enough and you can get relegated/miss out on Champions League spots, and so lose out on significant TV revenue. Another quirk of football clubs versus other businesses is that they often list players as assets on their balance sheets. I can’t think of any other industry that lists employees as assets, even if many firms will say that their main asset is their employees! In fairness these are issues faced by many sports, but unlike most sports, there are some listed football teams which means we can analyse these trade-offs.

A list of major football clubs that are publically traded is below:

Lazio (probably a bit more scared of telling one of their ‘Ultras’ that their support is discretionary)

Roma (same)

Manchester Utd (prawn sandwiches – terrifying!)

Juventus

Borussia Dortmund

Ajax

This list may not be exhaustive, and some clubs have listed and since de-listed, for example Tottenham Hotspur. Further as a disclaimer, although I am an occasional viewer of US sports, I’m going to avoid commenting on the (surprisingly few) listed teams there.

A sign that performance on the pitch doesn’t always directly affect the value of a club can be seen in Manchester Utd’s share price (which is listed in the US). They last won the league in 2012-2013, however the current share price is about the same as the end of that season, despite six seasons of relatively mediocre performance:

It is always important to remember that a share price should be based on the expected future profits of the company. The current listing on Manchester Utd only goes back to August of 2012, so gauging a valuation during the ‘glory years’ is difficult. For several reasons, two of which are listed below, this may not be a useful example for football clubs in general:

  • Manchester United have always had a huge global following that translates into revenues from areas such as shirt sales which is essentially unmatched. A few seasons of weak performance isn’t going to erode this, and these consistent revenues mean that prize money from winning leagues and cups is less relevant.
  • Alex Ferguson had announced at the start of the 2012-2013 season that it would be his last. It is likely that by the time of the listing, markets had already priced in several years of less stellar performance.

Ajax is a useful comparison. Prior to reaching the semi-final of the Champions League it was trading at around €16, valuing it at around €300mln. After winning the first leg and looking highly likely to reach the final, it rallied to €24.7, a valuation of around €450mln. The price promptly fell back to €16 after a shocking turn of events that saw Tottenham Hotspur come back from three goals behind.

The rise and fall in the share price came despite the fact that Ajax would have earned only €15mln extra for reaching the final and a further €4mln for winning it, far less than the €150mln swing in market capitalisation. It seems that markets assign a value to the prestige of winning the Champions league, even if the ability to monetise it isn’t immediately obvious.

Below is the share price for Juventus, which is particularly interesting. For several years the price ambled along between €0.2 and €0.4. Then in 2017 (circled in black) they reached the Champions League final. This saw the value of the football club rise significantly, even though they eventually lost to Real Madrid. However the biggest rise in value didn’t come from winning a competition, but the increased likelihood that they could in future (and that perhaps they could get more shirt sales). Despite having to pay €100mln for Cristiano Ronaldo, and pay him €35mln a year, the share price has soared since the acquisition (circled in deep Portuguese red).

Yes they have won a league title since the purchase, but they had been doing so for several years. This is as sure sign as any that, for the biggest clubs, brand matters more than immediate results. However this argument is circular, since the brand can only be maintained by continuing to win games, and I wonder how much longer Manchester Utd can continue to underperform on the pitch and maintain its premium brand status, and thus market value.

Finally a reminder that sports clubs often represent awful investment opportunities. Unlike many industries where there is a barrier to entry, and thus competition, the whole point of sport is that there is perpetual competition. To stay at or near the top requires consistently high spending, and it only takes one bad season or bad investment and you might not even be in your country’s top tier league. Below is the chart for Lazio’s (or should we say Collapszio’s?) share price. Initially, during the dot.com bubble when global stock values rose to unsustainable levels, an investor would have made some good money. However the shares are now almost worthless. Just don’t tell the Ultras.

As a final disclaimer I support Crewe Alexandra. Profit – we don’t know the meaning of the word.

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