- Asset management fund’s two largest holdings are in Ajax and Lyon
- Says European football teams are undervalued in comparison with US franchises
- Estimates Covid-19 outbreak will only cost Ajax and Lyon €1m in lost revenue
Luis García Álvarez speaks to SportBusiness on the day fears about the impact of Covid-19 first begin to impact the financial markets. The equity portfolio manager at MAPFRE AM asset management fund marvels at one of the largest intraday drops in the history of global trading, but surprisingly he doesn’t seem unduly worried.
Working for one of the few funds to invest wholeheartedly in listed football stocks, he says he has conditioned himself not to fixate on short-term volatility and always tries to take the longer view. His MAPFRE AM Behavioural Fund manages around €35m ($39m) in assets across a range of industries. But its two largest holdings are a five-per-cent stake in Eredivisie club Ajax and a 4.5-per-cent stake in Ligue 1’s Olympic Lyonnais.
In this respect García Álvarez suggest the fund “deviates from the herd”. Although there are an increasing number of private equity firms investing in private football clubs, he claims nobody is making as big a bet on publicly-traded European football clubs.
This, he argues, is because investors have often been spooked by short-term setbacks such as a failure to qualify for the Champions League, injuries to leading players, or indeed the cancellation of fixtures.
“When you invest in football, you need to know that these times are psychologically tough – you’re going to face short-term volatility,” he says. “You see the prices fluctuating every single day.
“It’s always more comfortable to invest in something that everyone thinks is a good thing than to invest in something that no one else is doing. But I think football is such a big opportunity precisely because it’s psychologically tough.”
García Álvarez says the fund favours football clubs which, like Ajax and Lyon, boast strong balance sheets, diversified businesses and well-established youth systems to insulate against bad results and the vagaries of the football season.
And he thinks the introduction of financial fair play rules has had an enormous impact in helping clubs to balance their books. Since the regulations came into force, the European football industry as a whole has begun to register net profits. He believes the number of American private equity firms beginning to invest privately in European soccer also bodes well in the long-term. “An industry that was un-investable has become an industry that generates profits and you can invest in,” he says.
Given the stronger financial results of so many clubs, MAPFRE thinks football stocks continue to be undervalued. García Álvarez highlights the disparity between US franchise valuations and those of European teams as a market inefficiency.
“If you look at the ratio of enterprise value to net operating profit, the difference is huge,” he says. “The New York Mets are generating around €100m Ebitda and the price is $2.6bn. Lyon are targeting the same Ebitda for the next couple of years, but the valuation is below $500m. If I had to tell which of those groups will grow faster in the coming years, I would say it is clearly European football – just by catching up with some of the technologies that the US sports franchises have been using in the last couple of decades.”
One reason MAPFRE chose to invest in Lyon was the club’s decision to invest €400m building a new stadium in 2016. The project – which takes some of its inspiration from efforts in the US to develop sports venues that can generate revenues 365 days a year – has enabled the club to diversify its business.
“Now they are getting around €50m in revenues a year – half from the ticketing, half from corporate events, concerts, and the organisation of games for other sports,” says García Álvarez. “Their overall target for revenues is a little bit above €420m and they want €45m or around 10 per cent of that to come from using the stadium for things that are not related with the game.”
He thinks another opportunity for European clubs to close the gap on their US equivalents will arrive when their content businesses begin to mature. García Álvarez contends that the relatively fixed costs associated with creating content for club digital channels and growing digital audiences can lead to exponential growth in profits.
“European football teams are now media businesses and in media businesses, when you reach a certain point, it’s all about operating leverage,” he says. “The moment you are able to increase your revenues up to a certain level, then everything goes directly to your operating profit margin.
“We have seen that in the NFL. Some ten-to-15 years ago, revenues were much lower and operating margins were much lower. As revenues have expanded, the operating margins have improved a lot.”
The attraction to MAPFRE of Dutch club Ajax, the other major football team in its portfolio, lay in its strong youth development system – something that was borne out by the club’s remarkable run to last year’s Champions League semi-finals and the subsequent sale of some of its best players to the continent’s largest clubs.
García Álvarez believes the club’s ability to develop young players and then sell them at a profit immunises it against major changes in competition formats to suit the richest clubs. Even if Uefa Champions League reforms or a European breakaway league exclude the Eredivisie side from the most lucrative matches, the increased revenues generated by the new competitions will create inflation in the transfer market from which selling clubs like Ajax, and Lyon could benefit.
Equally, he welcomes the idea that the Belgian Pro League and the Dutch Eredivisie could merge to form a more compelling “Beneliga” competition. Ajax is reported to be one of eleven clubs across both countries that have begun exploring the possibility but it is understood to want guarantees that the new competition would not jeopardise its participation in the Champions League.
“If you asked me as an investor, I could probably see that [Beneliga] as a positive for the valuation of the stock. If you’re able to grow your market and maybe have access to better broadcasting contracts, that’s a positive for sure,” says the fund manager.
“You always have to take into account other things like what the fans and supporters would think about it, but it’s a possibility and it seems that they are considering taking that step.”
When asked if MAPFRE has uncovered any other rough diamonds among the other 22 listed clubs in Europe, he points to Serie A’s Lazio and the Bundesliga’s Borussia Dortmund.
He thinks the disparity between the estimated $800m US businessman Dan Friedkin paid privately for AS Roma and Lazio’s €150m market capitalisation at the time of writing suggests the Italian capital’s second club is undervalued. “I don’t see a huge difference between the two to explain why the difference in the valuation is so huge,” he says.
That said, he believes Lazio’s balance sheet is “not as clean” as that of either Ajax or Lyon and the club would only become more attractive if it reduced its debts. “For the time being, we prefer to go for the two more conservative options within the industry and the two better businesses within the industry which are Ajax and Lyon.”
Of Dortmund, he thinks the club’s ability to buy players at a low price, develop them and then sell them on at a large profit is comparable to Ajax’s youth system. However, the German club’s Signal Iduna Park stadium falls short of Lyon’s brand-new facility.
“Dortmund only use their stadium once every two weeks or ten days for the games that they play at home. But again, Dortmund is very interesting as well; we are keeping an eye on that one.”
In keeping with wider trends, however, stock in both teams has plummeted as the coronavirus contagion has spread to the markets. So is García Álvarez concerned about what the cancellation of domestic and continental matches will do to the value of his investments? Once again, he says his instinct is too focus on the long term and to believe things will ultimately return to normal for his investments.
“In terms of the financial impact, missing four or eight or so games and not getting the ticket revenue is not that much,” he says. “If I have to guess, [it will be worth] maybe €1m or less than that in [lost revenues]. If you look at that, from a rational perspective, it is not so significant in terms of valuations.”