- Cutting fixed-cost base essential – starting with player salaries
- Effects of shutdown on revenues from transfer market and media rights could be affected in the long-term
- France more exposed due to expiration of Canal Plus’s rights deal
Football clubs at all levels must take “swift and proactive action” to ensure their financial survival throughout the current shutdown, says Fausto Zanetton, chief executive of Tifosy Capital & Advisory.
Zanetton co-founded Tifosy alongside former Juventus and Chelsea star Gianluca Vialli. Tifosy’s clients have included Premier League sides Crystal Palace and Everton and Serie A clubs as Parma and Sampdoria, and the firm focuses on providing bespoke and innovative solutions and advice to challenges faced by investors in football.
That advice is now much-needed. The outbreak of Covid-19 and the subsequent shutdown of almost every sector of industry has hit sport particularly hard, as clubs, leagues and rights-holders struggle to come to terms with how to run their businesses at a time when there is no product and no audience.
The financial response has been uneven, with some clubs – most notably Liverpool and Tottenham – falling foul of PR disasters of their own making, announcing that they would be utilising the UK government’s furlough scheme before confirming u-turns after widespread criticism from fans, while others, such as Juventus and Real Madrid, independently agreed player pay-cuts in an effort to protect staff wages.
Those agreements will have to become far more widespread, says Zanetton, as clubs look to leverage the few opportunities they have to reduce their outgoings at a time when revenue is almost at a stand-still. SportBusiness spoke to Zanetton about why player salaries have become such a burning issue for clubs, the knock-on affects of France’s media-rights cycle, and the potential long-term impacts of the shutdown.
How have you been advising your clients throughout the first few weeks of the shutdown?
We’ve obviously been looking at a number of potential scenarios for the future and how each one would affect clubs. But whatever scenario happens, clubs need to cut costs. And really the only line they have is to cut player salaries. That’s the reality of an industry where 60-80 per cent of your top line gets eaten away by player salaries – that’s just not a healthy business model to start with, so any revenue disruption for any length of time will really create a lot of distress for clubs.
Football has been harder hit than most industries. The other main indices are down 20, 25 per cent; we’ve seen football clubs lose sometimes between a third and half of their market value, in the cases of Manchester United and Juventus. Those are the public companies; I think if you go to the private markets, valuations will have gone down even further, because they have a very vulnerable business model, it’s a very levered business.
You’ve got operational leverage, i.e. the fixed cost base is high, resulting in very thin margins and cashflow conversions. But you’ve also got financial leverage, and a lot of these clubs have a lot of debts. If you combine that operational leverage with the financial leverage, you’re really going to end up in a situation where the minimal amount of revenue loss is going to hit you very very hard, and potentially might lead to financial distress if you’re very levered or don’t have the funds to inject into the business.
That’s why some leagues are looking at league funding, or awarding prize money early, because for a lot of these clubs it will be very hard to raise capital independently or some of the owners quite frankly will need to inject more cash.
I think first and foremost clubs need to be proactive. I think they need to think about all their options at their disposal. There’s not much else that clubs can do, if there is a sustained loss of revenues, then to go to the players and say “look, let’s cut a deal. We’re on the same team. This is really really going to hurt the business and so we need to we need to basically make an agreement”.
If the banking industry gets hit, people don’t get variable bonuses. But football is an industry which has very few variable bonuses – there are some, but the fixed cost base is just so high, and people get paid no matter what. So when the revenues are gone, it’s very hard to sustain, so you need to cut into that fixed base to be able to absorb the shock.
Once you’ve reduced the cost base, owners can start to look at what they can do themselves. Some clubs are obviously requesting that shareholder contributions are made, and there will be more capital injections directly by owners to stabilise the ship. You need to try to get as much liquidity on your balance sheet as you can, which is what other companies are doing – airlines, cruise operators, hospitality industry. If you’ve got a credit line, pull it. If you can ask for a favour from your bank, ask it. Because you need all that cash.
I don’t think the long-term value of sports is affected. It might be somewhat, because there might be some longer-term impacts. But the value is still there. Clubs just need to basically be able to get through this period. And so you need to cut costs, you need to get liquidity, and they need to really be proactive around that and not just wait for the league or the government to give them some helicopter money. Because that just is not a good approach.
Is everyone affected equally by this? Are some leagues and clubs better placed to weather the storm than others?
If you look at it geographically, France is exposed because the broadcaster there has said they’re not going to pay the last tranche of payments. Canal Plus has got the domestic rights and beIN the international, but Canal Plus doesn’t have the rights for the next cycle, starting next season – they’ve already been given to Mediapro. So for Canal Plus, there is less incentive to be constructive, because they don’t have that view down the line that the need to salvage the product, they don’t have that incentive to provide funding now to help keep the LFP [French Football League] afloat.
Whereas I think Sky, especially in Italy, Germany and the UK, has such symbiotic relationships with the leagues, they’ve been partnering for decades, so to really screw the clubs and not give them funding that potentially might prevent them from going bankrupt – there’s no reason to do that. You’re also interested in protecting the end-product, you want to maintain the integrity of the leagues, so I think there’s going to be a more constructive dialogue there. Down the line, there might be an impact on future cycles where the costs incurred now get priced into the next rights cycle, and the leagues should not expect as much of a revenue increase going forward.
Obviously the Premier League followed by LaLiga have the biggest contracts, but in terms of relative impact, it’s kind of the same as the starting cost base in Germany and Italy is lower. And the clubs have the same problem. Yes, you’re Barcelona, but on a percentage of revenue basis, you have the same problem, if not more so, which is that you need to be able to fund your cost base, and if Barcelona doesn’t play in the Champions League and the last tranche of the broadcasting money doesn’t get paid, you still need to pay Messi and Griezmann and the other guys who get millions a month.
There’s not much clubs can do besides cutting costs, and getting your hands on liquidity, even as a big club, will be tough, and a lot more expensive given that risk has been repriced significantly in the public market, both from an equity and a debt point of view. So, even if they could get future funding, it will be a lot more expensive than than what they what they had before. It still comes back to reducing outgoings on player salaries.
Are there any other fixed costs, other than player salaries, that clubs can look at reducing?
Very little, to be honest. 60 to 80 per cent of costs are player salaries, the rest is people who work at the club, staff costs, general administrative costs. You can cut those a bit, but it’s not going to move the needle much. Some clubs have furloughed staff, but it’s not going to save the business, and we’ve seen that clubs need to think carefully about the PR aspect of doing that as well, reducing staff wages when they’re still paying players millions a month.
The other thing that doesn’t come into the conversation enough is that when we talk about billionaire owners, they usually own other businesses that are impacted by the crisis equally, if not more so. And they’re probably more sound businesses than football clubs – they’re probably not paying 80 per cent of their turnover on staff, and the owners might see it as more important to protect those workers and those businesses.
How long can top-level football clubs sustain themselves without football?
It depends on the club, it depends on the specific situation, but I think if there’s no money coming in for the next two months, for example, you would expect a lot of the mid-size to lower clubs in the top leagues to really suffer or not be able to deal with this unless they have a massive waiver from from the players.
The other thing to consider is the knock-on effects after we start playing again. It’s not just about clubs sustaining themselves through the shutdown, but preparing for the world afterwards as well. Transfers are going to impacted – not just the value, but the PR aspect of it. There’s going to be a real appreciation for social workers, nurses, doctors – people that are not making much money, but are saving thousands of lives. PR-wise, even if a club has the money to spend £50m on a player in the next transfer window, I think a lot of fans would have a negative reaction to that.
So, if you’re a club that is relying on developing talent and selling top clubs, you might not get your £60m, £70m transfer fees. If you have to do that to balance your books, if you haven’t grown your other business lines, you will really struggle.
In the long-term, is there an underlying strength in the market? Is football well-placed to bounce back from this? Will it return to relative normalcy reasonably quickly?
There’s always going to be a demand for football. I still think that people will want to watch it. I think they want to go back to their normal behaviour. Maybe, initially, going back to the stadium with 80,000 people, might not be front and centre in people’s minds. But I think, as and when we find a vaccine, people will want to spend time with with other people and will want to watch sports.
After an economic recovery, sponsors, broadcasters will want to be associated with it, but the recovery might take might take time. And I think the forecasted growth might be lower than previously projected. But, on the other hand, maybe costs might be lower as well, because this might be a good moment to sit down and have a real discussion about the business model and how it should change, it could be a good opportunity to address spending on salaries and transfer fees, all these types of things.
It’s a media and entertainment play, the end of the day, so I think that has and will always have value. There might be an impact on valuation in the short-term, at least, but I think the long-term drivers should not be impacted too much. People will want to do sports, want to see sports, and Manchester United’s always going to be Manchester United. And if you own Manchester United, somebody else will not own it. So that scarcity value will always be there. Wealthy people will always want to invest in into sports. They might just do it a little bit cheaper.