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James Paul | Buying low: Why investment will continue to flow into football

James Paul, head of sport finance at Blackstar Capital, discusses why investors will be regarding European football with interest in the coming months – even with the flattening of the ESL project

James Paul, Blackstar Capital

It has been a turbulent 12 months for professional football, from the initial postponement of the major European leagues last year to the recent announcement and subsequent collapse of the European Super League project.

However, while it is a reasonably uncontroversial assessment to say that the period has been largely negative for the sport itself, assessing its impact on the potential for investment into football is considerably more complex.

First off, the demise of the ESL is undoubtedly positive for all clubs outside “the twelve”. The significant valuations enjoyed by the central contracts (particularly broadcast) for the major leagues rely heavily on the presence of their top clubs, and any uncertainty around their future participation would have had a highly damaging impact on future bids from broadcast partners.

For clubs on the fringes of the existing European competitions, the potential fall in the valuation of these contracts would have been even more significant, and as a result the potential uncertainty even greater.

In both cases, clubs would have been left with significantly lower future revenues than currently projected, and at a time when many could ill-afford such an outcome. Uncertainty is among the most unattractive qualities in a potential investment, and thus the ESL undoubtedly would have dampened investment across the sport at least in the short term.

Statements from those involved that the revenues generated by the new league would allow for a substantial increase in the ‘solidarity’ payments which prop up the wider football pyramid below the top tiers seem (at best) unsubstantiated and optimistic, particularly if you consider that many of the major potential broadcast partners were quick to distance themselves from the project.

It is unlikely that any potential investor in a non-ESL club would take such an analysis at face value when considering an investment. The quick demise of the breakaway project should therefore afford most clubs some much-needed predictability of income in the short term, even if that income continues to be lower than projected.

As with many industries, the pandemic has left professional football clubs with a significant gap between their original budgets and actual income, primarily due to matchday restrictions and broadcast rebates. Therefore, the vast majority of clubs are seeking some form of investment, whether it be a long-term loan or an outright sale of the club.

Perhaps counterintuitively, interest from potential investors (particularly American) is as high as ever, as demonstrated by recent sales both up and down the pyramid and across the continent, such as Roma, Burnley, Ipswich, Lille, Derby, Sunderland and others. The old adage of “buying low” is undoubtedly part of the attraction for the new owners, but there is more at play here.

In the US, all major professional sports follow a franchise model which removes the main performance-related financial risks for teams (such as relegation or missing out on competitions). Each league also includes a salary cap system, which puts significant controls on each team’s yearly costs. Therefore, financial strategy in US professional sport has historically been significantly more focused on commercial revenue streams (sponsorship, hospitality and events, merchandise, etc.) than is seen in European football. Accordingly, European football teams are typically much less sophisticated on the commercial side than their American counterparts, and to potential US investors this lack of sophistication represents a significant growth opportunity.

Regardless, the current financial predicament facing many teams means potential buyers currently have most of the leverage in negotiations. Club valuations remain at discounts to their pre-pandemic levels (with reasonable justification, as the financial impact of the pandemic is likely to stretch over several years), but many existing owners are reticent to sell now at below what they consider to be the club’s long-term value. This is why, for example, Burnley remains the sole Premier League club sold during the period, despite the fact that there are other clubs up for sale in the league.

However, as losses from the pandemic continue to pile up (especially at clubs outside the top tier) the burden of supporting the club financially until the pre-pandemic “normal” is achieved may well prove too much for some owners. Investors remain waiting in the wings.

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