The benefits and perils of taking a football club onto the stockmarket.
Football clubs have a choice of ownership models, here we will look at the two most common corporate identities for investors.
On 23rd August 2018 Manchester United plc became the first football club in the world to be worth $4 billion. We know this because their share price finished that day at a record high price of $24.60 on the New York Stock Exchange, where the club’s shares are publicly traded.
At around about the same time as United went through this price threshold there were rumours that Liverpool and Chelsea had been subject to takeover bids for about £2 billion, but the actual price is unknown, because both these clubs are private companies.
United’s share price boost at this time was partly based on the view taken by the markets that if Chelsea and Liverpoil were worth £2 billion then United were worth more than that and factored the difference into the share price.
Many people queried the logic of Juventus signing Cristiano Ronaldo, and whether the club would benefit from a €110 million transfer fee and wages for a 33 year old player.
Since joining Juve, the doubters have been proved wrong as the club’s value has more than doubled from €600 million to €1,400 million as the market digested the impact that CR7 has on the global commercial desirability of the club with sponsors.
The Juventus share price rise was a classic case of the market responding to a single factor in relation to a company, and that factor was Cristiano Ronaldo and his squeaky clean image that is so popular with sponsors of both the individual and the club for whom he plays.
When rape allegations in the media in relation to Ronaldo appeared the share price went into a hasty reverse.
A cynic might say that a short seller (someone who sells shares they do not own in the hope that the price will go down and they can buy them back at a lower price) would be very pleased with the accusations made, as it has allowed these people to make a fortune in the markets.
In the 1980’s and 90’s many clubs in the UK, as diverse as Spurs, Millwall, Southampton, Hearts and Sheffield United changed their status from private to public. Within 20 years the vast majority had reverted to being private companies, chastened by their experience to the additional scrutiny and costs of being members of a stock exchange.
All businesses, including football clubs, need finance. Before the first ball is kicked, the first ticket sold, the club will need to buy the land on which to play their matches, build a stadium, employ a manager and coach, sign players and so on. Cash will only come into the club at a later date as matches are played, commercial deals signed and broadcasting rights are sold.
Finance comes from two sources. Clubs can borrow from either banks, private institutions or owners or they can generate cash from issuing shares to investors.
Prior to being acquired by the Glazer family in 2005, Manchester United plc had its shares traded on the UK stock exchange and was debt free.
The situation changed when the Glazers borrowed substantial sums from financial institutions to fund the acquisition of shares from the market and take the company private.
Because United was seen by lenders as being a risky investment, banks charged interest rates of up to 16.25% on the borrowings. This has resulted in United paying out £767 million to banks since being acquired by the Glazers.
Critics argue that this money would have been better spent being invested in the squad rather than paid to banks, although it could be argued that the local branch manager of Barclays probably had a better chance of nutmegging a defender and sticking one into the net at the Stretford End than the likes of Memphis Depay or Bebe.
The alternative to borrowing money is for a company to issue shares to investors. A share normally allows an investor to vote on key decisions each year such as who are the company directors. There are broadly two types of company, although recently some clubs have gone down a third route of being community owned.
Public companies are able to issue shares to anyone, through what is called an IPO (Initial Public Offering). The company issues a prospectus, where it sets out its intentions in terms of a business strategy and budget.
The benefit to the club is that it can raise money from anyone and everyone, thereby broadening the number of people who are willing to invest and raising more money. This money could be invested in the playing squad, improved facilities for fans and so on.
The benefit to shareholders of buying shares in a public company is that they can easily sell their shares on an open market and know the price of those shares from day to day. From a fans point of view they could own anything up from a single share in the club.
The shareholders are not however involved in the day to day running of the club and are not consulted on strategic or operational decisions, which are delegated to the board of directors and the manager/coach.
Therefore, if a fan thinks that buying 100 shares in their favourite club will allow them to have a say in transfer, ticket price and away shirt colour policy they are wrong.
There are significant downsides to being a publicly quoted football club.
(1) The club is subject to greater compliance costs, as it is necessary to abide by the rules set down by the relevant stock exchange as well as more complex and detailed company law requirements.
Millwall estimated these costs to be about £100,000 a year when they made the decision to return to being a private company in 2011. At one stage Millwall had 78 billion shares in issue, but each one was worth 2/100 of a pence each, making the costs of maintaining records for each shareholder and sending out communications via the post prohibitive.
(2) The club may have to answer to analysts and commentators in the media to a greater degree on its financial dealings. Analysts give advice to their clients as to which companies they should invest in, and so tend to want to know the intricacies of the club’s finances. The club directors may feel this is time wasted and prefer to focus on the day to day running rather than being grilled and observed with keen interest by a bunch of bankers.
(3) The majority of shares in publicly quoted companies are owned by institutions such as pension and insurance companies. These shareholders have little interest in the club as a sporting institution, their aim is to maximise a short-term financial return rather than the longer-term success of the club.
(4) For an owner, going public means potentially losing control of the club. The Glazers at Manchester United have prevented this by having two types of shares in the club. Class ‘A’ shares carry one vote each and are the ones traded on the New York Stock Exchange. Class ‘B’ shares carry ten votes each and are owned by the Glazers. This allowed the Glazers to generate £140 million in 2012 by taking United public. Half of this was used to pay down debt and the other half went to the Glazers.
The ‘A’ shares represent about 25% of the total number of shares in Manchester United, but carry just 3% of the votes. This allows the Glazers, provided they do not fall out with each other, to make whatever decisions they see fit without worrying too much about unhappy third-party investors.
The alternative is to be a private company. Here shares are not traded on a market and are not easily transferred from person to person. Most clubs have what are called pre-emption rights, where anyone wanting to sell must first offer the shares to existing shareholders before selling to a third party.
Private companies usually have a single or a few shareholders, who are often board members too. As such they benefit from not being answerable to outside parties, more relaxed company law and accounting filing rules but the club has fewer methods of raising finance.
Regardless of being public or When a business makes profits, which historically has been a rarity for football clubs, those profits belong to the owners.
The owners then have the choice of either reinvesting the profits back into the club or taking them out in the form of dividends.
Very few owners have taken the dividend route, one of the most famous however was Blackpool in 2011, where after being promoted to the Premier League, owner Karl Oyston saw fit to pay himself £11 million in dividends from the money generated that season. This has led to huge subsequent protests from Blackpool fans who felt that the money should have been used to improve matters on the pitch, as the club slowly fell through the divisions.
Manchester United, being a public company since 2012 and therefore the demands of the market, have paid dividends of over £64 million since that period.
Whilst this has caused grumblings amongst the United fanbase who have been happy that the club is paying less out to finance providers in the form of interest, but if this is simply being replaced by dividends will not be happy, neither will Jose Mourinho, having seen his transfer requests this summer rejected by Ed Woodward and the board, all of whom receive dividends on their shareholdings…