Playing to a new breed of supporters

Funny old game, football. One year a team is riding high on the table, the next it is fighting off relegation. Premiership hopes can vanish in the shattering of an ankle or be miraculously restored by a freak last-minute goal. It is this very unpredictability which keeps the fans enthralled.

But does it make good business?

While fans will support their clubs through thick and thin, football club plcs cannot rely on such unquestioning loyalty from their newest band of followers, City investors.

The City has to assess the listed football club with the same yardsticks as it would look at any other investment: the soundness of the financial management, sources of revenue, earnings potential and the strength of the balance sheet. Past glories on the field count for nothing.

So far, football clubs have fared well. Despite a 28% dip in football club share prices in February, football stocks have consistently outperformed the FTSE 100 index since 1993. Merchant bank Singer & Friedlander, which launched the country’s first football fund earlier this year, makes the point that investments in clubs such as Celtic, Leeds (the Caspian Group) and Manchester United have at least tripled over the past year.

With so many clubs rushing to join the stockmarket league – more than 10 clubs have joined the stockmarket or announced plans to do so in the past year – it would seem the Stock Exchange has spawned another fast growing and vigorous sector. Even Italian clubs such as Milan and Juventus are said to be looking at the possibility of floating on the London market.

But while there is an eagerness on the part of clubs to cash in on market enthusiasm for football shares, City institutions and stockbrokers warn this is not a game every club can play. Nor has it become clear yet whether the market’s feverish interest in football is going to be a short-lived fad or develop into a longer-term business and football partnership.

Football clubs are attracted to the stockmarket for the same reason that any other company might be: access to capital. The flotation of a football club on either the Alternative Investment Market (AIM) or the main board of the Stock Exchange can provide club management with an important financial platform at a time when players’ transfer fees and wages are rising dramatically.

It also allows individual club owners, who have poured millions of pounds into their clubs over the years, the opportunity to claw back some of their investment and to spread the burden of financial responsibility.

Most football clubs coming to the market are using at least some of the funds raised to develop infrastructure at their home grounds or meet rising player costs. For example, most of the #5.5m raised by Charlton Athletic when it joined AIM earlier this year will be used to increase seating capacity at The Valley from 15,000 to 20,000. Bolton Wanderers, which moves up to the Premier League next season, hopes its pending stockmarket listing will help underpin its investment in football talent.

John Sedgwick, finance director at Tottenham Hotspur, which last year raised #11m on the market through a rights issue, says the main advantage of operating as a plc is that the club can access external finance more easily. “We have been able to raise capital without having to suffer interest charges,” he says.

“Clubs traditionally have been owned by one person or by a family. Now clubs in the Premier League should be able to demonstrate to third parties they can make sustainable profits. Many of them have not been able to do that before now.”

Being accountable to shareholders also enforces strong financial discipline within the club. “We have to be able to sustain our own performance, acquisitions and stadium development from our own finances,” Sedgwick says. “We can’t just go out and spend #15m.”

But the quid pro quo is that clubs have to show they are capable of delivering value to shareholders. How they do this depends on their ability to raise income from the principal sources of gate receipts, including executive boxes; merchandising; corporate sponsorship; and revenue from television broadcasts.

In terms of gate receipts, most clubs are reporting significantly improved attendances as a result of the implementation of tighter safety rules and all-seater grounds following the Taylor Report several years ago.

Similarly, the reluctance of sponsoring companies to be associated with football after the series of violent and tragic events in the late 1980s has diminished as the game has regained its family appeal. Merchandising, too, has been a growing source of revenue for clubs, spurred, in part, by the often-controversial policy of changing home football strips on a regular basis.

But it is television to which many clubs look as the big profit earner of the future. As recently as the late 1980s, the top division clubs shared a total of between #11m-#15m a year from ITV for television broadcasts.

In the latest deal, which takes effect next season, BSkyB is paying the Premier League #670m for the live broadcast of 60 games each season over the next four years. In a separate four-year deal starting next season, the 20 Premier League clubs will be paid a further #73m by the BBC for broadcasting recorded match highlights. Taking into account the more modest sums from radio broadcasts and overseas television rights, the total earnings from media broadcasts are well in excess of #750m a year.

Revenue from television should be at least #3m for each Premier League club in the 1997/98 season. First division clubs, such as Charlton, can expect to earn close to #1m a year from television rights. The rewards from the previous five-year deal between the Premier League and BSkyB are already filtering through. Tottenham Hotspur’s Sedgwick says more than 50% of the club’s revenue now comes from sponsorship and television.

The slice from television becomes sweeter still when one considers the potential of pay-per-view TV. Despite continued uncertainty about pay television, Premier League insiders say pay-per-view (PPV) could become a reality “in the reasonably near future”. Given that the likely cost per view is still an unknown (although the figure #4.97 is commonly mentioned in football circles), it is difficult to forecast with any accuracy the potential revenue input from PPV. But with an estimated 31% of the population supporters of football, it is not difficult to understand why so many believe PPV will be an important money-spinner.

Caspian Group, which acquired Leeds United last August, is convinced there is scope for earnings further beyond these four key areas.

Apart from developing revenue from merchandising, club sponsorship deals and the Premier League television deal, Caspian chairman Chris Akers sees strong earnings potential from initiatives such as a dedicated Leeds United cable television channel. Caspian, which produces Sport in Question for Carlton Television and the Racing Channel for BSkyB through its Multi Media Television Productions business, has also put forward a proposal to the Leeds City Council to build an ice hockey and multi-purpose arena alongside its Elland Road stadium.

Caspian considers football an important strand in its strategy to develop the company as “a leading sports, leisure and media group through a managed policy of vertical integration”. It is not the only listed company seeking to exploit the perceived potential of football by purchasing a club. Mosaic, a manufacturer of spirit measures and other bar equipment, recently linked up with Bolton Wanderers through a reverse takeover. The enlarged group was expected to start trading its shares under the new name Burnden Leisure in late April. Similarly, Southampton joined the main list of the Stock Exchange by reversing into retirement-home construction company Secure Retirement in December and the merged entity now trades as Southampton Leisure Holdings.

Tony Fraher, chief executive of Singer & Friedlander Investment Funds, says the stockmarket value of football clubs is very much linked to the strength of their brands.

“Basically, we view football club plcs as media and leisure companies rather than just football clubs and we see ourselves buying into their brands,” he says. “Manchester United, for example, is a better known international brand than Marks & Spencer and yet it has not really capitalised on the value of that brand.

“So far it has gone into replica kits and it is beginning to extend into areas such as Manchester United branded whisky. When the club realises the full strength of the brand it should be able to make serious inroads into the travel and insurance markets.”

Fraher argues that many of the 55,000 people who attend Manchester United matches every week and the millions who watch the matches on television would be willing to buy holidays or insurance cover from a company with which they have a close affinity, especially if there are discounts for club members and season-ticket holders.

He adds that others are already exploiting the success of the Manchester United brand. “I understand that in Bangkok, where there is a huge Manchester United following, there is a bank which offers an incremental rate increase on savings accounts every time the club wins a match. It is using Manchester United to sell its product and the club doesn’t get anything for it.”

But a club’s performance in terms of gate receipts, merchandising and television coverage – or any of the ancillary income sources that Fraher envisions – is going to be directly related to its performance on the pitch and, in the view of many investors, whether it is in the Premier League.

The frequently quoted example is that of Manchester United which, in 1993, when it had not won the league for 25 years, reported income from merchandising of #5m. Two years later, after rising back up the table, its annual merchandising revenue had risen to #25m. It continues to grow in line with the club’s ongoing success. In the six months to January this year the club had already notched up $17.6m in merchandising revenue, an increase of 45% over the same period last year.

If one accepts the correlation between performance on the field and performance on the market, the question arises about medium-term performance forecasting.

Comparing a football club with a widget manufacturer, for example, it must stand to reason that forecasting demand for widgets will be easier than forecasting whether the club will have a good season or not in three or five years’ time.

Not necessarily so, says Fraher. “A widget maker could get hit by recession and high interest rates. Football clubs, on the other hand, tend not to see a falling off in attendances during economic recession. And if there is a recession on the pitch the club can buy players to break out of the trough.”

Even so, Fraher admits investors need to exercise caution when evaluating football club plcs. Financial results can be dramatically affected by transfer payments or receipts and football club plcs commonly report profits or losses “before transfer fees”. Apart from looking at a club’s likely income streams, it is important to look at whether the management will need to spend large sums to maintain or upgrade its squad. Singer & Friedlander’s football investment decisions are influenced by advice from football pundit and former Liverpool defender Alan Hansen on clubs’ on-field performance.

The commonly-held view that only Premier League clubs make good stockmarket investments irks Richard Murray, chairman of the AIM-listed Charlton Athletic.

Murray points out that the club approached 31 institutions ahead of its share placing in March and 20 of them bought shares. “The most commonly asked question was ‘do you think you are going to make the Premier League’,” he says. “But the people asking that question have got it wrong.

“The whole Charlton concept is about not having to be in the Premier League, we can make a proper business being in Division One.”

“What some analysts in the City don’t realise is that millions of people watch football and they will come and watch a game even if their team is not at the top of the division. Charlton, for example, has a huge catchment area of fans and potential fans. We have had to lock the gates three times so far this year because the ground had reached its crowd capacity.”

While other clubs may look to raise revenue by exploiting their brand as a Premier League club, Charlton is relying on its ability to “farm” footballers.

The club flags its investment in training as one of its major selling points. Murray says 15 of the 30 players in the main professional squad have come up through the club’s own youth ranks, which apart from saving costs has helped to instil a good team spirit “which you don’t always get when you employ mercenaries”.

The other advantage of a successful youth training programme is that promising young players can be sold to other clubs. “We have managed to earn on average #1m a year over the past eight years by selling young players to Premier League clubs such as Newcastle United, Leeds United and Chelsea,” says Murray. Newcastle United has spent #40m on transfers this year – including the record #15m for Alan Shearer – which Murray claims has been necessitated by the club’s decision to abandon its reserve and youth teams.

“I make no bones about the fact we are not going to be another Manchester United,” says Murray. “But we can make profits each year.” The club, situated in the London Borough of Greenwich, should benefit from investment in the area ahead of the millennium celebrations, he says. Not only will the 30,000 new homes and improved transport infrastructure provide potential new supporters but the enlarged stadium could be used for staging some of the events.

While Murray plays down the investor drawbacks of being a non-Premier League team, the advantages of playing in the big league are not lost on him. The company’s prospectus argues that Premier League status is “a realistic aim” given that the club reached the play-off semi-finals last season. “If the club were promoted to the Premier League, revenues from gate receipts, sponsorship, hospitality and merchandising should increase substantially,” it says.

Not all football clubs have thrived on the market. Millwall, another early entrant to the stockmarket, has been in administration since January.

The club which raised #20m when it came to the market in 1989 fell into financial difficulties after diversifying into pubs and restaurants. “Things did not go well for Millwall because it did not stick to its knitting,” one institutional investor says.

By comparison, the investor says, clubs such as Tottenham have done well because Alan Sugar, head of computer group Amstrad, saw that the company was being extremely badly run and, by buying into the club, was able to turn that around.

“People will tell you all sorts of things because it is football. It is no different than any other type of investment trying to make money.

It’s all about common business sense.”

The performance of Manchester United further proves football clubs can be successful as plcs as well as football teams. Market watchers were not slow to point out that the club’s pre-tax profit of u19.5m for the six months to the end of January this year was greater than many other clubs’ annual turnover. Manchester United’s turnover for the period increased 68% to #50m.

Football clubs’ interest in listing on the stockmarket is showing no signs of abating. The head of corporate finance at a regional securities house recently said his firm had been approached by 10 clubs looking to attain plc status.

But the evidence does seem to point to a strong investor preference towards Premier League clubs, those which look set to join the Premier League and clubs which can demonstrate strong earnings growth.

Murray says clubs wishing to become plcs should be prepared to adapt to the City culture. “If you are taking money from the City you have to offer shareholder value. I think too many clubs are still run as personal fiefdoms.”

Fraher agrees. “Until fairly recently, football clubs have been run in an amateurish way from a business – not a football – point of view,” he says. “But more and more the business influence is coming in with people like Alan Sugar (at Tottenham Hotspur) and Professor Sir Roland Smith (at Manchester United).” It is also becoming more common for clubs to have a finance director on their management team. Last month, Aston Villa, which is planning a stockmarket flotation, announced the appointment of Mark Ansell, head of corporate finance in Deloitte & Touche’s Midlands office, as finance director.

As with any sector, some football companies will be successful and others will not. Premier League clubs cannot expect to make the grade automatically.

Even outstanding success on the pitch will not necessarily guarantee a smooth transition to plc status. As Fraher says, “a club’s management will not be exploiting the brand properly if it is only concerned about Saturday afternoon between 3pm and 4.45pm.” By Lucinda Horne.