Show Me the Money

In the 1980s, English football club owners were more often than not local boys ‘done good’, or crooks like Robert Maxwell. Owning a team was a vanity project with little to no money to be made from it. But then in 1992 everything changed. The Premier League was created and satellite TV cash was being thrown around like confetti. Almost overnight the owner demographics were transformed. The ’92 football league club chairmen, once described by the late great Brian Clough as “football hooligans”, were no longer local brewery owners or shady media moguls.

They were Russian oligarchs, Abu Dhabi oil barons and American sports investors. The attraction of the sport to these behemoths of business was simple. Even the worst performing teams in the top flight of English football can make millions of pounds in profits if the business is managed frugally – and if the worst comes to the worst and the team gets relegated to the Championship, there’s £50m to soften the blow in the form of parachute payments.

Financial experts estimate that Blackpool will trouser around £80m for its single season in the top flight. If only it were that simple for everyone. In the 2009-10 financial year Premier League clubs generated total revenues of £2.1bn. However, 16 of the 20 clubs made losses totaling £484m. Even Manchester United, the jewel in the Premier League crown, reported losses of £79m despite turnover of £286m, more than any other club.

Former Spurs owner Alan Sugar famously once said: “Football is about the only business in the world where it’s embarrassing to make money.” But what’s really embarrassing is the inability of businessmen who are incredibly successful in other fields to make a profit from football. So what’s the secret to making money out of a football club?

According to football finance expert Tom Cannon, a professor of strategic development at the University of Liverpool Management School, there are two ways that football investors can hit the back of the net financially: bolster revenue streams (by increasing existing ones or generating new ones by exploiting untapped markets), or they can buy a club cheaply and sell it high.

Cannon estimates that exiting British owners, such as the Moores family at Liverpool, Sir John Hall at Newcastle and Martin Edwards at Manchester United, have cumulatively made capital gains in the region of £500m from selling their clubs. However, based on recent deal activity he thinks this sort of gain is no longer available to new purchasers.

“Mike Ashley claims he paid over the odds for Newcastle and most of the evidence suggests Sir John Hall made a lot of money on that deal. Tom Hicks and George Gillett lost money at Liverpool and the Icelandics who bought West Ham clearly made a loss,” says Cannon.

Evidently buying cheap and selling high is a tough nut to crack, but what about generating more income from existing and new revenue streams? Redeveloping an existing stadium, or building a new one, means more bums on seats and more matchday revenue. However, going down this route entails a significant investment and the country’s draconian planning laws mean it can be tricky to get approval. You could attempt to circumvent the planning laws by taking a leaf out of Ken Richardson’s book. The former Doncaster Rovers owner hired crooks – one ex-SAS – to burn down the club’s main stand in 1995 but his plan was foiled when they left a mobile phone at the scene, which eventually led to Richardson’s arrest and prosecution.

Selling budget-busting executive boxes to the prawn sandwich brigade is another surefire way of generating additional revenue, as is hiking up the cost of matchday tickets to supporters – something that Liverpool and Arsenal intend to do in the 2011-12 season. While such pricing tactics may be an unpopular move, Jason Traub, head of the sports division at Investec Private Bank, says that both clubs have successfully mastered the trick of generating additional revenue from the three mainline items that football clubs rely on – namely broadcasting income, media sponsorship and commercial.

However, incoming owners will struggle to wring more cash out of broadcasting revenue, which is fixed until 2013. This leaves sponsorship and commercial. Former Newcastle chairman Freddie Shepherd had the right approach to boosting commercial returns by selling “overpriced” replica shirts to supporters (although bragging about this strategy to undercover tabloid newspaper reporters should be avoided at all costs). Or you could follow incumbent Newcastle owner Mike Ashley’s lead and invoke fan fury by offering to sell the stadium naming rights – the proposal to rename St James’ Park the ‘sportsdirect.com @ St James’ Park Stadium’ was aborted.

As for branching out into new markets, Asia is the most commonly cited geographic area ripe for exploitation by Premier League clubs thanks to the tremendous following English football has in the region, but at present it generates very little revenue from this support base despite the best attempts of some of the bigger clubs to cash in.

“English Premier League football is the biggest sport in the world and wherever you go in China, India, Thailand and Vietnam you come across it,” says Cannon. “Americans are very fixated on Asia and my guess is they [American Premier League club owners] are assuming that unlike the previous club owners they can actually generate revenue streams from the Asian market.”

And it’s the Americans who are leading the charge to snap up Premier League clubs. From Randy Lerner at Aston Villa, the Glazers at Manchester United and more recently Fenway Sports Group – led by John Henry – at Liverpool and Stan Kroenke at Arsenal.

According to Cannon, one of the key reasons behind their appetite for Premier League football is that club ownership in some European leagues is more complicated than in the UK. For example, in Germany no individual can own more than 49% of a club, whereas in Spain two of the biggest clubs – Real Madrid and Barcelona – are essentially social clubs that are owned by the people, so cannot be bought by external investors.

In addition, US sports franchises are incredibly expensive whereas English football clubs are relatively cheap. “You only have to compare the acquisition of Boston Red Sox by John Henry, which might be big in America and Japan but nowhere else, with the purchase of Liverpool, possibly one of biggest sports franchises in the world, which he bought for virtually nothing,” says Cannon.

English football clubs may offer great value to some overseas investors, but as Hicks and Gillett proved with their disastrous purchase and subsequent sale of Liverpool, it’s easy to get it wrong, and that’s because they failed to recognise football’s subtle nuances, says Traub.

“It’s difficult to take income out of a football club because of the pressure from the club’s fan base, the media spotlight and the pressure to continue to perform on the pitch, and use that spare cashflow to invest in the playing squad. So you can’t have a yield as you can with ownership of any other share class of a FTSE company.”

If only former Chesterfield owner Darren Brown heeded this advice. When he bought Chesterfield it was a well run and profitable club. However, Brown ran the club into the ground embezzling around £1m from its coffers to fund his lavish lifestyle. To further cloud the issue, for some investors buying a football club is not purely a money play. For instance, it’s difficult to see how the owners of Manchester City will ever make a return on the £500m that they have already invested into the club, with some football finance experts suggesting it could end up being a £1bn play.

Similarly, Roman Abramovich will struggle to walk away from Chelsea with anywhere near as much money as he has ploughed into the club since purchasing it from Ken Bates back in 2003.

Traub believes that for these individuals it could be more of a marketing or exposure strategy. “I know of some owners of European clubs who tell me that their investment has lost money directly but they have returned multiple times that investment through political allegiances and the networking opportunities that owning the club has afforded them at the highest levels. It might be a bit of a ‘sprat to catch a mackerel’ situation.”

So for those looking to go fishing for a Premier League club at the moment where’s the biggest catch? The name that crops up time and time again is Everton. Current owner Bill Kenwright is said to be desperate to offload the club for a bargain basement price to the right owner. On paper it certainly looks like an attractive opportunity. The Merseyside team has a relatively small amount of debt (circa £40m) and a playing squad that includes a number of valuable and highly attractive assets, including England internationals Leighton Baines and Phil Jagielka. The man tasked with selling Everton, Seymour Pierce chairman of Keith Harris – who has been labelled the most influential man in football after brokering the deals that took Abramovich to Chelsea and Lerner to Villa – sees the club as a “terrific play”.

“Everton is a great club,” says Harris. “They haven’t spent much money on players, the stadium is quite small, the merchandising is not a sustainable contributor and they’ve got a great chairman and a great manager.”

Opportunity or not, the fact remains that it’s incredibly tough to make money out of owning a football club.

One chairman who attempted to break the “cold war” mentality towards player purchasing and run a football club like a business is Sir Alan Sugar. Much to the annoyance of Tottenham supporters Sugar refused to splash the cash on expensive foreign imports, but his team was ultimately overtaken by rival clubs who invested heavily in overseas stars. The North London team rapidly went from title contenders to also-rans. Lord Sugar famously – and bitterly – described his time at Spurs as a “complete waste of my life”.

But it wasn’t a waste of money: Sugar sold his shares in Spurs for just shy of £50m, earning him membership of a small and elite band of investors who have made money from the beautiful game.