SBJ/19980629/This Weeks Issue

European soccer clubs share the glory

Manchester United, other teams find going public is great way to raise funds for stadiums, salaries

European soccer has truly evolved in the past 20 years, and leading the way have been two English clubs – Tottenham Hotspur and Manchester United – that may become role models for some cash-strapped American sports franchises.

Until 1983, soccer teams were, like American sports franchises, firmly in the hands of individual proprietors. Then top London club Tottenham did something so revolutionary in this economically conservative nation that it was years before any other team tried it: Hotspur went public.

It offered 41 percent of its shares at, by current rates, $1.65 a share. Today its shares are worth $16.50 – not a bad investment at the time if you loved Tottenham and were willing to try something new.

The smaller London club Millwall was next to offer stock, in 1989. But it wasn’t until 1991, when Manchester United went public, that the future of European football would change forever. Manchester took the big plunge with a majority offering, and today its unsurpassed brand image allows multimillion-dollar subsidiary industries to flourish on the international marketplace.

As Merrill Lynch account executive Antonia Wells said, “Manchester United has become a proper business with a strong brand identity and merchandising.” For example, last year 34 percent of the club’s revenue came from tickets, but 33 percent was derived from souvenir and product sales worldwide. As the accounting firm Deloitte & Touche put it in its 1997 review: “Manchester United stands alone in terms of support, turnover, wage costs, operating profits and pre-tax profits.”

Thirty-two European teams, 18 in Britain, have gone public, and the first two German teams soon will take that route.

Some valuable lessons have been learned along the way.

First, going public is a great way to secure funds for capital improvements and ever-increasing player salaries.

Some soccer teams in England and Scotland have been in the same town for more than 100 years, and many, unlike American sports teams, either own or have long-term leases on stadiums. Win or lose, that forms a strong bond with the community, something similar to the Green Bay experience.

Manchester’s initial 55 percent public offering was geared toward raising $11 million for improvements to its 55,000-seat Old Trafford Stadium. That seems like small change today for the club, which is now 80 percent public and made a $15 million net profit last year on $145.2 million in revenue.

Going public is also a way of securing fan loyalty via the checkbook since all teams encourage their supporters to buy shares. Of the 21,539 Manchester stockholders, 21,409 are small investors, mainly team supporters, representing 23.4 percent of the stock. The majority – 59.6 percent – is held by institutional investors, and club directors hold the remaining 17 percent.

Loyalty, as well as the stock price, depends on the club’s performance as a football team, however. Manchester United has been Premier League champ four times in six years. That does a lot for its popularity and its price.

The recent case of the Sunderland-Charlton playoff game was a different example. At stake was entrance to the big-bucks 20-team Premier League (the bottom three Premier teams swap places with the top three first-division clubs each year). Charlton won the game, and its share price rose 23 percent the next day. At the same time, Sunderland’s stock fell by an almost identical figure.

Why? Because the Premier League enjoys a $1.43 billion satellite/cable contract with Rupert Murdoch’s British Sky Broadcasting, a sum that enriches stockholders beyond the wildest dream any owner could have had 10 years ago. Any of the 20 teams in the Premier League is far better off than those in the lower divisions.

And by far the best of the lot is Manchester United, which last year took 19 percent of the total league revenues and had attendance figures 38 percent higher than the second-biggest draw.

United’s winning way is built around success on the field and performance on the stock market married to American-style merchandising and marketing. “Its brand is known around the world,” said Wells, who added that the team has more fans in Asia than it does in England.

Yet, before selling stock, it had a cash balance in the bank of $5.2 million and debts of $490,000. That didn’t give Manchester, already the New York Yankees of English soccer, much scope for its stadium renovation and marketing plans. Going public in 1991 and the formation of the Premier League a year later solved that.

United’s original share price was $6.35 and its market capitalization was $77.5 million. Today, after several splits, that original share is worth $45 and the market capitalization stands at $650 million. That growth is largely due to the worldwide income generated from subscription television and international merchandising, both of which have been growing steadily.

With the league as a whole, television revenue now accounts for 20 percent of total revenue, up from 12 percent in 1997. For United, TV revenue during the first six months of 1998 stands at $13 million, compared with $9.6 million for the same period last year.

The league recently turned down Sky TV’s pay-per-view plan, which would have charged subscribers an additional fee for certain top events, but there’s speculation that teams such as United are planning eventually to run their own TV stations. Manchester is launching, in cooperation with local TV provider Granada, its own MUTV service in the fall. It will offer only color and news for fans, not games, but that could be just a first step.

On the negative side is the effect all this is having on the lower-division teams. Historically, they were the farm teams of the first division, the top rung of English soccer before the Premier League’s creation. A cash-strapped third-division team could pay off the mortgage on its 15,000-seat stadium with one sale of a promising player to the first division. According to Kevin Nudd of Deloitte & Touche, “Until 1961 some players were making 20 pounds a week. Then, the maxiumum-wage restriction was abolished and the era of spiraling wages began. But, for the lower-division club, the transfer fee it received from the upper divisions could solve all its financial problems that year.”

However, those deals are disappearing. Once a team goes public, it spends its money to either get in or stay in the top league. It looks for the best players money can buy, which often means importing established foreign stars rather than giving the kid next door his big break.


European Options

Two other ways European soccer teams have raised capital through public ownership

■ In London’s fashionable Fulham district, the Chelsea Football Club, quoted on the Alternative Investment Market, is reaping the benefits of a privately funded bond issue last year that earned $124 million.

The 10-year Eurobonds were bought mainly by several British insurance companies and the pension funds. Their main incentive was the club’s valuable location coupled with the long-term development strategy of the parent company, Chelsea Village PLC, which includes its new hotel and future residential developments.

■ In Norway, soccer teams establish public trading companies at the clubs, and with astounding success. During 1997, the total revenue for publicly quoted Norwegian Premier League football clubs grew 52 percent, to $64 million.

“It’s of great importance that the clubs hold public trading companies but are not themselves publicly traded companies. The distinction is important because the clubs have to have a voluntary and democratic system in order to be a member of the Norwegian Football Association,” said its general secretary, Tryggve Borno.

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