European football has increasingly become an attractive investment target in recent decades, due to the overall transformation of the industry over the past 30 years. The prime motivation and strategy of investors, ranging from well-known local businessmen to foreign billionaires, from private equity firms to supporter groups, can be manifold, as discussed in a previous KPMG analysis. Maximization of financial gains is one of several key drivers of this phenomenon, along with expanding markets, brand or PR profile building, geopolitical positioning or local community enhancement.
The conversion of football clubs from community-based non-profit organizations to profit-making brands with global reach started around the early ‘90s, when a boom in pay-TV subscriptions inspired clubs and leagues to build new business models, and evolved until the past few years, when digital transformation gave a final boost to professional football as it becomes a true entertainment industry. The overall transformation has made the sector increasingly financially attractive to investors, either as potential business partners or owners. Indeed, according to UEFA, the European football market grew from EUR 13 billion in 2010 to EUR 21 billion in 2018 in operating revenues, which is equivalent to 65% growth. Unsurprisingly, the big five European football leagues have presented the most attractive markets for potential investors, as detailed in another of our previous pieces.
Although the overall impact of the coronavirus pandemic on the football ecosystem has been devastating, the transaction market remained active, albeit at a lower level, indicating longer-term investor interests in football. While there were 45 notable transactions including both majority and minority investments in Europe in 2019, less than 20 major deals have been completed this year to date – although it should be noted that last year’s number of deals reached a peak, compared to over 20 transactions registered in 2018.
As primary investment targets, clubs in the top leagues have become incredibly scarce resources, so investors have begun focusing their attention on secondary targets, ranging from lower-division clubs with a potential of promotion to clubs in less privileged leagues but with the possibility to qualify for European competitions.
England’s two top divisions registered five deals in 2019, while only two have been reported in 2020 so far. Similarly, in Spain, a 35% stake takeover of second-division club Girona FC was the only transaction this year, in contrast to five deals completed there in 2019. France, however, has recorded five deals this year, most of them involving the takeover of minority stakes of lower tier clubs, while in Italy, AS Roma, Parma Calcio and Venezia FC all changed majority owners despite the uncertainty caused by the coronavirus pandemic. Other major European domestic leagues outside the big five have also registered some notable deals this year, as our chart shows.
As the transaction market reveals, the Covid-19 pandemic has created some special circumstances that may even be encouraging for investors who are searching for bargains in anticipation of football's return to normal.
“Football clubs' costs increased relative to their revenues during the pandemic as all of their income streams have been severely affected by the absence of gate receipts for most of the season and by some media and commercial deals having also been disputed by media partners and sponsors. Consequently, many clubs suffered a significant drop in their market value, making them a potential investment target. Besides the opportunity to buy a club at a lower price, investors could be attracted by the chance to acquire players at a discount in the coming transfer windows as some clubs may be forced to sell players in order to shore up finances,” comments Andrea Sartori, KPMG’s Global Head of Sports.
US investment firms are perfectly poised to penetrate the market since they have the resources to act quickly and capitalize on such an opportune moment. In addition, while Europe has been a popular market in the past several years for Chinese and American brands connected to sport, now US influence may grow further, following a systemic retreat of Chinese investors due to the pandemic and deteriorating international relations, amongst others.
American investors have already made great strides in European football – they hold major stakes in approximately one-fifth of the 60 teams playing in the top division of England, Italy and France. They remained active in 2020, too, acquiring controlling stakes in four clubs in these countries, including Italian outfits Parma Calcio and second-division club Venezia FC, as well as French second-tier side Toulouse FC. Still, the most notable transaction was the Friedkin Group's purchase of 86.6% of Serie A giants AS Roma. The case of the Giallorossi is emblematic of the unique current market circumstances, as they changed hands at a lower price tag than the one reportedly originally agreed-upon right before the breakout of the pandemic, which has resulted in a good opportunity for the investors to strike a deal at a much more convenient price.
Since the turn of the century, the first wave of American investments has involved major US sports franchises adding English football clubs to their portfolio, capitalizing on the synergies the industry offered. The chart which follows shows American entities who already held stakes in US sports franchises, including teams from the NBA, NFL, NHL, MLB and MLS, before investing in European football.
The English Premier League has been the most appealing for investors as its broadcasting revenues are enormous compared to other leagues. While TV rights income has plateaued in England, other major European leagues may offer them an opportunity to capitalize on future growth from this income stream. Italy's top flight, for example, is planning to establish a new company that would manage Serie A’s broadcasting and commercial rights, with a vision to increase the overall broadcasting revenues of the league and its exposure globally, thus bridging the gap with the other big European leagues. Interestingly, along with an Italian investment fund, US-based private equity firm Advent International and CVC Capital Partners have already proposed to pay EUR 1.6b for a 10% stake in that new company, according to media reports. However, it is important to note that the impact of the pandemic has stalled growth. In June, the Bundesliga sold its domestic TV rights for 5 percent less than its previous deal, while Ligue 1’s broadcast partner Mediapro skipped a EUR 172m payment in October. Additionally, potential future structural changes (such as the formation of a European Super League), might negatively impact the value of deals, as CVC is reportedly negotiating for a break-away clause in case of such changes in the European football landscape.
Another key motivation for American investors is the fact that European football often offers better terms than investing in major American sports – even without taking the current overall devaluation of football clubs due to the pandemic into consideration. For example, a 10% stake in MLS side Los Angeles FC was purchased by multiple minor investors for USD 70m in March, valuing the team at USD 700m. Likewise, Utah Jazz of the National Basketball Association (NBA) were sold for USD 1.66b in October. On the other hand, Newcastle United FC, a historic club with a large fanbase and access to lucrative Premier League revenues has been on the market for GBP 300m, according to media reports. In addition, in American franchise-based systems investors inevitably need to purchase a stake in the league to become owners of a club. Although the lack of promotion-relegation and central cost-controlling mechanisms (e.g. roster rules) create a stable investment environment, buyers need to pay a premium price for the benefits. Seeking greater ownership control over the owned entities or higher returns on investment, many US investors find acquiring a European football club a better fit for their investment strategies.
Changes and differences in regulation have also contributed to the increase of US financing to the sector. The increased sustainability and more sophisticated financial regulations, such as the UEFA FFP, have aligned the European football leagues more closely to the less volatile, and more business-driven, American sports leagues. The possibility of player trading for profit also attracts investors, since this is not possible intra-league in major American sports, due to the single-entity model or internal rules.
Success of the group strategy, which is very similar to the multiple franchise model, also provides a source of motivation for further US investments. Last year, US-based private equity giant Silver Lake acquired a 10% stake in City Football Group (CFG), owner of Manchester City FC and a further nine football clubs globally. The success of Austrian energy drink producer Red Bull, who own MLS-side New York Red Bulls (along with further involvements in clubs in Austria, Germany, and Brazil), also demonstrates that such an infrastructure would allow the investor to reap the benefits of operational efficiencies, increased brand appeal and revenues.
According to Shawn Quill, National Sports Industry Leader at KPMG in the US, American investors are looking at European football as a market with long-term profit-generating opportunities.
“Besides having solid financial background, US investors have extensive experience in the business of sports, and they possess the strategy and know-how to make the most of owning football entities. They view these investments as an opportunity to both diversify their sports ownership portfolio and to cross-promote the franchises under their ownership umbrella in a new market,” he explains.