Should I buy myself a football team? Part 2


Last Sunday's Times Money section included a section with Simon Jordan. He's 39 now and reveals that he made around £10m last year, having built a fortune of around £36m from scratch by the age of 32. When asked about his worst ever investment, he said financially it's the purchase and subsequent investment in Crystal Palace football club, originally bought for £11m but then he's spent about £24m on it since for a total of £35m. At current market value, if Aston Villa, one of the most successful English football teams of all time (in terms of League wins) and with a large, established fan catchment area cost under £60m, then I doubt Crystal Palace, with no history, no fans, no top-flight status and little chance of promotion are worth much more than the original £11m spent on them. Yet Simon Jordan says that "emotionally" Crystal Palace was his best ever investment.

This reminded me that this blog has covered the topic of investment in sports teams. The previous post explained the relatively straightforward phenomenon of wealthy individuals (such as Simon Jordan) investing in sports teams in cases where they could receive part of their “return” as a non-financial return, such as increased celebrity or utility from improving the teams they supported as children.

However, in England over the last couple of years there have been a number of cases where football clubs have been bid for or acquired by individuals or investment funds that have an exclusive aim of generating a financial return, with little or no scope for non-financial utility gains. In some cases the investment was even likely to be associated with substantial disutility, in particular with Malcolm Glazer, who bought Manchester United, becoming possibly the most hated man in the country and receiving numerous death threats. This poses the more interesting question of how and why these investors think they can get sufficient returns investing in English football clubs to exceed the returns they could have achieved on competing investments and the disutility from being hated by unwelcoming English football fans?

In the case of Malcolm Glazer’s purchase of Manchester United, this makes perfect sense as an investment. Based on my interpretation of Warren Buffett’s investment criteria, Man Utd is the best Buffet share I’ve seen amongst English companies with market values above £500m. The major factor input is a resilient intangible that has appreciated strongly over time without requirement for significant investment, i.e. the Man Utd brand. This has proved resilient to the relatively mediocre form between the Busby Babes and United’s all-conquering team of the 1990s and I’m always surprised when visiting continents outside of Europe to see the Manchester United team shirt as the most ubiquitous around the World, even ahead of the Brazilian national strip. To this classic Buffett company, Glazer added the private equity techniques discussed previously on this blog to leverage his upside in a conventional leveraged buy-out to make a deal with all the ingredients for success (until spoilt with a ridiculous and unnecessary transfer spend this summer).

Beyond Malcolm Glazer, I don’t understand any of the other return-seeking bids for or purchases of English football teams. Famously very few individuals have made any money out of investing in football, led by David Dein (who is rumoured to have once made a round-trip to Scotland to buy a single Arsenal share from an old widow), Alan Sugar (who supposedly made money at Spurs despite publicly suggesting it was a labour of love) and Ken Bates (who was close to losing his whole investment before Roman Abramovich bought Chelsea and who may now have overall lost money in football following his involvement with twice-bankrupt Leeds United). Even Doug Ellis was reported to only have achieved capital appreciation at Aston Villa just under the rate of RPI inflation during his 38-year involvement.

So why are the new investors coming in? They presumably think they will generate a financial return, but I put this down to herding instincts similar to those that led so many investors into dotcom companies in the late 1990s. My record on predictions on this blog is appalling, running at 0% (0 out of 1), but in an attempt to get up to 50%, I predict that investors getting into English football for financial return will probably leave in a few years' time having made substantial losses.

PS. as datacharmer's back this is either my last or penultimate blog for now, depending on who writes the follow up to Popular Misconceptions about Private Equity, Part 1.

3 comments:

  1. Football Gifts Says:

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  2. Manchester United Says:

    Excellent information. This sounds exactly like what I've been looking for.

  3. Football Fan Says:

    Can't help thinking the big clubs would take the FA to the EU courts for restraint of trade if they tried it. Think we know where the balance of power lies.