They think it’s all over

The global economic slowdown is set to arrive on the terraces of English Premier League clubs, and potential investors from the Gulf are already getting cold feet. Arabian Business reports on dark days ahead for the beautiful game.

When an Abu Dhabi Government-backed group spent around $400m in September to snap up Premier League club Manchester City, the mood was one of euphoria.

Dish-dasha-clad fans danced outside the club's gleaming 48,500-seat stadium, and thousands of miles away in the Gulf, millions of football supporters suddenly had a new ‘second team'.

The club's super-wealthy new owners had the funds to buy any player on the planet, as evidenced when they snatched Brazilian winger Robinho from Real Madrid for a British record $69m - paying the entire fee up front.

And whatever ambitions they had on the pitch, were easily matched off it, with a host of merchandising schemes designed to extend the ‘City' brand across the globe.

But now the mood has changed. The beautiful game is no longer such an attractive investment in a world reeling towards economic recession, and even the richest league in the world is losing its lustre in the wake of concerns over future ticket sales and merchandising opportunities.

The situation is so dire that some clubs even risk slipping into insolvency, as they struggle to secure financing for the huge levels of debt that they have racked up.

"If you look back over the last two or three years then there have been a number of clubs, largely lower-league clubs, forced into administration," says Geoff Mesher, head of the Forensic Sports Disputes team at KPMG in London.

The real risk for football clubs in the current climate, is their ability to refinance when their current financing comes up for renewal. In that situation, we could see some clubs at risk."

With fans set to feel the pinch, and match-day income likely to slump as a result, many clubs face an uncertain future. Even the next Premier League TV deal - by far the biggest cash cow for each of the 20 Premier League clubs, and due for renewal in 2010 - could be restricted by the global economic climate.

And in the Gulf, would-be investors are going sour on soccer as a result. "We're not interested in football - it's seen as a ‘silly' investment and we don't want to be associated with it," a source at a major private equity house told Arabian Business last week.

This shift is supported by the statistics. Bloomberg's European Football Index, which tracks the fortunes of Europe's 25 listed clubs - including Premier League giants Arsenal and strugglers Tottenham Hotspur - has dropped almost 30 percent year-to-date, and 24 percent in the two months since the Manchester City deal was first announced. Only three clubs have seen their share prices rise over the year-to-date.

"There are less people out there now who are willing and able to acquire an English football club, than there were 12 months ago, six months ago, or even six weeks ago," says Paul Rawnsley, a director within the Sports Business Group at accountants Deloitte.

The general economic climate and in particular the challenges of the credit market have reduced the likelihood of more deals, and the level of interest has certainly dropped."

Gulf investors have been circling the giants of the English game for two years now, ever since Dubai International Capital (DIC) and Zabeel Investments signaled their intent to buy Liverpool Football Club in February 2007.

The two Dubai government-owned institutions eventually lost out to American pair Tom Hicks and George Gillett, but the message was clear: that Gulf governments were eyeing some of the world's biggest clubs in a bid to make headlines as well as money.

The deep pockets of potential Gulf investors fired the wildest fantasies of fans, club chairmen and board members alike - and almost every one of the 20 Premier League clubs has since been linked with a Middle East-backed takeover. DIC has been connected to a string of clubs, while the representatives of Newcastle United, Blackburn Rovers and Everton - as well as Burnley and Rochdale - have actively courted investors from the region.

Some of these connections have proved to be unfounded paper talk, yet Zabeel was back in the game earlier this month as it was announced that the board of English second-tier side Charlton Athletic had received an indicative cash offer from the investment firm.

The offer was subject to a number of preconditions, including due diligence, but the Charlton board said it would back any potential takeover as "beneficial to shareholders and employees of Charlton, all fans of the club and the local community as a whole".

Alas for the club's long-suffering fans, the promised injection of Gulf cash was cancelled just a couple of weeks later, the would-be investors pinpointing the "worsening economic climate in the UK" as a dealbreaker.

"You've got the Middle East trying to diversify away from oil revenues and crystallise their cash in some shape or form, and the investment thesis a few years ago in football was relatively sound, but with the downturn in the real economy and budgets being cut back, that thesis isn't robust enough any more," says Andre Sawyer, managing editor, EMEA, at London-based mergers and acquisitions intelligence service Mergermarket.

"Going into this season, most of the revenue has been secured through season tickets," he continues. "However, the real economy is in a downturn, and if people are facing a tightening of their purse strings, then that's going to impact on gate receipts, for one."

Merchandising sales, too, are likely to be hit as the UK economy steels itself for its first recession since 1991. The economy shrank 0.5 percent in the third quarter, and last week the pound posted its biggest weekly drop since Black Wednesday in 1992. Debt was 37.9 percent of GDP in September, compared with 36.2 percent a year earlier.

The Premier League is the number one league in the world in terms of revenue generated from each and every one of the game's three primary revenue categories: match day, broadcast and commercial.

However, the weakening exchange rate of sterling against the euro is likely to impact on this position, and with double digit wage inflation resulting in the highest wages/turnover ratio in Premier League history, the league has seen a second consecutive year of falling operating profits, while pre-tax losses have also reached a new high.

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