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Sun 11 Feb 2007 11:44 AM

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Playing a dangerous game?

In the wake of DIC's withdrawal from the race for Liverpool FC, Andrew Mernin and Andrew White examine the business end of the 'beautiful game'.

Last week, after months of negotiations, Dubai International Capital (DIC) finally packed its bags, shrugged off the cold and wet weather of Northern England, and jetted back home to sunnier climes. Match abandoned - neither Liverpool FC nor DIC could break the deadlock.

Fast forward a few days, and English football's most successful club is under new, American ownership. George Gillett and fellow American tycoon Tom Hicks have already pledged to invest in a new stadium as well as make millions of dollars available for transfers.

So did DIC miss a trick, or simply decide that buying into Liverpool might prove to be a serious own goal? Either way, the figures involved mean that football is much more than a game to today's would-be investors.

"There are a number of things that make football clubs very attractive," explains Dan Jones, head of the Sports Business Group at business advisory firm Deloitte. "You've got an incredibly loyal customer base, you've got great certainty over where your revenues are coming from - the TV deals are arranged for a number of years at a time, likewise sponsorship, and the sale of season tickets is up-front before the start of a season - and the cash flow is quite positive," he adds.

The Premier League is the most lucrative football league in the world, where annual club revenues are 40% higher than its nearest competitor (Italy's Serie A), and matches are broadcast to 195 countries around the globe. Indeed, a Deloitte report to be released later this month is expected to cite several Premier League clubs among the top 20 highest revenue generators in the world. For DIC - a company whose portfolio includes a US$1bn stake in DaimlerChrysler and the US$1.3bn secondary buyout of the Travelodge hotel chain - a healthy return on investment would have been the key motivation behind the deal.

Yet with football attendances on the slide, at the same time as players' transfer prices and wages soaring like never before, is still it possible to make money from the game?

Since acquiring Chelsea Football Club in 2003 for US$118m, Russian billionaire Roman Abramovich has invested over US$750m on player transfers - a figure well in excess of the club's income in the same period. As a result, in Abramovich's first year at Stamford Bridge, the club lost US$172.6m while its player wage bill climbed to US$226m.

"Then there's the emotional side of it, in terms of the profile it brings and the excitement," adds Jones. If, as the investor, your rationale is not purely economic and you're happy to wear a loss because you can afford to do so, then that's fine. The problem comes if you're happy to wear a large loss but then get carried away and spend too much, and you find yourself quickly running out of money."

Of course, Abramovich - the 11th richest man in the world with an estimated fortune of US$19.5bn - will not find himself short of cash. Instead, he appears to have found himself a multi-billion dollar ‘hobby', and is clearly enjoying his time at the Premier League champions.

This season Premier League clubs have spent over US$590m on player transfers. Annual transfer spending has increased by US$118m between the Premier League's 2004/05 and 2006/07 seasons, and although DIC's transfer spend for Liverpool may not have been as lavish as Abramovich's, the group would have been expected to throw its financial weight behind getting the club to the top of the Premier League.

As LFC is one of the established ‘big four' clubs in the Premier League, DIC would have come under pressure to be one of the biggest contributors to this vast expenditure. As well as the cost of bringing in new players and covering their astronomical wages, DIC also proposed that it would stump up for a new US$393m stadium.

Clearly, reaping the benefits of English football doesn't come cheap, and getting a return on your investment is not easy.

"The most obvious potential pitfall has always been how much of it can you hold on to and count as a return, and how much goes out to the players and agents in wages and transfer costs?", says Jones. "The other potential pitfall is if the on-field performance doesn't turn out the way you planned. If you're buying a Liverpool, Arsenal or Manchester United, what happens if you don't make the European Champions' League? If you're buying a West Ham, what happens if you get relegated? Business structures have to ensure that you can bring your costs down in line with such setbacks."

Abid Riaz, senior research analyst at regional investment bank EFG-Hermes is sceptical of the "notoriously bad" investment opportunities offered by football clubs. "Most investors in football clubs invest for emotional reasons rather than money," he explains. "Either they are from that town, or fans of the club, so you tend to find investors have more money to put into the club than they will take out of it."

Yet for every Roman Abramovich, there is a Malcolm Glazer - a man who has proved it is possible to cash in on the Premier League while simultaneously spending big in the transfer market.

In 2005, American businessman Glazer acquired a controlling interest in Premier League giant Manchester United Football Club (MUFC) for US$1.5bn. The US$1.3bn debt taken on by Glazer to finance the takeover was put into the club with annual interest payments of US$122m. "When Malcolm Glazer bought Manchester United everyone said that the club would be debt laden and how, if he was to make a return on his investment, he wouldn't have any money to buy new players," says Riaz. "Then they went out and bought Michael Carrick for US$35.5m and they have an even bigger war chest than they've ever had."

If initial results are anything to go by, the acquisition of MUFC has certainly been successful for Glazer, and the figures serve as a tantalising glimpse of what DIC might have achieved at Liverpool. Last month, MUFC reported a pre-tax operating profit of US$60.3m for the year ending June 2006; nearly triple the US$21.16m for the previous 12 months. Meanwhile, sales jumped 5.2%, to US$324m from US$308m.

"The important thing when you're going in to buy a football club is that you have to be very clear on what it is you are trying to achieve," emphasises Jones. "If you are investing with an economic rationale, you need to have a proper business plan, be prepared to stick to it, and then also be prepared with contingencies if things don't quite work out as planned."

So, as the dust settles and a new era begins at Anfield, where next for the Dubai consortium? "I don't know if we've seen the last of DIC in the Premier League, but I do think we certainly haven't seen the last of the acquisitions of Premier League clubs," admits Jones. "Football's the biggest sport in the world, and the Premier League's the biggest league in the world. It's a clear leader financially, and in terms of its global audience.

"The Premier League clubs are particularly attractive, and there are other opportunities," he continues. "There has been a lot of speculation over Newcastle United, which is an obvious target as it is a big club with a big fan base that is not enjoying the best of times.

"Chelsea and Manchester United have already been snapped up, so the only one of the ‘big four' left is Arsenal," he adds. "They've got the new stadium, which is pretty well settled, and they're based in London which is obviously the best market from the corporate hospitality point of view." Elsewhere in Europe, Riaz highlights Italian club Juventus and German outfit Bayern Munich as high-potential takeover targets.

So, while the risks of investing in football clearly match the potential rewards, it could be a while before the final whistle is blown on DIC's love affair with the beautiful game.

The business of sport

Jordan F1 team:

When Alex Shnaider — a 36 year-old Canadian billionaire — bought Jordan Grand Prix in 2005, the franchise was struggling to keep up with the competition. With a lack of sponsorship money, the team didn’t have the budget to pay for expensive engines that were supplied to others through lucrative deals with manufacturers. Desperate to ensure long-term security for the team, Formula One legend Eddie Jordan turned to Shnaider, selling his beloved business for US$60m. After changing the group’s name to Midland F1 Racing, rumours immediately arose suggesting Shnaider was unhappy with the purchase. In 2006, a technical partnership with chassis manufacturer Dallara broke down, as did Shnaider’s failed attempt to set up a Midland Formula Three team.

In September last year, Shnaider sold the Midland F1 Racing franchise to Dutch sports car company Spyker for US$106.6m.

New England patriots:

Before Robert Kraft — CEO of investment empire The Kraft Group — took over the Patriots in 1994, the team had never won more than 11 games in any one season. After Kraft fought off several competitors to buy the team’s stadium for US$25m, the patriot’s fortunes changed considerably. Having saved the team from relocation by making a US$175m takeover bid, Kraft promised to bring the Superbowl and a state-of-the-art facility to New England. These were no idle boasts, the team has since won seven AFC East titles and three Superbowls.

Manchester United:

American businessman Malcolm Glazer acquired the world’s richest club for US$1.5bn in 2005. Fans opposed the move, fearing that the club would be plunged into debt, and that there would be no money for transfers. In 2006 Glazer announced a refinancing package that saw the US$1.3bn debt he acquired in taking over the team taken on entirely by the club. Last year, profits rose by US$39m to nearly US$61m, while turnover climbed by US$15.7m to US$325m. Today, the team is within touching distance of winning the Premier League title.

“The Premier League is the most lucrative league in the world”
“I don’t know if we’ve seen the last of DIC in the Premier League... there are other attractive opportunities”

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