European football is underpriced risk
Serie A is fielding a multiple bids from financial institutions who all want to lend against the asset. Are these bidders backing the wrong collateral, or shrewdly vulture investing in a fire sale?
The Albachiara Journal is an eclectic collection of our opinion and perspective, from our travels and encounters.
It’s been a humbling week for Italian football on various fronts.
The scandal enveloping Juventus, and other clubs, around false accounting threatens a 2006 Calciopoli redux for the industry of soccer in the Bel Paese. Some people would like to see the Turin club, a listed company, once again sent down a division for their sins of gaming their numbers around wages and false player trading gains. Conspiracy theorists suggest that Gravina, head of the Italian FA, is taking direct orders from Ceferin. He wants the blue blood of Agnelli, who doesn’t have his troubles to seek, as we previously chronicled in this Column.
But the most chilling and tragic example is that of the multi-titled and genuinely glorious AC Milan being financially outbid by Bournemouth,(with all due respect), for the services of Roma player Zaniolo.
This is a world upside down. A glitch in the Matrix.
DAZN, the main broadcaster here, betting on the attraction of the media rights in Italy, is losing bucket loads of cash. Their ongoing commitment must be in question. Especially at that price!
Sampdoria apparently has to find €11m immediately to avoid going bust.
Italy hasn’t qualified for the last 2 World Cups and has on the surface stopped producing the type of talented players that made their brand of football one of the great schools of the game. The divine Roberto Baggio blames the proliferation of very average foreign players, as a blockage to the progress of good Italian talents (that still exist) stuck in the lower divisions. “When I was young, the only foreign players in Italy were top top notch. Each club could only have 3″.
These are sad and volatile times for the whole sector of pallone in Italy.
Isn’t all this an obvious example of an asset in decline?
And yet, and yet, we are told that the league, Serie A, is fielding a multiple selection of bids from financial institutions, who all want to lend against the asset. Indeed, last year, they also received a similar bid from private equity company CVC.
Curious.
Aren’t we told that Big Finance is very clever and informed about the assets against which it invests? The smart kids in the room?
What are they thinking? What is going on? Are they backing the wrong collateral for their capital, or are they shrewdly vulture investing in a fire sale, into a desperate host, in need of any kind of solution?
Without knowing the details of the bids, it’s foolish to opine with conviction. I just don’t have the numbers and spreadsheets. So let’s talk in generality. That still works.
So, let’s assume that Big Finance isn’t stupid. (As a parenthesis, they did a lot of very stupid things in 2006/7. Always, when money is basically free, malinvestment is just around the corner.)
“Nothing sedates rationality
like large doses of effortless money”
– Warren Buffett.
If Big Finance is bringing its A game to these deals, that leaves the idea that Serie A, and La Liga, Ligue 1, are doing bad business.
This article will look at both sides of the trade.
What drives smart people to make bad financial deals? In my experience it is often when people have been backed into a corner, and strategically snookered. When the wolf is at the door.
Why are European soccer and rugby leagues taking money from Big Finance? There has been a plethora in recent years.
What are they trying to achieve? Are they making good deals for their sport?
A question asked by Nick Meacham, one of the best commentators himself and with his SportsPro Media masthead.
Firstly let’s explain what they are doing as a term sheet.
In the case of Serie A, with the interest from Goldman, JP Morgan, et al,
They are basically selling the family silver (future media revenues) in exchange for a wedge of money up front.
This type of thing isn’t new. Sport has done it for ages. In its most basic description, this is merely invoice factoring. They’ve been selling forward sponsor and player trading invoices for years.
Big Finance can structure these deals in various ways:
An equity investment. Ownership in some kind of vehicle that owns a league’s media rights.
A loan, debt, against the collateral of future media rights. With repayment of capital and interest into the future.
Equity capital is however very different to taking debt capital. CVC thinks about deals (in sport) from a different perspective. They feel they can add operational value.
But whichever way you cut it,
Big Finance is taking a view, a bet, on the stability
AND GROWTH of future media broadcast rights.
And applying a finance cost (discount rate) for giving their money up front. Different from factoring, we as yet don’t know what the exact quantum of future invoices for Serie A media rights will be years into the future.
As someone who has run a league, and knows how those shareholder clubs think, and act, I struggle to come up with a worse idea than selling your future revenues and prosperity to merely put more money into the hands of clubs for today.
Why? Because clubs are hugely indisciplined in their husbandry of resources. And the temptation to use that money to (over)pay for playing talent, TODAY, is overwhelming.
We are, and will always be, told that this is the wrong take, and that the monies from selling the silver is for capital investment. Digitalisation, new stadia, women’s game, DTC strategies etc. Investment that will have a long-term return. Readers of this article will tell me that there are fixed limits on players expenditure, that in Spain, the CVC money is already going to the right projects. And in theory, In Italy, eventually to stadia. God knows Italian football needs modern stadia. But, ask them all, the Pallottas, the Commissos, the Milan clubs, how politically easy that is.
So, to use an Italian word to describe the whole “money for investment” idea: CAZZATE.
It’s BS. Window-dressing. Narrative.
The reason they really want the money is mentioned at the start of this article.
Strategically, they can no longer compete with EPL clubs and they need more firepower for players. To compete with a Bournemouth.
They are cash poor, illiquid, insolvent. In simple terms… BUST.
There is some precedent in the sports sector by now, on all this. Most famously, the CVC investment into rugby. What was the plan there? The justification? How is that working out? May I ask, what has rugby done with CVC’s money? Anyone seen progress?
Some friendlies rebranded, the cliched Netflix series of course, trying to organise the global rugby calendar, but, in the trenches, clubs are going bust. That’s reality.
If you read articles like this, you can see CVC has misread the value of broadcast rights and central revenues in rugby.
Leagues should IMHO not be doing these deals.
Sport already has a horrendous problem with short termism, and minimum guarantee mentality.
Both often driven by the need for instant success, and fan pressure for results this Saturday. It’s a very tough gig. No value judgement on owning a football club.
“How do you make a small fortune? Start with a big one and invest in a football club”
So these deals for me are like giving a junkie 10 bags of cash with the request that they go and get a hot meal. You know what is really going to happen… that fresh wedge is going where it has always gone… on players and agents. Call me cynical.
Big Finance doesn’t necessarily care, especially if it is structuring its capital as debt. It’s Shylock. Either way, it is getting a pound of flesh. It may even have offloaded the debt to some other sucker by now. That’s often what happens.
This clip is the cold, ice cold, reality of finance, proving the point.
Sell it all… today!
Big Finance will always do what it needs to do. Sport is merely an asset class, a cashflow stream, a loan book.
There are, however, other practical realities around why these deals are hugely problematic in open leagues.
A league today is pledging the future revenues of tomorrow’s league for many years; 50 years in the CVC la Liga deal. But tomorrow’s league will likely have different shareholders. Clubs get promoted, others drop out. Can you imagine you finally get promoted to the big league. And you think that finally you can get your hands on the big TV monies, but when you get there you’re told: “eh, actually we have sold those rights a long time ago. And the monies went to the clubs in the league at the time”. I don’t hear this talked enough. It’s, I humbly suggest, a huge issue.
So I am pinning my flag to this opinion:
To continue reading this article, including the opinion I am pinning my flag to, please click here.