A money losing proposition, year in and year out
Forbes recently published their latest data on soccer club values and their financial inflows and outflows. Comparing this data to previous reports provides some insight into how the major clubs in Europe have managed their finances in the hyper-competitive economics of soccer while concurrently weathering a world wide recession. It also provides insight into whether or not the asking price for Liverpool is reasonable.
Background on 2010 Data
The Forbes data is expressed in dollars, which means it is subject to exchange rate fluctuation from year to year.
From June 2008 to June 2009 the euro and pound fell 11% and 17%, respectively, relative to the dollar. As result, the top 20 clubs have an average enterprise value (equity plus net debt) of $632 million vs. $691 million a year ago. The 8.5% decline equates to a $1.2 billion aggregate loss in value. Absent the conversion to U.S. dollars the clubs appreciated in value--2.7% in euros and 10.7% in pounds. Our team values are calculated using revenue (excluding player transfers and dispositions) multiples based on historical transactions.
My analysis will attempt to eliminate this exchange rate change by examining two critical business ratios: revenues-to-debts and income-to-revenues (or profit margin). Far be it from me to suggest Forbes' is wrong, but these two commonly used business metrics that are not included in their analysis can help us understand how heavy a club's debt load is and what their return on revenue is. Using the ratios helps to eliminate the need to apply an inflation rate to the previous years' data, as the ratios are calculated within each single year's data set. Ratios do present a problem though - a number of teams reported zero debt in the Forbes studies, which generates a divide by zero error. In that case, I have assigned the highest calculated revenue-to-debt ratio to any club with zero debt. For the purposes of this analysis it doesn't really skew the data.
Forbes has data going all the way back to 2004. I have purposefully chosen to focus on data from 2006 onwards (my compilation of data is available here). This ensures that the vast majority of the teams on the 2010 list are represented throughout the years studied, minimizing the effect of teams showing up and/or leaving the lists and distorting the longer term trends I am interested in. The other interesting attribute of the data is that every year except 2010 has the Top-25 teams listed. In 2010, Forbes only lists the Top-20 teams in 2010.
Analysis of all teams
To begin with, I analyzed the statistics associated with the countries represented in the Forbes list for the 2006 through 2010 seasons. The Forbes lists during that time had teams from eight countries, but has consolidated to teams from five countries in 2010 by only focusing on the Top-20 teams. Click on Figure 1 to see a breakdown of the number of teams by year and country.
Figure 1: Number of teams in Forbes' list by year and country (click to enlarge)
England was the most penalized with the decision to only publish the Top 20 in 2010 - they lost two of the nine squads listed in 2009. Scotland's lone two remaining clubs also fell off the list, while Germany lost one team. France, Italy, and Spain maintained their level of clubs from 2009. England is the best represented nation, supplying an average of 9 participants in the list each of the five years. France and Spain each only supplied an average of two per year, while Germany and Italy were stable at 5 and 4, respectively. This provides a good overall commentary on both the strength and diversity of the English leagues, where as the results also confirms some of the worst fears about the French and Spanish leagues being two horse shows.
The impact of this diversity (or concentration) of entrants in the Forbes lists also has an impact on the average finish of the teams from each country. To simplify the analysis I have narrowed it down to the five countries represented in all five years of the survey - England, France, Germany, Italy, and Spain. Figure 2 shows the average finishing position of the teams from each country. England's 7-10 teams each year finish right around the list average of 12.5, while France's teams finish in the lower third. Spain and Italy's teams consistently overachieve, with Barcelona's recent surge in the rankings raising Spain's two team average finish to 3.o in 2010.
Figure 2: Average finish position by country and year.
Now to move on to the financials of each country's clubs. The first evaluation is made of the revenue-to-debt. This measures how easily a team can service the debts that they have - the higher the ratio, the more flexibility they club has. In this regard, the English sides are at a disadvantage compared to their continental competition. Figure 3 shows the relationships of the revenue-to-debt ratios.
Figure 3: Revenue-to-debt ratio by country and year
In this measure, the English teams are averaging half the ratio of the total average (3.69 to 6.84). Spain's two teams, who have crept into the Top 4 teams in terms of value by 2010, are outstripping the English teams. Truly impressive is Germany, whose teams have nearly the same average finishing position yet do it with nearly three times the ratio of revenue to debts - confirming some perceptions about the financial benefits of the Bundesliga. Italy, with its relatively debt free four teams, finishes in the Top-2 in four out of the five years and first overall. Their emergence on the international scene and potential revenue sources will be enhanced with their top league's recent TV deal.
Finally, a check of the country's average net profit margin continues the bad news for the English sides. See Figure 4. A league average profit margin of 7% is misleading, given that it was -1% in 2010. Spain and Italy lead the pack, with Spain's 11% average buoyed by an average 23% profitability in 2010, the highest single year average! The four Italian squads seem to have the most consistent profitability of the five major countries.
Figure 4: Average profit margin by country and year.
Overall, the English leagues are still tops in value, but the Italian league may be the most impressive with its high number of teams (4) that consistently finish near the top of all the metrics.
Analysis of the English Teams
Being a Gooner, the English teams are of special interest to me. In my analysis I am focusing on the top four English teams in the survey, which happen to be the Big 4 in the Premier League.
Figure 5 shows the revenue-to-debt ratios for the Big 4. Manchester United has the lowest revenue to debt ratio, which is really just a relic of the debt taken on during the Glazer takeover of the club. Chelsea's ratio seems to be in a good bit of flux, with much of the rebound in 2010 due to the owner's forgiveness of the debt in return for equity. Arsenal's debt load spiked due to the building of Emirates Stadium, but has been steadily receding. The net effect is Arsene Wenger is ready to splash some cash in this summer's transfer market.
Figure 5: Revenue-to-debt ratio of Big 4
Especially troubling is Liverpool's debt position. It has steadily eroded under the ownership of Hicks and Gillette. Unlike Arsenal, the debt hasn't been used to guarantee future revenue streams through a stadium expansion. It has been used to buy players, the end result is this year's finish outside the Top 4 in the Premier League. Investors looking at such a debt ratio - in line with Manchester or Arsenal - would be disappointed to not find the international marketing presence or stadium size associated with those two soccer clubs.
The status of the Big 4, especially for Liverpool, gets more interesting when profit margins are examined. See Figure 6. Chelsea's M.O. is clear - win by losing any amount of money that is required. More troubling is that Liverpool has the next lowest average profitability, and has shown a steady decline the last three years after Gillette and Hicks bought the team. Manchester's worldwide brand is clearly paying dividends, while Arsenal finishes a strong second and closes the gap by the end of the decade. The business case for a Liverpool purchase looks a bit difficult if it's competition is Arsenal, Chelsea, and Manchester.
Figure 6: Profit Margins of Big 4
Finally, we examine the average finishing position in the Forbes survey of the Big 4. See Figure 7. Manchester United, Arsenal, and Chelsea have been stable from 2006-2010. Liverpool, however, has moved through more than a quarter of the survey's positions. Liverpool's value greatly benefited from the sale price to Gillette and Hicks in 2007, which was reflected in 2008's survey results. But much like a home sale that hasn't kept up with the neighborhood, Liverpool has not been able to keep up with the rest of the field the last two years and has slid several positions. That's a third strike against a high priced sale when comparing Liverpool to the rest of the Big 4.
Figure 7: Average finish position of the Big 4
Conclusions
Manchester's future seems stable, although the staggering debt load is obviously of concern to the ownership and supporters. Chelsea's owner seems committed to spending whatever it takes to win - a blessing for the team and its supporters, but a potential disaster for the league. The best thing Chelsea's leadership could do for the club is find a way to deliver the long delayed expansion at Stamford Bridge, and continue to expand its international supporter ranks.
Liverpool's and Arsenal's situations couldn't be more different. Liverpool needs new ownership and a new organizational direction. It needs to rebuild its balance sheet, and it desperately needs a new stadium to compete with the other Big 4 in revenue. Instead, it has a delusional ownership group who, despite all the evidence presented above, feels it is entitled to between £600m to £800m ($920M to $1,227M) for making the club's books and team worse than when they got them. This is the thought process of a man looking to cover his overall failure in managing his sports empire - a 12% to 49% premium over what Forbes says the club is really worth.
Arsenal, on the other hand, seems perfectly positioned for the future. Smart investment and deferred trophies over the last 5 years to finance the new stadium are enabling Arsene Wenger and the organization to have a consistent revenue stream to spend in the future. During a time where the transfer expenditures by Arsenal were austere compared to their Big 4 brethren, their finishes have been above average based upon what would be expected of their expenditures. Manchester has better brand recognition, but it may be interesting to watch how a shrewd Wenger and a financially liberated Arsenal competes financially and on the pitch against the likes of ManU and Chelsea.
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