Sense behind the football glory

Gulf investors have now made three high profile acquisitions of English football clubs. Are the moves purely glorified hobby-type purchases or do they represent shrewd business moves underneath the glamour?

Notts County, the oldest professional football club in the world but currently languishing in the League Two Division, was recently acquired by Munto Finance, a Gulf investment special purpose vehicle backed by and linked to the Qatari Al Thani Group, the investment house supported by Abdullah bin Saeed Al Thani.

The new Middle East owners have ambitious plans for the club, which has a noted fan base, aiming for a return to the championship division within five years. The recent appointment of former England manager, Sven Goran Eriksson, underlines the new owner's intent. Munto intends to invest in the infrastructure of the club and making funds available for playing and coaching staff. It also plans to link the club closer to the community, capitalising on revenue opportunities through investing in the stadium so it can be used as a multi-function venue. Munto's acquisition could prove to be a very good investment, providing of course the team moves up the leagues.

Emirates-based Sulaiman Al Fahim, together with other Middle East and Asian investors, acquired premiership club Portsmouth in a $100 million (Dh367m) deal in addition to a pool of cash necessary to grow the club. The club has been running at a monthly loss of £2m (Dh12m). Prior to the takeover, Portsmouth were facing Administration, with Standard Bank about to call-in its £36m debt from the club. Al Fahim intends to strengthen the brand of Portsmouth Football Club, expand the youth set-up, and possible commercial development along the lines of apartments, shopping and hotel at a new stadium.

In 2008, Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Presidential Affairs, through Abu Dhabi United Group, bought Manchester City for $360m. This represented a price to revenue ratio of 3.5. Leading up to this acquisition, previous deals were being done at price to revenue ratios at just under 2, apart from the Manchester United purchase by the Glazers at a 4.7 price to revenue ratio. Manchester City was previously sold for $165m in 2007.

To strengthen its business investment, Manchester City has recently reached a wide-ranging partnership with the TV production Endemol Sport in an attempt to accelerate their ability to compete on a global basis with Manchester United and Real Madrid. It will re-launch the club's website and develop TV ideas and its brand throughout the world with an initial focus on the Middle East. Revenue from overseas fans is still a very small proportion of all clubs overall turnover. However, to help boost the fan base, the club needs to have success on the pitch.

Despite the stratospheric salary levels in the English premiership, it is still a fast-growing revenue and operating profit generator, even throughout the current global financial crisis. Premier League revenues have increased every year since the competition began in 1992. According to Deloitte research, in 2007-08 season revenue growth was 26 per cent, following an 11 per cent increase in 2006-07. Premier League revenue was £1.93 billion, way more than any other football league in the world, in the 2007-08 season. The growth was mainly due to new broadcasting deals and a significant increase in commercial revenue. The latter is likely to have stabilised in the most recent season due to the weaker economic conditions but overall revenue is still expected to have surpassed the £2bn mark.

Although dominated by the Premier L?eague clubs, the overall revenues of the top 92 English professional clubs increased by 21 per cent to £2.46bn. Total revenues of the 72 Football League clubs exceeded £500m for the first time. Broadcasting deals remain crucial. The increased revenues under new broadcasting contracts were the main driver of growth in the Premier League. Member clubs received £767m from central broadcasting distributions. Additional monies, primarily from the UEFA Champions League helped increase total broadcasting revenues to £931m. Operating profits for the Premier League increased to a record £185m in 2007-08.

Spiralling wage costs for football club owners are a concern but a need to compete is ever present. Wage costs in the Premier League exceeded £1bn in 2007-08, reaching £1.2bn. The increase in total wage costs of £227m (23 per cent) is the biggest annual increase recorded by the Premier League. Premier League clubs' increase in total wages of £342m in the two years to 2007-08 is broadly in line with the £351m increase in their broadcast revenue over this period.

Despite the increase in wage costs, the surplus of revenue over wages for Premier League clubs has increased to a record high of £736m. The wages to revenue ratio for the Premier League fell marginally to 62 per cent from 63 per cent. The recent broadcasting rights coup by Abu Dhabi TV should aid the fan base and revenue potential of Gulf-owned Manchester City and Portsmouth. Abu Dhabi TV has secured the exclusive rights to broadcast live matches, in both Arabic and English, from the English Premier League to football fans in the Middle East and North Africa for three consecutive seasons beginning in August 2010.

The purchase of English football clubs by Gulf investors may prove to be timely and potentially lucrative. The main challenge will come in maintaining commercial revenues and higher priced corporate hospitality ticketing, while also addressing wage and other cost inflation. Indeed, in 2009-10, Deloitte expect some revenue growth will be driven by the increase in domestic broadcasting deals and higher UEFA Champions League distributions, but with relatively flat commercial and match day revenues due to the economic climate.

The economic downturn, driven by the global liquidity crisis, has led to a reduction in the amount of active investor interest in football clubs, and has also made some clubs' proposed refinancing and fundraising more difficult to achieve until credit conditions improve in due course. The acquisition of clubs by Arab investors may turn out to be purchases at the bottom of the market. The fundamentals underpinning the football business in England remain sound.



- The author is the US-based commentator on business issues

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