Soccer's Choice: Billionaire Bauble or Viable Business

(Bloomberg) -- In 2011, Europe's top 900 or so soccer teams lost a combined 1.7 billion euros. By 2018, that had become a net profit of 140 million euros. The change is due largely to rules called Financial Fair Play aimed at keeping clubs from spending more than they earn from broadcast revenue and sales of tickets, jerseys, sponsorships, and ads in their stadiums.

Backers of the policy say it has breathed new life into the sport and made it possible to actually run clubs as businesses. Detractors say it kills a lot of what's fun about soccer. A dispute over a stiff penalty imposed on Manchester City for violating the regulations is poised to determine which side prevails. Clubs “not at the very top of the sport are frustrated by the constraints on spending and feel the rules stifle their ability to grow and compete,” says Alex Kelham, a partner at Lewis Silkin, a London law firm that works on sports deals.

Since Abu Dhabi's Sheikh Mansour bin Zayed al-Nahyan bought Manchester City in 2008, the club has gone from a mediocre performer that spent much of the 1990s in the second tier of English soccer, and even dropped to tier three for a season, to the Premier League's best team last year.

But UEFA—the governing body of European soccer—says City's success ran afoul of the fair play rules. Regulators in February found that the club had overstated its sponsorship revenue from 2012 to 2016, allowing it to spend far more than it had actually brought in.

UEFA fined City 30 million euros ($33 million) and, far worse, banned the team from Europe's top competition, the Champions League, for two years. That could cut the club's revenue by more than 100 million euros a year and give star players and coaches—for whom the Champions League is a powerful draw—less incentive to stick around. City is appealing the penalty to the independent Court of Arbitration for Sport in Switzerland.

Supporters of the fair play regulations say they've turned soccer clubs from a bauble that billionaires can hang from their charm bracelets into serious enterprises with a real chance of turning a profit. Javier Tebas, president of Spain's La Liga, called Manchester City's spending “financial doping” and said it's essential for the sport to put an end to rule-breaking.

“We finally have a good example of action and hope to see more,” Tebas texted to journalists when the penalty was announced. “Better late than never.”

Since the regulations were introduced, the game has seen increased interest from investors, according to Andrea Sartori, global head of sports at accounting firm KPMG. Last June, Rocco Commisso, the billionaire founder of American cable company Mediacom, paid 165 million euros for Fiorentina, the Florence club in Italy's top league. In August, Jim Ratcliffe, founder of British chemical giant Ineos, purchased OGC Nice, and in 2017 he bought Switzerland's FC Lausanne-Sport.

“Clubs are in much better financial condition, and that's attracted bids,” Sartori says.

Even private equity funds, which rarely put their money into anything that doesn't show a clear path to profit, have started to buy in. Hedge fund Elliott Management took over AC Milan in 2018. KKR & Co. in 2014 paid 61 million euros for 10% of Hertha Berlin, and Silver Lake Management last year bought a similar stake in Manchester City for $500 million.

Those opposed to the rules say that far from leveling the playing field, they concentrate power in the hands of rich and successful teams such as Italy's Juventus, Germany's Bayern Munich, and Real Madrid and Barcelona in Spain, leaving smaller entrants stuck as perennial second-stringers.

Manchester City's rise came after the new owner hired coach Pep Guardiola, who had shepherded perennial favorites Barcelona and Bayern Munich, with a contract that local media reports say tops 15 million pounds ($19 million) a year. In the past four seasons, the club has spent some 700 million pounds to bolster its squad with the likes of Brazilian goalkeeper Ederson, Belgian midfielder Kevin de Bruyne, and English defender John Stones.

After the Qatari ruling family bought Paris Saint-Germain in 2011, the new owners hired stars such as Brazil's Neymar and French teen sensation Kylian Mbappe. Chelsea, which hadn't won the English championship since 1955, has taken home the title five times since Russian billionaire Roman Abramovich took over the club in 2003 and spent more than 1 billion pounds on new players and facilities.

The fair play rules mean that teams with more cash from ticket sales and TV rights can shell out more for players. Manchester United, with followers around the world and a stadium that seats 75,000, will always be able to outspend a team like Bournemouth, which has few fans outside of southern England and just 11,000 seats at its home venue. And Bournemouth is better off than, say, Spain's Valladolid or Banik Ostrava in the Czech Republic, because the English team gets a share of Premier League's 3 billion pounds a year in broadcast revenue—roughly 50% more than teams in Europe's second-richest league, Spain's La Liga.

“Financial Fair Play is a bit of a misnomer because it has essentially frozen clubs where they were,” says Steve Horowitz of Inner Circle Sports, a New York investment bank that works on soccer transactions such as purchases of English teams by former Walt Disney Co. boss Michael Eisner and the owners of the Boston Red Sox. “It's not really `fair play' because clubs end up spending in accordance to their revenue, which favors larger clubs.”

Sports, of course, are inherently unpredictable. Even the best players can have a lousy day, and middling teams will sometimes find their mojo. For instance Leicester City, a club perennially among the also-rans in English soccer, in 2016 topped the Premier League with relatively little spending. 

That, says Simon Chadwick, director of Eurasian sport at the EM Lyon Business School in France, is the beauty of the game: No matter who wins the tug-of-war between billionaire bauble-buyers and profit-motivated investors, there's always a chance of an unlikely hero.

“What engages people with football is the excitement, drama, and emotion,” Chadwick says. “This is borne of never knowing who will win.”

To contact the editor responsible for this story: David Rocks at drocks1@bloomberg.net

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