Don’t buy a football club

The World Cup has long been known as the debut ball for undiscovered football talent from around the world.

One minute a star who should be kicking in a low-profile African or Asian league.

Some spectacular changes at the World Cup later, and the agent flew to Barcelona to talk.

How much of this happened is still debatable, while scouts are now even scouring youth game footage on YouTube to find the next Lionel Messi on the cheap.

But one aspect of the beautiful game that captured the imagination at the Qatar World Cup was the business of football itself. Because the following weeks have been full of rumors about the English club changing hands.

All to play

Liverpool’s owner Fenway Sports Club, for example, has reportedly fielded offers from 13 interested parties – including the Qatar Investment Authority.

And the Qataris – who already own French club Paris Saint-German – are also said to have made an approach to North London’s Tottenham Hotspur, although the club denied it.

Merseyside was also buzzing before Christmas about interest from Saudi Arabia – a rumor stoked by none other than the Saudi sports minister on the BBC.

It’s the same story down the M62 Manchester United.

The most bankable brand of British football has been put up for sale by the US Glazer family, which has been owned since 2005. Even F1 legend Lewis Hamilton said he was involved in jostling there.

Of course, speculation about football club deals is famously – well – speculative. It can make Twitter gossip about AIM shares look sober by comparison.

But top-flight football teams seem to be playing now, off the field as well.

Made in Chelsea

As I said, it is very exciting for all the activities of this company to hold the World Cup in the rich soil of the Middle East.

But involvement in English football clubs by the Gulf States is nothing new. And US money is in the Premier League too.

No, I suspect it was Roman Abramovitch’s sale of Chelsea last May that put the sport back on every billionaire’s radar.

Not least because Abramovich at first seemed to be doing very well from the investment.

The approved Russian struck a £4.25bn deal to sell Chelsea to US businessman Todd Boehly – far exceeding expectations and the £140m the oligarch paid for Chelsea in 2003.

On the surface, he multiplied his money incredibly—seemingly 30 times in 19 years.

But is Abramovich really getting such a high return? I don’t think so.

For starters, what is the amount and ‘just’ can come out as an annualized return of 20%.

It is extraordinary for mere mortals like you and me. But Warren Buffett Berkshire Hathaway have done better with common stocks for many more decades.

In addition, only £2.5bn of the £4.25bn specifically bought Abramovitch shares. Another £1.75bn is Boehly’s commitment to fund Chelsea’s stadium work and other programmes.

Actually, these may have been shenanigans because the oligarchs are on the financial blacklist. And indeed, Abramovich ended up getting zero returns – because he couldn’t access the results.

Boehly paid £4.25bn to take control of Chelsea, but the deal was drawn up.

But the truth is, the US mogul has always spent billions on club infrastructure, so I think £2.5 billion is more representative of Chelsea’s transfer price.

Either way, the big spending commitment highlights the final flaw in Abramovich’s impressive £140m return.

You see, the oligarchs loaned Chelsea over £1bn interest-free to fund their quest for silverware.

Abramovich was successful and Chelsea was very successful. But its operating losses are said to have run into hundreds of millions over 19 years regardless!

In the degradation zone

We can better see how economically motivated investors judge football clubs by going back to Manchester United, which has been listed on the New York Stock Exchange since 2012.

Before the big price pop when the Glazers announced they were selling, Manchester United shares were trading at around $13. That’s less than the $14 they floated for a decade earlier.

Or consider a Scottish club Celtic, which did its IPO in London in the mid-1990s. Celtic shares have fallen 66% since the distant days of the Dotcom Boom.

Another super club listed is Italy Juventus. The price of this stock is for 35 Euros. They are down 70% since 2001.

All that makes you think only idiots would buy shares in a football club. But interestingly, English stock picker Nick Train – certainly no dummy – has shares in all three clubs in various funds.

Train believes the club’s unique brand and long-run media potential is undervalued.

But I believe a football club is something you should buy when you’ve made money elsewhere, and you’re ready to lose it – whether you’re a billionaire or an everyday investor.

adjusted earnings

I say that because the economy of sports teams has many special difficulties.

Clubs have to spend bigger sums on the best players to stay competitive.

Worse, these players are commercial enterprises themselves. They can and negotiate their own deals for everything from merchandise to sponsors – and a lot of money that is never seen by the club that makes them famous.

The number can be very large. At the extreme, David Beckham is said to have earned $500m as a result of intrigue in Major League Soccer in the US, for example.

Compare this to Disney or Netflix. They create characters, they own them, and they can flog forever.

Mickey Mouse still makes millions – and never gets a raise.

Some actors get a lot of influence, it’s true. But they can be changed in the long run. Remember everyone who has played Batman or Spider-man in the last 30 years.

In contrast, Ronaldo is Ronaldo – you can’t replace him with a cheap Ronaldo. And a footballer’s life is short for that matter. Just a decade or so.

At least the top teams get a big slice of the media revenue. But the financial losses for Chelsea and the performance of Manchester United’s shares show that it is not big enough.

Smaller teams have fewer — and fewer seats in home games. For them, the dream is to find a young Ronaldo and sell him for millions, before he does his magic.

Again, it’s weird.

Imagine if a tech startup also sold its best new product to a bigger competitor to keep the lights on. There will be no more zero to billion dollar stories in the market.

At least actors Ryan Reynolds and Rob McElhenney only paid £2m for Welsh team Wrexham.

It seems quite modest if the income is from a Netflix documentary Welcome to Wrexham can be profitable. My guess, though, is that the money left over will be gobbled up by the club.

The goal difference

Richard Branson once quipped that if you want to be a millionaire, become a billionaire first and then start an airline.

I guess he never thought about buying a football club.

Let the oligarchs spend money on playthings, I said. And if you’re a fan of Manchester United, Juventus, or Celtic, be sure to buy some shares to show your support.

But if you’re looking to make a life-changing investment of money, I’d suggest the big companies we usually recommend on The Motley Fool will treat you better. Or even a global tracker fund. You can always spend the fortune of having a football team later – if you’ve got it!