The Red Sox and Liverpool Are Smart to Ride the SPAC Wave

(Bloomberg Opinion) -- The playbook for making sports teams more valuable is, in theory, quite straightforward: Invest adequately in the playing squad, improve commercial revenue with better stadiums and expanded merchandising, and bank on broadcasting rights becoming more expensive.

The practice tends to be more complicated, particularly in European soccer. Even if you execute the business plan perfectly, the final play — of finding an exit, a buyer who will crystallize the value ascribed to the club on paper — is often the hardest. After all, if the commercial potential is already being fully exploited, then the team’s subsequent worth is determined purely by on-field performance, which can fluctuate from one year to the next. That’s a risky proposition for any buyer.

Fenway Sports Group LLC may have found a solution: The owner of Major League Baseball’s Boston Red Sox and the English Premier League’s Liverpool Football Club is in talks to be acquired by the blank-check firm RedBall Acquisition Corp. The deal could see Fenway receiving close to $1.5 billion in return for a stake of between 20% and 25%, according to Axios.

It would be a very canny move for John W. Henry II, the billionaire who is Fenway’s biggest shareholder. In one fell swoop he would likely make back all the capital he spent acquiring the Red Sox and Liverpool, in return for selling a minority stake. The baseball franchise was valued at $660 million when Fenway bought it as part of a consortium in 2002. The company paid just 300 million pounds ($476 million at the time) for Liverpool in 2010. It also has a majority stake in the New England Sports Network, a cable station, the Nascar team Roush Fenway Racing and a management company that counts basketball star Lebron James among its clients.

Henry’s timing is impeccable because Liverpool is currently riding high. Whereas American sports franchises’ revenue streams depend relatively little on their teams’ form, and therefore enjoy more stable valuations, soccer teams’ fortunes quite literally rise or fall with their success in competitions.

Qualifying for European competitions can add 100 million pounds in annual revenue. English teams that fail to qualify can see sales drop by 20%, Deloitte estimates. If a team finishes toward the bottom of the Premier League and is relegated to the lower division, its income can drop to 57 million pounds a year, or 10% of the top clubs’ revenue, according to Deloitte. That’s one reason why Henry and the Glazer family, which controls Manchester United Plc, are shamelessly proposing a new league structure that would cement their financial dominance and reduce the likelihood of their teams getting relegated.

Considering Liverpool won England’s Premier League this year and the continental Champions League competition last year, there is no better time to cash in on the investment. And using a special-purpose acquisitions company, or SPAC, to do so is smart. Public market investors have long been wary of investing in soccer teams in particular, and with good reason: Manchester United, an admittedly poorly run club, has returned just 1% a year to investors since its 2012 initial public offering.

The SPAC structure gives investors a little more protection, and the ability to back out, while also generously rewarding its sponsors to do the deal. Yet life as a publicly traded sports team can be tough. Public market investors generally have less patience than their private cousins, and it did take Henry a decade to bring success to Liverpool. One can imagine that some proceeds of the sale might be used to invest in improving the soccer team’s Anfield stadium. Adding more teams in other countries or new sports to the group might be a good way to hedge against less successful seasons at one of the clubs.

Investors might take confidence from the impressive roster of directors put together by RedBall: As executive chairman of the Premier League for 20 years, Richard Scudamore turned it into a global commercial behemoth; and Billy Beane brings his sporting acumen as the general manager of the Oakland Athletics, where he won fame for his early adoption of data analysis in the sport, known as sabermetrics.

SPACs have become wildly popular over the past 12 months as volatile trading has made initial public offerings a riskier proposition. They may also provide a convenient goal for other soccer club owners seeking an exit.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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