Soccer Fans Show Private Equity the Red Card

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The fallout from the ill-fated European Super League has been so comprehensive that even those who weren’t involved are suffering. The latest casualty is the private equity industry, which is now struggling to make headway on its grand plan of investing in sporting competitions.

Spain’s La Liga, Italy’s Serie A and Germany’s Bundesliga, the top domestic soccer leagues in each country, were all exploring the option of selling stakes to private equity investors. Now both the Bundesliga and Serie A have rejected the idea.

Even though concerns about commercial interests outweighing sporting imperatives are warranted, the rejections appear shortsighted. Taking money from financial investors is not an inherently bad idea. It just has to be managed carefully.

Private equity has been eyeing the sports industry for the past two years, having seen the 500% return that CVC Advisors Ltd. managed to make from Formula 1 motor-racing over a decade. CVC itself has invested in several rugby competitions, while Silver Lake Management LLC is seeking to put money into New Zealand rugby to add to its stake in Manchester City FC parent City Football Group Ltd. Even netball has attracted PE attention as the pandemic has made the finances of sport more precarious. Investors sense an opportunity for cheap assets just as demand for video content soars.

The European Super League, which would have seen 15 soccer clubs permanently join a lucrative breakaway league, rightly prompted outrage from fans and players alike, and was promptly abandoned. It seems that the fear of eliciting a similar fan reaction partially informed the Bundesliga, whose members on Thursday voted against selling a 25% stake in its international broadcast rights for about 500 million euros ($410 million). The private equity bidders included KKR & Co. Inc. and CVC.

You can understand why the German clubs, which are mostly controlled by fan organizations, might be wary. Executives at the English teams who planned to join the ESL have assumed a pariah-like status, being forced to resign from administrative roles for the country’s Premier League, for instance. In Italy, teams are seeking the ouster of the executive who planned to bring outside investment into Serie A.

But the Bundesliga proposition was markedly different from the ESL, not least because it didn’t involve any changes to the sporting side of things. Instead, the Bundesliga planned to use the proceeds of any deal to build a direct-to-consumer streaming platform for fans of the competition outside Germany.

Rather than being dependent on foreign broadcasters, overseas fans could have instead downloaded an app to watch the likes of Bayern Munich, Borussia Dortmund and RB Leipzig duke it out for the title — or at least watch Dortmund and Leipzig battle for second place, as Bayern just won its ninth championship in a row.

One lesson to take away is that investors need to show they’re in these sports for the right reasons. A team like FC St Pauli, which prides itself on being rooted in the working class communities of Hamburg and left-wing punk subcultures, is not an easy partner for the tailored suits of Mayfair and Midtown Manhattan private equity. There are good reasons why such a team might have benefited from the project, but they understandably need more convincing.

Instead of concentrating more money in the top clubs, as the ESL would have done, the German plan was to share the proceeds more evenly with teams throughout the footballing pyramid, since it would also have included teams in the second tier of the sport.

Of course, there will always be risks in selling. Private equity companies often make outsize returns by adding debt to the mix. That’s partly how CVC was able to make the almost 500% return on its $1 billion investment in F-1, by saddling the competition with $4 billion of debt and extracting special dividends.

Sports fans might like debt if it funds the playing squad, but not if the proceeds simply appear to line an investor’s pockets — just ask Manchester United supporters. So by selling a stake to private equity firms, teams risk mortgaging the future earnings twice: once by taking an upfront pay day for the initial investment, and once by raising capital on the debt markets against the value of future earnings.

Since the Bundesliga only planned to sell a minority stake, the risk would have been manageable. If 24 of the 36 clubs voted against such debt financing, it wouldn’t have happened. More likely is that the PE firm would have created a special vehicle for its 25% holding and raised debt against that unit’s profits.

Amid the brouhaha, the clubs seem to have forgotten something crucial: The only thing that would permit a debt sale is predictable and generous profits. And that’s something they should also want.

The blowback from the Super League seems to have hardened soccer against financial investors for now. But that needn’t be the case forever.

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.

©2021 Bloomberg L.P.

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