Think Magazine

FOREIGN owners are buying into British football clubs in ever greater numbers. Most controversially the American businessman Malcolm Glazer has become the majority shareholder in Manchester United, the largest and best known club in the country. The fans hate it. Some analysts fear he offers a future of massive debt that can only be financed by continual success on the field. What are his chances of success? Mihir Bose looks at the experience of other foreign investors who have bought into sport on both sides of the Atlantic and offers some advice on the opportunities and pitfalls.

Ron Noades, a former referee and businessman, who has owned several football clubs in England tells a story of how one day in 1978 he received a phone call from a man who said he was the driver of a businessman keen to buy a football club.

The man was the Lebanese businessman Samir Georges Nassib Hammam who at that time owned a company headquartered in Riyadh which built hospitals and was involved in other construction projects in the Middle East.

The result of the phone call was an investment of $76,000 by Hammam in Wimbledon which eventually rose to $133,000, giving him total control. At that stage Wimbledon was a little known club which had just got League status.

Hammam was to take it to the First Division, which then became the Premier League, give it a cult status as the crazy gang, win the prestigious FA Cup, even play in Europe, and eventually walk away with $66 million having first sold the ground to the supermarket chain Safeway and then the club itself to Norwegian buyers.

When Hammam was at Wimbledon their fans could not get enough of him. Today they curse him. For Hammam left Wimbledon without a home and with such a bleak future that the club had to relocate many miles away to Milton Keynes, change its name and is now struggling to avoid going down the divisions.

Many of the original fans, distraught by the move to Milton Keynes, deserted the club and have formed their own club in a bid to emulate Wimbledon’s rise.

However Hammam’s success shows how a shrewd businessman can make money from football – although the success he had at Wimbledon would not be easy to replicate. Today, the massive sums generated by the Premiership and the European Champions League have created such disparities of wealth that unless a club is already well placed in the Premiership and qualifies for the Champions League every year it is much harder to break through.

It is also the case that small clubs can no longer make big money by selling home-grown players as Hammam did at Wimbledon. In a classic case of the biter bit, Hammam bought Cardiff City after selling Wimbledon, promising to make his new club one of the giants of Europe. But the club has debts of nearly $66 million and has had to take a loan from the players’ union to pay the players’ wages. Only time will tell if Hamman can come good on his promise.

A sound investor who avoids the pitfalls can still make plenty of money out of English football however.

There is an important reason for this – unlike other sporting environments, particularly the US, English football imposes few restrictions on new owners. In contrast to Spain or Holland where clubs belong to their members – it is impossible for instance to buy Real Madrid or Ajax of Amsterdam – football clubs in England are limited companies which can be bought and sold.

Moreover, recent changes in the way they are run have made it more attractive to acquire them. Thirty years ago club directors had the power not to register new shareholders they did not approve of. And, at that stage, one of the game’s ruling bodies in the UK, the Football Association, stopped clubs from paying dividends.

But since then public limited companies (PLCs) have been formed with the football club a subsidiary and the PLC is free to pay dividends. Indeed the proud boast of Manchester United PLC, which owns the original football club, is that it has never missed a dividend since going public back in 1991.

Perhaps the most attractive thing about an English football club for an investor is that most, if not all of them, own their grounds – and they are generally in the city centre, and that can be very profitable.

The trick is to find a club which is not doing well on the field, losing so much money off it that its present owners would be glad to get rid of it, is located in a city or town with potential and owns its own ground which could be very valuable real estate.

The classic example of this approach has been the remarkable story of Oxford United and its owner the Monte Carlo-based Asian businessman from Tanzania, Feroz Kassam.

Kassam, one of the richest men in Britain, bought Oxford in March 1999 for £1 ($1.90) and assumed its debts of around $9.5 million. Oxford were then based at the Manor Ground, a very lucrative piece of real estate in the centre of this rich university town.

The ground was valued at $3.4 million in the books although experts felt this was an underestimate and its real value, even without planning permission, would probably be nearer $7.6 million.

But it was obviously worth a lot more if planning permission could be obtained. The Nuffield Hospital Group were interested in buying it and eventually Kassam sold it to them for $22 million.

Then with the help of the local authority Kassam completed the stadium Oxford was building outside the town. Around this stadium he also built a hotel, a multiplex cinema and a bowling alley which is now said to be worth $95 million.

And what of the football club, which Kassam bought while they were in the second highest professional league? They have dropped two divisions – proof, if it were needed, that sporting success is not a prerequisite of commercial profit.

Of course unwise investors can be parted from their money in football. The best example is probably Mark Goldberg who invested nearly $56 million in Crystal Palace, saw his fortune disappear, the club go into administration and he himself declared bankrupt.

But this is the exception. Shrewd businessmen invariably walk off with money although it may take both time and much effort.

The biggest winner in English football has been the former owner of the world’s richest football club. Martin Edwards, who in 1990 was on the verge of completing a deal which meant selling his controlling share in Manchester United for $19 million eventually walked away from the club having made nearly ten times that by capitalizing on the club’s success and its stock market ratings.

The most spectacular example of money joining forces with a glamorous but declining club is Chelsea. Ken Bates bought it for £1 in the early 80s and in 2003 after two decades of control sold it for $32.3 million to the Russian billionaire Roman Abramovich who wanted to invest in a London club.

Alan Sugar, the computer entrepreneur owner of Amstrad, also made money from owning Tottenham Hotspur for a decade, coming away with $22.8 million while still retaining some shares.

But there is a price to pay. English owners like Edwards and Sugar have to put up with considerable hostility from the fans.

In contrast, such pressures are not that common in the United States where fans seem to accept that sports entities are franchises which can be traded. So the best business deal President George Bush ever did, indeed the only one where he made money, was his involvement in the Texas Rangers baseball team

Bush was allowed to buy 1.8 per cent of the team for $600,000, using borrowed money to pay for his stake, the offer coming from the same supporters of his dad who bailed out his failing oil company.

He was made one of the two general managers and also given 10 per cent of the team as a “bonus” of $12.2 million for “putting together the investment team”. He sold his stake for $14 million – while Texas governor – to a Texas millionaire. “When it is all said and done, I will have made more money than I ever dreamed I would make,” Bush told the Fort Worth Star-Telegram.

However, there are some obstacles before an investor can buy into major American sport.

Before it is possible to buy a baseball or American football team, existing owners have to approve by a three quarters majority.

In the National Football League the finance committee makes a background check on a potential new owner and the transaction would need to be approved by 24 of the 32 owners in order to pass.

This process is currently taking place at the Minnesota Vikings where Arizona businessman Reggie Fowler, about whom little was previously known, is bidding to buy the team from long-time owner Red McCombs for a reported $625 million.

There are reportedly concerns about whether Fowler has the financing – similar to the concerns expressed about American businessman Malcolm Glazer, who owns an NFL team, seeking to buy Manchester United. Fowler is said to be worth only $400 million.

Rupert Murdoch had to get approval of fellow baseball owners when he bought the LA Dodgers team in 1998 for $350 million – a record for a baseball team. There was strong opposition from media arch-rival Ted Turner, vice chairman of Time Warner Corp and owner of a rival baseball team.

The fear was that, as owner of Fox, Murdoch held contracts for local television rights with all but a handful of top-flight major league baseball’s 30 teams. But, as an owner, Murdoch would receive access to financial details of other teams with which he negotiates TV rights. In the end Murdoch won by a landslide as owners felt the deal would help the game in the long run.

Yet a year later, when he tried to buy Manchester United, shrewdly orchestrated fan pressure persuaded the British Monopolies and Merger Commission, which examines competition questions in the United Kingdom, to reject the deal.

There are other complications for those looking to invest in US sport. Ironically in free enterprise America owning a sports franchise often means entering a socialist world where everything is centrally controlled. So in the NFL all the television and sponsorship deals are centrally controlled and there is also a salary cap. Clubs have individual rights in only very limited areas.

This may explain why every NFL team (except the Arizona Cardinals last year) is profitable, thanks to a strict player-salary cap and a lucrative TV deal. Owners paid out 64 per cent of revenue to players last season. Each team received a total of $81 million last season from The Walt Disney Co., Viacom and News Corp. as part of an eight-year TV contract worth $17.6 billion.

The salary cap and rich TV deal gave NFL owners a cumulative operating profit of $850 million last season, compared with collective losses for both Major League Baseball and the National Hockey League.

The story of the National Hockey League (NHL) is a warning of how sporting businesses can unravel, a story about the pitfalls of growing too fast and getting painted into a strategic corner.

The NHL is an 88-year-old league that has wound up like a dot-com disaster, losing the entire 2004-05 season. It did so in February as the owners felt it was the only way to fix the league’s financial system.

It’s the only time in history that a major sports league in the US has shut down for a whole season. The NHL’s owners are believed to have lost $1.8 billion in the past decade with the market value of teams deteriorating. After this season was called off, one team, the Mighty Ducks of Anaheim was sold for a reported $75 million – five years ago, Forbes magazine estimated the team to be worth $118 million.

“The NHL never unified around a collective definition of success the way the NFL did,” says Rosabeth Moss Kanter, a Harvard Business School professor and author. “When things get tough, the temptation is to call it someone else’s fault. That starts a destructive downward spiral.”

© Mihir Bose


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