- Shauna Rush
WHY ARE SOCCER CLUBS GOING PUBLIC?
Updated: Jan 7, 2021
This article was originally published on August 14th, 2019.
For most the very mention of soccer conjures up images of cheering fans from every corner of the globe. The game's global appeal is undeniable and it's the strong support of fans that has propelled its growth into a multi-billion dollar industry.
In 2018, Manchester United became the first soccer club in the world to be valued at over $4 billion.
This is thanks to the company's share price finishing at a record high of $24.60, on the New York Stock Exchange, where the clubs' shares are publicly traded, on August 23rd.
However, clubs such as Liverpool and Chelsea, who had been rumored to be subject to $2 billion takeover bids. Although due to these clubs being privately traded companies, the actual price is unknown.
In the North American sports industry, it is a widely held view that professional sports teams should be profit-maximizing businesses. This belief has had important implications for the impact of widely-advocated policy measures, such as revenue sharing.
However, in Europe for most sports organizations, especially soccer, maximizing a club's win percentage is often traditionally seen as the primary objective. A reason for this view could include a perceived lack of profitability of soccer clubs and the opinions expressed by club officials.
In 1983, English club Tottenham Hotspur became the first European soccer team to be floated in the stock market. Shortly after they were followed by a number of other UK clubs including Millwall, Southampton, Hearts, and Sheffield United who also changed their status from private to public.
However, within 20 years the vast majority had reverted to being private companies. As the majority of clubs saw no onfield benefits with the additional financial scrutiny.
All businesses including soccer clubs need finance before a ball is even kicked and any tickets are sold. The club will need to buy the land on which they play games, build a stadium, employ a manager and coach, sign players, and so on.
However, the money will only come into the club at a later date as matches are played commercial deals are signed and broadcasting rights are sold.
Therefore, finance comes into clubs from two sources. Either they can borrow from banks, private institutions, and even owners; or they can generate cash from issuing shares to investors.
If a club does opt for a public share issue this now opens the doors to investors having the ability to vote on key decisions each year, such as who the company directors are.
Furthermore, some clubs recently decided to move away from the traditional types of companies and have gone down the route of becoming community-owned.
If a sports organization does choose to issue shares through an IPO, an initial public offering, it would issue a prospectus. In this document, the club sets out its intentions in terms of a business strategy and budget.
The major benefit of publically trading the club is that it can raise money from anyone and everyone thereby broadening the number of people who are willing to invest and raising more money quickly. Which the club can then use the newly raised capital on the playing squad, improve facilities for fans, and so on.
For shareholders, the benefit of buying shares in a publicly-traded club is they can keep an eye on the price of the shares on a day-to-day basis. Therefore, making it easy to sell the shares on the open market, when they are in a position to make a healthy profit, on their investment.
Despite having the ability to vote on a club's board of directors annually. Shareholders however are not involved in the day-to-day running of the club and are not consulted on strategic or operational decisions. Therefore, if a fan thinks that buying 100 shares in their favorite soccer team will give them a say in transfers, ticket price, and away shirt color policy, they are terribly mistaken.
Taking a soccer club public does also come with some significant downsides.
The first downside a soccer club will experience is becoming subject to greater compliance costs, as it's necessary to abide by rules set down by the relevant stock exchange. Furthermore, they also may have to deal with more complex and detailed company law requirements.
English Championship side Millwall estimated these costs to be around $135,000 a year, when they made the decision to return to being a private company, in 2011.
Further downsides for clubs being publicly traded include having to answer to financial analysts and media commentators, on their financial health and dealings. Traditional soccer club directors often see this as a waste of time, as it takes away focus from the day to day running of the club.
It is also important to note that the majority of shares in publicly traded companies are owned by institutions, such as pension and insurance companies. These types of shareholders have almost no interest in the club as a sporting institution. Their aim is to maximize a short-term financial return, rather than longer-term on-field success.
For a sports team's ownership group going public could also mean potentially losing control of the organization.
One family who has taken steps to prevent losing control of their team are the Glazers, who currently own Manchester United. The Glazers decided to offer two types of shares when deciding to trade the team on the New York Stock Exchange, in 2012. These are Class A shares that carry only one vote each and Class B shares, which carry ten votes each and are entirely owned by the Glazers.
Class A shares represent about 25% of the total number of shares in Manchester United, but carry just 3 % of the votes. Therefore, the Glazers are able to make whatever decisions they see fit, without worrying too much about unhappy third-party investors.
The Glazers ended up generating $330 million thanks to this method. Half of which was used to pay down debt, while the other half went straight to the Glazers.
Prior to being acquired by the Glazer family in 2005, Manchester United PLC had its shares traded on the UK stock exchange and was debt-free. The situation changed when the Glazers borrowed substantial amounts of money from financial institutions, secured against Manchester United's assets, to fund their acquisition of shares from the open market. Later they would take the company private again due to the amount of debt the Glazers had laid upon the club.
Sports organizations also have the option of choosing to become private companies. In this option, shares are not traded on a market and are not easily transferred from person to person. Most clubs have what is called preemptive rights where anyone wanting to sell must first offer the shares to existing shareholders before selling to a third party.
Private companies usually have a single or a limited number of shareholders who are often board members too. As such, they benefit from not being answerable to external third-parties, more relaxed company law, and accounting filing rules but the club has fewer methods of raising finance.
When a privately owned club makes a profit, which historically has been a rarity, those profits belong to the owners. The owners then have the choice of either reinvesting the profits back into the club or taking them out in the form of dividends.
Very few owners have taken the dividend route, however, one of the most famous was Blackpool, in 2011. Where after being promoted to the Premier League, owner Carl Oysten paid himself almost $15 million in dividends, from the money generated that season.
This decision lead to huge protests from Blackpool fans who felt that the money should have been used to improve matters on the field.
One easy to see an example of publically trading a club that can benefit the club is Italian side Juventus.
Many people queried the logic of Serie A champions signing Cristiano Ronaldo from Real Madrid, in 2018.
How would the club benefit from a $135 million transfer fee and wages, for a 33-year-old player?
However, since joining the Turin side CR7 has proven the doubters wrong. Juventus has seen its value more than doubled going from $735 million to $1.7 billion, as the open market digested the impact that Ronaldo has on the global commercial desirability of the club with sponsors.