Saturday, November 29, 2008

Football crunch - MacMillings

Those of you wondering how the global financial crisis is going to affect football might be asking the wrong question. It may not simply be a case of football clubs being affected by the Wall Street collapse. What if they are being run just like failed and failing lending institutions and Wall Street firms – with, at best, scant concern for shareholders and consumers, and sometimes outright incompetence?

The boom years that allowed anybody to get easy credit because lenders couldn’t imagine that the housing market would ever fall again, saw huge overspending and inflated home prices. As businesses with potentially large profits (like housing in a rising market), football clubs shifted their emphasis from means-based spending, to overspending based on projected revenues. But if the market predictions of mortgage lenders, Wall Street firms and the US Federal Reserve could be so far off, why should we think that the projections of the biggest football clubs’ ownership have been any better?

Did it occur to clubs that a shift towards heavy borrowing based on predicted future profits might leave them vulnerable to the same kind of financial difficulties that lenders faced in the US when homeowners saw gas prices go up and their jobs lost, and they could no longer afford to make their payments? That official club shirts and other merchandise are discretionary spending items? That there might be a financial downturn one day, and that, when it comes to choosing between making a mortgage payment and buying a season ticket, a family’s home might just come first?

There is one big club whose buyer funded his purchase by taking out a huge loan, based on high risk debt notes, backed by three US hedge funds. Yes, hedge funds. You may have heard that some of those aren’t doing so well right now. Currently, the debt’s interest payments alone are huge, and the onus for making those payments has, in effect, been passed on to the consumer by large increases in ticket prices.

At least one big English club has a creaking stadium, too small to create the revenue it wants, and is trying to borrow huge amounts of money to finance a new stadium that will make all its dreams come true. Assuming a sufficient loan is secured, is there any guarantee that the money won’t disappear half-way through construction? What if future revenue from success on the pitch, ticket sales, and TV and sponsorship deals don’t match up to projections? Ask Leeds United fans what division their team is currently in – and their club made its mistakes in far less difficult times, economically speaking.

There are clubs run by rich men with little actual interest in football. Sometimes a billionaire drops his toy after he finds a shinier one to play with. Ask Oxford United fans how they like life in the Conference, if you think that won’t happen.

The free market says that a house is worth precisely what a buyer is prepared to pay for it. That’s just as true in a down market. If a club’s having a fire sale, and needs to shift a player and his £5 million/year contract, and all the other clubs in the land are downsizing and economizing in the face of financial difficulties, even if the selling club can find a taker for him, that buyer won’t care how well he’s playing, or how much he was last bought for. If the club needs the money to stay afloat, his value is whatever they can get for him.

Are there any positives? Who, if anyone, will not only survive, but prosper? If you’ve been moaning that your team’s owners lack ambition, don’t buy success in the transfer market, and are thus keeping the club from regaining its “rightful place” among the big boys, stop complaining. Suddenly, running your company with a fiscally conservative business model doesn’t look quite so foolish. Give it a couple of years. If the big boys fall, the meek might be about to inherit the League.


beyond the pale said...

Mac, If you're right about that prophecy in your final sentence (and I hope you are), then we'll all be in for the kingdom of heaven--and the sooner the better as far as I'm concerned.

Mouth of the Mersey said...

Yes Mac - a future more closely linked to the ebb and flow of footballing talent rather than money would suit everyone. Football clubs must be able to cut costs better than most businesses though. Players' salaries are the biggest cost and, with turnover of staff as it is, you don't need to shift many £50k a week players and replace them with £20K a week before the books look better. (And if everyone is hurting, the player will probably stay for the lower wage). Sanity ensues.

Or maybe not.

This is superb on the financial downturn -

zeph said...

Good piece, Mac. What a house of cards it all is... so much of sports finance needs television, which needs advertising, which needs big-spending companies, which...

guitou said...

If Mac is right about his prophecy , I hope so too, is the FA coming up with a bail out plan based on huge amount of cash infusion like our governments are doing for other industries? that's a scary thought.

Anonymous said...

I agree with the suggestion that one or two big English clubs might find themselves doing a Fiorentina. A situation where foreign businessmen are buying clubs and then paying themselves back out of the club's coffers cannot be good in the long run.


Allout said...


Nice article as usual. Having listened to various GU journos a couple of weeks ago on Football Weekly run through what they thought the effects of the credit crunch would be I suspect this was not really their type of article!

On the Man U issue, the problem here is not so much that the Glazier's have funded the purchase through aggressive borrowing from hedge funds. If this was all then it would not affect the operating company (Man U).

The problem is that the Glazier's have pushed the purchase debt down to operating company level and therefore Man U's impressive income stream is being used to pay interest on the Glazier's purchase price. I guess you knew this already but I felt it was worth making clear in the article.

mac millings said...

Thanks all.

Allout: yes, I wanted to devote more space to the Man U situation.....but (excuse alert!) it was the week they upped the count to 700 words that I had the most trouble keeping within the limit. My eyes lit up and I got all greedy (I entered twice - the other one was my "Why We Shout" piece from these pages, painfully reduced from 1750 to 699 words....)

Is that Football Weekly archived? I might seek it out if so.


I've read the article you linked to, and it really is very good. I don't think sanity ever ensues. When AIG got bailed out, the top brass had a $700,000 dollar party.

MotM said...

Mac - I suspect the most we can hope for is less insanity.

Allout said...


Football Weekly is archived - go to the general blog sites and there's an option at the bottom for it's on sub-page. They discussed the credit cruch 5 or 6 weeks ago I think. I'm not mentioning it BTW because it was an outstanding performance by everyone on the panel - on the contrary in fact!

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