Mr. Breuer, there are currently rumors about the sale of several top football clubs: Manchester United, Tottenham Hotspur – and Liverpool are also talked about from time to time. Why now? Roman Abramovich’s involuntary departure from Chelsea certainly sparked some debate, but it’s hard to say for sure. In any case, there was no specific trigger. It seems that financial conditions are simply favorable right now. Many American investors, for example, see it that way. Interestingly enough, in China this is evaluated completely differently.
Why? Chinese investors have been very active in the Italian football market, buying stakes in several top clubs including Inter Milan and AC Milan – but the investments were poorly strategic. It was more of a political project. China has wanted to be a big player in soccer for years. Of course, it was good for wealthy Chinese to invest in European club football. An economic calculation was less important. For the investors, it was about strengthening their own reputation in China. At the moment, however, the Chinese government is no longer pursuing political goals in world football so intensively. As a result, the interest of Chinese investors has also declined.
What characterizes the market for football investors? Football is a market of permanent over-investment. We have so-called rat races here, i.e. competitions in which resources are systematically wasted: The football industry works differently than the rest of the economy. The competition rules state that there must be losers and the number of winners is limited. At the same time, there are always many more clubs with the same sporting goal than there are qualifying places available. 18 clubs do not want to be relegated from the Bundesliga – but by definition there are two to three relegated clubs. As a result, clubs have to systematically invest more in players than would be economically worthwhile on average. Money is therefore always scarce – at least in the vast majority of clubs – and donors are always wanted. But that is only one side.
And the other? The product has become very attractive and has become more and more of a normal commodity over the past few years. In other industries one would not be surprised that many investors are interested. But it’s different in football because there are extremely different types of investors. We also have classic private equity financiers who are interested in a financial increase in value. But we also have other investors who want to gain social recognition, for example, or those who act as patrons.
Many of the top European clubs write losses in the two to three-digit millions a year. How can that be interesting for investors – even if they are patrons or the Saudi sovereign wealth fund? If you apply the classic economic return targets as a benchmark, it can be quite rational. Investors assume that the industry will continue to boom. Football has grown significantly faster than the average market in recent years. There are several signs that this is not going to last. But when investors achieve efficiencies, it can still be worthwhile for them. For example, through group advantages that arise when you own several clubs. Then they can, for example, bundle the marketing or player transfer strategy for all clubs. We already see that with the City Group or Red Bull with their farm teams. But even there, the economies of scale are far from exhausted. There are also economies of scope.
To what extent are the sporting success of a club and the growth of the company’s value interdependent? The valuation of football clubs is more difficult than that of normal commercial companies. That’s because a large part of the valuation is intangible – meaning it depends on the club’s brand equity. On the other hand, the fixed assets consist almost exclusively of players’ market values, which only have short-term contracts. It is therefore very difficult to create comparable values.
What do investors look for before they make a purchase decision? There must be some key figures? Investors don’t really let themselves be looked at. In the case of investors from the Middle East in particular, however, it can be assumed that not everything has been calculated down to the last penny. That’s not so important either, because it’s about social recognition, security interests and market entry.
So you’re saying that there are valuation differences depending on where investors come from? Yes, definitely. Western investors, mostly from the USA, act more as typical financial investors. These are the people who are interested in increasing the value of the club. Investors from the Middle East are more interested in reputation and image cultivation. This also means a different investment behavior. It no longer has to be economically worthwhile to sign a player.
Let’s be specific: If Borussia Dortmund buys Erling Haaland for 20 million euros and resells it for 60 million, the business model is obvious. But once a player plays for clubs like Manchester City, they usually don’t move to other clubs for even higher sums. What is the bill then? At first glance, this is of course a negative deal. But one must not forget that Erling Haaland contributes to Manchester City’s brand value with his goals. It’s abstract, but it’s very clear: something definitely sticks with a transfer like this. And last but not least, when absolute top stars like Messi and Ronaldo are transferred, jersey sales and social media contacts increase massively, so that even transfers in the highest category can pay off.
With these sums, is it even worth investing in the top European players? A lot depends on chance. Lionel Messi, Neymar and Kylian Mbappé play up front at Paris St. Germain and yet there hasn’t been a Champions League title yet… But it’s not always worth it from a business point of view. There are studies for German football, according to which it would be most sensible to let the team play for sixth or seventh place. Everything else requires disproportionately high investments with an uncertain outcome.
In Germany there is again a burgeoning discussion about the abolition of the “50 1” rule. Clubs are then allowed to sell majority stakes. This is intended to close the gap to the English and Spanish leagues. Is that the solution so that Germany can play at the top? No, I think that’s a fallacy. On the one hand, this is only a one-off payment for the shares, which does not automatically result in further payments. On the other hand, the gap is now much too large. English top clubs sometimes have market values of 2 billion euros. If you then consider that the largest German investor, Lars Windhorst, invested 370 million euros in Hertha BSC over several years, then the gap becomes clear. That would have been enough 15 years ago, but not anymore.
Frankfurt won the Europa League last year. This year four teams are in the round of 16 of the Champions League and three in the Europa League. The performance of the German teams is not that bad… No, but behind it there are almost always financial successes that have been achieved internationally over the past few years. Many forget that. Frankfurt, Union Berlin, Freiburg – all of them have recently played internationally and developed bit by bit. If you add a good concept, like these clubs do, then something like that is possible. On the other hand, you can see from traditional teams like Schalke or Hamburg that the correlation between money and success is not automatically given. This is also shown by our studies of the expenses and income of clubs: Union Berlin is actually always at the top, Schalke at the bottom.
So you’re saying that money and success don’t automatically go hand in hand? Of course, the probability of sporting success increases with the available capital. However, it is clear that it depends on how you invest. With investor takeovers, the efficiency of the clubs tends to decrease. The effect of introducing the Financial Fair Play rules is also exciting.
How? Before the 2011 launch, investors could invest almost as much as they wanted. This was clearly reflected in my sporting success. Since the rule was introduced, the effect has hardly been measurable. So the more regulation there is, the less effect investor participation has on sporting success.
This is probably why some investor clubs want to set up the “Super League”, in which the top European teams compete against each other every week. That has now been slowed down several times – but the idea doesn’t seem dead. What do you think of it? From a purely economic point of view, the original idea of the Super League is reasonable – that there are no promotions and relegations. That’s exactly how the American leagues are structured. That would lead to less overinvestment and no systematic rat races. Incidentally, this would also prevent large stadiums from being built where nobody will need them after a few years. But all in all, that doesn’t correspond to our idea of a European sports culture
Speaking of sports culture, many fans complain that football has become over-commercialized – and warn that they are turning their backs on the sport. So far, however, the numbers show something else. Can football ever turn the wheel too far? As a classic sports fan, I would also assume that at some point it will become too much. However, the empirical data do not point in this direction. There is still enough attention for top-flight football. And due to its global size, football can afford a lot. I think it’s going in a different direction: that classic traditional clubs that don’t play on this European stage of attention will have it more and more difficult. A Hertha, a 1. FC Köln – such teams are decoupled from the global income pots.
What do you mean? Let’s look at e-gaming. The boys put their teams together themselves and select their stars or entire teams in order to have a higher probability of winning. As a result, many children not only have a favorite German club, but also one at European level. This will change financial flows in the future because the two are increasingly decoupling from one another. Now fans can say that they don’t want any of that – but then they have to deal with the fact that their club is permanently not playing for European titles.
And to what extent are Ultras a problem for the clubs and their investors? In fact, Ultras and the management of the clubs do not have such different interests – even if that may come as a surprise at first. Both want to prevent investors as the third player in this power constellation. That’s why clubs in Germany are also heavily financed by banks. But that primarily leads to higher debts, not necessarily to sporting success.
The interview first appeared on capital.de.
