8th August 2023


8th August 2023.

Another football season is upon us all with all the hope, expectation, anxiety and trepidation that comes with it, depending on which club you support and your level of engagement.

This season’s “big bad wolf” is the emergence and increasing economic influence of Saudi Arabian football and the Saudi Pro League in particular. Whilst previous attempts to crash onto the world stage as demonstrated by the Chinese version with semi-cloaked but ultimately doomed state investment via corporate vehicles as state policy eventually wavered, the Saudi version is blatant state promotion with the country’s Public Investment Fund (PIF) buying four domestic clubs and funding a rapid expansion in imported talent levels and wages.

Of course, detractors will point to the political and economic factors which are an integral part of the story. In anticipation of the post-oil era, the country is trying to diversify away from its traditional revenue source whilst at the same time imposing supply quotas, to bolster or protect the oil price/legacy asset. The population is young and many are avid consumers of sport with just over two-thirds under the age of 40. The ruling class have expressed an ambition to develop the nation as a sporting focal point within the Middle Eastern region and have obviously taken notes from the Qatar World Cup extravaganza with talk of a bid for the 2030 competition.

Meanwhile, the human rights aspect within Middle Eastern commerce and state policy continue to prompt commentary from Amnesty International et al.

In Newcastle, the Saudi Arabian ownership of the football club has opened the coffers and energized the local community by achieving a very creditable 4th place in the Premier League and subsequent Champions League football for this season. It is a long way from the Mike Ashley era where relegation was always a fear even though the club achieved 6 economic profits in 13 years. Under the current owners, the latest set of accounts (2021-22) show a record club revenue of £179.99m and a record economic loss of £82.43m. 

So often in the traditional analysis of football clubs, the focus is almost always on the Profit and Loss Account, yet the Balance Sheet is seldom mentioned. Over time this results in a commentary frequently at odds with the fundamental economics at play.  At the last respective published balance sheets (June 2022), Newcastle United has an Invested Capital balance of £159.9m, Liverpool £455.9m (May 2022) and Tottenham Hotspur a not insignificant £1,464.1m (June 2022).  Whilst acknowledging the Newcastle numbers were published towards the beginning of the new ownership regime, it is notable that for every £1 of Invested Capital sitting on the Newcastle United balance sheet, Liverpool had £2.85 and Tottenham £9.15.  No doubt this will change over time as the club effectively ‘catches up’ with two of the “Big Six” clubs who were arguably unsympathetic to the Newcastle acquisition. 

We have read that many Premier League clubs are getting twitchy over the potential for a talent drain and the impact of competition in terms of player contract values. Staff costs account for 66% of overall revenue for Premier League clubs in 2021-22. It has been as high as 72% in 2019-20 when revenues were reduced due to Covid restrictions. Nevertheless, Premier league club owners would not, we assume, welcome a return to double-digit labour cost inflation as was the case between 2015-16 and 2018-19. (see below).

Even though it is clear that the Saudis are prepared to pay handsomely for their new talent, would an aspiring 21 year-old with good prospects of Premier League football really take leave and move East? Currently, we think not but with a limiting supply of talent and increasing demand, there is little doubt in our minds that the cost of playing talent will rise and will push the economics of one or two senior clubs into a very difficult position.

The other and more disturbing aspect is the apathy surrounding the general financial health of the Premier League clubs. When we first began observing the economic and financial performance of football, very few people had been aware of the economic profit metric, which combines the Profit and Loss account and the Balance Sheet to produce a signaling indicator superior to cash flow and, more importantly, aligns with Alfred Marshall’s 1890 definition of value creation.

Subsequently, when we announced our version of events, we received a significant degree of publicity, and we predicted Super League well ahead of time, not because we liked the idea, but because that is what the economic performance of the clubs and the associated economic efficiency calculations were telling us.  The continuing struggles endured by clubs as increasing private equity-driven American influence permeates further is the ticking time-bomb underneath the pyramid.

Lately, the media has almost ignored the financial performance of the division. Instead, the narrative concentrates on the latest TV deal, the biggest transfer fee and whether or not a big northern club will ever be sold. And it is not difficult to argue that with the increasing state influence within football, do the financials really matter at all? Is it indeed the case that the financial performance of clubs is irrelevant when sovereign states are involved with seemingly limitless funds and a determination to ‘be the best’ at all costs?

From our perch, it would seem that things are drifting in that direction. Conversely, we also see that football’s current financial state remains perilous. The Premier League clubs have achieved economic losses of £6.1bn since 2009 from an overall revenue of £50bn. In the last four years (2019-22), economic losses stand at £3.98bn from revenues of £20bn. Football, at the elite level, does not make you money unless you sell your club and you may not recover your accumulated losses achieved whilst under your ownership.

As always, there is an alternative perspective.

A Middle-Eastern investor might have so much wealth that if they over-pay for a club or a player, then they might be largely indifferent to the ensuing losses.  On a superficial level, the observation might be “good luck to them”. However, where does that leave some of the clubs trying to compete without access to the funds of a multi-billionaire? Perhaps more importantly, what are the consequences for the competitive balance of the Premier League itself? 

Furthermore, the following quote from Peter Kontes (co-founder & CEO of Marakon Associates) places doubt on how long even the wealthiest investor can withstand sustained economic losses:

‘It is not too strong a statement to say that without Economic Profit measures, a proper managerial understanding of the strategic position of a business and the strategic options it faces would be nearly impossible…

In organisations where the overall economic performance is negative on an on-going and consistent basis then the outcome is rarely favourable particularly for the shareholder over the longer-term.  To be blunt, there is no balance sheet big enough to withstand consistent and large economic losses on the scale frequently encountered in industries with poor economics.’

Peter Kontes – The CEO, Strategy, and Shareholder Value (2010).

The notion of state-owned clubs vs Privateers/Private Equity is in itself not so far-fetched. The problem is the distortion of the economic dynamic because there are state actors in the mix. And do we think that the Saudi experiment is short-lived? No, we don’t. In our view it is only a matter of time before the Premier League and others start to formulate and execute protectionist measures to counteract the new kid on the block.

The clubs, however, may have other ideas. The financial dynamic as determined by the economic profit and loss trends tells us that sooner or later, Super League 2.0 will emerge as the route to economic value creation. The current structure is not conducive to value creation other than upon the sale of the asset. With American private equity prevalent in an increasing number of clubs, it is inconceivable that structural reform of the game is not on the agenda for the vast majority of involved investment firms and their backers.

And even if a regulator does arrive to allegedly ‘police’ the domestic game, our bet is that such a function will be very limited in power and scope given other regulatory examples in the UK where certain markets have actually performed against the interests of the consumer. Inevitably, it will be left to the game itself to resolve its imbalances and we know from previous experience that vested interests dominate all else with little regard for those on the margins.

However, if the financials continued to be largely ignored by the media, the average fan may wonder why the sport continues to drift towards seismic upheaval. The natural reaction is ‘greedy’ owners but with substantial and in many cases increasing losses, the privateers may get a rough ride from the fans for the wrong reasons. And given those deep state-owned pockets, the imploration to spend more to ‘guarantee’ success may fall on increasingly deaf and increasingly thrifty private ears.

Until, of course, the losses become unbearable and the calls of ‘something must be done’ re-emerge. By then, though, it may be too late. Ignoring those all too important numbers and the potential for strategic turmoil that lurks within is a very dangerous thing to do.

But hey, does it really matter anymore?


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