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Old 13th October 2015, 12:08   #1
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Default Premier League’s great takeover drought – why aren’t clubs selling?

Premier League’s great takeover drought – why aren’t clubs selling?

Fulham were the last club to change hands, more than two years ago. When the barren spell ends, the deals are likely to look very different from those of the past

Chris Anderson and David Sally
The Guardian
Tuesday 6 October 2015 14.28 BST

Amid the swirl of early-season chatter and activity – Chelsea’s stumbling start, Brendan Rodgers’ sacking, another north-east crisis – that is the new norm in the Premier League, a curious lull has been growing. Despite plenty of rumours, it has been unusually quiet on the club takeover front, and for a very long time: there has not been a change of ownership at a Premier League club in the two-plus years since Shahid Khan completed his purchase of Fulham in July 2013.

A glance at the frequency and timing of Premier League takeovers since the end of 2003 reveals a flurry of activity from the close season of 2006 to the sale of Queens Park Rangers at the start of the 2011-12 season, with many deals involving new overseas owners. During that five-year span, one club was sold on average every five months. Since those days that kept bankers racing from the spreadsheet financial model to the bank’s loan committee and on to the lawyer’s office for the closing, there has been a dearth of transactions. A little less than two years after QPR changed hands, Fulham were sold, and since then: nothing. Not only are we experiencing the longest recent gap between takeovers, but the drought in reality extends back more than four years.

Premier League club takeovers - interactive image

Why the slowdown? Have Premier League clubs become “unbuyable” or “unsellable”? Activity behind the scenes suggests otherwise. Strong rumours of buying interest in such clubs as Aston Villa, West Bromwich Albion, Tottenham, Crystal Palace and Everton, combined with some fairly serious tyre kicking elsewhere that we are aware of, suggests that clubs are not strictly unsellable. And, if Jeremy Peace or Randy Lerner are to be believed, there clearly is interest among sellers as well, so clubs are not necessarily unbuyable either. Although each rumoured deal has seemingly fallen apart for an idiosyncratic reason from the Chinese stock market jumping off a cliff to Putin’s adventurism and the resulting sanctions on Russia, or just because the deal “wasn’t right”, there does seem to be a more general trend that has dried up the market for clubs. Why?

Successful deals require a so-called zone of possible agreement (zopa) – a positive overlap between the buyer’s willingness to pay and the seller’s walkaway price. We suspect that market conditions in recent years have made it harder for buyers and sellers to identify agreement, and that two factors –exploding media revenues coupled with uncertain profitability – have caused a widespread negative zopa as seller’s expectations have zoomed skyward and potential buyers have hesitated to follow.

Despite recent annual accounts showing widespread profitability in the league for the 2013-14 fiscal year, football clubs historically have rarely been profitable (cue John Madejski’s quip about making a small fortune in football by turning a large fortune into a small one). As a result, their valuations often have been based on multiples of their total turnover rather than profitability, with a factor ranging from a little above one, to five or six times. With Premier League television monies increasing at a significant rate with each new three-year cycle and no slowing apparent in the current rounds of media negotiations for global rights, owners’ expectations may well have become seriously inflated: the Guardian reported a year ago, for instance, that Joe Lewis, the owner of Spurs, had valued the club at £1bn.

If you react to that figure by saying: “That’s ridiculous,” you are finding yourself in the shoes of prospective Premier League club buyers, and you are reflecting the zone of no possible agreement. Investors are worried that the increasing media payments – cue the usual prune juice metaphor – will simply flow out of the clubs in increased fees, salaries and commissions, to other clubs, players and agents respectively. They are worried that absolute valuations of clubs will rise along with the pot of TV monies, but that there will not be a concomitant increase in profitability or cash flow – the kind of things that make businesses more valuable – as both Uefa and Premier League cost control rules still allow sizeable annual losses and have yet to seriously slow the trend in transfer and wage spending in the Premier League.

When your hobby ceases to be funded out of your chequebook and requires you to sell your house, liquidate your retirement account and get a second job, your accountant better approve it as a sound venture. Football was never the safest investment and given the rising stakes involved, it is even riskier today.

If we are correct, this has several implications for Premier League club takeover negotiations. First, deal structures will become more complicated since a simple, single price cannot bridge current owners’ possibly outsized expectations and potential owners’ fears about profitability or asset appreciation. Instead, there will need to be complex formulas for earn-outs, buyouts and contingencies that allow risks to be shared and returns to be gradually realised. Contracts will grow in length and lawyers will be gleeful. This means that buyers and sellers will be tethered more tightly and for a longer time than they have been before.

Second, given rising absolute valuations and capital commitments that easily stretch into the hundreds of millions when budgeted over several years, we believe it is unlikely that there are going to be many single new owners – instead, buyers will share the risk among themselves by creating ownership groups.

Third, we strongly suspect the first successful deal will signal the end of the current drought and will quickly be followed by a second and third. The reason is simple: the next deal will provide a comparable that other deals can be based upon, both in terms of price and structure. Après the zone of no possible agreement, le déluge of complex contracts, syndicated ownership groups and former buyers and sellers being locked into continuous negotiations even after the deal is signed.

Chris Anderson and David Sally are authors of The Numbers Game: Why Everything You Know About Football Is Wrong (Penguin), and football industry advisers.
Our lives begin to end the day we become silent about things that matter. Martin Luther King
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