The Business Of Soccer

Published>Thu, Apr 22 10 02:52 PM

Edited by Peter J. Schwartz, Paul Maidment and Michael K. Ozanian, Forbes.com

The world's 20 most valuable soccer clubs took a kick on the shins from a stronger greenback last year.

From June 2008 to June 2009 the euro and pound fell 11% and 17%, respectively, relative to the dollar. As result, the top 20 clubs have an average enterprise value (equity plus net debt) of $632 million vs. $691 million a year ago. The 8.5% decline equates to a $1.2 billion aggregate loss in value. Absent the conversion to U.S. dollars the clubs appreciated in value--2.7% in euros and 10.7% in pounds. Our team values are calculated using revenue (excluding player transfers and dispositions) multiples based on historical transactions.

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Operating income (earnings before interest, taxes, depreciation and amortization) fell for our top 20 from an average of $50 million to $32 million. But the bigger concern is the growing bifurcation in profitability among Europe's elite clubs. The five richest teams (Manchester United, Real Madrid, Arsenal, Barcelona, Bayern Munich) earned $556 million, an operating margin of 24%. The five poorest teams (Newcastle United, Manchester City, Borussia Dortmund, Olympique Marseille, Werder Bremen) lost a combined $54 million on revenues of $778 million.

Look closer and it becomes clear that the wealthiest clubs have a big advantage over their competitors because they are global brands, which allows them to generate more revenue outside their home market from sponsorships, merchandise and broadcasting.

The prime example is Manchester United, the most valuable club in the world, worth $1.84 billion. Man U's Club TV Channel is shown in over 192 million homes. The club claims 333 million followers and 139 million core fans. Beginning next season Man U will have a new shirt sponsorship with Aon that will bring in $34 million a year over four years, 50% more than its current deal with AIG. The Nike swoosh will continue to adorn the shirt as well thanks to a 13-year pact with the apparel maker that pays the team $470 million plus a 50% share of profits on specific merchandise through 2015. Man U posted operating income of $150 million last year, the most of any team, while their media revenue of $164 million was tops in the English Premiership. Despite the club's huge success on the pitch since Malcolm Glazer bought them in 2005, the locals are unhappy with the $839 million of debt Glazer has saddled the club with and are hoping to raise enough money to buy him out.

Another English club with a strong following outside the United Kingdom is Arsenal, ranked third on our list at $1.18 billion. The club has been embroiled in a takeover battle the past three years with American Stanley Kroenke, who now owns 29% and appears to have outgunned rival owner Alisher Usmanov. Kroenke also controls two major U.S. sports teams--the Colorado Avalanche and Denver Nuggets--and has an option to increase his 40% stake to 100% in a third, the St. Louis Rams. Arsenal boasts the highest match day revenue (gate and concessions), $165 million, save Man U. The club reached the semifinals of the Champions League and FA Cup last season helping it to post operating income of $102 million.

Real Madrid's strategy has been to load its roster with marquee players. The club also spent the most on players--$510 million last season (transfer fees and salaries), including the purchases of Cristiano Ronaldo and Kaka for a combined $222 million. Real, worth $1.32 billion, is the second most valuable club and pulls in more revenue than any other squad, $563 million. Real's media revenue increased $35 million last season to $226 million, also highest in soccer. The club's seven-year contract with Mediapro, the Spanish broadcaster, guarantees them a total of $1.5 billion through the 2013-14 season. Real's sponsorship revenue rose $14 million last season, to $195 million.

Barcelona has made tremendous strides the past few seasons both on the pitch and in our rankings. Last season the club won the Spanish title, Champions League and FIFA World Club Cup. Barcelona rose from seventh to fourth on our list and is now worth $1 billion. As a result of its great season on the pitch, Barcelona's broadcasting revenues went up $59 million, to $222 million. The club achieved its stellar results with a relatively modest payroll. Reward: operating income of $113 million, third most on our list.

Outside the top five on our list, the Italian clubs are making the strongest push on the pitch and to expand internationally. Instead of continuing to negotiate individual broadcasting deals, the teams are going to negotiate as a league for the contract that begins next season, hoping to increase its revenue and expand its coverage outside of Italy. Juventus, a club at the center of a match fixing scandal in 2006, rose 9% in value and is now worth $656 million, eighth on our list. The Old Lady, as the team is known in Turin, jumped ahead of money-losing Chelsea in our rankings. Juventus' broadcast revenue increased $36 million last year, and the team posted operating income of $57 million. Rival Inter Milan, on the heels of its fourth consecutive domestic championship, increased its value 12%, the most of any club on our list. Inter is now worth $413 million, good enough to be ranked tenth.

The teams at the bottom of our list have little reach outside their local markets. Manchester City and Newcastle United posted operating losses of $56 million and $49 million, respectively. With a value of $258 million, Man City, despite a succession of foreign owners, is in free fall. Two-thirds of their stadium revenue goes to the city council, which financed the stadium for the 2002 Commonwealth Games.

In Newcastle, owner Michael Ashley has been trying to get out but has been unable to find a buyer. Newcastle was relegated from the premiership and is now playing in the second-flight Coca-Cola Football League Championship, though it will be back in the top-flight for the 2010-11 season. As a result, the club will likely see revenue decline this year much more than the 14% drop it experienced last year. The club's $198 million valuation marks the first time that the 20th ranked team on our list has been worth less than $200 million since 2007.

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