Can sport survive the pandemic?

Photo by Markus Spiske on Unsplash

Professional sport is in crisis. 

The government has withdrawn its mandate for the staged return of spectators, leading to mass dissent from clubs, athletes and supporters.  

The travails of the English Premier League are well publicised; lost gate receipts may total £152-161m, sponsors are demanding big discounts and across Europe’s five biggest leagues, projected revenues are predicted to drop by €1.5bn this year. The Championship is in even worse shape – EFL chairman Rick Parry has warned that clubs stand to lose a further £200m if things continue as they are for the rest of the season. The transfer market felt eerily quiet key in the recent window – let’s just say Neymar’s world record €222m transfer from FC Barcelona to Paris Saint-Germain in 2017 is unlikely to be bested for many years to come. 

In rugby, the talk is of bankruptcy, perhaps even a revision to amateur status if things don’t improve soon. And a host of other sports are feeling the pain as the event-driven model is rendered obsolete by social distancing. The business of sport is in the midst of a slow-motion car crash, and nowhere is this more apparent than the biggest sport of all – football. 

Death of a business model. 

The football “industry” has been smashed since play was paused in March 2020 as coronavirus ravaged populations across the world. The biggest leagues – Germany’s Bundesliga, Spain’s La Liga and England’s Premier League – are now back in action, but the user experience for folks at home sucks. Regardless of pre-existing TV rights, many clubs face losing massive amounts of revenue from missed ticket sales and sponsorship opportunities, exacerbating the financial difficulties in which many already found themselves before the pandemic. 

The numbers are ugly, but there is frankly a lot of hyperbole doing the rounds right now. That’s understandable, since owners, Chief Executives, coaches and even journalists depend upon the game to keep them living in a certain style. But cutting through the bluster, what’s at risk isn’t really the survival of professional football – simply the perpetuation of a certain type of business model. And one club typifies the scale of the problem facing many elite sports clubs: Manchester United. 

The theatre of (bad) dreams. 

Manchester United requires little introduction. But just in case you’ve been sheltering in a luxury bunker in rural New Zealand for the past 30 years, we are talking about (arguably) the most famous and well-established football brand in the world.  

In 2003 the club was taken over by the Glazer family (who also own the NFL’s Tampa Bay Buccaneers and a bunch of property interests), a move that foreshadowed the wave of American interest in English football that continues to this day. Malcolm Irving Glazer made his fortune through real estate, so he knows a thing or two about financial engineering. Indeed, the deal to buy Manchester United saddled the club with gigantic volumes of debt for the first time since 1931. In fact, the deal was almost entirely financed with borrowed money. It’s an incredible thought really – that a single family could buy one of the world’s greatest football club’s with barely any cash. 

The deal was hugely ambitious, audacious, and took great skill and patience to pull off, mirroring the managerial project of United’s legendary coach Sir Alex Ferguson. The Glazers began purchasing their shares in the club in 2003 through a holding company known as Red Football, starting with a small 3.17% stake in the team. By May 2005, the family had achieved more than a 75% controlling interest in the club. This bridgehead was used to delist the business from the London Stock Exchange, enabling the Glazers to gain 98% of the shares, before they finally acquired the last 2% to gain full ownership of the club. 

Ultimately, the Glazers paid around £790 million. The total amount of debt raised to pull off the acquisition was around £660 million. But it’s not the volume of the debt that angered the fans and raised eyebrows across the football community – it was the structure. The loans were provided by big American hedge funds, with interest amounting to approximately £62 million a year. And a significant portion of the debt consisted of payment in-kind loans, upon which the club was paying 16.25% interest on at one point. In 2019, The Guardian estimated that the total sum paid by the club in debt interest and other fees on behalf of the Glazers was £1 billion. The finest name in English football had effectively been reduced to junk. 

Deep pockets. 

Not all clubs are run like Manchester United. Some owners make positive contributions to clubs, at great personal expense. Football finance blogger Swiss Ramble has shown that United’s owners have the worst personal investment record in the Premier League: 

“In the last 5 years, the 20 Premier League clubs have benefited from £1.9 billion net financing with most of the money coming from their owners £1,569m (81%) and another £366m (19%) sourced from banks. However, there is a big difference between business models at individual clubs. Seven clubs have benefited from more than £100m funding from their owners in the last 5 years…On the other hand, Manchester United have paid £89m to their owners.’ 

“In terms of total financing, two clubs have received by far the most in the last 5 years, namely Tottenham Hotspur – £521m, and Chelsea – £433m, followed by Everton – £256m, Aston Villa – £224m, and Fulham – £186m. In stark contrast, Manchester United and Arsenal had significant net cash outflows with £169m and £101m respectively.” 

Owners with deep pockets are much better positioned to see out the wholesale disruption caused by COVID. But those who depend on hedge funds and the collective wisdom of the bond market to roll their liabilities and kick the can down the road? Not so much. 

Swimming naked. 

Warren Buffett famously observed that, “only when the tide goes out do you discover who's been swimming naked.” Heavily leveraged football clubs have been skinny dipping for a long time and getting away with it. Now they’ve been exposed.  

It doesn't have to be this way. There are other ways of running clubs and entire sports that are less risky, more sustainable and ultimately, better for supporters. The Bundesliga is a shining example of this. Ticket prices are kept almost laughably low in an effort by clubs to drive support within the community. The cheapest can be found at champions Bayern Munich, starting at just €145, which includes all 17 home Bundesliga games combined. This is less than half the price of the cheapest in the English Premier League.  

How is this achieved and sustained? The regulation and governance of the Bundesliga and its clubs is much more pronounced than its English cousins. Ownership structure rules are tightly regulated, and the league assesses each clubs’ financial competence and fitness to practice at the end of each season. Failure to pass the test results in a club not being allowed to enter the league. Crucially, ownership is tightly controlled from the top down – clubs must hold controlling stakes and a single investor cannot own more than 49%. 

The bottom line is that the Bundesliga business model is built upon a commitment to supporters. The English Premier League is built for investors. One is sustainable, the other, less so. 

What really matters. 

Reports of professional football’s death have been greatly exaggerated. As with all financial crises, those most highly exposed and geared will suffer. But the largest brands have huge intangible value and will no doubt be bought, relaunched and rehabilitated. And because of the sport’s popularity, TV rights (however depressed by poor viewing experiences and fake crowd noises) will always exist to sustain the crème de la crème.   

Smaller clubs in the lower leagues that have no media exposure, non-existent brand equity and depend on gate receipts for income will be forced to sell their best players at fire sale prices to big clubs, exacerbating the divide between the haves and have nots. “Project Big Picture” – the audacious attempt of the biggest clubs to seize control of the Premier League and its riches – is the ultimate attempt to consolidate power at the expense of the wider football community during a period of instability and weakness. 

The real risk from COVID stems from the trickle-down effect. Bankruptcies and failures at the top of the pyramid will lead to grassroots funding drying up, and a government bailout across the sporting landscape seems far-fetched at best. Sport, unfortunately, isn’t yet too big to fail. 

Without an intervention of some kind, many lower league clubs across all sports will collapse, leading to an inevitable decrease in community engagement and youth participation that will have knock-on effects in the years to come.  

That is a real concern, but we must remember that sport has been around for a very long time. It’s survived pandemics, wars, financial crises, scandals and a host of other indignities. It has a funny habit of enduring, reinventing itself and carrying on. That isn’t going to change because of a particularly aggressive pathogen. But what might change, when this crisis is over, is the way that some clubs and indeed leagues manage their finances and their responsibility to supporters. And in the long run, that is a good thing.