The opportunities and issues for sports teams considering an IPO
Published 22 December 2014 By: Cassian Goode
On 13 January 2014, Polish businessman, Dariusz Mioduski, became the majority shareholder of the football club, Legia Warsaw, the reigning champions of the domestic Polish league, who were controversially kicked out of this year’s UEFA Champions League as punishment for fielding an ineligible player.1
As with many other football teams (and, indeed, teams from other sports), Legia’s success on the field has come at a heavy price off the field, with the previous owner, ITI Group, deciding to sell their shareholding to relieve the financial burden of servicing the club’s estimated €19m of debt.2
Having paid off Legia’s debt as part of his acquisition of the club, Mr Mioduski has stated that his “goal for the upcoming year and for the following years is to lead a club which is kept in balance”.3 Mr Mioduski has indicated that an initial public offering of shares (“IPO”) on the Warsaw Stock Exchange is currently being considered as a way to help achieve this goal. However, Mr Mioduski has also admitted that he has concerns about “[whether] the stock market is the best vehicle”4 to raise new funds, and has revealed that “we are also thinking about other forms of financing the club”5.
The cost of competing in sports such as football has never been higher. However, as the major sources of income for sports teams are usually ticket sales and broadcasting fees,6 there is inevitably a limit to the amount of funds that can be raised through these channels. Spectators will only be willing to pay so much to watch their team, and broadcasters will only be prepared to pay so much for the right to televise the game.7 It is therefore likely that, as owners of sports teams seek to balance their books, they will have to turn to external funding, and this will involve weighing up the comparative advantages and disadvantages of the various sources of available funding.
While other industries consider an IPO as an almost inevitable stage in the growth process of a successful company, there have been remarkably few sports teams who have raised finance this way. Indeed, over the past decade, the trend has been for those teams who had listed to subsequently delist their shares, due to either insolvency related issues (such as Leeds United and Queens Park Rangers), or due to a change of ownership (such as Chelsea and Bolton Wanderers).8 However, there does appear to be enthusiasm among sports teams in favour of equity finance, with both football clubs (Manchester United)9 and Formula One motor racing teams (Williams)10 choosing to offer their shares on stock exchanges.
As with any company considering an IPO, there are both advantages and disadvantages for a sports team raising finance this way, some of which will be especially acute in the context of professional sports. It is therefore worth analysing those issues which owners like Mr Mioduski will need to consider when determining the suitability of an IPO for their team.
Potential opportunities with an IPO
An IPO provides an opportunity to quickly generate a large amount of capital. This may be used to finance items of exceptional expenditure, which, for a professional sports team, is most likely to involve either the construction or redevelopment of stadiums, or the transfer fees required to secure the services of professional athletes.
The cost of constructing the Emirates Stadium, the home of Arsenal football club since 2006, was stated as £470m.11 However, as their new stadium has the second largest capacity of any club in the English Premier League, the club’s gate receipts have more than doubled since moving from their previous stadium, Highbury.12 This has not been overlooked by local rivals Chelsea, with reports suggesting the club feel their current stadium, Stamford Bridge, which has 18,474 fewer seats than the Emirates, puts the club at a financial disadvantage compared to Arsenal.13 With the cost of redeveloping Stamford Bridge estimated at over £600m, the club’s owner, Roman Abramovich, may need to consider external fundraising, despite his vast personal wealth.14 This may also be true of Real Madrid and Liverpool, with both football clubs recently announcing ambitious plans to redevelop their stadiums. These clubs, and others with similar plans, may consider turning to the stock market as a way of meeting the initial capital cost required to increase their long-term income streams.
The use of external fundraising may also be considered by clubs seeking to either acquire or maintain a competitive advantage by financing the acquisition of players. For instance, some football clubs may find themselves competing in bidding wars for players against wealthy owners of other clubs, who are prepared to buy success at any price. Unfortunately for those teams who are unable to compete in the recruitment market, this will inevitably lead to a loss of competitiveness on the field, which will in turn lead to a corresponding loss of income. However, by raising funds through the stock market, a club may obtain the money required to meet the escalating transfer fees and salaries set by the market, and thereby strengthen their team. The club will hope that this leads to greater success on the field, which would ultimately generate higher income through increased merchandising, sponsorship and gate receipts.
A sports team may also consider using the proceeds from an IPO to reduce levels of indebtedness. Following the Glazer family’s leveraged buyout of Manchester United in 2005, the football club struggled to attract top players, largely because the club was unable to match the financial packages offered by their rivals whilst continuing to service their accrued debt. This led the club to seek a listing on the New York Stock Exchange in 2012, indicating in their Registration Statement that the club “intended to use all of our net proceeds from this offering to reduce our indebtedness”.15 Their Registration Statement also revealed that the club did “not intend to pay cash dividends… in the foreseeable future”,16 and that the club’s “principal shareholder [the Glazer family] will be able to influence our dividend policy”.17 From the perspective of the team’s owners, the IPO was therefore hugely successful, reducing levels of debt and thereby making interest payments more manageable, without incurring any obligation to provide investors with dividends.
The Glazer family’s decision to modify the capital structure of Manchester United may also have been influenced by the recent imposition of UEFA’s Financial Fair Play Rules (“FFP Rules”) for clubs participating in either the Europa League or Champions League. The FFP Rules aim to encourage participating clubs to reach their operating breakeven point, by forcing clubs to reduce their operating deficits to within a defined amount, the level of which will gradually be reduced. Any club that fails to comply with the FFP Rules may be subject to a raft of sanctions. However, the FFP Rules draw a distinction between deficits covered by debt and deficits covered by equity, limiting the maximum permitted deficit to a mere €5m when covered by debt, which is increased to a maximum of €45m provided the additional amount is covered exclusively by equity.18
For Manchester United, a team without a wealthy owner prepared to inject the necessary funds, this may have been a strong incentive to proceed with their IPO. Furthermore, with the proposed rules to constrain spending in the English Premier League and Championship also permitting clubs to operate with a greater deficit when this is funded through equity rather than debt, there may soon be additional teams turning to the stock market to quickly modify their debt to equity ratios.
As with any shareholders of a private company, the owners of a sports team may find it difficult to sell their shareholding. There are likely to be contractual restrictions in the company’s constitutional documents or shareholders’ agreement that govern to whom the selling shareholder is permitted to sell their shares and, in the absence of a sufficiently liquid market for the shares, the selling shareholder will also need to locate and negotiate satisfactory terms with a buyer, all of which is likely to increase the costs associated with the sale. The owners of a sports team may therefore be attracted by an IPO as providing a prospect of “exiting” (selling/realising) their investment, either immediately or at some point in the future.
Williams, the eponymous Formula One team, listed their shares on the Frankfurt Stock Exchange in 2011, providing a partial exit for owners Frank Williams and Patrick Head. Adam Parr, who was then CEO of the team, commented that “we have two dominant shareholders who are in their mid to late 60s [and who will be] looking to exit the business at some point”.19 Mr Head and Mr Williams were able to sell 17.7% and 6.4% of their respective shareholdings, thereby raising proceeds of €60m which were divided between the pair.
However, Mr Parr also stated that “[while] the flotation creates liquidity for them… more importantly, for the team it creates stability; we don’t end up being owned by a Russian oligarch or a car company who might one day pull the plug”.20 It was therefore a success for both the selling shareholders and the team, providing a way in which Mr Head and Mr Williams could sell their shares, without the team then being subject to the whims of any single investor. This would suggest that an IPO may be an appealing option where a sports team is owned by a group of individuals, as it will provide an exit option for the selling shareholders, whilst permitting the continuing shareholders to retain control of the team.
Potential issues with an IPO
Owners of sports teams, who are often single individuals or a small number of individuals, are usually unwilling to relinquish any significant degree of operational control over their club, and so are likely to be concerned that offering shares to the public could dilute their voting rights. However, the example provided by Manchester United suggests that, by adopting a dual class voting structure,21 it is possible for the existing owners to preserve control of their team following an IPO.22
Manchester United’s Registration Statement reveals that there are now two classes of shares in Manchester United plc: Class A Ordinary Shares (the shares which were sold to the public); and Class B Ordinary Shares (the shares which continue to be owned by the Glazer family).23 Significantly, each Class A Ordinary Share is entitled to one vote per share, whilst each Class B Ordinary Share is entitled to ten votes per share.24 It has been suggested that the IPO was successful because, despite the shares receiving neither dividends nor meaningful voting rights, a sufficient number of individuals purchased the shares because they were seduced by the idea of owning part of the iconic team.25 As a result, whilst the team was able to raise $230m from the IPO, the Glazer family were also able to retain 98% of the voting rights.
It may therefore be possible for the owners of other sports teams to utilise their team’s existing fan base as providing a large number of potential subscribers who are prepared to accept shares with unequal voting rights. As it is unlikely that private investors would be prepared to accept such lopsided rights, and as any lender would require entry into stringent financial covenants before lending such a large amount, the owners of a sports team may conclude that an IPO would provide the ideal way to raise the requisite funds without relinquishing a significant degree of control.
The owners of sports teams may be deterred by the costs of an IPO. These includes significant one-off costs directly related to the process of listing, which necessarily requires the involvement of professional advice in the accompanying process from lawyers, accountants, financial advisors and underwriters, whose combined fees will typically amount to approximately 15 per cent of the proceeds generated from the IPO.26 Additionally, there will be significant costs in terms of the time commitment required of the management team in the months preceding the IPO. Key personnel will be needed to discuss issues with the team’s professional advisors, and attend roadshows promoting the company to potential investors, which may lead to a short term loss of competitiveness as such individuals are taken away from the day-to-day running of the team.
There will also be continuing administrative costs, resulting from the need to, among other things, comply with reporting requirements, distribute materials to shareholders, and hold shareholder meetings. This has proved to be a particular burden for sports teams. Although the Sacramento Kings basketball team considered an IPO, it was ruled out due to the anticipated administrative costs, with the team’s then President Geoff Petrie stating that “the problem is you have 40,000 people each owning one share as a souvenir [and] the costs associated with that would be incredible”.27
This problem was experienced by the football club, Millwall, who were forced to spend an annual amount of £100k to cover administrative costs whilst its shares were on AIM,28 with the club stating that “the size of the shareholder register places an unwarranted financial and administrative burden on the company, which is out of proportion to its market value”.29 There may, however, be a potential solution to the problem, with the Florida Panthers ice hockey team successfully reducing their administration costs by introducing a minimum purchase requirement for their IPO.30
With non-stop media coverage of sports teams, it is likely that the team’s existing owners are accustomed to attempting to preserve the confidentiality of any sensitive information about their team, and are content with the limited amount of information a private company is required to divulge. However, an admission to listing on a stock exchange would require the continuous disclosure of a wide range of sensitive information about the team, which may discourage the existing owners from proceeding with an IPO. There may be various reasons that would make an existing team owner uncomfortable with the need to disclose such an extensive amount of information to the public.
There may be concern that the release of extensive financial information about a team could harm their negotiating power. It may, for instance, allow players to analyse a team’s financial results, and determine how much more the team could afford to pay them. There may also be a concern that disclosure requirements conflict with confidentiality provisions under existing contracts. Having initially considered listing its shares in London, Williams defended its decision to list in Frankfurt on claiming that the UK’s disclosure regime was “ludicrous”.31 There were, according to the team’s then CEO, Adam Parr, “confidentiality provisions, not just with Formula One, but also with partners, that would make that an impossibility”.32 There may also simply be a general unwillingness to provide information that would subject the team to an audience overlooking every aspect of their financial performance.
The owners of sports teams may also be dissuaded by the prospect of dealing with disgruntled shareholders following an IPO. There have recently been instances where shareholders of listed companies have utilised corporate procedures designed to ensure the accountability of directors to raise attention to issues that are of particular concern to them. For instance, the celebrity chef, Hugh Fearnley-Whittingstall,33 was able to force Tesco to consider a resolution which would have compelled the supermarket to only sell free-range chickens, which he achieved by purchasing a single share in Tesco and mustering support from 99 other shareholders to exercise the power under s.338 Companies Act 2006.34
Although the resolution failed to gain the support of institutional investors, and consequently only received 10 per cent of the shareholder vote, it nonetheless provided Mr Fearnley-Whittingstall with a platform to generate significant media coverage, and thereby exert external pressure on Tesco to adopt higher standards of animal welfare.35 It is conceivable that, in the context of professional sports, a supporter of a team may consider becoming a shareholder simply to voice their discontent with, for instance, the continued tenure of a struggling manager, or the proposed sale of a star player. Even if any proposed resolution failed, it is likely that it would result in considerable media scrutiny, which the existing owners of a team may prefer to avoid.
Convincing the Market
The owners of a sports team may also be concerned that they will be unable to persuade potential investors that purchasing shares in the team would constitute a good investment. Although a sports team may generate profits, these tend to be reinvested into the team, rather than distributed to shareholders as a dividend. The only potential for a return on the investment arises from capital appreciation, although historically a substantial increase in the price of a sports team’s shares only occurs when the team looks likely to be imminently privatised, following interest from a potential purchaser. This would be unlikely to satisfy conventional investors looking for both quarterly and annual returns on their investment.
This problem was recently experienced by CSKA Sofia, Bulgaria’s most successful football club. The club attempted to list its shares on the Bulgarian Stock Exchange, with the aim of selling 3 million shares, and thereby raising $6.3m.36 Unfortunately, take up of the offer was extremely poor, with only 215,961 shares being sold by the expiration of the offer period. As a result, the club was unable to comply with the requirement for a minimum of 1.4 million shares in public circulation for a listing on the Bulgarian Stock Exchange, and could not proceed with the IPO.37 The fortunes of CSKA Sofia can, however, be contrasted to those of Manchester United, whose shares were taken up by investors, and have proceeded to consistently outperform conventional market benchmarks, including the S&P 500, Dow Jones and NASDAQ indices,38 a recent slump aside.39 This would suggest there is at least some appetite in the market for shares in sports teams.
IPOs and sport: a winning combination?
The contrasting fortunes of Manchester United and CSKA Sofia suggests that sports teams will need to carefully consider whether an IPO is the best method for raising the capital they require. This will, particularly for smaller teams, involve considering whether they will be able to convince the market that buying their shares would be a good investment. Although the Manchester United IPO was a success, the majority of football clubs will have neither the level of revenue nor the content distribution potential of Manchester United.40 There are, of course, other financing options available, with Lancashire County Cricket Club’s recent innovative five-year fixed term bond perhaps indicating the dawn of an exciting era in sports finance.41
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- Tags: Contract Law | Corporate Law | Employment Law | England | Football | Formula 1 | Germany | Governance | Initial Public Offering of Shares (IPO) | London Stock Exchange | Regulation | UEFA | UEFA Champions League | United States of America (USA)
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