The opportunities and issues for sports teams considering an IPO
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.
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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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Cassian Goode is an Associate Solicitor at Clyde & Co. Cassian enjoys both watching and playing many sports and represented his county in both rugby union and hockey.