European Football Drawing American Interest En Masse, But Prospective Buyers Should Beware

European Football Drawing American Interest En Masse, But Prospective Buyers Should Beware

American Dan Friedkin’s The Friedkin Group (TFG) has seemingly outmaneuvered American John Textor’s Eagle Football Holdings for control of Everton F.C. The deal remains subject to regulatory approval.

Months before Friedkin emerged as a bidder, outgoing club owner Farhad Moshiri came to terms with a third American investment group, 777 Partners. That company was unable to close due to widely reported legal and financial challenges.

The heavy American presence in Everton negotiations (MSP Capital was also reportedly engaged in exclusive talks with Moshiri at one point) is reflective of a broader trend–U.S. investors and/or investment firms investing in European sports assets. Eight of 20 English Premier League clubs are now controlled by Americans (it’ll be nine when this deal closes). Two others have Americans as LPs.

The Americanization of European sport began in 2003 when the late Malcolm Glazer bought a 2.9% stake in Manchester United for £9mm. Two years later, the Glazer family executed a leveraged buyout to secure the balance of the club for £790mm (£600mm of which was reportedly borrowed against team assets).

The logic amongst those who followed was clubs in Europe could be acquired on the cheap given that they are often heavily levered and under-commercialized.

While European sport undoubtedly provides savvy investors with upside potential, investments on the continent come with nuanced risk that may not be understood by foreigners. There is over-spending abound, and cultural differences make it difficult to replicate the familiar American operational playbook.

“Sport in Europe has historically been more about winning than profits,” one senior executive at a major global bank said. And that “point of view is not usually aligned with U.S. private equity’s expectations which are to prioritize profits.”

Americans investing overseas ought to beware.

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TFG reportedly had a deal to purchase the financially troubled EPL club prior to Eagle’s emergence as a bidder. Friedkin withdrew that offer amid uncertainty surrounding £200mm in loans issued by 777.

However, as part of TFG’s withdrawal, the American investor/operator savvily agreed to lend the club £200mm; which enabled it to cut its debt to Rights and Media Funding in half (money reportedly used to cover construction draws on the stadium and ongoing operational costs). Like Glazer’s ManU loan, the TFG loan was secured by future media rights revenue. 

TFG then approached A-Cap, the source of the 777 loan, and bought that debt from the reinsurer. It became the club’s largest creditor in the process, and more importantly, the obvious party to acquire the equity in Everton.

One source suggested its value had been discounted to under £100mm due to TFG’s leverage.

Logic suggests the potential upside that comes with acquiring equity on the cheap was/is a key part of TFG’s investment thesis. For context, Forbes pegs the world’s 30 most valuable football clubs’ average value at $2.3bn (on average annual revenues of $397mm).

However, it was also likely motivated by several other dynamics that are not available to buyers of major U.S. teams:  

• Deeper Pool of Potential Capital - European football (and basketball) leagues do not prevent private equity or sovereign wealth funds from purchasing controlling interests in franchises.

• Lax Debt Limitations - The European leagues have more lenient bylaws regarding how much teams can borrow relative to their American counterparts. And with debt almost always cheaper than equity, investors often prefer the former.

• Prospect of Multi-Club Ownership - The 27 European Union countries have domestic leagues at multiple levels. In theory, this creates the opportunity to roll up clubs, bundle commercial assets, obtain operating efficiencies, and move players under the same ownership umbrella (think: City Football Group). 

• Growing Appetite for Live Events - Post-COVID demand for sponsorship, premium seating, tickets, and merchandise continue to drive sales records year after year.

• Room to Build Fan Base - The U.S. remains a growth market for European sports leagues and streaming and social media provide unlimited bandwidth for them to publish content and develop fandom.

The possibility of gaining promotion from a lower league and the subsequent jump in revenues that would come with it, and the steady stream of potential acquisition opportunities that surface as a result of financial distress, are other factors in the American takeover of European sport.

Until the investment cycle is further along, it’s hard to state with certainty how these investments will pan out. To date, there have been few, if any, noteworthy exits. 

The ‘21 collapse of the proposed European Super League may help to explain why. The standard American approach (think: hyper-commercialization, closed leagues, salary caps, drafts), designed to promote competitive balance, economic sustainability, and profitability, is not necessarily replicable in a region where winning is prioritized above all else.

But there are other reasons for U.S. investors to be cautious about investing in European sports teams: 

• Potential for Relegation - Unpredictability makes it difficult to forecast growth and ROI.

• Pro/Rel Leads to Over-Spending - Clubs closest to the bottom of the standings will do whatever is perceived necessary to remain in the league and retain the associated revenues.

• Clubs are Debt-Laden – Teams often borrow capital to cover exploding payrolls, racking up large debt loads in the process. With no league prohibition on the amount of debt a franchise can have, owners borrow against future revenue streams and club’s assets without taking on any personal risk.

• The Media Environment - There are simply fewer sports rights buyers in Europe than in the US. That tends to mean less competition for packages and lower deal values.  

• Softening Rights Market - The European media rights market may have peaked (see: Ligue 1’s new deal with DAZN and BeIN is worth 12% less than its prior contract).

• Unequal Revenue Distribution - The wealthiest and winningest clubs command an outsized portion of centralized revenues resulting in large disparities between the haves and have nots. That has made it challenging for mid and lower third spending clubs to compete for trophies.

Investors still willing to take the risk must be sensitive to localization, patient, and nimble. There is no one size fits all playbook to operate a club in Europe. Each market is volatile–politically, economically, and culturally.

To successfully invest on the continent, one must maintain a deep understanding of local traditions, norms, history, and mentality, and find the right opportunity.

JohnWallStreet is here to help.

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