Article / 26 May 2016 at 13:00 GMT

Madrid wins, but football is a law unto itself

Managing editor, / Saxo Bank
  • Real Madrid play city rivals Atletico in UEFA champions final Saturday
  • Football finances exploding as new TV deals come into place
  • Year of the underdog suggests new order beginning to emerge
  • Football still an unattractive sector for investors


Real Madrid fans were celebrating in Lisbon in 2014 when they beat
city rivals Atletico, but who will emerge victorious on Saturday? Photo: iStock

By Martin O'Rourke

It's going to be quite a day in Milan Saturday as the city of Madrid decamps en masse in a blanket of white interspersed with blood-red stripes. The atmosphere will likely be intoxicating, on the edge and, as tribal warfare often does, ready to spill over into battle over the slightest pretext.

Real Madrid meets its bitter city rival Atletico in a match that will revive memories of their pulsating encounter in 2014 when Atletico's grasp was prised from the trophy at the death by a late Real equaliser that enabled Los Blancos to go on to win by a flattering 4-1 scoreline in extra time.

To the victor goes the spoils and in the year of the underdog (is there a person on this planet who hasn't heard about Leicester City's logic-defying English premiership triumph?), Atletico will probably be fancying its chances of picking up the €55 million prize money on offer as well as the glory and kudos. And of course, there is also the TV, marketing and attendance revenues which all add up to a veritable bonanza.

Football isn't big business anymore. It is huge. Forbes listings of the top 20 global clubs for 2016 lists Real Madrid at the top of the tree with a valuation of $3.645 billion, just ahead of Barcelona at $3.549bn, Manchester United's third-place $3.317bn, Bayern Munich's $2.678bn and Arsenal's fifth-placed $2.017bn.

Atletico Madrid meanwhile comes in at a respectable 15th even if its $633 million valuation pales into insignificance alongside the top five. It is nevertheless a 45% rise on the 2015 valuation and fairly reflects the astronomical rise in values among the top 20.

Of that 20, West Ham United is the fastest riser having grown some 76% year-on-year to hit revenues of $542m and take 17th on the list. The East London club owes its good fortune to a happy set of circumstances allied to good management that have allowed it to become sole resident of London's Olympic stadium which has been almost entirely dormant since 2012.

The top 20 support a narrative for a sector that, as a whole, is growing at an exponential rate and will continue to do so as fresh TV money comes into the play.

The football deal for the English Premier League for 2016-19 came to a whopping £5.136bn, up 71% on the previous deal and coming in at a not-too-shabby £10.19m/game. Little wonder then that the playoff final for the last promotion berth into the Premier League that takes place this Sunday between Hull City and Sheffield Wednesday has earned the moniker of  the richest game in football with some £200m on the table for the winner, once all the various knock-on benefits of being among the elite are added in.

Speculation surrounding managerial appointments also have the ability to move the needle quite dramatically as this week's events at Manchester United have shown following the botched dismissal of manager Louis Van Gaal with his successor, Jose Mourinho waiting in the wings.

Manchester United's share price gyrates around the manager change speculation

Source: SaxoTraderGO

While it might be tempting to link Manchester United's sudden share price rise with the club's domestic cup final victory Saturday over Crystal Palace, it was the immediate speculation enveloping Van Gaal's impending dismissal that really sent the price into overload.

Paying the ultimate price for failure to qualify for next season's European champions league (the richest club competition in the world for which the two Madrid clubs will be fighting this weekend), the market clearly liked what it saw and liked even better the prospects for the club under Mourinho who's appointment is likely to be confirmed by the end of the week.

Yet, all this focus on the share price and earnings is a far cry from a bygone ear when, before the lifting of the maximum wage in 1961 in England, the bond between player and supporter was inextricable, a player's warm up was the walk to the stadium and the pervading sense of working-class hero embodied by the likes of Stanley Matthews, Hungary's Ferenc Puskas and Portuguese legend Eusebio was the norm through the leagues and countries.


 These West Ham supporters from 1929 might not recognise today's game. Photo: iStock

Not now. Footballers live in gated communities away from the prying eyes of their fans and what interaction there is, is often limited to Twitter and other social media.

With salaries of the top stars reportedly in the £300,000/week category, that is hardly surprising. And yet, despite such vast sums of cash sloshing about the industry, football remains something of a no-man's land for investors. Can that change?

"Not unless the rules are changed to be similar to those you have in US sports", says Saxo Bank's head of equities strategy, Peter Garnry. "For instance, a cap on player salaries would instantaneously change the investment dynamics as salary inflation would likely grow slower than revenue." 

"Equal sharing of league revenue from TV rights could also change things".

There are of course clubs that are able to maintain high standards on the pitch and offer returns off it. Germany's only listed club, Borussia Dortmund, has successfully promoted a model of developing players and then sellling high allowing the share price a compound average growth rate of 22%, 2013-15.

But for every Dortmund, there is a Leeds United (my club) and a Fiorentina, both proud clubs that came perilously close to extinction. Garnry points out that their is inherent volatility in the sector that legislates against throwing your hard-earned cash at the relatively limited number of football clubs that do enjoy a listing.

"Return on invested capital is neither high nor consistent," says Garnry. "The nature of the business is to volatility in revenue and profit, depending on league and cups performances".

"Historically it has been a very poor investment and I see nothing that changes this going forward," says the Saxo equities chief. "The main reason is that European football with no economic rules leads to a “winner’s curse” where clubs are increasingly paying and offering larger and larger amounts for quality players". 

"The payoff structure is very fat-tailed with a few clubs reaping the largest parts of the economic pie. Therefore the incentive is to be in the top, but only a few clubs can be up there consistently and as the supply of top quality players are rather sticky, you experience massive wage/transfer fee inflation". 

The escalation of transfer fees in recent years has been extraordinary. Gareth Bale was in 2013 sold for £86m in his switch from Tottenham Hotspur to Real Madrid. In 2000, the record stood at £37m. In 1984, it was Diego Maradona swapping Barcelona for Napoli for £5m. Needless to say, collective jaws dropped at the time for what now seems a paltry fee.

Garnry sees the flaws that potentially create a breeding ground for the industry's demise and keeps it as a no-no for investors. "It is actually ironic that it is the unconstrained capitalism in European football combined with the league structure that creates an unfriendly economic environment leading to poor return on investment", he says.

Of course, in this era of global branding, the footballing elite can continue to milk the revenues from across the continents with Asia, and China perhaps, offering the biggest scope for growth. But what happens when that's all used up? Can football grow anymore? Or are the seeds for the eventual implosion of the industry already in place?

And what if it alienates the core support that has sustained the game for the last 150 years?

Whomever lifts the cup on Saturday, these are the questions that football may one day have to face up to and solve — or risk dying.

 The global giants are casting their net ever wider in the search for revenues. Photo: iStock

Martin O'Rourke is managing editor of
26 May
Michael O'Neill Michael O'Neill
Great story. The NHL can only dream of football riches


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