Thursday, June 02, 2005

An Invasion of American Capitalism or of American Socialism?

Malcolm Glazer, the billionaire-owner of the NFL’s Tampa Bay Buccaneers, recently completed his 2-year quest to gain control over the world’s most valuable sports franchise, Manchester United, a publicly-traded firm. On the surface, one could easily group this purchase with the many recent acquisitions by US-based private equity shops of European firms. In classic LBO style, the acquisition will be considerably funded by debt, the firm will become private at the completion of the transaction, and the new owner will try to realize significant operational synergies. However, the uniqueness of the situation is clearly demonstrated by the reaction not only of the team’s vast legion of fans, but also by the British government.

Oftentimes, when LBO’s occur, employees of the target firm vigorously protest the transaction, fearing the loss of their jobs if the transaction were to go through. Typically, the new equity owner wants to ensure good labor relations, but they can also go out and find replacement workers if the workers are becoming too problematic. Manchester United’s potential problem is not in alienating its employees (i.e. the players don’t really care who the team owner is as long as they’re collecting their $100K per week), but rather with alienating what is arguably their most valuable asset, an extremely loyal fan base.

We believe the recent uproar of Manchester United’s fans over their beloved club being taken over by an American capitalist is not only highly ironic, but likely short-lived. Man U, unlike virtually all American sports franchises, is a publicly-traded entity that is directly responsible for delivering returns to its shareholders. Man U has delivered tremendous on-field performance since the early 1990s. This was initially largely driven by the club’s ability to develop great local players (i.e. David Beckham, Paul Scholes, Ryan Giggs, etc…) via its youth system, but its biggest stars today (i.e. Ruud Van Nistlerooy, Wayne Rooney, Christiano Ronaldo) have arrived via purchase from other clubs. If Man U fans believe their team’s on-field success today comes from the superior ability to train local boys, they are simply mistaken.

According to analysis presented in The Business of Sports: Text and Cases on Strategy and Management, there was an extremely strong correlation between payroll and on-field performance from 1999-2003 in the English Premier League, Man U’s domestic soccer league. This correlation greatly exceeded the correlation in any of the major US sports leagues, suggesting that Man U was ‘buying performance’ more than any other major sports team, including the NY Yankees. The capital need to purchase this success did not come from some benevolent team owner, as one might describe Chelsea’s owner Roman Abramovich, but rather from the merchandise marketing machine that is Man U. We would suggest that before a Man U fan starts protesting, he should notice the huge corporate logo on the front of his replica jersey and ask himself whether he’d rather have on-field success or a logo-free jersey. We believe that virtually all fans would choose on-field success and that as long as Glazer delivers on-field performance, the current uproar will rapidly subside.

Ironically enough, we believe that Malcolm Glazer potentially biggest value-add to British soccer is not his experience as an American capitalist, but his experience in the socialist world of American professional sports. Compared to the EPL, the major sports leagues in the U.S. have actively worked to ensure competitive balance between teams. Nowhere are these efforts more prominent than in the most financially successful of leagues and the one where Malcolm Glazer has deep experience, the NFL. We believe the NFL’s financial success is a direct result of its ability to ensure competitive balance via mechanisms like a salary cap, particularly one that all teams can afford with revenue sharing in place, and a reverse-order collegiate draft.

Should Glazer try to introduce similar collectivist features to the EPL? While modeling the EPL on the NFL would like greatly enhance total revenue and profits of EPL-teams, we believe that Man U’s financial performance could decline significantly as it wouldn’t be able to internalize most of the value of these changes (however, we note that these changes might be more economically rational for Man U to push for in the Champions League competition or in a future European ‘Super-League’). In the short run, we believe Man U should try to deliver the best on-field EPL performance and squeeze as much incremental operating profit as possible out of opportunities like marketing pushes into the US and China, selling off home stadium naming rights, raising ticket prices and negotiating an independent TV deal. This will allow Glazer to de-lever the firm. However, Glazer must ensure that in the long-run, fans don’t abandon Man U and the EPL because they are bored by the same team winning every year. If any hint of that alienation begins to occur, Glazer could push for more redistribution of the wealth within the EPL so that poorer clubs can become more competitive and indirectly benefit Man U.

In reality, we would expect Man U’s fans to remain interested as long as at least one viable domestic competitor exists. That is certainly the current case given the strong squads of Chelsea and Arsenal. If all three of these entities were rationally-driven, profit-maximizing entities, they would likely try to implicitly collude to limit investments in new players. Unfortunately for Man U, Chelsea’s owner currently appears to be committed to winning, independent of the economic ramifications of his actions. Glazer may succeed in talking Abramovich out of this philosophy, but assuming he can’t, should Man U try to play an arms war with Chelsea or resign itself to aiming for 2nd place in the EPL? We believe that they can’t profitably play the arms game with Chelsea in the long-run. In fact, their best action would likely be to try re-positioning as a lovable underdog. This re-positioning would likely prove quite difficult, so Malcolm Glazer better hope that either he can talk some economic sense into Roman or that Roman finds a new hobby (possibly in a jail cell courtesy of Vladimir Putin) if Glazer’s investment in Man U is to provide a handsome return.

-Vlad Bystricky, Tim Ligue, Justin Segool

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