Football, super league & Private equity - Private Equity Laid Bare

There is a lot of noise today about the creation of a European super league, although to be fair, we knew of this project. The FT has been writing a lot about these things.

And there is a lot of interesting twists to this story and take-away:

. what is on the table is closest to what is, elegantly called by Finance dudes, a Leveraged BIMBO (Buy-In Management Buy-Out) with some unique characteristics: JP Morgan creates a company (an empty shell called NewCo) and fills it with debt it is underwriting — here it actually looks like it is a whooping 100% leverage/debt. In a standard MBO, management of an existing company is appointed as management of NewCo and their company is taken-over by NewCo. Management is asked to put some of its money into NewCo. MBI is the same but management appointed to NewCo is from a different company. A BIMBO is a mix of the two. Here, it is a bit different: Management of 10-20 companies say we will be part of management of NewCo but stay as manager of our existing company, and we will provide goods from our current company to NewCo. And that is why some anti-trust issues may pop-up.

. you do not need to be a Private Equity firm to do an LBO. This is important because there are often talks of regulating PE firms. It is capitalism that needs to be regulated, there is not a clear frontier as to what is PE and not and anyone can do LBOs, anyone!

. as as pointed out at length in my book, what is unique about the PE mindset is a pure focus on profit. This is the closest thing to the homo economicus mindset, and that’s probably why economists on balance love them. And that is also why many entities do PE, not just PE firms.

. PE walked in football, and you bet what the homo economicus think there: it is obvious how to make money: i) eliminate the expensive intermediary who managed to obtain a monopoly right (FIFA, UEFA), ii) stop the subsidy of the rich clubs towards the poor clubs. And there may be some more, like treatment of supporters (often, one could make more money maximizing price of tickets etc.) Another one is to create your own rules on wages: it is politely called salary cap. These top super-league teams could just say: we do not pay any player more than $1mn a year, and bingo, tons of extra profits!

. The power fight is interesting in itself: An opaque organization, located in a tax heaven, paying high wages to its senior members (although of course, we do not know how much) and who is enjoying a monopoly situation, gets challenged by some homo economicus and they resort to threaten its members of extreme measures (like: any player part of a rebellious club cannot play for their national team!! — as an aside: these people have more power than governments. They can decide who plays for a national team and who does not !!?? next step is FIFA distributing birth certificates). And so the fight begins.

. It is hard to categorize this: Is it free markets at work with the potential destruction of a monopoly, in which case it is finance as its best! Or is it collusion, plain and simple, from pure profit maximisers who now control a majority of clubs. And maybe it is a bit of both. Am I the only one enjoying this a lot more than the last Arsenal game?

. Interestingly, the main PE firms bought some of the intermediaries: CVC/Advent went for series A, Bundesliga, six-nations (rugby). But other PE firms and pseudo ones went for clubs, and then JP Morgan went for the planning of the leveraged BIMBO. And what that leads to is the kind of fireworks that homo economicus generate when they meet. CVC/Advent apparently had some anti-embarrassment clauses in their deals (or trying to get it) which means their deal is cancelled if some clubs secede — which means leave the league. This sounds funny, but actually is a classic clause in acquisition deals. It is like if I find asbestos in the house I just bought, then I give the house back.

. The PE penetration in football may be under-appreciated, here is a quick, partial and rough overview:

Elliott Management Corporation –> Milan AC

RedBird Capital Partners –> Liverpool — minority stake

ALK Capital –> Burnley — LBO

Glazer family –> Manchester United – LBO, then listed

BC Partners and EQT –> Inter Milan [in progress]

The two top teams in French second league: RedBird Capital Partners -> Toulouse, Silver Lake -> Troyes

You may find this book of interest, but there are more on this topic