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Investors get a kick out of football club sharesINVESTORS in England's quoted football clubs have had an exhilirating and nerve-wracking experience. An index of the sector was started in 1993 by Nick Knight, investment strategist at the London operation of Japanese investment group Nomura. Then there were just three clubs on the market. In February this year the Nomura index had shot up from its starting point of 100 to 900. At that level values were strained - even for a bull market. The leader, Manchester United - which had seen its capitalisation rocket from an initial £38-million in 1991 to £476-million -- was rated on a price: earnings ratio of 35 and a yield of less than 1%. Although it remained the world's most profitable club and was heading for the premier league title again, earnings in the last financial year (to mid-1996) fell 23% to £15.4-million on sales of £53-million - less than 12% of market capitalisation. The boom prompted a rush to market in March, April and May. Five more English clubs were floated for a total of £425-million, led by Newcastle United (£193-million) and Aston Villa (£126-million). Newcastle's prospectus showed a loss of £24-million - having spent £28-million on buying players - on turnover of £42-million, yet the market valued the star-studded club at nearly £210-million. The flood of newcomers coincided with a new realism among investors. All of them fell back from issue prices, and from its heady peak the football sector took a tumble, with the Nomura index bottoming at 600 in June. This week it had recovered to 650, some 28% off the high and valuing the 18 listed clubs at about £1.5-billion. Knight says: "It is a substantial small sector which had a big run, a correction and is now consolidating before moving higher." This week accountant Deloitte and Touche published its annual report on the whole English league, which showed why investment in soccer equities is for those with deep pockets and patient bankers or passionate enthusiasm - and not for widows and orphans. Overall, the 92 clubs ran up a pre-tax loss of £98-million in the 1995/96 season, a rise of 606%, even though turnover was up 10% to £517-million. Income was split three ways: commercial income, such as merchandising (£224-million), tickets (£218-million) and TV rights (£75-million). Outgoings were players and staff (£298-million), other costs (£187-million) while a net £93-million went in transfer fees to foreign clubs. The big numbers are all in the 20-side premier league: sales of £346-million and operating profits of £52-million. But heavy spending on transfers of £106-million (net of receipts of £94-million, treble the previous year) wiped that out as managers used money received from flotations and borrowings from banks in anticipation of the new SkyBSB television revenues of an average of £8-million a year per club. In the premiership only four did not have overdrafts - Arsenal, Manchester United, Tottenham and Wimbledon - leaving the rest owing banks £100-million. Added to this are longer-term loans of £71-million - £61-million capital spending on stadia. In the lower leagues, only 22% made operating profits. Combined turnover of the 72 clubs was £171-million and total operating losses of £42-million were only shaved back to £35-million at pre-tax level by dint of selling talent - the premier clubs paid £13-million for league players. Wages also rose especially as more expensive foreign players were recruited lifting the premier clubs' total wage bill by 25% to £172-million. Inland Revenue did better than most out of the season. With gate receipts and wages up, the exchequer's take by way of income taxes and VAT improved by 22% to £145-million. By contrast, tax on profits made was 44% down at £4-million. The Deloitte and Touche report notes that the "business of football departs from the fundamental norms of business and economics". No other industry can boast the huge profile and media coverage of "quite small companies" - total turnover is about the same as that of a single medium-sized company in the FTSE 250. Few sectors on the London market enjoyed (or suffered) the kind of investment frenzy seen in the past 18 months. And, finally, it would be hard to find an area of business which has "the willingness of many financial supporters to fund the level of losses, at a whole range of clubs, which occur year after year . . . defying rational analysis and normal investment criteria". For these people the return is not financial - "it's emotional - putting something back into their community, philanthropic, building a 'monument' . . . or simply wanting to support their team". There remain doubts about which clubs will perform, build a record of profits and justify the current valuations which put the average ratio of share price at five times turnover. Some will fail, but Deloitte and Touche says "there seems little doubt that football is now in bed with the City for the long run".
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