In the wake of Qi Group’s decision to put PJ City FC up for sale, I wondered how much should the club’s price tag be, and how is the value derived.
There is no denying that owning a football club is rad. But owning a football club can also be like owning a newspaper. It tends to make less sense the longer you have it.
Last November, I was helping an advertising agency acquire a financially troubled football club that was on the brink of having its club licence revoked. The negotiations kicked off with the owner disclosing a price tag of approximately RM10 million.
Would the funds for the takeover be re-invested into the club? Or would it be regarded as payment to vacate and surrender control of the club to the incoming purchaser? These were some of the critical questions that came to mind, especially when the club had liabilities estimated at RM5 million.
So how did they justify the RM10 million price tag?
The value mentioned is an enterprise value, which is actually a common concept in finance. The easiest way to think about enterprise value is, you are buying an entire business, which is inclusive of all the financial inconveniences and baggage, not just its merry bits.
Therefore, RM5 million was derived from the liabilities known, and another RM5 million derived from other variables that constitute the enterprise value, namely profitability, popularity, sporting potential, broadcasting rights, and property ownership.
Liabilities accumulated by Malaysian football clubs stem mostly from unpaid salaries. The settlement of these unpaid salaries is a matter which requires urgent attention, as it potentially results in a damning transfer embargo from Fifa, and the suspension of the club licence.
Expecting the seller to settle this matter insistently would be too much of a plunge for the incoming purchaser. The liabilities (if any) should, therefore, be removed from the price tag, and be taken care of directly by the new management.
And what about the other five variables?
When Fenway Sports Group decided to put Liverpool up for sale, global financial services firm KPMG used its “proprietary algorithm” to give the club an enterprise value of around RM11.1 billion, making them the fifth most valuable football club in the world.
United States business magazine Forbes later released its annual list of the 20 most valuable football clubs. It also had Liverpool in fifth place, but with an enterprise value of RM15.6 billion. That’s a significant difference of RM4.5 billion.
University of Liverpool’s football finance expert, Kieran Maguire, applied a customised valuation method of all 20 teams in the Premier League, and spat out a valuation of almost RM8.3 billion for Liverpool – RM2.8 billion less than KPMG’s valuation.
You see, a club’s value, like beauty, is mostly in the eyes of the beholder. There appears to be an intangible value that functions like a multiplier.
It affects the tangible dimension of the valuation, and either raises or lessens the market value. This intangible value varies from one potential investor or purchaser, to the other.
It could potentially lead to the book value of the club being raised to 400 per cent, or have it lessened due to a negative multiplier. And that is where negotiations and bargaining take place.
So, when we decide to strictly look at our local football club at its enterprise value, at the instance where the club runs on a negative cash flow, where the capacity to monetise the popularity is ambitious, where the sporting potential diminishes significantly at the end of every season, where television money is a dribble, and where property ownership is fictional; we are likely left with the option of paying off the seller a mere RM1 million.
This is also treated more as a token, rather than an expression of the club’s true value.
But there is an advantage when buying ‘beauty’. It gives you a huge sense of contentment.
You will be indulging in a joyride that will only be experienced by a silk-stocking few. This experience is better than being hungry, or being surrounded by the average. Except if you buy Manchester United.
This is the personal opinion of the writer and does not necessarily represent the views of Twentytwo13.
