MARKET COMMENT
Football's Greater Fools

By Maynard Paton (TMFMayn)
August 9, 2002

On Sunday, the English football season kick-offs with the traditional Charity (now Community) Shield curtain raiser. However, the season will see more blood, sweat and tears in the boardrooms than on the pitch. Football is in financial crisis.

The dreadful state of the industry is highlighted in this article. Of the 20 listed British clubs, only five (Manchester United (LSE: MNU), Sunderland (LSE: SUA), Charlton Athletic (LSE: CLO), Watford Leisure (LSE: WFC) and Chelsea Village (LSE: CAV)) have managed to report a pre-exceptional pre-tax profit over the past three years. The sector provides plenty of work for administrators, with many clubs perennial candidates for receivership.

In the short-term at least, things look bleak. Television income, so long the sport's gravy train, has hit the buffers. These days, just British Sky Broadcasting (LSE: BSY) has the required financial muscle to buy the rights for televised football. Few expect Murdoch to continue showing his past generosity during the next rights tender.

There's no sign of player wages abating either. Rio Ferdinand's £33m transfer from Leeds United (LSE: LUFC) to Man U shows those in the boardrooms remain as lax as ever. To put Ferdinand's move into perspective, the twelve months ending January 2002 saw Man U generate post-tax profits of about £15.6m (excluding gains on player trading). Consider there's a £5m annual dividend payment too, and you can see the potential for Red Devil shareholder heartache.

Until return on capital is given priority over league points, shareholders in the football sector are likely to remain as sick as parrots. For the industry to reward shareholders long term, clubs need to face up to the corporate Darwinism that exists everywhere else -- and either merge or go bust. Unfortunately, the fans' emotional attachment to their teams makes this picture unlikely.

For beleaguered football investors, the only way out at the moment would appear to be relying on the Greater Fool theory; essentially, finding somebody else foolish enough to buy your shares (or hopefully, the entire club) at a higher price. Man U shareholders would appear to have the best chance of hearing the final whistle on their investment. Two Irish tycoons and a Scottish billionaire recently purchased substantial stakes in the team, buying their shares at a 30% premium to the current 100p share price.