Luis García Álvarez, CFA
Manager at MAPFRE AM
The announcement of the creation of the new European Super League has shaken the foundations of European football, generating great volatility in the share prices of some of the listed clubs. The latest events seem to indicate that the revolution will not occur, at least at this time and under this format. But, beyond the breaking news madness experienced in recent days, what conclusions can we draw about the situation of European football from the point of view of investment?
As we have been anticipating for a long time, a growing investment interest in European football is beginning to arrive. The MAPFRE AM Behavioral Fund, our fund that integrates concepts from psychology to try to make more rational investment decisions, has long held a position in three listed football clubs: Olympique de Lyon, Ajax de Amsterdam and Borussia Dortmund. These three clubs currently account for 10% of our total fund. In our opinion, short-term noise in European football has kept many investors away from the interesting transformation the sector is undergoing.
The announcement of the intention to create the Super League at the beginning of the week, for its part, put the spotlight on other listed clubs that are not part of our portfolio, such as Juventus and Manchester United, but that were within the list of founders of the new competition. The reason for this investor optimism is that the proposed format had three main characteristics that, initially, could please financial markets.
First, the Super League would have brought with it higher income for these clubs. In fact, much higher. It was said that the prizes for participating could be between 3 and 4 times higher than those of the current Champions League. Football, like Disney or Netflix, is an economic activity based on the generation of content and, as such, has high operating leverage. Higher revenue would have an even bigger effect on margins and that would have a positive impact on valuations. It is the story that we have already seen in the last ten years in American sports.
Second, these revenues would also be much more stable. Clubs would no longer have to jeopardize their participation in the top European competition each year, but would have it assured. Investors love stability, for which they are willing to pay more, and run away from uncertainty. However, this has been the point that has caused the most controversy among fans, who seem to have indicated that they prefer to maintain the sporting merit system of European sport.
Thirdly, there was an aspect that had gone more unnoticed but that, in our opinion, was especially interesting. It was the financial control model towards which the Super League seemed to be heading, with a maximum salary cap for players equivalent to 55% of the total income of the teams. With this, the operating margins of the clubs would be highly protected and it would be more feasible that, as is already the case in Spain, the vast majority of teams would generate economic benefits with recurrence.
Higher, more stable income, and protected operating margins form an attractive combination, which triggered investor interest and caused the stock market gains of Juventus or Manchester United. Following the latest news, however, these teams’ share prices have fallen sharply, returning to pre-announcement levels. This reinforces our conviction that, at the present time, it makes more sense to invest in European football through clubs such as Borussia Dortmund, Ajax Amsterdam or Olympique Lyon, well managed, with healthy balance sheets that allow them to survive the crisis and that they have already demonstrated the ability to create value for their shareholders.
In short, while waiting for the next chapters in this story, perhaps the attention caused by the announcement of the Super League may have been the definitive catalyst that directs the market’s gaze towards a sector hitherto forgotten, rejected and misunderstood. Personally, I like to explore the stories of change in sectors or companies, as they sometimes lead to discovering excellent investment opportunities. European football offers one of the most interesting that I have encountered throughout my professional career.