The Guide to Investing in Stocks and Shares

Who'd buy a football club?

Dan Tebbutt - A Shareworld Contributor

Published - 19th October 2010

So NESV have finally closed the deal and bought Liverpool FC. It seems like every time a half-decent football club comes on the market, there are buyers queuing up to bid. But to me football seems doomed never to provide a decent long-term return to investors - why would anyone bother?

Of course there are good and bad companies in every sector, and I'm sure there are a few clubs that do make a decent profit, but on the whole it seems that most clubs need repeated infusions of new capital just to keep pace with their competitors. There's rarely any spare cash for dividends - any operating profit is quickly eaten up with the purchase of new players.

How can this be? The English Premier League generates enormous revenues, and many clubs seem to have huge sums available for transfer fees, astronomical player wages, new stadiums and so on. Why no money for shareholders?

The answer lies in the sorts of people that own football clubs. For many, perhaps even most, it is an exercise in vanity. Investors are prepared to pay a high price for a club and then invest yet more funds in the search for success. Roman Abramovich is just one example - spending more than £600m since buying Chelsea FC in 2003. Other clubs can either compete - spending every spare penny (and plenty that aren't spare) on transfer fees and wages - or fail to keep pace and drop down the league, until they get relegated. Once that happens the massive drop-off in revenue means that even a modest profit is often unattainable, and bankruptcy beckons.

This massive source of irrational capital is what makes football such a bad proposition for investors. It's one reason that airlines have been such a terrible investment in the past - every country wanted its own flag carrier and was willing to pay the price to get it. If the investors (i.e. governments) concerned had been rational there would have been fewer airlines, less competition for passengers, higher ticket prices, and perhaps even some profits.

Although I doubt that football will ever provide a decent return on capital, that's not to say that individual investors will always do badly. The Greater Fool Theory seems particularly well suited to football - no matter how unprofitable a club is, there‘s always the chance of it being snapped up by an eager billionaire as his latest pet project, giving existing shareholders a tidy profit.

Personally I'm going to steer well clear. I'd rather not put my trust in the irrationality of others, but instead invest in profitable companies that have the ability and intent to pay a decent dividend to shareholders. Perhaps when I've made my first billion I'll reconsider.