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Table of Contents:
What I Watched Last Week
Deep Dive: Burnley’s Takeover
What I Am Watching This Week
What I’m Reading
What I Watched This Week
MLB
Hitter of the Week: Eloy Jimenez
After recently being activated from the 60-day IL, Eloy has looked extremely comfortable at the plate. He seems fully recovered from the ruptured pectoral tendon he sustained in Spring Training.
Eloy seems poised to play a huge role in their postseason run. He hit a beautiful opposite-field home run in the Field of Dreams game this week.
Pitcher of the Week: Tyler Gilbert
Tyler Gilbert was an easy choice. Making his first career start, Gilbert pitched a complete game no-hitter. The 27-year old southpaw’s only blemish was the three walks allowed to Tommy Pham. With the season Diamondback fans have endured, Gilbert’s no-hitter was a brief respite from the pain.
The clip below shows his father’s reaction to Gilbert’s no-hitter and his first start in the show.
Soccer
Brentford 2
Arsenal 0
Arteta out? It certainly is trending in that direction. Newly promoted Brentford is playing well and will likely finish above the bottom three. However, Arsenal should win matches like this comfortably — even without Aubamayang and Lacazette.
Manchester United 5
Leeds United 1
Bruno Penendes? No, not today. He scored a hattrick without any help from the spot. With all of the chatter around Paul Pogba’s contract, it was great to see him ping the ball across the pitch and register 4 assists.
Tottenham 1
Manchester City 0
Not many saw this coming unless you watched City in the Champions League last season. They desperately need a striker, but maybe Harry Kane rethinks his stance after Tottenham’s performance.
Deep-Dive: Burnley’s Acquisition
Part I: Background
I am breaking down ALK Capital’s £150 million acquisition of Burnley.1 I went deep into the financial details, so if you get bored or discouraged midway, skip to the takeaways section.
The typical club owner has shifted over the past few years. Before, there were Chinese billionaires, Russian oligarchs, and the Gulf States. A slow trickle of American-based investors has led to a swarm of private equity firms entering the space. According to Soccernomics, the vast majority of clubs lose money. So, why are some of the most intelligent investors acquiring assets that lose money? The answer lies in the lack of financing regulation.
Part 2: Financials
In America, the top leagues limit purchasing clubs with debt. As a response to rising team valuations, the NFL has recently increased this limit.
In soccer, there is much greater leeway in the amount of debt and its structure. For example, ALK Capital used cash to fund around £15m of the total £150 million. Reports state that £80m of the loan is lent from Michael Dell’s MSD Capital and the rest “equity taken out of the team itself” — a tactic pioneered by the Glazer’s with Manchester United.2 MSD Capital’s financing is secured “against the club’s assets,” and, based upon their previous loans to Derby County, Southampton, and Sunderland, the interest rate is expected to rise to “12 percent once the various fees are included.”3 How can ALK purchase a team with only £15m in cash and flood the club’s balance sheet with debt?
First, I represented the loan. I assumed that both loans had the same interest rate of 12.00% and duration of 10 years – paid annually. Their annual payment is £14,253,580.33.
From there, I built out a model using their historical financials and assumptions based upon research.
** If you want the Excel file, reply to this email, and I will forward it to you. You can change the assumptions and see the impact. **
This example depicts Burnley staying in the Premier League for the next 10 years. While the £14.2m in interest will hurt the club in 2021, it becomes manageable in 2023 when the new broadcasting deals kick in. The last two broadcasting deals increased year over year 47% and 46% in 2013 and 2016, respectively.
On the cost side, the overwhelming figure is Staffing Costs. EUFA requires the revenue-to-staffing ratio to be below 0.70. Burnley’s routinely hovered around 0.63, but I used the upper limit of 0.69 for my projections and tied it to the preceding year’s revenue.
Burnley does a great job of selling players at the peak of their worth. After analyzing their squad, I forecasted their future transfer sales.
A purchased player’s cost is amortized over the life of a contract. So when players are sold midway through their contract, the club does not recognize the total sum as a profit. For example, James Tarkowski was purchased 3 years ago by Burnley for £2.2 million. Each year the club amortizes a cost of £0.44 million and reduces “PV Remaining” until it reaches 0. The difference between his “Current Value”, courtesy of Transfermarkt, and “PV Remaining” is “Profit”.
Further, Burnley should sell Tarkowski and Nick Pope in the 2022 window to service the club’s debt. In total, I selected Brownhill, Mee, Westwood to be sold through 2030. These sums can be viewed in the line “Profit on disposal of player registrations.”
Instead of calculating free cash flow, I used net income as the cash flows.
“CF” equals the net income figures from before. “TV” stands for terminal value and is the projected sale of the enterprise in 2030.
Most finance professionals would conduct a CompCo (Competitive Company) analysis to estimate the terminal value. It is uniquely challenging in the soccer industry since most clubs lose money and only a handful are public: Man United, Juventus, Lazio, Benfica. Instead, I used the Enterprise Value (EV) ÷ Earnings Before Interest Depreciation and Amortization (EBITDA) multiple from the ALK aquisiton: 5.211. Next, I multiplied it by the projected EBITDA in 2030. Thus, ALK’s stake in Burnley in 2030 is projected to be worth over £523 million.
Now, cash in the future is less valuable than cash today. Therefore, we must discount those cash flows; I used a historical junk bond rate of 7%. The sum of those cash flows is the Net Present Value (NPV), highlighted in yellow above. The other measure is the Internal Rate of Return (IRR), which reflects annual return.
Part III: Takeaways
I created three situations and measured their respective financial impact on ALK Capital.
Worst Case
The bookies have calculated Burnley a 31% chance of being relegated this season — fifth highest in the Prem.4 In this instance, Burnley suffers relegation and fails to be promoted back to the Premier League for the remainder of the model. In this worst-case scenario, ALK Capital is still profiting on this endeavor by over £3.03 million.
Best Case
This was the scenario from the model at the beginning of this article. If Burnley can remain in the Premier League for the next 10 years, a notable feat, this investment will be extremely lucrative. ALK is looking at an IRR of over 76% — an exceptional return.
Miracle Case
Perhaps, ALK invests heavily in the squad and can somehow qualify for the Europa League in 2028 and 2029. The NPV and IRR are marginal improvements over the Best Case scenario.
Part IV: Final Thoughts
If the broadcasting deals continue growing at their current rates, this seems to be quite the profitable investment for ALK. Their primary focus will be maintaining their position in the Premier League instead of chasing the pipedream of European football. Upon pouring through the numbers, it becomes abundantly clear why there has been an influx of American private equity firms purchasing soccer clubs. With the lack of regulation around financing, firms can buy top-tier clubs without paying capital upfront. With streaming firms driving up the bidding of broadcasting rights, the revenue of these soccer clubs is poised to grow substantially over the next decade. Moreover, if the investment goes sideways, there will always be someone else willing to purchase a brand-name football club.
What I’m Watching This Week
Monday:
Oakland Athletics vs Chicago White Sox at 8:10 PM EST on ESPN
Tuesday:
Red Sox vs Yankees at 1:05 PM EST on MLB Network
Red Sox vs Yankees at 7:05 PM EST on MLB Network
Oakland Athletics vs Chicago White Sox at 8:10 PM EST on MLB.TV
Wednesday:
Red Sox vs Yankees at 7:05 PM EST on ESPN
Thursday:
Patriots vs Eagles at 7:30 PM EST on NFL Network
Friday:
Brest vs PSG at 3:00 PM EST on BeIn Sports
Saturday:
Leeds United vs Everton at 10:00 AM EST on Peacock
Bayern Leverkusen vs Borrusia Mönchengladbach at 12:30 AM EST on ESPN+
Bills vs Bears at 1:00 PM EST on NFL Network
Jets vs Packers at 4:25 PM EST on NFL Network
Sunday:
Wolves vs Tottenham at 9:00 AM EST on Peacock
Arsenal vs Chelsea at 11:30 AM EST on NBC
49ers vs Chargers at 7:30 PM EST on NFL Network
What I’m Reading
Sports
The Premier League is back and we might even have a title race… **
‘There was never a doubt’: How Diamondbacks rookie Tyler Gilbert went from nobody to no-hitter **
Vardy spent his summer on the sofa enjoying a few beers – and now he is flying ***
Solskjaer is modeling his brilliant attacking play on the Rooney-Ronaldo-Tevez axis *
Knicks rookie Miles McBride knows the way to get on the court in New York and he’s showing it *
Debate: Should Spurs even consider selling Harry Kane this summer? **
The ‘Field of Dreams’ game was an absolute home run for MLB and Fox — so get ready for more *
Business
SoftBank deals unleash internal compliance tensions: ‘If Masa said yes, who am I to object?’ ***
How Millennial Investors Lost Millions on Bill Ackman’s SPAC *
Hackers Steal $600 Million in Likely Largest DeFi Crypto Theft **
Private Equity Firms Are Cutting Out Banks and Funding LBOs Themselves *
How to Sell ‘Carbon Neutral’ Fossil Fuel That Doesn’t Exist ***
*** Must Read
** Very Good
* Recommended
https://theathletic.com/2305713/2021/01/08/burnley-takeover-football-soccer/
https://www.sportico.com/business/sales/2021/alk-capital-burnley-debt-1234621513/
https://theathletic.com/2305713/2021/01/08/burnley-takeover-football-soccer/
https://www.telegraph.co.uk/betting/football/premier-league-relegation-odds/