Growth Multiples on Mature Businesses

Growth Multiples on Mature Businesses?

?The Financial Times caused a stir last week.?Ahead of its annual Sports Summit it release a report stating that the true value of the club was ￡1.5bn.?Well below the reports of bids around ￡4-￡4.5bn that have been made, and even further below the apparent expectations of ￡6bn from the Glazer.

This would be closer to x2.5 revenues when I was willing to be a part of a bid that was just north of x5 Revenues for Chelsea last year.

The article doesn’t go into enough detail about how they ran their analysis, the discount rate used the ability to use leverage so it's hard to give a fair response dismissing their valuation.?

What intrigued me was that it didn’t pick up on some of the more obvious reasons why you could attack the valuation being used.??The primary reason is that an x5 Revenue multiple is clearly a high metric more typically used for a growth company.?At ￡5bn it would be almost an x10 Revenue multiple which instinctively feels high.

The reason it feels high is that, as the FT alludes to, the underlying metrics do not support the valuations.?European Sports teams, like it or not, are currently Sponsorship, Licensing, and Ticketing businesses.?Dig into the Deloitte Report on Football Finance or almost any other resource, and you will see that those three buckets are where clubs have control of their Destiny.

Ticketing, if we take the EPL, is maxed out.?The stadiums are running at max capacity and have done for a while.?In this space, we are at the point of yield management. How to set pricing strategy, mix of premium seats, family access, and Hospitality is all about coaxing the last few drops out of the stadium.??Even venues that try to do non-match day events are limited in capability – they rarely invest in the people needed to make it work.?

The outlier is to build a new stadium and increase capacity and the physical mix of boxes.?Spurs have gone one step beyond with NFL and F1 agreements to fully sweat the asset – but now the stadium is full on game day they too are into yield management.

On Sponsorship and Licensing that too is limited in growth, increasingly into the haves and have-nots.?Man Utd split the Commercial group off and relocated to London.?They are the bell weather for sponsorship sales, but that too has plateaued.?Look at it across various reports and you see the same across the European Clubs.?To a large extent growth is minimal.?Some will make leaps every now and then but that’s the exception that proves the rule.

A little google research and you will see that in licensing and sponsorship expectations for growth are at 4.5% CAGR and 6% CAGR respectively.?Not bad but nothing to get so excited by that you pay x10 Revenues.

Outside the direct control of the Clubs is of course Media revenues.?The EPL has managed to mirror the USA and has competition for rights.?Premium rights continue to command inflation-busting fees but without competition that too can stagnate.?The USA is an anomaly in that it has 5 main free-to-air networks, cable channels, for the moment Regional Sports Networks, and Direct to Consumer Tech firms all vying for the same rights.?In most European countries there are only two or three competitors and most of them end up agreeing to carriage rights limiting the need to beat each other in a bidding war.

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Despite all of the above – I’m a bull on sports. But Why?

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Simply put, in the modern era the Fan has not been at the heart of the business model.?The business model is effectively unchanged from when the EPL was first founded, and it could be argued that the EFL’s model predates that.

We have become exceptionally good at selling sponsorship, licensing, and tickets.?The leagues have done a damn good job in marketing their wares to the broadcasters but the underlying model remains the same.?My challenge with the European Super League wasn’t that things didn’t need to change but that they were simply arguing it needed to stay the same – but with fewer participants!

When I pitched the business model on why we should buy Chelsea, and how it could work, I didn’t pitch that we would do what had always been done but better (I admit that on the sponsorship sales element that’s precisely what I said as the club has underperformed there for years).

My view was that a new business model will emerge.?The ‘By the Fans, For the fans’ mantra that Martin and I held wasn’t just because we have both grown up supporting the club but because we believe that the fans are inherently undervalued.

As we built out our strategy we looked for Senior Management that we believed both understood that and could navigate the way to a new model.?Ticketing, sponsorship, and licensing can all be valued parts of that new way of working but the business emphasis would change.

We crafted a new role that we called the ‘Chief Fan Officer’ that a large part of the commercial group would have reported to.?Why? Well, words and actions matter.?If the person responsible for delivering doesn’t know who they are beholden to then how can they deliver the appropriate results??

The Fan Flywheel that I have made public is at the center of the new business model.?As is actual two-way communication between fans and rightsholders.?The Fan Led review calls for a Fan Board member or Shadow Board.?Whilst a step in the right direction its easy to see how many clubs will give it lip service at best.

Sports teams are community businesses, note this does not imply community ownership though that’s clearly possible.?Without communication, there is no community.

Do I believe that Chelsea’s addressable audience is the 400m they claim, or does Man Utd have 1.2bn fans??Not really, but nor do I believe that it needs to be in order to drive significantly more revenues.?Chelsea is making roughly ￡500m in revenue despite only knowing about 4-5m of its actual fans.?If they can take the steps that we had planned then I expect an ax10 increase in genuine addressable fans.?That would be exciting.

Given the vision that we had the x5 revenue multiple for Chelsea would have been cheap at the price.?The fact that Martin and I had identified leadership to lead that changing model gave us, even more, assurance that we were on the right path.?

The opportunity exists for others to take the next step.?All empires end, the exciting bit now will be to see who else grabs the opportunity that a new business model offers and becomes the leader.?If you think it can’t be done take a look around every disrupted industry, or closer to home and see how the MCO model adopted by City Group has become the way forward.?This isn’t true disruption as it simply leverages the older model at scale but the next step isn’t far behind.