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Issue 476, 4 February 2002

Valuing the national sport how to put a price on football

Football is big business – total turnover for the Premier League is now over 800m and will break the 1bn barrier in the next two years. It's the national sport, with total league attendances in England around 25 million every year. It's also global, with millions more watching Premier League matches on television all around the world. Yet the stock market doesn't like football, it mistrusts and devalues it, often leaving clubs struggling to prove their financial viability, according to Leeds lecturer Dr Bill Gerrard, who has been helping some of the major British clubs prove their worth not on the pitch, but on the balance sheet.

Football is a sport where there's money to be made – it's synonymous with enormous transfer fees, huge salaries for players and massive earnings from TV rights. There are many that see fans as the losers, as matches – both live and on paying TV – cost more and more to watch.

Dr Bill Gerrard of Leeds University Business School (pictured left) disagrees: "Like any other business, football is a market. Clubs have high revenues and players earn high wages precisely because of the huge level of fan interest in football. Ultimately, the consumer is still king: if there are no fans, then the game makes no money. The clubs know that if the fans stop getting what they want, they'll desert the game, revenues will fall and some clubs will go bankrupt."

Dr Gerrard has been devising new ways to help football clubs put together a realistic valuation of their assets and future earnings. Up to now, stock market valuations have been low, making it more difficult and more expensive for clubs to raise new finance, and limiting their ability to invest in players and facilities and provide the fans with what they want – good football. Yet although Dr Gerrard points out the anomalies in financial reporting for the game, and the problems these cause for clubs, he doesn't believe that clubs should benefit from different rules.

"Financial statements can only ever give a fair and true assessment relative to accounting rules, and won't necessarily show the full financial picture for any company. I'm trying to look for better ways to look at the accounting information provided by clubs, in order to determine their true market value."

A football club's main assets are its players, as transfer fees and salaries reflect. But how do you place a value on a person? Dr Gerrard has just carried out an independent squad valuation of Leeds United – of 198m – which appeared in the club's annual report. The valuation was based on a system he devised, following academic research into transfer fees. His formula takes into account players' ages, experience, international recognition, goal-scoring ability and the size and status of the club. Dr Gerrard explains: "Clubs need to win matches, and for that they need players who will score goals. Clubs will pay a premium for good strikers, and the top transfer fees are always for forwards. The only defender who has secured a high fee is Rio Ferdinand – but he is one of the best in the world. Transfer fees show the value placed on a player – so if you can calculate how much the players would be worth in a transfer, you can calculate the total squad value."

Costly defence – Rio Ferdinand (pictured left)

Despite the sound basis for Dr Gerrard's valuations of players and the squad as a whole, these can't be included within a club's standard balance sheet. Players are counted in the same way as other physical assets: their transfer or ‘purchase' value goes on the balance sheet, and the longer they are with the club the more their value ‘depreciates'. In reality, a good player, performing well, will actually appreciate in value.

Another anomaly is the situation of players acquired by other means than transfer. David Beckham, now one of the top players in the world, signed with Manchester United as a trainee in 1991 and so doesn't count as an asset for the club. Similarly, Leeds United also has excellent players which aren't counted financially as ‘assets', including Harry Kewell, Ian Harte, Gary Kelly and Alan Smith.

Valuations are also based on future earnings, difficult to determine for football, because they depend on how successful a club is on the pitch. If that was easy to predict, we'd all be winners on the pools. Ticket sales and merchandising depend on a club's performance, as does the value of the club brand. Despite the obvious brand worth of the big Premier League clubs, this cannot be put on the balance sheet. Dr Gerrard: "It's possible to create a formula to calculate brand value in the same way as player valuations, based on factors such as the history of the club, the level of support, their performance, and the value of the squad. However, the clubs' problems reside in the fact that the way their business works can't be truly reflected in their accounts and so they are consistently undervalued."

Brand value is more than just empty figures. It can be the key to financing major developments. Leeds United is trying to sell its brand to help finance construction of the new stadium, looking for a corporate buyer for the naming rights.

All in a name – the old stadium of Elland Road was known by its address (right)

Again, Dr Gerrard has been looking at how these naming rights are valued: "The value is based on previous deals, with adjustments made for size of club and inflation. The last deal in Britain was Southampton, with Friends Provident, but most are in North America where the last six have been in excess of $100m. While this may seem a lot, the size of the FA Premier League is now proportionately equivalent to the major US leagues – including international recognition – so a deal of a similar size could be possible. Leeds – now one of the top teams in Europe and aiming to qualify consistently for the Champions League – could still look at 40m as a reasonable objective.

"Naming rights have a lot of power, and are often for life. Although the arena in Manchester is now officially the Evening News Arena, most still know it by the former cable company that first bought the rights, Nynex."

Despite the reassuring size of these deals, they still don't offer real financial security for clubs. The Baltimore Ravens sold their naming rights to PSInet, which went bust; and the ill-fated Enron funded a field in Houston.

Financial insecurity is a feature of any company, and football is neither exempt nor more prone to that than any other kind of business. Dr Gerrard's work is attempting to combat the snobbery and mistrust which the sport has to deal with, to ensure that the sector is appreciated not just by the fans, but by the markets as well.


 
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