Sport Investment Analysis

Sports and physical culture have been developing rapidly in recent decades, turning into a whole industry of sports and spectacular events, which, from a business perspective, is a promising object of investment. In modern society, these are the most important factors in maintaining and strengthening people’s health, improving the technical and innovative approach to conducting and organizing sporting events. Moreover, it is connected with building sports facilities and arranging infrastructure around them.

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Modern sport is very multifaceted: it is a very complex and controversial economic and social phenomenon. Sport today simultaneously represents the fllowing:

  • A national ‘treasure’ and an object of national pride, a significant political capital and an effective instrument of political life,
  • The most important economic resource that significantly affects the level of economic development of the country and the reproduction of labor carriers, able to create specific products,
  • A new and special area of economic and business relations.

The positive impact of physical culture and sports on the economic system of any state is explained by the development of this industry as an extensive branch of entrepreneurial activity. The economization of the policy of the highest achievements sports, the need to develop strategies to support a kind of “points of its growth,” improving management efficiency is one of the urgent problems of the professional sports development.

The relevance of this study lies in the fact that, at the moment, in the conditions of rapid development of the sports industry, there is a lack of theoretical and methodological work on the market aspects of conducting business operations by professional sports clubs. A large number of works and publications are devoted to general issues of managing economic processes in the field of professional sports. The complex of problems associated with the analysis of the specifics of the sports entities’ activities and their investment attractiveness has not been studied enough, which confirms the relevance of the research topic.

Nevertheless, the financial specificity of entertainment services of professional sports gives the industry a competitive advantage in relation to other services of similar quality, presented in the entertainment markets. The exclusivity of professional sports product can be described as follows (Desbordes, Aymar, & Hautbois, 2019):

  • The possibility of selling a service in various forms of its existence: in the form of tickets, video and broadcasting information, information in a printed periodical and the Internet, as well as in the form of material media in the form of attributes (scarves, T-shirts, baseball caps, souvenirs, etc.).
  • In the potentially unlimited profitability of a sports service, which, due to its entertainment nature and constant novelty is a mass product, the level of net income from the sale of which is directly dependent on the number of buyers of this service.

Namely due to the financial specifics of professional sports services, the assets of organizations operating in this sector of the economy are considered as an effective investment and advertising tool. Thus, investment in sports, despite the high risk characteristic of the sports business, can bring significant income both in the form of dividends and image capital, and in the form of a socially significant effect in the process of rehabilitation and reproduction of a quality workforce.

Based on the socio-economic importance of professional sports for society, a specific form of payment for sports and entertainment services has been formed, based on the unity of direct (the services are paid by the consumers themselves) and indirect (sponsorship payments and government allocations) sources of financing. In this case, government spending on the development of the sports industry is considered as an economically viable investment in the development of human potential and improving the quality of life of citizens. The value of intangible assets is strongly tied to athletic performance.

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Victories in tournaments raise the value of human capital, business reputation, the image and brand of the club, which is reflected in increased income, and vice versa, poor athletic performance reduces the value of intangible assets.

Professional sports clubs are currently full participants in the economic process and, along with companies representing various sectors of the economy, can be considered as an object of investment. When choosing methods for assessing the cost of a professional sports club, it is necessary to take into account the fact that the clubs have assets that cannot be taken into account due to the extreme difficulty of their evaluation (base of loyal fans; reputation/brand; membership/right to participate in profitable competitions; the effectiveness of the training system for football players), but which have a significant impact on the size of the sports club’s income.

Directions for stabilizing the value of the club’s assets are to increase the share of tangible assets in the overall structure of non-current capital through the construction of the material and technical base. Also, it is about the diversification of activities and the development of non-core assets, which will allow generating income in addition to core activities, making the club less dependent on sports results (Desbordes, Aymar, & Hautbois, 2019).

Thus, when placing its shares, a sports club should offer investors to invest not only in a team consisting of well-known players and participating in various competitions. First of all, possibility of investment is needed in an organization that owns sports infrastructure, has its own well-developed brand, which regardless team sports results will be profitable.

Prospects for the further development of the football industry are based on a further increase in the proceeds from the sale of media rights to broadcast competitions. Also, it is the introduction of deductions for sports clubs for a part of the income received by bookmakers through the use of the brand of a football club (Rohde and Breuer, 2016). Moreover, the need to optimize the cost part of the club budget is obvious, including by establishing the so-called “salary ceiling” in the sports league, improving the use and management of sports infrastructure, and investing in youth sports.

For successful placement of shares in the primary capital market, the leadership of a sports club needs to invite interested parties to invest money not just in a team of athletes participating in various tournaments. Investment should be made also in an organization that actively positions its brand on the market and effectively manages socially significant infrastructure. This will allow it to generate income from related activities, including those not directly related to sports.

It should be noted that, as a rule, the economic indicators of sports clubs are lower than the average for companies representing different sectors of the economy. It is since they use the generated retained earnings for the purchase of athletes, which can make it possible to achieve goals set for the season, rather than paying dividends to shareholders. However, in the case of a change in priorities in terms of a development strategy from the principle of maximizing utility to the principle of maximizing profit, the shares of sports clubs can be considered not only as a speculative tool. They can be regarded also as an object of long-term capital investment.

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There are rare cases when a football club immediately makes a profit to its owner. This investment object requires huge financial ‘injections’ that can pay off only in the long term. However, when a football club becomes successful and, most importantly, stable, it starts to bring its owner a significant profit and becomes an excellent investment.

The high popularity of the professional sports industry led to the emergence of a new way of accumulating financial resources for the development of a sports club ‑ the placement of shares on the stock exchange. The main advantages of entering professional sports clubs on the IPO market include the following:

  • The possibility of obtaining additional financial resources to increase the profitability of their activities and avoid sponsorship as an inefficient source of financing for a commercial organization. In most European clubs, intangible assets, which include registration rights for players accounted for using the “capitalization and depreciation” method, occupy a significant share in the structure of fixed capital and play an important role for fundamental valuation of shares (Sloane, 2015).

Some advantages of a sports club entering the stock exchange include the possibility of attracting resources to cover its obligations, moving to a higher level of corporate governance, as well as improving the image by giving the club a public status, creating the possibility for owners to exit the business or partially return their investments. Football club stocks first appeared on the London Stock Exchange in 1983. The pioneer was Tottenham Hotspur; soon other English clubs followed its lead, including Manchester United. In the first three to four years, the shares of all clubs grew in price, increasing their capitalization by almost three times (Baur and Mckeating, 2011). However, then each club went its own way and currently, 26 football clubs are listed on the stock exchange (Rohde and Breuer, 2016).

The history of English football has shown that the IPO of football clubs is an effective measure only at a certain stage of development. Football is too unpredictable to guarantee the continued interest of investors and provide stable financing for even the most successful clubs. Clubs such as Chelsea, Manchester United, Tottenham, Leeds, Aberdeen, Aston Villa, Newcastle, Sheffield United, Southampton, and Watford have experienced the delisting procedure.

Obviously, any transaction in the capital markets should be preceded by an analysis of its effectiveness with the development of relevant indicators, the subsequent control of which will help to form an idea of its results. One of the main indicators used in this approach is Economic Value Added (EVA), which is the spread between the return on net assets and the cost of capital multiplied by the invested capital. If we analyze the formula in more detail, we see that EVA increases, and the cost is created each time the company achieves any of the following results (Sloane, 2015):

  • Increase in return on capital ‑ increase in RONA;
  • Profitable growth;
  • The closure of units (lines of business) that destroy value;
  • Decrease in the cost of capital.

In order to regularly achieve high EVA indicators, it is also necessary to identify leading cost indicators that would signal the creation or destruction of value before it affects the final EVA value. However, RONA and EVA are short-term historical indicators. This means that the heads of individual departments of the company can take actions that increase these indicators in the short term, but destroy the cost in the long-term planning horizon.

Thus, there is a need for the introduction of some additional indicators. For example, one can try to measure the level of satisfaction of the needs of customers and employees (level of loyalty). This can be done with the help of various surveys, as well as by calculating several indicators in the format “per client/employee”. For a football club, such calculations are somewhat complicated by the procedure for measuring the number of fans. For example, Manchester United in its investment memorandum published before the IPO indicated that 669 million people support the club worldwide (Ross, 2013). Despite the unconditional popularity of this English club, it can hardly count on such a number of fans. For analytics, it would be more appropriate to use the number of subscribers on social networks.

One of the most important indicators of value is the market capitalization, or stock price, which reflects the expectations of investors regarding future cash flows. If these expectations are revised downward, the stock price will fall. The conclusion is very simple: in order to earn high profits, the company must exceed expectations. Thus, a business should be evaluated not only on the basis of historical performance, but also with an eye to the potential for creating value, which can be realized by exceeding the planned indicators for existing projects or by implementing new projects.

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The specific indicators that can be used as part of a football club management system are as follows (Pyatunin et al., 2016; Sloan, 2015):

  1. The dynamics of the number of fans and attendance (taking into account country (regional) segmentation);
  2. Percentage of irrelevant income ‑ non-monetary items or certain types of income from activities not related to sports;
  3. Revenue structure and dependence on the maximum income item (for example, sponsors/revenue);
  4. Revenue growth rates over the past five years (by articles: TV, sponsors, merchandising, transfers);
  5. The growth rate of wages over the past five years;
  6. The absence of deterioration of the indicator “net liabilities” (liabilities exceed assets) in comparison with the previous reporting period;
  7. Self-sufficiency ‑ the absence of losses and compliance with the requirements of the financial ‘fair play’ regarding compensation for losses by club shareholders;
  8. The ratio of salaries of football players to total revenue;
  9. The ratio of net debt to capital;
  10. The ratio of net debt to revenue;
  11. Operating profit margin (operating profit ‑ profit excluding transfer operations and income from related businesses not directly related to football/revenue);
  12. Overdue debt (primarily for transfers);
  13. Average revenue (profit) per match, that is, total revenue (profit) on the day of the match/number of matches per season;
  14. Average revenue per viewer, that is, total revenue on match day;
  15. The average number of spectators at home matches;
  16. Transfers balance for the last five years.

However, when making decisions on investing in a company, investors all over the world take into account not only its annual financial statements. They conduct their own analytical studies, media monitoring, etc. Also, investors are increasingly interested in the so-called hidden value of a business, its intangible assets, in particular, CSR strategy, the results of its implementation, and the impact of this on reputation capital.

Moreover, the company’s transparent reporting on activities in the field of sustainable development is part of the compliance system and directly affects not only its reputation, but also the company’s capitalization. The share of intangible assets in the market value of S&P 500 companies increased from 32% in 1975 to 84% in 2015 (Adams, 2015). Non-financial reporting is most often of interest to investors, including those who invest in sports and, in particular, football. However, among reports, 42% are devoted exclusively to financial information, and only 14% cover a description of a business strategy (Rohde and Breuer, 2016).

Thus, the investor receives mainly historical data, while attracting long-term investments requires revealing the company’s development vision. Meanwhile, for sports and especially football, with its high dynamics of player transfer, a description of the medium and long-term strategies can potentially increase the confidence and, as a result, investor interest.

In fact, an integrated report is a combination of financial and non-financial information. It includes the following areas: business model, external environment, opportunities and risks, strategy, results of operations, forecast for the future. Thus, the report consists of a basic description of the business model of the enterprise and external factors that affect its activities, as well as management strategies to manage these risks. According to the International Council for Integrated Reporting, 71% of investors consider having an integrated report very important for making an investment decision (Eccles and Krzus, 2014).

It is obvious that sport is no exception ‑ on the contrary, the presence of integrated reporting in the organization of the “industry,” where it has not yet gained widespread distribution, can become a unique competitive advantage at the moment.

The integrated reporting standard states that the main goal of companies is to create value in the interests of all stakeholders, i.e., to increase all types of company capital (Adams, 2015). Therefore, reporting should meet the requirements of developing a company’s strategy; it is important for interested users to understand from the reporting how exactly a business creates value, and not only in terms of financial capital. It is also important how the business affects the surrounding economic, natural, and social environment. In this regard, drastic changes in reporting are needed; at the same time, improvements in financial reporting are required not so much in terms of the amount of information, but in order to present a complete picture.

Company reporting reflects the business culture. The importance of improving reporting is due to the fact that it brings changes to the practice of company management, that is, there is a relationship between reporting and business management.

On the one hand, the better reporting, the more effective management; on the other hand, the more efficient the business, the better reporting. The logic behind all this is quite simple: financial statements are compiled on historical information and, as a result, look back. It is also very focused on financial capital, while the success of many organizations today depends on other resources ‑ such as the knowledge of their employees, the intellectual property created in the research and development process, as well as their relationship with the environment and the society where they work. The integrated reporting (IR) is designed to fill these significant reporting gaps.

There are both significant risks and advantages for issuers, which are hidden in non-financial information. Investors are increasingly realizing that, by understanding these risks and benefits, they can avoid the negative impact and experience the positive benefits of creating value that comes from the non-financial activities of the organization (Eccles and Krzus, 2014). Being a separate philosophy, IR goes beyond the numbers ‑ often it is thought abuot it not as reporting, but as “integrated thinking.”

From the perspective of accounting (in particular, using IAS 38 Intangible assets) according to the criteria, recognition of a transaction to transfer a football player from one club to another (that is, in essence, the football player himself) can be considered an intangible asset. According to clauses of the international standard, recognition criteria for an intangible asset are identifiability, control, and future economic benefits (Oprean and Oprisor, 2014).

Since all three conditions are successfully observed, a football player can be recognized as an intangible asset. It is seen in such a way that the club gains the talent, skills, and abilities of the player, which, in fact, is an intangible asset. On the other hand, players management can be seen as human resource management, which is part of non-financial reporting. Thus, the inclusion of the development strategy of the players and their transfer to the football club reporting is an excellent tool for informing potential investors.

The interests of the audience are a platform for creating a successful sports business. The leading link here is the achievement of local athletes or national teams. If there are no such achievements, then this sport does not cause spectator interest and is unattractive from a commercial point of view. Even when all the other components of the sports business are presented perfectly ‑ auxiliary trade and lotteries, performances of dance groups and pop stars are exemplary organized, comfort and safety are ensured ‑ this set of services is, although important, but still supportive in nature.

The economic role of sports is prominently manifested in several main areas. In particular, physical activity, sports and tourism are currently the most important area of extensive entrepreneurial activity, which provides, on the one hand, the employment of many people in the sports industry and the tourism industry. On the other hand, these industries replenish state and local budgets through tax revenues, which allows the state to solve the social problems of the population quickly.

A special place in the system of scientific research of the last decade is occupied by approaches to studying the problems of sustainable development of regions and individual territories. The paradigm of sustainable development, involving a dynamic process of successive positive changes that balance the economic, social, and environmental aspects, underlies the formation of approaches to solving the problems of territorial entities (Blewitt, 2014).

A number of factors influence the maintenance of the sustainable development of regions and territories, including the development of social infrastructure, the availability of qualified personnel, the activities of public organizations, and social institutions (educational, cultural, health). In addition, the concept of sustainable development is successfully accommodated in regional socio-economic systems, which include sports organizations.

Understanding sustainable development in the context of sports is multifaceted. However, it is generally accepted that any viable definition should include “an assessment of the future consequences of current actions” (Blewitt, 2014). This means that responsible decision-making must take into account the future consequences of the current choice, as well as effectively integrate social, environmental, and economic criteria into daily planning and operational practices. This understanding means that an organization from the sports industry that wants to comply with the principles of sustainable development must constantly evaluate the possible trade-offs between the short-term and long-term consequences of business decisions and strategies.

Obviously, encouraging an IPO, advising investors, and giving preference to football clubs implementing integrated reporting will increase the investment attractiveness of large state football clubs. In turn, the growth of investments will contribute to the development of infrastructure, the creation of jobs, and the strengthening of the development factors of the competitive advantages of large cities.

These advantages include the level of economic development of the city, the innovative potential of the urban environment, the level of investment, as well as the implementation of large sports projects. This will give the state enormous reputation effects, as well as various advantages: the development of business and the regional economy as a whole, the creation of new jobs, the improvement of the investment climate, as well as the attraction of qualified specialists.

Reference List

Adams, C. (2015) Understanding integrated reporting. Abingdon: Routledge.

Baur, D. and Mckeating, C. (2011) ‘Do football clubs benefit from initial public offerings?’ International Journal of Sport Finance, 6(1), pp. 40-59.

Blewitt, J. (2014) Understanding sustainable development. Abingdon: Routledge.

Desbordes, M., Aymar, P., & Hautbois, C. (2019) The global sport economy: contemporary issues. Abingdon: Routledge.

Eccles, R. G. and Krzus, M. P. (2014) The integrated reporting movement: meaning, momentum, motives, and materiality. Hoboken: Wiley.

Oprean, V. and Oprisor, T. (2014) ‘Accounting for soccer players: capitalization paradigm vs. expenditure,’ Procedia Economics and Finance, 15, pp. 1647-1654.

Pyatunin, A. et al. (2016) ‘The Economic efficiency of European football clubs – data envelopment analysis (DEA) approach,’ International Journal of Environmental and Science Education, 11(15), pp. 7515-7534.

Rohde, M. and Breuer, C. (2016) ‘Europe’s elite football: financial growth, sporting success, transfer investment, and private majority investors,’ International Journal of Financial Studies, 4, pp. 1-20.

Ross, K. (2013) ‘The American market & sports IPOs: does Manchester United signal a change?’ Law School Student Scholarship, 296.

Sloan, P. J. (2015) ‘The economics of professional football revisited,’ Scottish Journal of Political Economy, 62(1), pp. 1-7.

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