The recent acquisition of English soccer big hitters Chelsea and the news that both Manchester United and Liverpool are seeking investors or acquirers have drawn focus to how top soccer clubs are valued.

Very different valuations for both Manchester United and Liverpool have appeared, varying from less than £2 billion to the £6 billion or more touted (perhaps unsurprisingly) by United's owners, the Glazer family. These differences do not just reflect a disparity in the assessment of the business fundamentals of the clubs but also differences in how top clubs are valued. Should one value a soccer powerhouse like a business, or is it more like pricing a famous artwork?

The answer to that question is probably that it’s neither (or both), although it may be closer to an artwork than a business, and bidders should beware of plans and projections that try to provide a cashflow-based business rationale for an artwork type of valuation.

A purely cashflow-based valuation is problematic – most clubs are roughly breakeven, requiring significant spend on player wages to maintain their place at the top table and ongoing (and considerable) transfer spend to refresh the playing squad.  The implied earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples of these businesses would deter all but the most irrational investor.

The best intellectual benchmarks might be the value of acquiring other objects of desire for any ambitious billionaire – an influential newspaper, a thoroughbred racehorse, a private island, or even the costs of running for and then retaining a seat in the US Senate.

All these confer value beyond money but also involve ongoing costs to sustain the investment and hold out the prospects of making some income while owning the asset. This is unlike artworks, which generate little in income beyond loan fees and require little ongoing expenditure beyond storage and security.

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There is, however, a common starting point for both approaches to valuing top clubs – cashflows or prize asset-based – and that is the size and loyalty of the fanbase, and especially how it compares with that of rivals within any club’s relevant peer group. This has underpinned O&O’s work on club-based investments over the last 25 years and will continue to do so.

Financials, rivals, ambitions

Within any group of clubs at a given level in European football, the club with the largest and most loyal fanbase should be able to generate more revenue than its rivals, thereby sustaining a higher level of squad spend and attaining more on-pitch success while still making a profit. A virtuous circle of financial and sporting success is possible if you choose your commercial and sporting directors wisely. If anything, the digital world has only reinforced this – clubs are less constrained by their stadium capacity’s ability to generate matchday revenue.

Conversely, a club with a smaller or less loyal fanbase than its peer group will have to build that fanbase and/or make much better commercial and sporting decisions in order to achieve both on-pitch success and long-term profitability. This is a harder task, it is made even more difficult by financial fair play rules that might limit a club’s ability to endure losses in the short term to build a larger fanbase for the long term. A fan-build strategy should typically see more relative investment in a club post-acquisition rather than in the acquisition price – a point that is of particular relevance to valuation metrics.

It follows that what is needed above all when valuing a club as a cashflow generating business is a sense of the fanbase’s size, quality, and propensity to spend – both domestically and internationally – and how this compares with the relevant peer group. Top-line numbers on social media traffic or TV audiences won’t be sufficient as these can be influenced by short-term success or the acquisition of a star player – especially with fanbases in Asia. Much deeper research on the level of engagement, propensity to spend, and switch media behavior by fans is needed – and above all how this compares with the peer group.

Fanbase size and quality also play an essential role in assessing a football club as a prize asset. Not only will a club with a larger fanbase than its rivals cost less to keep at the top of its peer group but it will also have the best chance of sustained on-pitch success and the bragging rights that follow from that among the owner’s own peer group of billionaires.

But, with the prize asset-based valuation, another peer group assessment on top of the fanbase is very useful in determining whether to sell or not. This is an assessment of one’s rival owners. If the pool of relevant owners is broadly at the same wealth level as you then you might as well keep the asset unless you want to own something else even more valuable. If they are all richer and/or get more from owning the asset than you do, then you should become a seller.

One last factor to take into account alongside the relative size of a fanbase compared to peer group clubs and the wealth and ambitions of the pool of rival owners is the league or leagues the clubs are likely to play in. Again, this can play a crucial role in determining the relative value of clubs.

The English Premier League (EPL) is the most valuable of all European leagues due to its legacy and current competitiveness. Elite EPL clubs with a similar fanbase to those in Spain and Italy can, therefore, afford to match or outdo those clubs in terms of on-pitch success in European competitions but still make a profit. Meanwhile, their European rivals have to choose between enduring losses or losing ground in terms of European silverware.

For top EPL clubs, any move to join a European super league on equal terms to their peers might depress their value and increase the value of their rivals with similarly sized fanbases. Moreover, any spending caps that might help preserve profitability within a super league would reduce their chances of dominating on the pitch and building fanbases further. In turn, this could reduce their relative attractiveness to the billionaires and sovereign wealth funds who want to own the world’s most successful clubs.

In practice

So, where does this leave the likely prices that Manchester United and Liverpool might fetch in the current sale processes? Both clubs are in the top five of global fanbases on the raw numbers, although more research will be needed on the depth and resilience of that fan loyalty.

Even so, projected cashflows and usual business valuation metrics probably won’t get the values much beyond £2 billion to £3 billion, especially if a European super league of some sort ever comes about – with or without them. It is billionaire bragging rights that might take the values beyond £5 billion, especially if people believe trends in global wealth inequality are set to continue providing a ready supply of new potential owners even richer than today’s.

The likelihood that values will get to over £5 billion are, in truth, very high, despite the protests of more profit-focused investors. Both teams offer a seat at the top table of global club football, especially if a super league doesn’t happen, which currently looks the more likely outcome as of last week. But they still probably do even if a European super league does come about and they don’t make the mistake of joining it on equal terms. Given the size of their fanbases, United and Liverpool probably offer a better bet even at those values than Chelsea, where most fanbase assessments leave them outside the top 10 teams in Europe.

If values do get to this level, any involvement by private equity groups alongside billionaires and their family offices will be as providers of credit finance, not risk equity finance, and most likely secured against the cashflows that justify the £2 billion to £3 billion price tag, not the £5 billion to £6 billion one.

And for those that say prize asset-based valuations aren’t rational, it’s entirely rational for a competitive billionaire who has made it financially to want to win on a bigger stage, especially if they believe that there are plenty of other billionaires willing to step in to take their place when they have had enough. It’s just a different type of rationality.

Oliver & Ohlbaum Associates is an independent strategy advisor in the media, entertainment, and sports sectors.

Image: Christopher Furlong/Getty Images