The Super League – bad for the game, good for the owners

As football fans around the world will surely have heard by now, 12 of Europe's biggest clubs planned to break away from the UEFA Champions League and set up their own competition – the European Super League. The project now appears to have collapsed as the English clubs have all pulled out. Nonetheless, it's worth examining why the clubs wanted to breakaway in the first place.

And, as some of the clubs are listed on the stock market, this is a great chance to write about two of my favourite things at once – investing and football, not necessarily in that order.

Before you get your pitchforks out, I want to be clear: as a football fan I hate the Super League idea and I'm happy to see it fall apart. But as an investor I can see the logic.

How does the current UEFA Champions League work?

The current Champions League is the top European club football competition. Every country in Europe has its own domestic football league. Clubs that finish in the top few spots in each domestic league qualify to compete in next season's Champions League. These clubs then play in a pan-European tournament to find the best team on the continent. The financial rewards for both qualification and a deep run in the competition are lucrative and have a meaningful impact on club finances.

How would the Super League have been different?

The Super League would have been a partially closed-shop – the 15 founding clubs (12 with 3 more to potentially join after the inaugural year) would have qualified automatically every year regardless of domestic performance. There were other proposed differences to the structure of the competition, including more matches between the big clubs to generate more revenue, but from an investor's perspective it's the closed-shop element that really matters.

Why does the closed shop matter?

Take a look at Manchester United's financial results between 2015 and 2019. I've excluded 2020 as the pandemic makes this a truly exceptional year. Revenue grew 58% between 2015 and 2019, which is pretty good, but operating costs also rose 52%, which has largely cancelled out the revenue growth. The end results are slim operating margins and relatively poor returns for shareholders.

Source: Company Accounts.

For Manchester United and the other clubs to make more money it's not enough to get more cash flowing in – the clubs also need to stop money flowing out. The two biggest operating costs are player wages and transfer fees (the costs of buying new players).

These costs have grown about as quickly as revenue because competition in Europe's domestic leagues is astonishingly fierce. Only the top four Premier League clubs qualify for the Champions League each year. That means every year, unless someone outside the top four wins the Europa League, at least two of the 'big six' (Manchester United, Manchester City, Liverpool, Chelsea, Arsenal and Tottenham Hotspur) are going to miss out. And this year both Leicester City and West Ham look like they could muscle into the qualification spots, piling on yet more pressure.

As a result, every club must continually spend ever increasing amounts of cash on player salaries and transfer fees to stay competitive. Missing out on a Champions League spot has real financial consequences, so failing to qualify for a few years means less money coming in, which means less money to spend on wages and transfers and so on. Eventually the clubs can find themselves at risk of dropping out of the European elite all together. This incessant need for investment severely limits profitability.

A closed-shop Super League would've reduced the need for this massive spending. The ‘big six' would qualify automatically every year – so no more stress about missing the top four, and far less pressure to spend big to attract the best players.

Less spending on players means potentially more money for dividends and shareholder returns.

This is ultimately the mechanism that could unlock the vast profit potential of some of the world's most loved and recognisable brands.

What could this look like?

Fortunately, we actually have a real-world model of what profits in a closed-shop sports league could look like. According to Forbes these are the five most valuable teams in America's NFL. We can't compare the margins directly to Manchester United's because the accounting is slightly different, but they still show a healthy level of profitability.

Source: Forbes, 2020.'Cash profits' are earnings before interest, taxes, depreciation and amortisation.

The NFL is a closed shop. There are 32 teams, and no one can get relegated no matter how badly they do. Furthermore, because players can't go anywhere else the teams are able to implement wage caps, further limiting spending requirements. It's no coincidence the Super League planned similar wage and transfer spending caps.

Backlash

The Super League project had the potential to help the founding members become very profitable. The brands are among the most famous in the world and inspire a level of devotion and loyalty that most companies could only dream of. Without the need for constant investment, margins could have got closer to NFL levels and higher profits may have followed, although there are no guarantees. All investments and any income from them can fall as well as rise in value and investors could get back less than they invest.

But the backlash has been staggering.

Several big clubs, including the reigning European champions Bayern Munich, refused to join. Domestic fans near universally condemned the idea and politicians spotted an open goal. The Super League founders probably expected some pushback from football's own authorities like UEFA, but I doubt they expected Boris Johnson and Emanuel Macron to come out quite so strongly against it.

As a fan I'm happy to see the Super League collapse. But if it had gone ahead, football clubs that made the cut could've started to attract the attention of more hard headed investors as well as devoted fans.

This article is not personal advice. If you're not sure if an investment is right for you, please speak to a financial adviser.

Investing in individual companies isn't right for everyone. You should make sure you understand the companies you're investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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