Silicon Valley Meets Sports: Silver Lake takes a Stake in Champions League Football Club Manchester City

Silver Lake Partners just bought a $500 million stake (10% of the equity shares) in the owner of Manchester City, at a valuation that makes the English football team one of the most expensive sports franchises on the planet.

Silver Lake is one of the world’s largest tech investors with over $43 billion in assets under management including stakes in Alibaba Group, Dell Technologies and Tesla. On Saturday 23th of November, the Silicon Valley private-equity firm officially took a 10% stake in City Football Group (CFG) – owner of the English Premier League powerhouse – in a deal that values the team at $4.8 billion.

source: KPMG Football Benchmark, May 2019

The CFG’s majority owner is Sheikh Mansour bin Zayed Al Nahyan, a member of Abu Dhabi’s royal family. Since buying the team in 2008, he has spent hundreds of millions of dollars on world-class players, and renowned manager Pep Guardiola, in order to build one of Europe’s premier teams and the world’s fifth-highest revenue-generating soccer club in the 2017-18 season. CFG has also managed to expand its footprint by acquiring other football clubs worldwide such as Chinese third-tier side Sichuan Jiuniu, adding up to investments in the US, Japan, Australia, Spain and Uruguay. The group is also in talks to take over Indian Super League team, Mumbai City FC.

source: KPMG Football Benchmark, May 2019

CFG will leverage on the $500 million cash injection from the transaction to continue its expansion strategy, by growing globally through further acquisitions of football clubs and the planned construction of a stadium in New York City. From Silver Lake’s view, the deal is part of its plans to gather sports, media and entertainment groups that attract the attention of millions of consumers globally. Its investments also include mixed martial arts franchise UFC, talent agency group Endeavor (represents leading athletes such as Serena Williams and Novak Djokovic), the Miss Universe pageant and the Madison Square Garden Company. Silver Lake intends to hold its stake for about a decade, but according to sources close to the firm, the PE house could opt to exit through an IPO or a sale to another private investor.

Silver Lake had approached other major football clubs, including Chelsea, finally landing on the bid to Manchester City. The technology-focused firm was attracted by the multibillion-dollar prices paid for football media rights by broadcasters and internet streaming groups. 

While the big clubs still make most of their money from broadcasting rights and merchandising, they are looking for ways to use technology to sell privileged access to fans. Some have developed apps providing exclusive content such as player interviews, short documentaries, press conferences and even match highlights. Manchester City took a taste of the potential value of behind-the-scenes content last year when it partnered with Amazon’s Prime Video streaming service for an eight-part documentary charting the path to its 2018 title win.

Moving to the challenges, some experts blame Silver Lake has not closed a good deal, choosing a strange time to enter the football business. According to Enders Analysis report published last month, the media rights market is weakening; last year’s auction for Premier League domestic rights saw a 10% decline in the total paid by broadcasters. An increasingly common trend sees fewer people choosing to pay to watch football on TV in Italy, the UK and France. Media companies jumped into the live events as one of the remaining ways to bring in advertisers, who are increasingly shifting online. It is a crucial time for clubs to diversify their revenue sources, focusing on matchday and commercial revenues. In order to boost the latter, many European clubs are looking to expand their global footprint and worldwide fanbase

Other criticism on the deal emerged relating to CFG’s sky-high valuation assessed by Silver Lake, seen as excessive compared to its peers in the sports industry. As of July, Man City was ranked 25th, with a value of $2.69 billion on Forbes list of most valuable sports teams. But the new stake brings the club all the way up to No. 2, thereby exceeding the New York Yankees valued at $4.6 billion, but just behind the Dallas Cowboys which are No. 1 with a valuation of $5 billion. However, this new valuation is much higher than the previous one because it includes the other assets of CFG. In addition, Silver Lake acquired preferred-shares in the transaction, which demand a premium, so the real valuation may be lower according to specialists.

Critics however support the idea that Silver Lake over-valuing Manchester City is just an effect of a potential bubble floating on the football industry, made up by inflated transfer prices (players are treated as assets by sports clubs) and excessive investors’ euphoria. Man City’s rival Manchester United is listed on the New York Stock Exchange, and had a market capitalization of $2.75 billion before rumors of the Man City deal. The acquisition lit a spark under Man Utd’s shares, which jumped up to 14% on Wednesday. 

Time will reveal if Silver Lake, one of the most successful private equity firms in the world, has grasped a great opportunity that will generate value for its investors, support its transversal expansion to sports and entertainment, while backing the growth of one of the major sport houses globally or if, instead, it has simply overpaid a stake in a sports club, facing risks posed by negative trends in its industry.

References

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