(Bloomberg) — It’s no secret that Wall Street likes to test the rules. Mortgage-backed securities, options pricing, credit risk, SPACs — all have been subject to what’s known as financial engineering. Now, it’s the turn of football.
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Ever since a US consortium led by Clearlake Capital acquired Chelsea Football Club for £2.5 billion ($3 billion) in May, co-owner Todd Boehly has led a charge to outbid rivals for star players. The result was close to £600 million this season alone, more than the total spent in the French, Spanish, German and Italian top leagues combined during the recent January transfer window.
American high finance’s ownership of European football clubs is not a new trend. AC Milan, Atletico Madrid, Crystal Palace and Genoa CFC are all among those owned or part owned by private equity investors. What separates Clearlake from the pack is the sheer size of the gamble.
Boehly, a private equity investor who became a billionaire from trading loans, and his co-owners believe the club could ultimately overtake larger rivals to become the biggest in the world with a sustainable financial model.
What has yet to be proved is whether the buy-big transfer policy is another example of Wall Street nous that will reap its private equity investors outsized rewards, or a case of testing the rules governing the finances of a sport that’s seen many a club owner nurse painful losses.
“Chelsea’s spending has been bold, but the jury is very much out on whether it will work from a financial or footballing point of view,” said Dan Jones, a sports business adviser. “The scale of this transfer activity is huge.”
Chelsea’s transfer strategy is to spend big for young players, but place them on lower wages than previous stars, according to a person familiar with the matter. Sources at Chelsea say the plan was the brainchild of the club’s private equity dealmakers, who believe that London’s pull as one of the world’s major cultural and financial hubs will mean Chelsea’s value will continue to rise.
At present, the west London club sits 10th in the English Premier League. The top four teams get places in the lucrative Europe’s Champions League, a tournament Chelsea won in 2021 to bank about €120 million ($128 million) in prize money. It’s still in this year’s competition, though lost at Dortmund in Germany on Wednesday night in the first of two matches in their knock-out tie.
The argument from Chelsea’s headquarters is that the transfer policy is a clever example of financial engineering rather than simply throwing money at whatever sticks.
Governing Europe’s clubs are a series of so-called Financial Fair Play rules. In the case of signing new players, 90% of annual revenue is allowed be spent on transfers and wages, dropping down to 70% by 2025. The idea behind the rules is to stop larger clubs with deeper pockets spending billions revamping their squad to blow their rivals away.
Chelsea found a solution often used by financial firms looking to defray the costs of mergers or expenses over a longer period. Instead of booking the hit of buying a player this year, Chelsea spread the cost across a series of years.
Take the signing of Ukrainian winger Mykhaylo Mudryk for £88 million from Shakhtar Donetsk. Much of the deal will be divided over his eight-and-a-half-year contract at Chelsea. Similar deals were written for French defenders Wesley Fofana and Benoit Badiashile, and English midfielder Noni Madueke.
Putting players on longer contracts is a risky proposition, said Jones, former head of Deloitte’s sports business group. If a player turned out worse than expected, their long contract would be a liability and if they did better than expected, the agent or the market would likely force a mid-contract renegotiation. In terms of the profit and loss impact, it’s purely a timing change, he added.
On the plus side, spreading transfer costs over a longer period can help avoid breaching rules set by European governing body UEFA and the English Premier League, according to Jeremy Drew, head of sport at international law firm RPC. Also, homegrown talent from Chelsea’s “sophisticated academy” likely counts as cost-free, so any sales are booked as pure profit, he said.
“Clubs are constantly reviewing the different iterations of financial regulations to see where the edges and angles are,” said Drew.
And Chelsea’s new owners no doubt have the ability to do that. Boehly, 49, is a minority investor in Chelsea along with billionaire Hansjoerg Wyss. The real financial power — and risk — lies with Clearlake Capital, founded by former Wall Street dealmakers Jose Feliciano and Behdad Eghbali, who own about 61% of the football club.
Clearlake’s track record in spotting undervalued assets and making a quick return includes tech firms in recent years. It bought software company Dude Solutions in 2019 for a sum small enough to go under the radar. It then backed Dude’s acquisition of some smaller rivals, followed by a rebrand and sale to Siemens for $1.8 billion in 2022. Another one was ProVation Medical, bought in 2018 for $180 million and sold for $1.4 billion in early 2021.
Chelsea is a different league. It’s Clearlake’s largest-ever deal, and its first sports investment. So far, Boehly has taken the reins. A former dealmaker at Guggenheim Partners, he’s previously shown good timing on major sports acquisitions, and isn’t afraid of paying a record price in the hope of making an even bigger return.
In 2012, while still at Guggenheim, a group of investors including Boehly, Guggenheim Chief Executive Officer Mark Walter and basketball legend Magic Johnson, spent $2.15 billion buying the Los Angeles Dodgers baseball team out of bankruptcy. That was almost double the top price ever paid for a US sports team.
Two years later, Boehly helped engineer an $8.35 billion deal — spread over 25 years — with Time Warner Cable to show their games on a new regional network, paying back the investors and freeing up cash to rebuild the team. In 2020, the Dodgers won the World Series for the first time in 32 years. Boehly still has a 20% stake, and in 2021 bought a minority holding in the LA Lakers basketball team.
Boehly left Guggenheim in 2015 and launched investment firm Eldridge, seeking out businesses with stable cash flows to securitize. Portfolio company Security Benefit — a US retirement insurer with $45.9 billion in assets — often buys part of the debt.
At Chelsea, Boehly initially took the on the role of interim sporting director, usually associated with negotiating with executives and agents. He quickly secured the £54 million acquisition of defender Marc Cucurella after inviting him to his villa on the Greek island of Mykonos. Like others, Cucurella’s contract is spread over six years.
Chelsea, though, now has a bloated squad and that’s where the risk lies in potentially coming up against football’s financial rules. Attempts to offload players failed, with one attempt collapsing at the last minute because of botched paperwork.
Whether part of the grand plan or not, that raised questions about the speed of Chelsea’s purchases without offsetting some of them with sales. Boehly and Clearlake could have spent the same amount over a series of years, building a stable squad and installing their vision on how they want Chelsea to be run.
Speaking to Bloomberg in 2019, Boehly made no secret of his desire to own a Premier League club. “It’s hard to buy quality and also not have to pay up,” he said. “It’s a question of can you continue to build on what you’ve acquired at that price. I don’t think you should expect 30% rates of return on them, but I also think they are very stable.”
In the short term, the patience of fans — notoriously fickle at the best of times — is already wearing thin. Cucurella was booed off the pitch by his supporters at a recent London derby game. Chelsea play Southampton on Saturday, a team without a manager and bottom of the table. Only a win will do for those supporters to start believing in Boehly’s masterplan.
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