Football's coming home ... from the City

By Dan Gledhill
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Before they curse the fickleness of the stock market, those internet investors whose fortunes have been made and lost during the past 12 months are advised to consult their history books.

Before they curse the fickleness of the stock market, those internet investors whose fortunes have been made and lost during the past 12 months are advised to consult their history books.

The chapter they should turn to chronicles the events of four years ago when the City decided the next big thing was football. Lifted by the £673m that BSkyB had agreed to pay for four years of live Premier League TV rights, the game's finances took off. A whole league of clubs eager to tap the sudden demand for all things round rushed to float. It was the kind of atmosphere that the Francophiles caught up in last Sunday's celebrations on the Champs-Elysée would recognise.

But this party was so decadent that the hangover still throbs today. Of the 20 clubs that have secured either a full listing or joined the Alternative Investment Market, only three have proved consistently profitable for investors who were in from the kick-off. Some of the others enjoyed a brief honeymoon but found that the market's affection soon wore off, never yet to return.

It is a sobering lesson for the optimists who maintain that the market's love affair with internet stocks can be revived.

The question now is whether many of these quoted football clubs belong on the stock market or should return to their more natural private home. Many believe that the success of Manchester United, which at one stage was valued at more than £1bn, is the exception not the rule.

Nigel Hawkins, football analyst at Williams de Bröe, says: "These companies have only one thing in common - they play football. There is no reason why many of them should be floated."

For a start, most football clubs have suffered for no other reason than their lack of size. "It's not just football stocks, it's all small stocks," says the chief executive of one quoted Premier League club.

"The stock market has changed from an arena where venture capital is raised to a home for savers. Instead of funding new companies, a wedge has been driven between big and small companies. Shares which enter the FT-SE 100 perform well because trackers have to buy them, but if it's a stock capitalised at less than £500m, they're not interested."

But it's not just smaller clubs which have been affected. Both Manchester City and Glasgow Rangers are understood to be shying away from planned flotations because of their failure to drum up sufficient interest among the institutional investors with more specific objections to the sector.

"There is just no point investing in most football clubs because people see the revenue being passed straight on to the players," says one analyst. "It's not a normal business. The cost base seems to expand at a faster rate than the top line."

In most industries, he adds, companies manage to increase sales without incurring a similar upswing in costs. But when the revenue of football clubs rises, it is usually a consequence of success on the field.

Success breeds the demand for more success and that requires extra cash, whether it be for paying higher wages, buying players or improving stadiums. All too often, additional income fails to effect an improvement in the bottom line.

The influential football report by Deloitte & Touche, for example, stated that almost all the £101m of additional revenue generated by the Premier League the season before last was swallowed by higher costs, mostly wages.

If these problems exist among even English football's elite, they are writ large among the quoted sector's poorer relations. Of the nine clubs listed on the stock market but playing in the lower divisions, only two managed to make a profit in their last financial year.

And maintaining a stock market listing is not a luxury smaller clubs can afford to maintain willy-nilly. Not only is it expensive, it comes with conditions that many directors, used to the more relaxed atmosphere that private ownership affords, find intolerable.

"There's a ridiculous regulatory framework", says the Premier League club's chief executive. "They are loading more and more responsibilities on to directors of companies."

One Nationwide League club's chief executive, who is considering a move private, bewails the constant calls from season-ticket holders who believe their investment in the club entitles them to a say in its running. The additional scrutiny that a listing brings was most apparent at Newcastle United, which lost manager Kevin Keegan just before its float in 1997 largely because the City demanded clarification of his position.

Not everybody has given up. Preston North End, which last season won promotion to Division One, is ploughing ahead with a £7.5m rights issue to strengthen its squad, develop its youth policy and build new stands. However, chief executive Tony Scholes is realistic about his prospects of success: "Outside the top half of the Premier League, clubs are having more and more difficulty convincing people of the merits of their companies."

According to the stock market, Preston is worth £5.1m - a valuation that seems to ignore a £6m squad and two stands each costing £7.5m to build. Like many clubs, its shares have been hit by the sense of disillusionment at institutions whose investment in football clubs has proved a bum deal.

Most of the pension funds have long since departed the sector, leaving the share registers to the many supporters who remain proud to own a stake in their beloved team. They are unlikely to be particularly fazed by paper losses.

Karren Brady, managing director of First Division club Birmingham City, says: "People holding our investment did not buy it for dividends but for capital growth, and that will come when we get promoted."

As Birmingham prepare for another bid to return to the top flight, the future looks rosy for Ms Brady. But fans who have bought shares in smaller clubs are more likely to find the object of their affections continuing to strain their wallets as well as their hearts.