Chinese companies are looking at initial public offerings as a capital raising and exit plan for a host of sports assets including their stakes in European and Chinese football clubs, as well as the domestic training academies and stadia being developed through China’s National Football Plan.
Some of the country’s leading business groups have begun work parcelling up their sports assets and bankers expect a raft of listings to begin in the next 12 to 18 months from among others Suning Sports, Wanda Sports, Fosun Sports and Jinhua Sports.
Other companies, which own single assets such as English Premier League club West Bromwich Albion and Italian Serie A club AC Milan, are also said to be considering the Hong Kong Stock Exchange as a listing venue according to equity capital market bankers.
The driving force behind these flotations is a desire to release value from existing investments to fund new ones, or in AC Milan’s case to repay the acquisition finance provided by US hedge fund Elliott Management Corp. Bankers also said that while the groups were looking at Shenzhen and Shanghai, most favoured Hong Kong for two reasons.
Firstly, they would be raising capital offshore, thereby making life easier from a capital control perspective at a time when the Chinese government is clamping down on the acquisition of loss-making trophy assets at inflated valuations.
Secondly, bankers said they favour Asia over Europe, where their current brand leaders are based, because they want to tap into a region where retail investors play a more active role.
“If these IPOs are structured correctly, they should be very well received given how football crazy many Asians are,” commented Alexander Jarvis chief executive of sports investment firm, Blackbridge Cross Borders. “If and when Hong Kong, Shanghai and Shenzhen establish IPO Connect schemes, they should be particularly well received by Chinese retail investors.”
However, Jarvis cautions that many of the football-related IPOs are likely to have a strong China focus despite the inclusion of high profile international assets. As is typical with so many mainland-backed deals, it will be real estate that underpins many valuations.
“The real story here is the effort the Chinese government is making to develop football nationally,” he said. “For Chinese companies this presents a great opportunity to get state-owned land for free on the basis they will use it to build football training academies and new stadia.”
In 2015, China launched its Football Reform Plan, with the ambition of improving the country’s Fifa ranking and eventually hosting and winning the World Cup. However, it wants to reach this goal and achieve a sensible return on investment at the same time.
Recent M&A deals such as entrepreneur Li Yonghong’s €750 million ($799 million) acquisition of loss-making AC Milan do not appear to fit this criteria. Fifa figures also show that China was the world’s fifth biggest spender on transfer fees after England, Germany, Spain and Italy in 2016 despite ranking only 82nd in its overall global rankings.
HKEx listing requirements
For prospective listing candidates, there is also the question of meeting local regulatory requirements.
Manchester United, the world’s best-known sports brand, was shown a red card by the Hong Kong regulators in 2011 and eventually listed on the New York Stock Exchange one year later. However, this was the result of wanting to adopt a dual class share structure and not because it had been unprofitable the year before.
Virginia Lee, a partner at Clifford Chance in Hong Kong, said there were three main eligibility tests for an IPO. The first requires a three-year track record of profits.
If a company cannot meet this, there is a second eligibility test covering market capitalisation, revenues and cash flow. If a company cannot meet this, then there is a third test governing market capitalisation and revenues.
To meet the third test, a company needs to have a minimum market capitalisation of HK$4 billion ($512 million) and revenues of HK$400 million for the previous financial year.
Based on this last criteria alone, even UEFA’s two biggest loss making clubs, AC Milan and Inter Milan, would qualify given they recorded respective revenues of €214.7 million and €182.2 million in 2016. And even if they proposed to list at half of Man United’s current stock market valuation of 4.28 times 2016 revenues, they would still qualify under the market cap rules as well.
But Lee also said a second set of rules govern companies which have been acquired. In this scenario, a change of control requires a full financial year to elapse before a company lists and a degree of management continuity. On this basis, the earliest that AC Milan could likely float in Hong Kong would be early 2019 based on a December financial year-end.
Suning Sports the most advanced
Inter Milan is owned by Suning Commerce – the most far advanced in its listing plans according to bankers, who said it was also targeting Hong Kong after giving up on Shenzhen and Shanghai.
The Shenzhen-listed group purchased a 69% stake in the Italian football club in June 2016 for €270 million according to S&P Global Market Intelligence data. After accounting for an €100 million capital injection, the club had an enterprise value of €391.3 million.
According to UEFA’s most recent figures, it lost €140 million in 2015, while AC Milan lost €89 million.
Suning has been building a sports-related ecosystem of clubs, sponsorship and broadcasting rights.
Other potential assets for a Suning Sports IPO, therefore, include Jiangsu Suning, which is currently 16th in the Chinese Super League, plus a host of Chinese broadcast rights - Spain’s La Liga (€250 million in 2015 for five seasons), England's Premier League (a rumoured $721 million for the years 2019 to 2022) and most recently, China’s own Super League.
Italian newspapers also say it is keen to scoop up the Chinese broadcast rights for Italy’s Serie A.
China’s other big domestic player is Dalian Wanda, which spent €1.1 billion in July 2015 to buy Swiss-based sports marketing agency Infront. This is run by Philippe Blatter, who is also vice chairman of Wanda Sports and the nephew of disgraced ex-Fifa president, Sepp Blatter.
The group’s other main international asset is a 20% stake in Atletico Madrid, although football consultants say it wants out after falling out with the city government.
Domestically, it has very big ambitions and launched the inaugural China Cup, a Fifa-recognised international football championship earlier this year. The group has also spent millions training young Chinese players through its “rising stars” youth project.
Smaller but no less acquisitive is Fosun Sports. In 2016, the group spent £45 million ($56 million) on Wolverhampton Wanderers, which made a £5.8 million net profit last year.
Then there is the Shanghai-listed Jihua group, which made its name with military light industrial products, but has ventured into real estate focusing on football academies among others.
Shenzhen-listed Palm Eco-Town Development, run by Lai Guochuan, is also said to be considering the listing of English Premier League club West Bromwich Albion.
According to S&P, Lai purchased an 88% stake in August 2016 for an estimated £185 million. And unlike many of the other listing hopefuls, West Brom is profitable and moving up the Premier League rankings.
One key question will be whether Asia can prove a more successful IPO destination than Europe where 22 clubs are listed and traded by Stoxx Europe Football. In a recent report, KPMG’s Football Benchmark Team concluded that their share price performance has been “stagnant and illiquid.”
For example, English Premier League club Arsenal has a £1.07 billion market capitalisation, but sometimes closes trading days on the London’s ISDX exchange without a single share changing hands.
Manchester United has fared better since its $233 million NYSE listing. It currently has a $2.78 billion market capitalisation and is trading around 14.4 times forward EV/Ebitda and 4.26 times 2016 sales of £519.5 million ($649 million). It has also re-built its profitability over the past five years.
In its latest Football Money League, Deloitte notes a widening gap between the world’s biggest revenue generating clubs and those lower down the rankings. UEFA also says the revenue of an average Premier League club is five times that of a Serie A club in Italy, or Ligue 1 club in France. TV broadcast rights are also double.
For those at the top, the globalisation of football revenues and media fragmentation is opening up new revenue opportunities. As KPMG Football benchmark team concludes, some of the world’s most famous clubs are becoming “professionally managed global businesses,” which should facilitate better access to equity capital markets given analysts and investors will find it easier to model future earnings growth.
Manchester United, for example, derived 53% of its 2016 revenues from commercial earnings (merchandise and sponsorship), 27% from broadcast revenues and 20% from match day revenues. Italian clubs such as AC Milan and AS Roma make 12% to 13% from match day revenues.
For HKEx, the listing of European football clubs would enable the exchange to diversify its issuer base. It has struggled to do so for a number of years following a flurry of deals during the years 2010 to 2011 when a string of luxury goods manufacturers like Prada and L’Occitane listed.
Clifford Chance’s Lee believes its fortunes may be changing. “It’s facing more competition than it used to from other exchanges, but a new drive to target international tech and fintech companies should also help to widen the issuer base,” she concluded.