Manchester City deal is good business for China

December 1, 2015

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Sport tends to consume capital rather than create it. Acquired kudos often bridges the gap. The $400 million investment by two Chinese groups in one of the UK’s most successful teams could break the mould. Still, investors in English soccer seem to value trophies above profit.

Abu Dhabi royal Sheikh Mansour bin Zayed al-Nahyan has scored on both fronts. Manchester City – nicknamed the Sky Blues – is one of Europe’s top teams and currently leads England’s top flight Premier League competition. Al-Nahyan bought the club from Thai politician Thaksin Shinawatra for 200 million pounds in 2008. Trophies have come, at least in part, as the Sheikh ploughed 1 billion pounds into the enterprise. Still, the Dec. 1 investments imply an equity value of 2 billion pounds ($3 billion).

China’s CMC Holdings and CITIC Capital are paying a rich price for the 13 percent stake in City Football Group – the holding company behind Manchester City. Including the group’s net debt, the 2 billion pounds price-tag values the enterprise at 6.1 times last year’s revenue, a Breakingviews calculation shows.

That’s an eye-watering 20 percent premium on quoted English Premier League rival Manchester United, which trades on 5.1 times trailing revenue. When Wang Jianlin, boss of Chinese property conglomerate Dalian Wanda, bought a 20 percent stake of Spain’s Atletico de Madrid in January, the implied enterprise value was 4.5 times last year’s sales.

City’s financial track record has improved recently, but is still more chequered than the team’s performances on the pitch. After generating an operating loss of 17.7 million pounds in the 2014 financial year, it made a profit of 15.8 million pounds before interest and tax last year. But its operating profit margin of merely 4.5 percent still pales in comparison to rival Manchester United’s 15.7 percent.

If City can keep players’ wages under control and the team can keep winning, these figures are likely to improve. Revenue from the English Premier League’s record 5.1 billion pounds television rights deal with Sky and BT will boost all top-flight teams and may put more silverware in the Manchester City trophy cabinet. But there’s a bigger prize, already illustrated by the way China’s President Xi Jinping visited Manchester City’s Etihad stadium when he travelled to the UK in October. The bigger trophy being chased – in the UK and China – is soft-power recognition.

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