Rise of Micro-Deals, eGalácticos: How will the post COVID-19 football world look?

May 1, 2020
Posted by: SportsV
Categories: Case Studies, Featured Articles, Features, Home News, Industry News, News, Press Releases

In this latest case study, Akash Punjabi, Senior Accountant at KPMG Australia, delves into what the post COVID-19 football world could look like and what it means for the sports sector as a whole.

Unprecedented is the word that is ringing around the globe and these are indeed unprecedented times as the world is facing a major global health crisis. The sporting world has been paralysed like never before. The European football industry that takes pride in surviving the Global Financial Crisis with a remarkable 1-5% growth (Source: Annual Review of Football Finance, Deloitte) especially during a recessionary period in Europe has now frozen!

COVID-19 has impacted almost every sector, industry and company. The football and the broader sport industry haven’t been immune to it. While my first article was on an analysis on Liverpool X Nike’s kit deal, my second piece explores how the new football world, post COVID-19 could look.

Rise of Micro-Deals:

Stadium naming rights:

Tottenham Hotspur (Spurs) are struggling to sell naming rights of their world-class stadium unveiled last year. Whereas just few months ago, Spurs’ chairman, Daniel Levy was gunning for a £25m/year deal for 15 years (£375m total value), which would have been a record British deal eclipsing Manchester City’s current deal of £21.9m/year with Etihad. However, now a deal of that stature looks extremely unlikely at least for the next 6-12 months as cash-strapped businesses look to rebound during this timeframe.

Typically, stadium naming right deals have been long-term deals lasting ~20 years. It might be worthwhile for a club like Spurs to consider a micro-deal (short-term deal) lasting ~2 years to begin with and once the market has rebounded then enter into a long term deal.

Scenario A – Let’s say Spurs are able to lock in a deal for 2 years at £17.5m/year (a 30% reduction from their original asking price). This would enable them to earn £35m in 2 years. With global markets down by ~30% and the timing of the recovery not in sight, this has created a buyer’s market. Any business which has the financial capability to buy or enter into such a deal is in a win-win situation as they get to associate with a top European club for a deal that is definitely undervalued by 30% compared to a usual market scenario.

Scenario B – With COVID-19’s impact the market is expected to bounce back in the next 6-12 months. Let’s assume Spurs don’t lock in any deal in the next 12 months. After a year, when the market has recovered they crack a deal for their estimated valuation of £25m/year. In this scenario, Spurs have only earned £25m in two years vs £35m in Scenario A.

The below graph displays the long-term benefit to Spurs for an estimated 15 year deal that starts with a micro-deal in the first 2 years at a low value (£17.5m/year) and later switches to a long-term deal with a higher value (£25m/year).

From the graph we can comprehend that the micro-deal would give Spurs a first-mover advantage that would increase their revenue throughout the 15 year term. This mutually beneficial situation for both buyers and sellers could foster such deals in the future.

Sponsors (Shirt, Shirt sleeves and others):

Unfortunately, times like these are resulting in businesses becoming insolvent. West Ham United (WHU)’s sleeve sponsor – investment firm Basset & Gold has run into administration and WHU is looking for a new sleeve sponsor now. WHU could benefit from a deal similar to the aforementioned micro-deal in the short as well as in the long term. Such short-term deals could also be useful for other clubs whose deals are expiring in the near future. Especially since these clubs could possibly face a challenge to obtain a lucrative deal in these difficult times.

Player contracts

With an estimated 20% of the player contracts expiring in the Big 5 European leagues by 30 June 2020, it is highly likely that the short-term contract extensions are an absolute possibility. These could range from a few weeks to a few months. Of course, whether the club and player are interested in a short-term contract extension would depend on various factors (need of the club, player’s fitness/injury record, player needing more security with a long-term deal, etc.).

In the end, it would really depend on the negotiations and consideration of multiple factors. This micro-contracting, which looked imminent a few days ago, will now definitely be a reality after FIFA announced to alter transfer windows and permitted extensions of contracts running out on 30 June, 2020 to ensure the domestic competitions can be completed.

eGalácticos:

Gaming

Real Madrid recently announced their arrival on Twitch (an Amazon-owned streaming service designed for gamers) and participated in LaLiga’s eSports tournament. The key reason for this move as per the club’s Twitter handle was: “We want to increase the scope of our content in the face of the exceptional and difficult circumstances we are experiencing”. A brilliant initiative to keep the fans engaged during these times.

Here are a few other instances of increasing online engagement:

~4.4m viewers tuned in for Formula 1’s inaugural eSports Virtual Grand Prix – A testament for the motorsport industry!

71% increase in Twitter conversations related to eSports and gaming in last 2 weeks of March 2020 vs first 2 weeks of March 2020.

NBA 2k20 players’ tournament was launched on 5 April 2020 with live broadcast on ESPN. The winner being able to claim US$100k to be donated at a COVID-19 related charity of their choice.

These are just some of the examples of how eSports is turning to be a saviour of the sports industry. The engagement and involvement has increased multifold. Hence, there is no reason why eSports and the sporting industry could not work in tandem going forward.

Coming back to Real Madrid, their new stadium is expected to be the ‘best in the world’ as proudly exclaimed by their chairman Florentino Pérez. It is expected to be completed by 2023 and would have a specially dedicated area for eSports. Considering the phenomenal growth for eSports and the increasing interactions with the sports industry, could the next Galáctico (expensive and world-class players recruited by Real Madrid, example – D Beckham, Z Zidane, C Ronaldo, etc.) be an eGalácticos? Well, I might go long on this one!

Other ‘eInteractions’:

These are times that have brought and shall continue to bring increasing innovations in engaging with supporters throughout the globe.

Borussia Dortmund held an online party for their Chinese fans when their game with Schalke 04 was called off due to COVID-19. On the other hand, Chelsea FC have received ~7.5m views by live streaming a 2 hour broadcast of their 2004/05 title winning season with Chinese fans on Weibo and Douyin.

LaLiga Business School has launched free online master classes. All of this and so much more has happened during the COVID-19 pandemic. The online disruption is here to stay. The football industry and mainly the fans are truly embracing it; promising a future scope of extraordinary collaborations in the online space.

More £8.5m Coutinhos:

While the financial impact of COVID-19 is going to be enormous, the impact on smaller clubs would be even worse. Even the funding from Federations may not be able to save clubs as highlighted by sports business expert, Chris Winn. Governments would need to bail out smaller clubs and top-tier divisions would need to support the lower league clubs more than ever before.

All these financial implications would definitely result in deflating the arguably inflated player transfer market. We might see more of the £8.5m Philippe Coutinho deals (Inter Milan to Liverpool) and less of expensive panic buys like the one of Kepa Arrizabalaga’s transfer costing £71.5m – a world record fee for a Goalkeeper paid by Chelsea FC to Athletic Club Bilbao.

The low value deals would also result in less transfer of cash from one party to another and create a low liquidity domino effect in the industry. This could result in higher demand of transfer fee factoring – typically, player transfer fees are received in instalments over a term period. With transfer fee factoring, banks step in to provide the funds upfront to the seller club at a discount of 4-5% while receiving the agreed upon funds from the buyer club on the agreed term dates.

Further, these transfer fee instalment payments act as future receivables for clubs thus assisting in securing funding. The reduction in the receivables (due to lower transfer fees) would also decrease the clubs borrowing capacity and hence securing debt financing could be a challenge. However, this could also have a positive impact in enabling clubs to bring down debts both in the short and long run. For investors, all of this would be an absolute nightmare due to the increased due diligence involved. On the other hand, for fans and the clubs – who wouldn’t love a £8.5m Coutinho bargain? Bring on more Coutinhos, shall we?

Concluding Thoughts:

While the sports industry has been hit hard by this pandemic, the post COVID-19 football world certainly seems to be an intriguing proposition with potential rise of micro-deals, possible emergence of eGaláctico and some bargains in the future transfer market. Moreover, it’s heartening to see bodies like FIFA, UEFA, Federations, Clubs, players and even the support staff doing all they can to bring football back to the fore.

For passionate fans, sports is a critical element of happiness especially during such times. Sports has the ability to bring tears of sadness or unmatchable joy. Sports, indeed has this power!

Stay safe and keep the faith while each one involved in this industry directly or indirectly works tirelessly to make the beautiful game, beautiful again.

For further information, contact Akash via LinkedIn.

#esport #football #formula1 #namingrights #PremierLeague #sportsindustry #sportsbiz #Stadia

References & special mentions

Grateful to Pedro Iriondo, Chris Winn and Marco for their constant support and guidance. Special thanks to Ansul Bayani and Rohit Shetye for our ideation sessions.

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