In the last couple of decades sport has become particularly big business and in the top leagues in the land success is becoming more and more crucial. This can be evidenced by the rise in professionalism, prize cheques and by the increasing number of teams being taken over by rich individuals. Whilst the rewards for success are increasing, so are the costs required to maintain success. Clubs without wealthy owners are constrained by the amount of money they are able to raise from areas such as merchandise, ticket sales and broadcasting rights, and even very wealthy owners can struggle for finance when it comes to factors such as constructing a new stadium. One option teams can therefore look towards is raising money through an initial public offering (IPO). This option has not been widely utilised and it has its drawbacks along with its potential benefits, as discussed below.
In order to compete at the top level and meet the financial requirements of modern professional sports, many clubs have put themselves in millions of pounds worth of debt. Not only can this build up to unsustainable levels and limit future spending power, but it can also lead to clubs falling foul of the regulations applicable to them. For example, the Financial Fair Play Regulations introduced in football recently aim to limit the amount of a club’s debt (although this is only applicable to teams competing in certain competitions) and impose penalties on those clubs that fail to meet the requirements. An IPO can therefore be useful in raising money to service this debt, and in the process reducing the interest payments due on the debt.
Increasing stadium size is an excellent way of increasing revenue from ticket sales. This provides a long term benefit, but obviously involves a substantial capital outlay. Even the wealthiest of owners would struggle to fund the construction of a new stadium on a large scale, and so an IPO is one source of raising the requisite funds. The same applies to the acquisition of new talent, although the capital outlay will be less substantial. It is not only the initial fee, but also the ongoing cost of wages, which needs to be covered. When, as is the case with many Premiership football teams, there are numerous players on wages upwards of £100,000 per week, the possibility of external finance can be an attractive option.
A potential benefit of an IPO to supporters and stakeholders of sports teams is that it can act as a restraint on an individual owner from exerting unilateral control. In recent times, Hull City supporters have been irked by their owner’s desire to change the team’s name to the Hull City Tigers, whilst Cardiff City fans expressed dismay at their owner’s decision to change the colour of the team’s kit from blue to red (although it has since been changed back after fans expressed their dissatisfaction). Similarly, Blackpool FC’s fans have protested against their owner’s alleged greed and unwillingness to spend money. If shares were to be offered to the public, one party would be less likely to hold significant control and stakeholders would have a greater influence over the decisions made by the company. From an owner’s point of view, an IPO can also be beneficial in creating an opportunity for them to exit the company. This can be complex in a private company, where there are often restrictions on who shares can be sold to and in any event such a sale is reliant on there being a buoyant market with prospective purchasers.
Despite the potential advantage in respect of enabling an exit for the owner of a sports team, an IPO also brings with it the possibility of losing control over the club. There are ways round this, such as by issuing new shareholders with non-voting shares or shares with limited voting rights, but this will not always work and may put off potential investors. Regardless, there will be significantly more parties with an interest in the club and this brings with it the possibility of activist shareholders who attempt to galvanize other members in order to force changes in the way the club is run. Even if the majority of shareholders are passive, it may only take one shareholder with a very small stake in the company to stir up issues, and there is the possibility of such shareholders using their rights under legislation to attempt to bring about change which is not desired by certain more significant shareholders.
IPOs also bring with them significant challenges in terms of regulation and cost. The process of listing shares generally takes several months, and will inevitably rack up fees incurred by lawyers, financial advisers and the like. This is combined with the opportunity cost, with significant time being dedicated to the process by members of the company who could be making better use of their time focusing on other aspects of the club’s operation. On top of this, there are various regulatory requirements to comply with. Shareholders’ meetings must be held, and if the club has not stipulated a minimum purchase requirement on offering their shares for sale, there may be hundreds if not thousands of shareholders with a right to information and attendance at meetings. Furthermore, other information relating to the company must be disclosed, including financial information which the club may prefer to keep quiet. Not only is there a cost burden in compliance with these regulations, the disclosure of financial information can also be an issue, for example in affecting a club’s negotiating position when attempting to agree deals.
A final, yet crucial, issue is the difficulty in attracting investors. This may not be an issue for certain sports team who have a global brand and following, but for smaller teams it can be a big sticking point. For a team such as Manchester United, garnering investment is less difficult because many supporters just want to be able to say they own a share in the club. But for smaller, teams, the fact that there is limited return on an investment is a bigger problem. Sports teams are unlikely to pay dividends, and instead invest monies back into the club. The attraction in investing is therefore more limited than in most companies as investors are reliant on capital gains.
An IPO is a good option for quickly raising funds and limiting an individual’s power, but it does come with its drawbacks. There have not been too many sports teams to have listed their shares and many that have, such as Leeds United FC and Chelsea, have since de-listed. That said, it can be fruitful and many would point to Manchester United as evidence that it remains an option worth considering.