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The largest ever Chinese-backed M&A transaction in the European football sector is scheduled to close today (Thursday) as a Chinese-led consortium purchases Associazione Calcio Milan, otherwise known as AC Milan, for €750 million ($799 million) including debt.
The deal is completing one day earlier than anticipated given April 14 is an unlucky number in Chinese, but a number of months later than originally expected following the Chinese government’s imposition of capital controls.
This forced the acquirer consortium, led by entrepreneur Li Yonghong, to seek expensive financing from US hedge fund Elliott Management Corp to bridge the rest of the purchase price and provide loans to cover the loss-making club’s immediate running costs.
The deal’s tortuous progress since its announcement last July underscores the increasing difficulty Chinese buyers are facing in their desire to acquire stakes in European football clubs.
According to figures from sports investment firm, Blackbridge Cross Borders, they have spent a total of $2.4 billion (excluding AC Milan) to buy minority or majority stakes in 23 European clubs over the past three-and-a-half years.
But the Chinese government has effectively blocked a number of deals by refusing to allow domestic companies to remit funds out of the country.
As Bank of China governor, Zhou Yiaochuan, said earlier this year, the government’s main aim is to encourage M&A deals, which improve exports or technological expertise rather than sports club investments, which “aren’t valuable and cause foreign governments concern. These trades aren’t necessary".
Nevertheless, bankers and football consultants believe the pace is unlikely to slow down too much. What will change is the nature and size of deals as the government steers investors away from trophy assets towards acquisitions, which make sound financial sense, or have a clear turnaround plan.
The policy very nearly scuppered Li’s acquisition for AC Milan, leading most of the initial consortium to pull out. This is said to include Baidu’s founder Robin Li, GSR Capital’s Sonny Wu and solar power entrepreneur, Zheng Jianming.
Instead, Li set up an offshore vehicle, Rossoneri Sport Investment Luxembourg (so named after the club’s nickname; il Rossoneri - the red and blacks) and secured a €300 million bridge loan from Elliott Capital, which is believed to carry an 11.5% interest rate.
Bankers say that if Li is unable to re-pay or re-finance the debt, Elliott will end up in control.
But it is easy to see why Li was not keen on pulling out given he had already made an initial non-refundable €100 million down payment into an escrow account before the Chinese government clampdown. A further €100 million non-refundable deposit was paid into escrow in December to keep the deal alive, followed by a further €30 million payment in late March.
For many Italians, the takeover is highly symbolic, not least because it marks the end of former Italian prime minister Silvio Berlusconi’s three-decade tenure at AC Milan. He will now stand down completely according to Italian newspapers.
Expensive valuation
Blackbridge's chief executive, Alexander Jarvis, told FinanceAsia that Li had done well to get the deal across the finish line. But he also believes he has a lot of work on his hands to make sure he retains control by meeting the terms of the bridge loan.
"This is a great deal from the Americans’ perspective: a true case of the empire strikes back," he commented. "AC Milan has been purchased on an extremely expensive valuation and against the wishes of the Chinese government, which clearly wants to limit what it views as vanity deals lacking a clear business plan.”
The club has been sold on an EV/revenue multiple of 3.5 times based on AC Milan’s 2016 sales of €214.7 million according to Deloitte Football Money League data.
It is clear why specialists consider this expensive given other Italian clubs such as AS Roma and Lazio command 2016 EV/revenue multiples of 1.8 and 0.8 times respectively according to S&P Global Market Intelligence figures.
Jarvis, who has advised on a number of football-related M&A deals including at Hull City, Middlesbrough and Southampton FC, also believes the new owner has an uphill tasking turning the financials around. According to UEFA’s most recent benchmarking report, AC Milan recorded the second biggest loss among its member clubs in 2015, falling €89 million into the red.
"AC Milan is a heavily loss-making club carrying a lot of debt," Jarvis continued. "It's not doing very well in the Italian league and will require heavy investment to plug those losses."
However, Andrea Sartori, KPMG’s global head of sports said things might be looking up for the Italian clubs, which have lower match day revenues than their European peers because of years of underinvestment in stadium infrastructure, which they often do not own.
“Italian clubs are reliant on their strong domestic broadcasting market and, in the case of a few clubs, on participation in European competitions,” he said. “Therefore the upcoming negotiations for Serie A broadcasting rights (2018 to 2021) will be crucial in determining whether Italian clubs are able to keep up with the recent growth of other leagues.”
He also believes Chinese investment will help the loss-making Italian clubs to improve their P&Ls. “Ownership by Chinese corporations can provide European clubs with unique access to a relatively under-penetrated market, creating new revenue streams and ultimately increasing the value of the club,” he stated.
New M&A model
Football consultants also believe that while Chinese President Xi Jinping is one of the world’s football super fans, his government will continue to block uneconomic trophy deals. This has yet to deter a raft of Chinese investors who continue to try and plough money westwards.
The biggest ongoing public deal involves a £200 million ($251 million) plus bidding war for Southampton FC between Citic Securities, Shenzhen-based Amer International and Shenzhen-listed Lander Sports. The club made a £4.9 million net profit in 2016.
A £130 million sale of loss-making Hull City FC to Guangzhou Cansing Global and Hong Kong-listed GreaterChina Professional Services has yet to close, as has a deal to sell Reading FC to entrepreneurs Dai Yongge and Dai Xiu Li.
Further down the road, the English press reports that HNA Group is interested in buying a stake in Chelsea FC.
Dalian Wanda is also said to be keen on buying into the English Premier League and is actively mulling the sale of its 20% stake in Atletico Madrid, which it purchased for €46.4 million in April 2015.
Specialists say the latter decision was prompted by chief executive Wang Jianlin’s “loss of face” after a tussle with the Madrid city government over plans to redevelop one of the capital’s most iconic landmarks, Edificio Espana.
Wang sold the building for a loss earlier this year, having reportedly said he was treated “like a dog” by the new mayor, Manuela Carmena.
Whether he will be any more successful in the UK remains to be seen.
In part two of the series, FinanceAsia will examine new financing options being explored by Chinese football investors.
