The Magic Touch: Chinese Soccer Club Going Public?

June 5th, 2014 was a landmark day for Chinese soccer. Jack Ma, the founder of China's largest e-commerce business, Alibaba Group, bought a 50% stake in Guangzhou Evergrande Soccer Club. Ma purchased the top Chinese club for 1.2 billion yuan ($192 million), and aimed to lead the club to new heights. Meanwhile, Jack Ma and Jiayin Xu, the chairman of Evergrande Real Estate Group, announced together that they would take the club public to raise capital by 40% and seek another 20 investors, each holding 2% share .

A Chinese soccer club preparing to go public? It's hard to imagine, given of the depressing state of Chinese soccer at the beginning of 21th century. Guangzhou Evergrande, however, has ascended with a stunning pace, winning all three domestic titles since 2011 and becoming the first Chinese club to take home the Asian club championship this past season.  For Guangzhou Evergrande, floating on the stock market now maybe seem plausible and tangible. Although this is perhaps the first time that a Chinese soccer club prepares to go public, in Europe, it is far less rare. Before making the final decision, Guangzhou Evergrande could learn a lot from the stories of other clubs: both the benefits, and the risks.

Jack Ma (right) and Jiayin Xu (left)

The first soccer club to float on the stock market was Tottenham Hotspur in 1983. In 1982, Irving Scholar, a property tycoon purchased the club. However, he found that the club was operated extremely inefficiently, with more than one million pounds debt left by his predecessor. Soon he figured out that there was only one way to solve this pressing problem. He established a holding company, with the soccer club as a subsidiary, and then floated the holding company on the London Stock Exchange (LSE). The initial public offering raised £3.3 million, which helped the club successfully tackle the debt problem.

Following Tottenham’s successful experiment in raising money through such a new way, (along with the rapid commercialization of the soccer industry) an increasing number of soccer clubs started to go public. By 2000, there were 22 English clubs listed on the London Stock Exchange, the Off-Exchange (OFEX), and the Alternative Investment Market. These offerings raised a total of £167 million , most of which was used to strengthen squads, renovate stadiums, improve liquidity to existing shareholders, and develop commercial operations.

Nevertheless, enthusiasm for investing in soccer clubs faded shortly. After the temporary success, most clubs delisted due to enormous fall of share prices. For instance, Sunderland soccer club originally went public in 1996, with an initial price of 585 pence. Astonishingly, when the club delisted in 2004, its share price had substantially plummeted to 31.4 pence, an epitome of the failure of soccer clubs to float on the stock market.

When it comes to the reasons why soccer clubs could hardly sustain a long term success on the stock market, we need to focus on the nature of soccer clubs: unpredictability.

First and foremost, in soccer industry, the performance of a club fluctuates greatly through a season and always cannot meet expectations from fans and investors. Therefore in many cases, the return is not proportional to the investment, and it is almost impossible for investors to guarantee the return of investing on soccer clubs.

For example, the let's discuss London-based club Queens Park Rangers (QPR). During the 2012-13 Premier League campaign, QPR spent more than £41 million on transfer fees, landing more than ten high-profile players, and saw their wage bill increase by almost £17 million to £68 million. However, rather than obtaining a substantial income based on its huge investment, at the end of the season, the club announced it made a loss of over £65 million and did not escape from relegation. Companies in non-soccer fields such as manufacturing enterprises, investors can precisely calculate the rate of return, gaining sufficient information to decide whether to invest it with little risk.

Secondly, even if a large amount of investment could improve the performance of a soccer club in a season, it is unlikely to ensure that the soccer club could sustain good form for a decade. It is possible that a franchise which was a favorite to the championship last year has to fight to avoid relegation this season. From investors’ perspective, stable and sustainable performance is preferred.

Additionally, some investors of a club’s stock are die-hard fans, who are eager to support the club. A club may find it difficult to attract investors who are not its supporters. Thus, the stock market of soccer clubs is a thin market, with few bid and ask offers, leaving more volatile stock prices.

So if Guangzhou Evergrande is steadfast in its belief to go public, it definitely needs to tackle these issues with its professional management team. If it is to reduce unpredictability of its stock price, it must develop steadily, and to make the investment-return ratio more measurable. Guangzhou Evergrande needs to emulate Manchester United, not only a survivor, but a victor in the cruel stock market.

With a strong base of fans around the globe, the most outstanding strategy Manchester United has been applying is business diversification. Man U significantly expanded its business fields, such as derivative products and new media, in a global context and therefore diversified its commercial operations. Thus even if the club cannot radically get rid of the unpredictability on the pitch, the performance off the pitch has become a relatively larger fragment of the overall operation. With many other stable and measurable channels beefing up the development in a long term, the Red Devils have diversified risk leading to better risk management.

If Guangzhou Evergrande can eventually go public and survive on the stock market in the future, it will start a new chapter in Chinese soccer industry. It is quite possible to obtain huge financial investment and develop to a better global. More critically, after converting to a joint stock company as a requirement to float on the stock market, the club will be pushed to enhance its management and make it more professional. That could positively influence all other Chinese clubs to pursue professionalism in managing sports, a key to reignite the country’s soccer hope.