Multivariate Model - An Optimal Method for Valuing Football Clubs?

The Multivariate Model is a well-known method to carry out the valuation of football clubs. Its main components are revenues, transaction fees cost, assets owned by clubs. While a more optimal approach compared to DCF and Relative Valuation, it also suffers from certain limitations.

The Multivariate Model, developed by Tom Markham in 2013, is used for the valuation of football clubs. It is essentially a multiplier model wherein the fundamental variable is revenue, which is multiplied with certain other variables. It is a variation of the Revenue Multiple approach, with the underlying principle being that a sports franchisee’s ability to make money in the future determines its valuation. Revenue generation capacity depends on three important factors:

1. League, with its revenue streams and player salary cap
2. Stadium and related capacity, corporate boxes, sponsorship and advertising
3. Market, including corporate presence and demographic catchment area

As per Markham, “The main assets of a club, typically a stadium, training ground and player registrations, need to be weighted up versus the liabilities (normally trade creditors and debt)”. Accordingly, net profit and the club’s net assets are included in this model.

Revenue + Net Assets: Revenue includes the cash generated in a financial year. Adding net assets to revenues helps determine the club’s current and future cash generation capability; it is, thus, the backbone of this valuation model.
(Net Profit + Revenue) / Revenue: This ratio examines a club's profitability in comparison to its revenue. Thus, for profitable clubs, the Revenue + Net Assets will be multiplied by a number greater than one, enhancing the valuation.
(% stadium filled) / (% wage ratio): The numerator in this ratio, i.e. the average utilization percentage, illustrates how effectively a club is using the stadium, its core differentiating asset. Higher the stadium’s utilization, higher the valuation. The wage ratio denotes the club’s ability to control its major expenditure, player costs. Higher the player wages, lower the ratio and vice versa.

This leads us to the assumption that revenues are the most important factor in determining a football club’s value. Wage ratio and percentage of stadium filled jointly determine nearly one-third of a football club’s value and are the most relevant indicators of the management’s ability to control costs and exploit assets.

Major Sources of Revenue
All football clubs have three major sources of revenue.

Commercial: Football clubs monetize their global brand via (i) sponsorship and (ii) retail, merchandising, apparel & product licensing. Commercial revenues are largely controlled by the club and, hence, less dependent on market cycles. Liverpool reported a 23% YoY surge in commercial revenues in FY2019, mainly due to sponsor bonuses following success at the UEFA Champions League.

Commercial revenues of top football clubs in FY2019 (EUR mn)

Source: Club website

Broadcasting: It is derived from the global television rights related to country-specific leagues (Premier League, Ligue 1, La Liga, Serie A, and Bundesliga), UEFA club and other competitions. In addition, certain clubs earn from their wholly owned global television channels.

Broadcasting revenues of top football clubs in FY2019 (EUR mn)

Source: Club website

Matchday: It is a function of the number of games played at the club’s stadium, size and occupancy, and prices of tickets. A significant driver of revenue under this category is the number of home games played at the club’s stadium. Real Madrid reported highest matchday revenue in FY2019, totaling EUR 175mn. This was due to high attendance at the Santiago Bernabéu stadium in the 2018/19 season: 1.7mn members and fans, with over 450,000 tickets sold.

Matchday revenues of top football clubs in FY2019 (EUR mn)

Source: Club website

Analysis of Top 20 Clubs
While matchday revenues depend on the capacity of a club’s stadium, broadcast revenues depend mostly on the auction of TV rights. Hence, commercial revenues become important for a club’s financial performance as sponsorships are signed for the foreseeable future. However, since 2015, the importance of broadcast revenues has increased, mainly due to higher rewards by UEFA for clubs competing in the Champions League, and country-specific leagues signing profitable TV deals. Accordingly, broadcasting revenue for the top 20 clubs expanded at a compounded annual growth rate (CAGR) of 11% between FY2014 and FY2019, and surpassed commercial revenue (that grew 8.0%) in terms of contribution. Over the past several years, lucrative broadcast revenues have provided huge pay-outs to clubs. However, the broadcasting segment is evolving, especially with Facebook, Google, Netflix, Amazon, and Apple entering the football broadcast space. Hence, during the phase of disruption, having a bigger proportion of a controllable source of revenue is advisable for clubs.

Revenue split of top 20 clubs in overall revenues (%)

Source: Football Money League Report 2020, Deloitte Sports Business Group

Commercial revenues are very important, but only top clubs can monetize their brand. Clubs such as Barcelona and Manchester United have significant international presence, and therefore the scope for raising money from merchandise sales and sponsorship is huge. There are disparities even among the top 20 clubs as can be seen from the chart below. In FY2019, commercial revenues for the top five clubs (in terms of gross revenue) accounted for 49% of their total revenue. However, the contribution keeps declining as one goes down the pecking order.

Revenue breakup (%) by club rank in overall revenues

Source: Football Money League Report 2020, Deloitte Sports Business Group

The single most important cost associated with football clubs is registration of players, which is factored in the Multivariate Model.

Player Costs
The transfer fees paid by football clubs to acquire the services of a certain player have skyrocketed in recent times. In 2017, PSG bought Neymar for a staggering EUR 222mn from Barcelona. Valuing a player accurately is a difficult task. Football clubs value players based on either historical cost or replacement cost or market-based cost. Players are valued based on their status in the squad, position, league they are playing in, age, talent, and fame.

Top five most valued football players

Source: CIES Football Observatory

Along with revenues and player costs, the Multivariate Model takes into consideration the core differentiating asset of a football club – stadium.

Major Asset – Football Stadium
A club-owned stadium generally means an opportunity to generate additional revenues. Apart from matchday ticket sales, football stadiums also earn from hospitality ticket sales, concerts and other events, naming rights, food and beverages sales, and stadium tours.

Top five largest European club-owned football stadiums

Source: Stadium Guide

Pros and Cons of Multivariate Model –
Pros –

• Is a straightforward approach but not too simplistic like Revenue Multiples technique
• Uses audited accounting data and industry-specific KPIs for an industry that has starkly different characteristics in comparison to regular corporates
• Gives scope for flexibility as the variables in the formula can be suitably adjusted to reflect the true position of various clubs

Cons –

• Rigid underlying assumptions with high emphasis on revenues

Conclusion:
Compared to traditional approaches for valuation of companies, the Multivariate Model is more effective as the Market Capitalization method cannot be universally applied due to a smaller number of public listed football clubs. Moreover, the Discounted Cash Flow method requires clarity on profitability and reliability of operational forecasts, both challenging parameters for football clubs, given the inconsistency in profitability and unpredictability of a team’s on-field performance. The Revenue Multiples technique, on the other hand, is too simplistic and fails to consider a club’s assets, liabilities and ability to control costs and profitability.
Hence, due to the use of industry-specific KPIs and its applicability to any football club, the Multivariate Model has an edge over traditional methods of valuation.