Chinese Investment in European Football Giants

Chinese Investment in European Football Giants

Chinese Super League is known worldwide for its massive transfer offers and huge wages that from time to time manage to lure even the best football players. Whether the Chinese Super League project will succeed, or more likely fail, one thing this is certain: there is a growing interest in football in world’s biggest market – China.

Ever since Roman Abramovich bought Chelsea FC in 2003, there are more and more billionaires ready to spend a fortune on expensive new toys – European football clubs. Last club that joined this ever-growing group of clubs owned by rich foreign investors is was arguably the biggest one – AC Milan.

UEFA’s report regarding financial developments in European clubs in the 2015 names China as the biggest spenders on foreign clubs. Therefore, it is not a surprise to see that AC Milan was bought by Chinese invesment group called Rossoneri Sport Investment Lux and lead by Yonghong Li. Rossoneri Sport Investment Lux had to pay staggering €740M to persuade former AC Milan owner Silvio Berlusconi to sell 99.93% share of the club. This was to date the biggest Chinese investment in a European football club and it furthermore strengthened Chinese grip on Italian football.

Now, Derby della Madonnina (derby between Inter and Milan) is sarcastically or not, called a „Chinese“ derby, since both of these European Giants are now owned by Chinese investors. Internazionale is owned by Suning Holdings Group. Upon taking owner the club in June of 2016, group’s chairman Zhang Jindong said: “Acquiring Inter Milan is part of Suning’s strategy in becoming a leader in the sports industry in the coming five years. We will make Inter more internationalized.” Same as it was the case at Inter, this sale marks the beginning of a new era in Milan’s history.

Upon finishing the transaction, the joint statement from both selling and buying party said: „The terms of the agreement are the same disclosed in August and reflect of an aggregate evaluation of AC Milan equal to €740M, which includes the club’s indebtedness, equal to €220M as of June 30th 2016. A €90M refund for AC Milan’s running costs anticipated by Fininvest from July 1st 2016 hitherto add up to the evaluation.“

Rich new owners agreed to inherit club’s significant debt, to compensate old owners for operating costs and to inject significant amount of money in attempt to strengthen club’s financial well-being.

Dreams and Reality

If you think this will now surely bring AC Milan’s glory days back, don’t rush to conclusions. This transaction was not easy and it is still not clear what long-term future will bring for AC Milan.

Think whatever you want about Silvio Berlusconi, he is a shrewd businessman which didn’t want to sell the club under price, for the sake of selling the club. He stalled with the sale until he didn’t get the amount of money that made him happy. With clock just about striking midnight on the latest deadline, Haixia Capital Management Co. decided to pull out of the deal, forcing Mr. Li to take a loan from US based hedge fund called Elliott Management.

Ok, massive partners turned their back on Mr. Li in the last moment, but as a man rich enough to be interested in buying and improving financial situation at a massive European football club, why did he need a loan from a hedge fund? According to Italian financial newspaper “Il sole-24 ore” Yonghong Li owns assets worth €500M and Forbes doesn’t name him in the 400 richest men in China. Despite this, he bought the club from Silvio Berlusconi, the 13^th richest sports owner in world, with assets worth about €7B. Now, things get a bit clearer. Without Elliot’s €300M loan, sale would not have happened.

This loan must to be paid back by October 2018, with 11% interest rate alongside €15M arrangement fee. On top of that, Elliott Management will have a member on AC Milan’s board of directors. To continue with worrying information, it is widely understood that Mr. Li will have issues with repaying the money through AC Milan’s revenue, since the club is losing about €70M per year and estimations suggest that club lost about €250M in the last three years.

Not over yet. Sempre Milan suggests that Mr. Berlusconi insisted to put on paper assurances that €130M summer transfer budget will be made available. Even though UEFA’s Financial Fair Play rules tend to be widely ignored, Italian clubs still are most careful when addressing them. Reports from Italy suggest it is the best for AC Milan to avoid European competitions and UEFA’s transfer limitations that follow them and try to receive an exception from Financial Fair Play rules with a reliable five-year plan.

And lastly, David Gentili, head of anti-Mafia council, calls the new Chinese owners to reveal their full identities so that city of Milano, owner of the San Siro stadium, knows who actually is the owner of the football club that is using its venue.

Short Term Plans

Mr. Li, of course, placed his own people on boardroom seats. And here is where I will try to convince you, even though financially situation seems bad, there is a light at the end of the tunnel.

Some of these new boardroom members are Paolo Scaroni, the former CEO of ENI (the biggest Italian energy company), new CEO Marco Fassone, former Inter Milan director, and Marco Patuano, ex-CEO of phone carrier Telecom Italia SpA.

New CEO Marco Fassone revealed some short term plans for the on field success:

“We’ll have a significant budget for the next transfer window, Montella has our full endorsement.”
“quick return” to the Champions League and the glory days of old – “The Champions League is a platform a club like Milan can’t be without”
“We are AC Milan. We can’t afford to sit back and say, let’s see what happens”

These are the words fans want to hear, but what else was he going to say? What interests me is how they plan to fulfill these promises and generate profit.

Mr. Fassone also said that AC Milan will create a China-based marketing company, which will play a big role in revenue growth. On top of that new owners plan to list the club in Hong Kong, the entry to Chinese market. This would seem like a risky move, but China is the biggest market in the world, and football’s popularity is experiencing a massive boom. This move is especially interesting for marketers, since marketing strategy will play a major role in revitalization of a fallen football giant.

The value of European TV rights have also been soaring in China, and even though Premier League still bosses this market, other big European leagues are adopting to the situation. Each in its own and unique way, already described on this blog. As a first massive advertisement on Chinese market, Milano derby, the first ever played with both clubs under Chinese ownership, took place at 12.30 pm local time, simply because that is prime time in China.

Football in China

As already mentioned, according to UEFA, Chinese investors were in 2015 largest investors in foreign clubs. Chinese investors already bought minority stakes in Manchester City and Atletico Madrid and majority stakes in Aston Villa and West Bromwich Albion. But in Premier League there is so much competition among billionaire owners that stepping away from it and “buying” both clubs that participate in one of the biggest football derbies in a league that is on a rise, might prove to be the correct move.

Both Inter and Milan, clubs with great history and tradition, already had massive global fanbases. Their fanbases in China will only grow, since clubs are now Chinese owned and their marketers will specifically target Chinese market.

Before the Rossoneri Sport Investment Lux bought AC Milan, the Italian Giants were already among the top 5 most supported football clubs in China (among Manchester United, Real Madrid, Barcelona and Bayern München).

Therefore, it doesn’t seem like an overestimation to expect that agreement with Chinese retail chains can help AC Milan’s official merchandise reach over 100 million football fans.

Short term goal is to sell AC Milan official merchandise to 5% of these 100 million fans and generate an income of about €250M, while a long-term goal is to double those sales and reach the Real Madrid’s and Barcelona’s heights of popularity in China.

And then there is China, a market that the major clubs have never been able to develop that much. Milan are something extraordinary in China, I saw it with my own eyes. We expect revenues from Asia to be very high.

Marco Fassone

CEO, AC Milan

New Stadium

When a club doesn’t own the stadium, that is a big hole in its revenue streams. Not only the club doesn’t earn from the stadium, in Milan’s and Inter’s case, the stadium costs them each about €4.6M per year in rent. New ownership promised that Milan will own its stadium. As Mr. Fassone said, that doesn’t necessarily mean AC Milan will build a new stadium.

San Siro is one of the most known stadiums worldwide and it is a brand on its own. Buying the stadium from the city might just be the right move, that would offer marketing team a possibility to cash in on the legendary stadium’s brand value.

Since Inter plans to build a new stadium by 2022, buying San Siro seems like the most realistic outcome for Milan. And the smartest one for a club concentrating on marketing strategy.

We want to give AC Milan a stadium in the short term. We know that in Italy it cannot happen straight away… Whether it’s San Siro or a newly built stadium, as long as the club can have its own stadium.

Marco Fassone

CEO, AC Milan

Conclusion

Some time ago I read an article in Top Gear magazine which claimed that manufacturer’s dynasties in racing are down to creative and hardworking people who run the teams and always find the way around the problem, whether that problem is money, engine failure or unforeseen circumstances.

Good team will find a way to win despite the problems.

Same can be applied to this AC Milan’s new behind-the-scenes team. They seem to be goal oriented sharks you wouldn’t bet against, and they look more than capable to find a way how to overcome financial issues that at this moment seem huge.

What is very interesting to us, their key seems to be proper application of their marketing skills in new, massive and growing market. If they succeed I don’t expect them to stop with their marketing strategies. I expect that AC Milan might be on the front lines of a new marketing boom, using still unknown marketing practices.

Their plan definitely deserves Your attention.