Soccer in Italy: A Buyer’s Market

Soccer in Italy is broken – or so I’ve heard.

The world’s best no longer ply their trade in the land of the azzurri.  They’ve departed, taking one-way tickets to Madrid, London, and Paris.  The once-glitzy sides of the Italian peninsula have been ransacked, leaving outdated, cash-stricken ghosts of the glory days past.

This exodus of quality has made way for an abundance of complexity, controversy, and adversity.  The Calciopoli scandal rattled the nation in 2006.  Racial slurs and chants followed Balotelli at Milan in 2013.  A Napoli fan was killed ahead of the Italian Cup Final last May.  The Italian Federation president wants to reduce the league size to 18 teams.  Back taxes and unpaid wages at Parma have led to the club’s sale this season for the sum of €1. Twice.

This is not the 90s Serie A of Maldini, Baggio, and Weah.  From the outside looking in, things look pretty bad.

Andrea Pirlo, one of Italy's top talents. Image courtesy Zimbio

Andrea Pirlo, one of Italy’s top talents. Image courtesy Zimbio

To see the wreckage firsthand, I’ve traveled to the Northern Italian city of Turin via New York.  Myself and forty-one thousand Italians are gathered at the new Juventus Stadium on an early October night to see Italy’s best, Roma and Juventus, both undefeated and tied for first place.  A five-goal, controversial thriller, topped off with an 88th minute Bonucci volley hands Juventus the victory, three points, and the top spot in Serie A.

It’s over the course of the next two weeks traveling through the country that I learned that although soccer may be broken in Italy, it is not beyond repair.  And interestingly enough, using  basic investing principles,  I’ve come to find that the same elements that have critics waving white flags for calcio in Italy –  the outdated operating models, the lack of star power – make Serie A not a lost cause, but instead, the perfect buying opportunity.

Buy Low

The classic mantra of “Buy Low, Sell High” is a well-founded principle of investing.  One identifies an undervalued asset, whether due to poor management, bad press, financial complications, or a number of other temporary conditions.  Investors are usually attracted to these opportunities by a discounted price tag that comes in lower than the traditional or “normal” asking price – an indicator of an undervalued asset.   Once business picks up, normalcy is reestablished, or the right management group takes over, the value of said asset rises, and those who recognized the opportunity are left counting their profits.  Ideally, an investment is made based on the potential future benefit of an asset’s fundamental qualities.

Such is the state of the business of soccer in Italy: a market of undervalued assets waiting to be recognized and revitalized.

Financially, Italian soccer is a bit of a mess, a land of deferred opportunity attributable to a failure to adapt to the modern game where money drives results, and ironically, brings in more money.  Additional factors bringing down the league include disconnected fan experiences on game day, violence, and an overall failure to transition teams with gloried pasts into modern, global brands, like industry leaders in England and Spain.  On top of that, teams play in antiquated stadiums owned by municipalities rather than clubs, holding back match day revenue from the levels known by the likes of Manchester United and Real Madrid.  To illustrate, Deloitte’s latest Money League indicates Manchester United earned one-hundred and twenty-nine million euros (€129 mn) in match day revenue in the 2013/2014 campaign.  A.C. Milan, on the other hand, earned just twenty-five million (€25 mn), a stark contrast that indicates the potential effects of the revenue stream.  These are conditions that have set, and will continue to set, Italy back in the world of soccer, both on the field and on the balance sheet.  But all of the aforementioned complications have created a buyer’s market, considering the passion for and legacies of Italian teams both domestically and throughout the world.

Market Conditions

In Italy, like the rest of Europe, soccer is the biggest sport in the country, deeply instilled within the culture, adored by the masses, and played everywhere (literally everywhere: beaches, streets, sidewalks, and malls – yes, organized matches inside of malls).

Italian Clubs have proud pasts as Champions of Europe, winning 20% of all European Cup/Champions League titles, second only to Spanish clubs.  Domestic interleague competitiveness is rivaled only by that of the English Premier League, with some top class players still calling Serie A home, such as Juventus’ Andrea Pirlo and Paul Pogba, and Napoli’s Gonzalo Higuaín.  Attendance numbers are promising, with half of the league averaging twenty thousand spectators per match, despite the adverse conditions noted above.

Further adding to the upside is that anyone willing to invest in an Italian side can work towards regular, relatively manageable access to Champions League action and sizable UEFA broadcasting pool distributions typical for Serie A teams.  This disbursement is the amount paid to clubs for their participation in the Champions League, and is influenced heavily by domestic television broadcast deals, the number of teams competing from each respective country, and of course, performance.  It’s the reason that PSG, the only French team to make it out of the Group Phase last year, netted the second highest Champions League payout, despite only bowing out to Chelsea in the Quarter Finals.

In the years to come, the importance of and focus on the Champions League will grow as the disparity between top tier and average clubs widens.  The public’s demand will continue to ascend for the noticeably elevated quality of play, high stakes, and end to end action typical of the knockout rounds of the Champions League.  So too will the associated payouts grow.  The big money era of soccer in the world will be defined by Champions League action, both on the pitch and financially.    Serie A offers relatively easy access into the Champions League compared to England and Spain, which is becoming more competitive as investors and clubs vie for just four spots in the competition.  Any club that can make the right investments on the field to build a standout squad, with the accompanying decisions in the front-office, can claim a regular Italian spot in the Champions League for the foreseeable future.

All things considered, the basic framework is in place to turn the clubs of Italy, and Serie A as a whole, into a bonafide cash cow.  The quality of play, the competitiveness of a league, and the enthusiasm of supporters, are the foundation of any sporting business success – what’s lacking is the administrative direction, infrastructural improvements, and most importantly, money, needed to return Serie A to greatness.  Though arduous in nature, these are achievable, realizable challenges that for the right investor can prove to be extremely profitable.

Consider any emerging league in the world of soccer, Major League Soccer in America for one.  Through twenty years, the league shows promise with expansion, record attendance, and all-around sustainable growth that improves gradually year to year.  Even critics would be hard pressed to classify the league’s progress and prospects as anything but encouraging.

One of the missing pieces in America barring it from the top tier leagues of the world is quality of play, a complex issue deeply rooted within the development system and national culture.  Stemming from the quality gap are issues like compensation for players, club profitability, and maintaining consumer interest levels and attention in a market dominated by American football, basketball, and baseball.  The opposite is true for Italy.  Investment to attract and maintain premier talent, combined with adjusting the administrative aspects of club operations, are minor fixes when considering the already existing elements of world class play that is adored by the masses.  To build what Italy has would take a lifetime – to lift it from the ashes would take a couple of seasons.

PSG, the model takeover.  Image courtesy Reuters.

PSG, the model takeover. Image courtesy Reuters.

A model transformation which the Italians should look to replicate is that of Paris Saint-Germain.  In 2011, the Qatari Sports Investments group purchased a majority interest in the club for around USD $60 million.  New management cleaned up the PSG brand, brought in some premium talent like Zlatan Ibrahimović and Thiago Silva, and ultimately built one of the largest earning clubs in the world, growing at an incredible pace in a relatively short period of time.  In three years, PSG went from outsiders to pace-setters for two reasons: investment and smart management.

A similar approach in Italy would likely have an enhanced effect and return on investment for ownership on the domestic and international fronts, given a rich history and an already devoted local and global fan base and support, which was virtually nonexistent in the case of the Parisian club.  Management transformed PSG from mediocrity to a luxury item; there’s significantly less work to be done in Italy with a higher return on investment to be gained.

American Opportunism

With opportunities aplenty, change in the form of foreign investment and modern operating methods have started to trickle in, most notably, with American James Pallotta’s 2011 purchase of AS Roma.  Pallotta has ushered in a new era at the club, where an increased level of competitiveness both in Italy and in the Champions League has trended revenues upward.  Most importantly, he’s established a sustainable business model to usher Roma into the era of modern sports administration and functionality, all while increasing the club’s global appeal.

Off the pitch, Roma have stepped up commercial efforts in securing global partnerships and agreements, while a new Roma owned stadium is set to open in 2016.  Under Pallotta, Roma has taken unprecedented commercial and social media efforts to build the global Roma brand, with agreements with Nike, Volkswagen, and Disney.  The club is also a regular on the American summer preseason tour along with Real Madrid, Manchester United, and Liverpool, with an Asian tour in the works for this summer.  Internally, the club just linked up with Goldman Sachs to refinance some of its debt.  In just a few years, through foreign investment and management, Roma now lead the way toward the future of Italian soccer.

Similarly, this past October, New York based attorney Joe Tacopina and Montreal Impact owner Joey Saputo purchased seven-time Serie A champions Bologna Football Club.  Time will only tell, but for a sum just over $25 million dollars, the two investors appear to have executed a great piece of business.

Bologna owners, Saputo and Tacopina.  Image courtesy Goal.com.

Bologna owners, Saputo and Tacopina. Image courtesy Goal.com.

Founded in 1909, Bologna is yet another example of the “buy-low” mentality in action, similar to that executed at Roma.  The club was last year relegated to Serie B, Italy’s second division, and has not won the Italian Championship since 1964.  Since 2010, the club has been subject to administrative and financial turmoil, including changes in ownership, unpaid wages, and general cash flow issues.

Now for the upside: Bologna currently sits near the top of Serie B in a play-off Serie A promotion spot.  In the community, the club is deeply integrated within local culture and supported accordingly, as evidenced by an average 2012/2013 average attendance of over 21 thousand fans – a relegation year.

Essential to any club takeover is location, where occupying a major metropolitan city is key – think Chelsea in London, Roma in Rome, and, again, PSG in Paris.  Importantly, Bologna more or less fits the bill as the seventh largest city in Italy, and an economic, industrial and transit hub for the northern part of the country.  Boasting the largest economic growth rate in all of Italy, several large Italian, globally renowned companies call Bologna home, including the likes of Lamborghini and Segafredo Zanetti Espresso.  It’s also a city rich in culture, learnedness, and history, with medieval roots, well-preserved architecture, and an avid, diverse student population frequenting the world’s oldest university.

By connecting the dots, you can start to see the pieces in place that mark Bologna as a strong environment for a prosperous club, namely a metropolitan community and dedicated fan base (see relegation year attendance numbers above).  With its strong business influence, there’s opportunity for local and international corporate relationships and interaction, which can push commercial and matchday revenue through partnerships and luxury suite packages.  Bologna isn’t London or Paris, but it’s far from a lost cause.

Since acquiring the club, Tacopina has assumed presidency, prioritizing a return to Serie A, with promises to invest time and effort into the club, as well as renovations to their home at the thirty-eight thousand seat capacity Stadio Renato Dall’Ara.  As an integral player in Pallotta’s Roma takeover, and former Vice President after the takeover, Tacopina has the know-how and experience within Italy to re-energize Bologna.  He’s further assembling an executive team to help lead the club in the boardroom by bringing along the likes of the recently resigned Roma Director Claudio Fenucci.

If things go according to Tacopina’s plan, Bologna could eventually be in for big business.  With the same ideology, so could a number of other clubs in Italy.

In short, Italian history and culture have already done so much of the leg work towards building a premier soccer enterprise over the past century.  Clubs around Serie A need a few adjustments, a new method of operating and offering themselves to the world, and club-owned stadiums through which they can generate their own match day revenue.  On the pitch, they’ll need the investment to buy and keep top caliber players.  If money can bring some of the world’s best to the French League, then it can also bring them to Italy.  It’s through these factors that make an investment in Italian clubs among the wisest in the world of sport today.

Watch-List

The following teams represent a few clubs that present attractive opportunities in Italy for prospective investors, based on the criteria and circumstances presented above:

Napoli – Napoli is the fourth-most popular club in Italy, behind Juventus and the two Milan squads.  The club garners support from the entire Southern region of Italy, a major global tourism and vacation destination with a warm climate and an easily accessible international airport.  Financially, the club is trending upwards, finishing 16th in Deloitte’s latest Money League analysis.  With one of the best attendance averages in Italy (approximately forty-thousand spectators) and a squad with legitimate quality, there’s not too much work to be done at Napoli in comparison to its competitors.  That will come at a cost, but Napoli is “close” – an elite player or two, and a top-tier manager, away from being genuine Serie A contenders and Champions League regulars.  With issues of fan violence on match days and an antiquated home in the Stadio San Paolo, a few tweaks to administrative matters, branding, and business model (not to mention the right price) could take Napoli to the next level.

Torino – Is there room for another club to be supported in Juventus’ city?  Call me crazy, but I think so.  After thirty-six hours in Turin, the first Juventus fan I saw in the city was on the bus to the match; everyone else preferred Torino’s colors.  Torino, one of the most successful Italian sides in history, is fiercely supported by the city’s locals, with seven Scudetto titles in their trophy case.  Torino makes sense from a logistical standpoint and in terms of a target audience.  Similar to Bologna, the city has strong cultural and economic roots, hosting the automobile industry’s FIAT, Alfa Romeo, and Lancia, providing a real opportunity for growth with locally headquartered but internationally established brands and corporations.  With the club coming off a bankruptcy/reorganization in 2005 – a discounted price tag might be a deal breaker in attracting a prospective buyer.

Fiorentina – Fiorentina has rollercoastered through the 2000’s era, spanning from a fourth place finish in Serie A and a run to the knockout phase of the Champions League, to relegation from the Calciopoli scandal and complete nonexistence in the early 2000s.  Stability has since been reestablished with a solid player development and talent identification system, complemented by some notable coaching performances over the years.  In 2002, the club was brought back to life by Italian leather goods industrialist and Tod’s chairman Diego Della Valle.  Florence also holds the cultural, and economic attributes that make it an attractive locale for a club, with the fashion industry and tourism driving the local economy.   There’s room for growth for Fiorentina.

Buy low.  Build an empire. Then sell never.

 

What do you think about Italy as a buyer’s market for professional soccer? Let us know in the comments section below, or via Facebook or Twitter.

Reporting on the business side of the world's game.