Liverpool FC - a SPACtactular partnership to build a global football conglomerate?
A merger to kickstart a new era in European football?
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Liverpool FC - a SPACtactular partnership to build a global football conglomerate?
Welcome to this week’s edition of the Techstadium. The Techstadium is a biweekly newsletter focused on the intersection of business strategy, sports, and technology written by me - Max Riegel. You can follow me here on Twitter. If you haven’t subscribed already to the Techstadium, you can sign up here.
In this week’s edition, we’ll focus on the convergence of sports and SPACs - one of the most talked-about financial topics of the year. Over the last months, the Financial Times, the Wall Street Journal, and Reuters have reported that John W. Henry, the owner of Liverpool FC and the Boston Red Sox, is in talks to list his holding company, the Fenway Sports Group, on the NYSE. The process would involve a reverse-merger with the RedBall Acquisition Corp (RBAC). RedBall is a SPAC set up by Billy Beane, who has come to fame as a baseball executive depicted by Brad Pitt in the film Moneyball. The reports suggest that RedBall plans to acquire a 25% stake in FSG at an $8 billion valuation. RedBall would finance the transaction with the $575 million that it raised while going public and a further $1billion, which it plans to raise through a PIPE.
The transaction would be the second major deal involving a Premier League club in the last twelve months after Manchester City sold a $500 million stake to the private equity firm Silver Lake at a $4.8 billion valuation last year. Given the inherent scarcity of elite football clubs, it's worth shedding some light on the potential transaction. Hence, the following paragraphs will portray the actors involved in the rumored transaction, Liverpool FC’s transformation into a data-driven football club under FSG’s ownership, and the potential upside from turning itself into a football conglomerate. Talking about the Red Sox’s role in the deal deserves a whole blog post on its own and will, therefore, not be covered.
Let’s jump right in. (For my American readers, I will refer to “soccer” as “football” throughout this piece)
How does a SPAC work?
Given that SPACs have risen to prominence in recent months, it’s worthwhile to quickly explain its basic principles before diving deeper into the potential deal between FSG and RedBall. SPAC stands for Special Purpose Acquisition Company and is sometimes also referred to as “blank-check company”. The purpose of a SPAC is to raise capital by going public to pursue a minority investment in a private company once the SPAC is listed on the stock exchange. The process of a SPAC investing into a private company is commonly referred to as a “reverse merger” and is characterized by the fact that a private company takes the SPAC’s place on the stock exchange. A SPAC is, therefore, fundamentally a publicly-listed pool of money that is looking for an attractive minority investment.
SPACs are not a new concept and have a rich history in financial circles, but have been rising in popularity over the past 12 months as a record number of SPACs have gotten raised. Besides an increase in the number of deals, the average amount of capital raised per SPAC has also increased significantly, resulting in over $30 billion in capital waiting to be deployed.
For a private company, the main advantages of going public via a SPAC instead of following the traditional IPO route include a faster process, the ability to make forward-looking financial projections, and a leaner fee structure - though this is debatable and depends on each specific transaction. Prominent examples of successful SPAC deals include DraftKings (DKNG) and Virgin Galactic (SPCE); however, there have also been several SPAC-related scandals - most notably Nikola Motor (8NI). For those interested in a differentiated and highly nuanced discussion of the pros and cons of going public via a SPAC, I highly recommend checking out the articles from Billy Gurley and a16z. Having discussed the basics of a SPAC’s inner workings, we can now focus on the deal between RedBall and FSG by shedding some light on the actors involved.
RedBall Acquisition Corp. - a SPAC with substantial domain expertise
Congruent with the cited speculations that identify FSG as RedBall’s key target, the RedBall Acquisition Corp. announced in its public filing that it wants to acquire a minority stake in a company involved in the sports, media, and data analytics sector. The focus on the intersection of sports and data analytics is logical given the previous experience of the two leading executives at RedBall, the so-called deal sponsors, namely Billy Beane and Gerry Cardinale. Both Cardinale and Beane have domain experience in the focal sectors based on decades of valuable work experience.
Cardinale, who attended Harvard University in the late 1980s, started his working life at Goldman Sachs, spent 20 years at the firm, and rose to partner. In 2012 he left Goldman Sachs to join BDT Capital Partners before setting up a private equity firm called Red Bird Capital Partners. Already during his time at Goldman Sachs, Cardinale demonstrated his interest in the sports and media by acquiring a stake in the YES Group, the Yankee Entertainment & Sports Network. YES is one of America’s most significant regional sports TV networks and broadcasts the New York Yankees, the Brooklyn Nets, the New York Liberty, and New York City FC.
Besides, Cardinale is a board member of One Team Partners, aiming to monetize NFL and MLB players’ name and image rights. He’s also a shareholder in the Texas-based firm Zelus Analytics, which provides sporting analytics software. Most recently, Cardinale made headlines by partnering with Hollywood actor Dwayne “The Rock” Johnson in the purchase of the XFL football league from Vince McMahon. This year, Cardinale also made his first direct investment into European football by acquiring an 85% stake in Toulouse FC, a club in the French second division. After the acquisition, Cardinale installed Damien Comolli, who had previously worked at Liverpool and is also a long time acquaintance of Billy, as team president. Overall, Cardinale has built a wide-ranging network of contacts in both the financial world and the sports industry, which positions him at the sweet spot to close an attractive deal with RedBall.
Cardinale further boosted RedBall’s potential by partnering with Billy Beane, who already owns stakes in different European football clubs - namely Barnsley FC, playing in the English second division, and the Dutch first division club AZ Alkmaar. Beane, who has long had an interest in European football, came to fame by revolutionizing the MLB in the 1990s by applying a data-centric approach to baseball. In 1990, Beane joined the Oakland Athletics as a major league scout, after being a player for the club beforehand. He was promoted to general manager in 1997 following severe budget cuts by new owners, who took over the club in 1995. Due to the limited resources available, Beane then turned the A’s into a pioneer of the sports-analytics revolution by focusing on the sabermetric principles and on-base percentage among hitters to obtain undervalued players, which was a radical and non-consensus move at that time.
Under Beane’s regime, the Athletics became one of the most cost-effective baseball teams in history. It reached the playoffs in four consecutive years from 2000 to 2003, losing in the American League Division Series each year. However, over time, many more cash-loaded clubs teams adopted Beane's strategy, which diminished Beane’s club's competitive advantage. Most notably, the Boston Red Sox owner, John W. Henry, adopted Beane’s principles and even offered Beane a job at the Red Sox in 2002, which would have made Beane the highest-paid baseball executive at that time. But Beane turned down the opportunity, stayed at Oakland, and got promoted to executive vice president of baseball operations in 2015. Due to his involvement in RedBall, however, Beane is expected to resign from his role with the Oakland Athletics as soon as a deal closes, and it looks increasingly likely that Beane will finally get to work with John W. Henry eighteen years after turning down that job offer.
Rumors have been flying around for some time now that FSG is willing to sell a minority stake to outside investors, but talks with several suitors from the US and the Middle East over the last couple of years never past the initial stage. Now, the chance of a deal happening seems substantial. Beane recently fueled the rumors by not only acknowledging that he has “an association with John” and described Liverpool FC as “an amazingly well-run football club [...] [that] incorporates everything you’d want in a successful sports team,” he is also reportedly willing to actively shape the future of a renowned football club. A key impetus for that can be found in the potential upside of reshaping the global football landscape by building one of the world’s first multinational football conglomerates and Liverpool FC is in a splendid position to be a partner in that pursuit. To understand why it’s worthwhile to illustrate the transformation of Liverpool FC since FSG took over the club in 2011.
Turning around Liverpool FC’s fortunes by implementing data-driven decision making
During the 2010–11 season, Liverpool FC was on the verge of relegation from the English Premier League as well as financial bankruptcy after years of mismanagement under owner's Tom Hicks and George Gillett. During a time of heightened tension, Liverpool's creditors forced the club's sale, overruling Hicks and Gillett's wishes in front of the High Court. John W. Henry and FSG stepped in with a successful £300 million bid for the club and took ownership of the club in October 2011. (Fun fact: Basketball star LeBron James became a minority investor in Liverpool FC during that transaction)
Since then, Liverpool FC has transformed itself under FSG ownership. The new owners have made substantial infrastructure investment into the famous Anfield Stadium and a state-of-the-art training center, built a brand with global appeal, and, most importantly, installed a data-driven decision-making process on and off the pitch. By taking several non-consensus and right decisions (similar to the Philadelphia 76ers under Sam Hinkie, which Packy McCormick brilliantly illustrated in this piece), Liverpool FC unknowingly followed the familiar Silicon Valley mantra: “to better than the rest, you need to be both non-consensus and right.”
Overview of the non-consensus and right decision-making matrix
In line with Sam Hinkie’s statement on the Invest Like The Best podcast that “the more randomness there is and the less consensus there is around how the value is created, the more opportunity there is - but you need some data to be able to do this,” Liverpool FC took several unconventional decisions.
Off the pitch, the club adopted a controversial data-driven transfer strategy. The recruitment team, led by fan-favorite Michael Edwards, focused on identifying great but underappreciated players like Mo Salah, Virgil Van Dijk, and Allison Becker, and selling price assets in lucrative deals even against the fans’ will, primarily Philippe Coutinho.
Besides, the club has built a state of the art sports analytics department around Ian Graham, a theoretical physicist with a Ph.D. from the University of Cambridge, to make sense of the inherent randomness in football and to gain an edge over their competitors. The department's analysis resulted in a drastic change in shot locations due to the utilization of expected goals (xG) models and other advanced stats.
Changes in Liverpool FC’s shot locations from 2017 to 2020 (Source: Liverpool.com)
Moreover, the team is now one of the best set-piece takers in Europe by constantly iterating their free kicks and corner kicks based on new input. The club has even hired a throw-in coach in Thomas Grønnemark, something unheard of in professional football, but has been happy with their progress in that area of the game and extended his contract.
The turnaround of the club, which has been accelerated with Jürgen Klopp’s appointment as head coach in 2015, has now finally manifested itself in on-field success. The team sealed its first English league title in 30 years last season and won the UEFA Champions League, the European Super Cup, and the FIFA Club World Cup in 2019.
By finally winning silverware on the pitch, the club has demonstrated that it deserves to be mentioned among the world's best teams for years to come. Moreover, a partnership with RedBall could further accelerate the club’s trajectory by creating a Liverpool-based global football conglomerate.
Transforming Liverpool FC into a global football conglomerate
Historically, football teams were a bad fit for financial investors. The economics were poor due to the inherent rat race for the limited revenue sources coming from matchday, broadcasting, and commercial deals, as well as the high wage-to-revenue ratio. Moreover, cash flows were fluctuating and highly dependent on on-field performance. That changed to a certain extent in recent years, with mega-media deals and more sophisticated business operations that have made elite clubs appealing investment opportunities.
One strategy, pioneered by Manchester City, seems to be particularly appealing to investors - the creation of a football conglomerate. Manchester City has managed to transform itself into a global business under the umbrella of the City Football Group through acquisitions of other teams enabled by the Emirate Abu Dhabi's financial backing. The City Football Group now owns majority or minority stakes in teams in Australia (Melbourne City), Belgium (Lommel SK), China (Sichuan Jiuniu), France (Troyes AC), India (Mumbai City), Japan (Yokohama F. Marinos), Spain (FC Girona), the United States (New York City FC), and Uruguay (Club Atlético Torque) and continues to scout for more investment opportunities. Besides, City Football Group has a partnership with the Right to Dream Academy in Ghana, which allows them to cherry-pick the best talent from the academy once players graduate and bring the best players to Europe.
The strategic rationale for owning multiple clubs is relatively straightforward. Football holding companies, such as the City Football Group, are primarily concerned with their key asset’s prospects - in this case, Manchester City. To boost their chances on the pitch and create commercial opportunities off the pitch, the holding company acquires stakes in several smaller “satellite clubs”, which fulfill several functions:
The satellite clubs act as feeder clubs where the focal club’s most significant prospects can develop before stepping up or getting sold at a profit.
The satellite clubs often have a local following, which can be leveraged to generate revenue for the holding company and run the satellite clubs at least break-even.
The satellite clubs play intra-holding matches against each other to create spill-over effects between different fan bases to create a unified global fan base.
A similar approach has also been deployed by the energy drink brand Red Bull, which owns clubs in Germany (RB Leipzig), Austria (Red Bull Salzburg and FC Liefering), Brazil (Red Bull Bragantino, Red Bull Brasil), and the United States (New York Red Bulls). In Red Bull’s case, RB Leipzig acts as the focal club and transfers the best talents from its feeder clubs, such as Péter Gulácsi, Naby Keita, and Dayot Upamecano to Germany - often below market value. Though the tactic has received adverse reactions from other clubs’ fan bases, it undoubtedly boosted the prospects of RB Leipzig, which resulted in awareness for Red Bull, which is the ultimate goal of the project.
Should FSG and RedBall start to venture along the same route as the City Football Group and Red Bull, they could start by building partnerships between Liverpool FC and AZ Alkmaar, Barnsley FC, and Toulouse FC, which are already partially owned by RedBall’s deal sponsors. In the following, a publicly-traded FSG could use its capital raising capability to acquire stakes in other European clubs or extend its portfolio worldwide.
The initial building blocks of a football conglomerate by FSG and RedBall
Liverpool FC would benefit from the multi-club structure’s synergies by loaning their players to its satellite clubs to develop and picking the best players from their youth departments. Besides, Liverpool FC would boost its global presence by playing intra-holding matches against their satellite clubs, especially should they partner with teams from Asia and Latin America, where Liverpool’s fan base is comparatively underdeveloped. Moreover, a football conglomerate under FSG’s ownership could roll out the lessons learned from Liverpool FC’s data department to its partner clubs. This would result in significant benefits for its satellite clubs as data analytics are still on the verge of adoption in leagues with less global significance. Broader adoption of data-driven decision-making within the potential feeder clubs would then improve the development of the players, which, in turn, would help Liverpool FC’s long term progress.
Overall, the potential merger between RedBall and FSG would be one of the most exciting developments in the sports business, given the actors’ shared history and their pioneering roles in the sports industry’s data revolution. Besides, RedBall’s management is well-regarded and has a proven track record in commercializing sports assets. FSG, as the owner of Liverpool FC, holds one of the most lucrative sports assets in Europe right now and could receive a further boost from the partnership with RedBall. From an investor’s point of view, the potential deal has many properties of an attractively priced call option given the potential to double down on the opportunity to build data-centric football conglomerates. It is undoubtedly a development to keep an eye on to see whether the potential match made in heaven will become a reality.
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Terrific article! Despite some negative reputation around SPAC's a potential merger between RedBall and FSG truly seems like it could prove itself astonishingly valuable for investors and Liverpool FC alike, especially due to the marvelous track record of the deal-sponsors and cash influx for the club during the unprecedented times of the ongoing pandemic. I'm also curious about the actual extent of synergy realization inside the prospective football conglomerate. Thank you for your work!
Great article! It's cool to be able to learn something from a former student. accadis is proud of you! #accadisalumni