White Paper: German Bundesliga: Sports’ Latest Potential Gold Rush

One of the last significant opportunities to invest in a professional sports team at a reasonable valuation could be soon taking place in Germany, one of the wealthiest and most soccer-fanatical nations in Europe. While English Premier League (“EPL”) clubs have seen their valuations skyrocket and have received numerous investments from investors outside of England over the past decade, valuations and ownership of clubs in the Bundesliga, the top professional league in Germany, have remained stagnant. The Bundesliga ownership landscape may be changing in the very near future, however, and the German soccer market could see an EPL-esque boom in investments.

Following the success of the 2006 World Cup, soccer’s popularity has reached all-time highs throughout Germany. The Bundesliga, Germany’s top league, has witnessed escalating attendance records reaching averages of over 40,000 fans per game. In addition, new stadiums built for the World Cup now house many of Germany’s top clubs. The world’s most popular sport has gained tremendous momentum in a country it has dominated for decades.

At the same time, the EPL, the top league in the United Kingdom, has benefited from this momentum through increased foreign investments in their top clubs. Investors from the United States, Thailand, Israel, Iceland, and most recently, the United Arab Emirates, have paid record amounts to purchase teams in the EPL. On the other hand, Germany has not received the same influx of foreign investments despite boasting the largest economy in Europe, housing a population with approximately 20 million more people than the UK, constructing brand new soccer stadiums throughout the country, and cultivating an extremely passionate fan base with renewed enthusiasm for the game.

To help attract foreign investors, several club presidents led by Martin Kind of Hannover 96 have been fueling the yearlong charge to abolish the Bundesliga “50+1” rule. The rule states that at least fifty percent plus one share of each club must be controlled by the members of the club. German clubs are structured similarly to U.S. non-profit organizations and are called “E.V.’s” or Eingetragener Vereins. The E.V. owns the financial company which runs the entire soccer entity, including the professional club, the youth team, the marketing arms of the organization, and the stadium. The members act as “boards” for the clubs, hiring key executives and voting on major club decisions. A vote to eradicate the “50+1” rule is expected to take place at the Bundesliga’s next League Assembly in late April 2009. It appears that the abolishment of the rule and subsequent foreign investments are imminent.

Under the current member-controlled E.V. ownership structures, any new substantial investments in the clubs would cause current members, having never paid for their memberships, to profit handsomely and provide reinvestment capital for the club itself. For example, if a club is purchased for $100 million, members would receive $20 million up front and the remaining $80 million would be earmarked for investment in players, facilities, marketing, etc.

By comparison, consider purchasing an NBA team for $400 million and then spending an additional $200 million to acquire the top players for the team. Under the E.V. ownership structure, instead of paying the current ownership group the $400 million purchase price and then spending additional capital signing players, $300 million of the $400 million purchase price would go towards acquiring new players. The owner commits less cash overall but spends more on player acquisitions.

The case for abolishing the “50+1” rule is fairly simple. First, the success of England, Italy, and Spain’s soccer teams cannot be ignored. Each has lower Gross Domestic Products than Germany, but all have higher revenue-producing soccer industries. The independently wealthy ownership groups in those countries have afforded their fans the opportunity to watch the top players in the world by paying large transfer fees and salaries for top players’ services. This, in turn, has driven up matchday, sponsorship and broadcast revenues and, consequently, team valuations.

One recent trend among investors in England involves buying Championship level clubs, the level just below the EPL, at relatively discounted prices. Then, these clubs are positioned for promotion to the EPL in order to take advantage of the broadcast revenue sharing and increased fan followings. It is anticipated that the purchase price for the Bundesliga clubs will be approximately equal to the price of a Championship level club, though without the implied risk of not being promoted to the highest level. Additionally, the Bundesliga plans to increase the number of teams in the top division from eighteen to twenty, further reducing the risk of relegation.

Second, the top two leagues in the Bundesliga are thriving financially. In fact, the Bundesliga announced record revenue figures for the 2007-08 season. The thrity-six teams that make up the league’s top two divisions generated 1.93 billion euros in revenue during the season, an increase of 10.7% over the prior year. Of the eighteen teams in the top division, fifteen were profitable.

Not surprisingly, there is opposition to changing the current ownership landscape of the Bundesliga. Opposition points to the EPL’s rising ticket prices, the over-commercialization of the game and the Game 39 Proposal, under which teams in the EPL would play an extra round of games in cities outside of England. Supporters of the current Bundesliga ownership system feel the league’s popularity can be credited to its reasonable ticket prices, safe standing areas and support of the member-owned teams.

Opposition is also weary of greedy owners looking for in-and-out situations. In response, Martin Kind has proposed a compromise in which investors would have to commit to a long-term investment, allow the clubs the right to reclaim their shares in case of insolvency, and face stringent restrictions on dividends.

The case in favor of abolishment received some very strong support recently. Uli Hoeness, the general manager of Bayern Munich and one of the vocal leaders for the Bundesliga, recently declared that he is in favor of abolishing the “50+1” rule. Hoeness’s opinion carries a lot of weight in Germany, and his support is seen as a huge victory for the case to abolish the rule.

In the end, the rule that has discouraged foreign investment in Bundesliga clubs is expected to be abolished. In fact, the Bundesliga has already made exceptions for two clubs, Leverkusen and Wolfsburg, which are controlled and financially supported by Bayer and Volkswagen, respectively. The strongest support for the rule change is coming from middle-of-the-road clubs who see such foreign investments as a way to level the playing field between Bundesliga clubs and the top clubs in Europe.

In short, investors looking to purchase European soccer teams would be wise to wait for a final ruling on the “50+1” rule in Germany. If the rule is abolished, this change would present an unforeseen opportunity to purchase a professional soccer team at an all-time low valuation. Doing so would allow an investor to be a part of the first wave of investors in soccer-enthused Germany and take advantage of the expected appreciation in valuations over the next five to ten years.