It appears the buyer was the driving force behind the deal. Silver Lake specializes in technology and has been held back from putting money to work in recent years by sky-high valuations in its native sector. That creates the risk of overpaying in frustration when an attractive asset turns up.
Sport has some obvious selling points: Live content is valuable, technology allows clubs to connect directly with the fan-base, and those supporters tend to stay loyal. Soccer is becoming more global too, and Manchester City’s international recognition lags that of its local rivals Manchester United and Liverpool despite the appeal of its coach Pep Guardiola.
Silver Lake doubtless has some skills to offer but CFG probably held the balance of power in negotiations. For starters, the group already has deep-pocketed backers in Sheikh Mansour bin Zayed Al Nahyan’s Abu Dhabi United Group, the controlling shareholder, and minority holder China Media Capital. It scarcely needs more outside cash. What’s more, its immediate spending requirements may be more analogue than digital. The company is in advanced talks to build a stadium for its New York team and its global ambitions suggest a desire to add another club to its portfolio.
So why take a fresh outside investor? Expertise can be bought by hiring good people, without diluting the existing owners.
One answer is that Silver Lake provides an eye-catching external validation of Manchester City’s value. The price equates to 6.4 times sales for CFG’s 2018 financial year, when the group made a 45 million-pound ($58 million) loss. That revenue multiple compares with 4.3 times for Manchester United Plc and 4.9 times for Italy’s Juventus. Manchester City itself (rather than CFG as a whole) recently posted 2019 results showing revenue growth of 7% and it claims to have been profitable for five years.
The high valuation is an obstacle to achieving the kind of mid-teens percentage returns that private equity normally seeks. A non-controlling minority stake and a probable holding period exceeding the buyout industry’s usual five-to-seven years make this an unusual deal. Another big hurdle is a potential ban for Manchester City from the lucrative European Champions League because of alleged breaches of “financial fair play” rules. Depending on the debt it can apply to its stake, Silver Lake could have to exit its holding at a valuation three times higher for this to stack up over a decade.
The potential to expand City’s international fanbase is one source of optimism. Technology may help monetize that. The distribution of sports content is evolving fast — witness Amazon.com Inc.’s imminent streaming of English Premier League games. Silver Lake is in the dugout to influence how this plays out. But it’s a big gamble for a mid-sized and otherwise U.S.-focused firm.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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