The AC Milan Gamble: Can Silvio Berlusconi Save The Bleeding Giant And Stay …

Forbes May 6, 2015 0

It’s safe to say that when it comes to a negotiation, Silvio Berlusconi knows what he’s doing. The three-time Italian Prime Minister is arguably Italy’s most powerful man, still heading the country’s political opposition while sitting atop a media and financial empire Forbes recently valued at more than $7.4 billion. Yet, at his 78 years of age, Il Cavaliere —as he’s dubbed by the Italian media—is looking to close his largest deal yet: selling Italy’s most successful and historic soccer team, A.C.

It’s safe to say that when it comes to a negotiation, Silvio Berlusconi knows what he’s doing. The three-time Italian Prime Minister is arguably Italy’s most powerful man, still heading the country’s political opposition while sitting atop a media and financial empire Forbes recently valued at more than $7.4 billion. Yet, at his 78 years of age, Il Cavaliere—as he’s dubbed by the Italian media—is looking to close his largest deal yet: selling Italy’s most successful and historic soccer team, A.C. Milan, for more than $1 billion, while staying in control.

Is the club actually worth that? In this world of ballooning sports team values, with soccer teams easily leading the charge as the world’s most valuable sports franchises, one could argue that a team with the global reach of A.C. Milan should garner such a price tag. And indeed, Berlusconi has received at least two undisclosed bids for the rossoneri from Asian investors led by Thai businessman Bee Taechaubol and Chinese impresario Richard Lee that could reach that level, even if that’s what it could’ve been worth, rather than what Milan is worth now.

A.C. Milan president and former Italian Prime Minister with Thai businessman Bee Taechaubol, who is looking to buy the legendary soccer club – Flavio Lo Scalzo/Ansa via AP

The books paint a clear picture. In late April, the club unveiled a consolidated net loss of more than $100 million for 2014 as revenue slid 8% to $261 million. Financial debt stood at a staggering $278 million. The loss, fully underwritten by Berlusconi’s family holding company Fininvest, adds to the $25 million Silvio had to personally cover over the past two seasons, as the team remains adrift on the pitch and suffering from the broader woes flogging the Serie A, Italy’s top-flight soccer division. After flying close to the sun, Milan has dramatically fallen from the Olympus of global soccer and now ranks twelfth amongst the world’s most valuable teams, worth a meager $775 million according to our latest tally, compared to more than $3.2 billion Real Madrid commands at the head of our rankings. In 2004, Milan topped off the podium, coming in behind English powerhouse Manchester United—today third— and Juventus, currently the best ranked Italian side at tenth place overall. (See the full list of the world’s most valuable soccer teams in 2015 here).

“Ten or fifteen years ago, Seria A was the place to be,” explained James Pallotta, an American hedge fund manager who through Raptor Group owns Italian side A.S. Roma since 2011. “Because they were at the top, they didn’t think they had to do that much, so they got blind-sided, as the ownership group wasn’t that sophisticated,” said the first foreigner ever to buy an Italian team. The American is no fool: despite crumbling state-owned stadiums, fan violence, and the lack of professional management, Pallotta truly believes “Serie A provides the greatest opportunity” in terms of potential returns, blowing wind into Berlusconi’s sails.

The problems, rather than the upside, are easier to identify. Pallotta echoes the broader consensus that Italian owners haven’t stepped up their game in the past decade or two. In their widely respected Football Money League, Deloitte Deloitte’s Sports Business Group notes, “[the 2015] ranking further emphasizes the relative decline of Italian clubs,” which went from having five clubs in the top ten revenue earners in 2001 to just one, Juventus, in 2015. “The story isn’t that they changed for the worse,” says Deloitte’s Alexander Thorpe, senior manager and their Italian soccer expert, “it’s just that they haven’t managed to keep up with their European peers.

Italy’s major problem is its old and crumbling infrastructure, with state-owned stadiums that last saw any serious investment ahead of the World Cup in 1990. “It may seem cliche, but the main issue for Italian clubs are the challenges in generating match day revenues,” Deloitte’s Thorpe said. While top teams across Europe are raking in at least $50 million from an optimized match day experience that includes premium hospitality, Milan and the rest of the Serie A–with the notable exception of Juventus which four seasons ago moved into the new Juventus Stadium–continue to struggle. “Not having your own stadium means missing out on 30 to 40 million euros a year, which buys two to three players that can get you into European competition,” explained the head of the sports group at a major global bank. Last year, the rossoneri made a paltry $28 million from their home games at the San Siro.

Unlike American sports, global soccer is all about winning, which requires a capital intensive strategy based on putting the most competitive players on the pitch. Winning the national championship helps fill the coffers with domestic TV money and bigger sponsorships, which leads to European competition in the UEFA Champions League, bringing in more broadcasting euros along with exposure to international audiences and therefore attracting the attention of global brands. This pays the salaries of superstars like Barcelona’s Lionel Messi and Real Madrid’s Cristiano Ronaldo—the world’s highest earning soccer players—, who in turn win more tournaments and perpetuate the virtuous cycle. Feeding all of this is the eternal lubricant: cash.

Barcelona’s Lionel Messi squeezes past defenders in a 2013 Champions League match against A.C. Milan at the Camp Nou(AP Photo/Emilio Morenatti)

For decades, profits weren’t an issue for Italian teams, which were consistently competitive at the top level. Backed by Italian multi-millionaires and billionaires like Berlusconi, Inter Milan’s Massimo Moratti, or the Agnelli family (founders of global auto giant Fiat and still the money behind Juventus), family companies and fortunes subsidized dream teams and Champions League-winning squads, as friendly bankers extended credit and FIFA—soccer’s global governing body—turned a blind eye.

Factor in a global financial crisis, Europe’s sovereign debt crisis, Italy’s deep recession, the aging of family dynasties, a decade of league-wide operating losses, FIFA’s financial fair play rule—which bans teams from financing spending with equity injections—, and a transfer of wealth to Eastern Europe, Asia, and the Middle East, and deficit spending is no longer a panacea. Pallotta cracked open the tough foreign ownership riddle with the Roma deal, sparking a renaissance of much needed professional managers, opening the door for others like Indonesia’s Erick Thohir who in 2013 bought a 70% stake in Inter Milan at a $480 million valuation. In both cases, the original owners lost control of the teams.

Italian clubs are indeed rough diamonds, a sort of El Dorado of brand power masked by a rain forest of unprofessional management tormented by hemorrhaging red ink. A history of government corruption, augmented by a 2006 match-fixing scandal that saw Juventus relegated into second division and A.C. Milan penalized with an exemplary 15-point reduction along with a Champions League ban, further alienated potential investors.

International businessmen like Thohir and Pallotta were the first to see light at the end of the tunnel. “Timing couldn’t have been better,” said Pallotta, channeling his inner Warren Buffett, “[to] buy things in a distressed situation that is not as bad as people think.” Despite experiencing slower growth than its rivals, Serie A has the second most lucrative TV rights deal of any league in the world, worth some $1.1 billion per season, while league-wide revenues have grown 62.5% over the past decade, according to Deloitte’s figures. Their global appeal hasn’t waned despite lack of international success on the pitch, with A.C. Milan “maintaining enormous retail pressure, selling [jerseys and merchandise] like Manchester United and Liverpool,” , the skeptical banker noted. Most importantly, Italian teams are cheap.

Along with a group of investors that included private equity investor Thomas DiBenedetto, Pallotta bought a controlling stake in Roma at a valuation of approximately $150 million. Using financing methods unavailable a decade ago, such as cheap credit and naming rights deals, the group is working to build a state-of-the-art stadium with more than 60,000 seats that will dramatically expand match day revenues and will be able to host all sorts of events, from NFL, NBA, and UFC bouts to “concerts like Coachella.” At an estimated cost of more than $335 million, it could take the team’s value to $1.5 billion in the next few years, Pallotta said.

Which brings us back to Berlusconi’s coveted A.C. Milan. Lacking its own stadium and a championship-winning squad, it is difficult to envision how the team merits a selling price that will put it deep in the global top ten that Il Cavaliere believes it deserves. Yet, armed with plans for a new $340 million stadium, a global brand with the power to attract top advertisers, and the interest of supposedly cash-rich Asian investors, the strength of Berlusconi’s hand shouldn’t be underestimated.

In the twilight of his career, Il Cavaliere knows he needs the cash to save his team.Despite Italian soccer’s major issues–difficulties with product placement deals, adapting to FIFA’s financial fair play rules, containing hooligan violence, among other things–values in Serie A “will move up substantially,” according to Pallotta, as teams like A.C. Milan upgrade their stadiums, and management. Used to being in charge, Berlusconi is playing a high-stakes game of poker, trying to blush his way to the pot without showing his cards. On the other side, Mr. Bee and Mr. Lee, as the potential suitors have come to be known, are looking him straight in the eye, holding what could be equally empty hands. Given the riches that lie with A.C. Milan, the real question becomes, does any of them have an ace up their sleeve?

Full Coverage: The Business Of Soccer

Article originally posted in Forbes website.