Football's biggest divers

By ANDREW OXLADE, COLUMNIST
Updated: 19:00 EST, 10 April 2002

PUNTING on football shares is often labelled a mug's game. But with the Football League in particular turmoil this year, the battle for promotion - or just to stay up - is creating one of the most volatile season run-ins shareholders have ever endured.

'The sector has lost the confidence of the City,' says Ted Rust, analyst at City broker Brewin Dolphin. 'Something major will have to change to make football clubs attractive investments again.'

Division One and the lower Nationwide leagues are in crisis following ITV Digital's refusal to pay £178m of a £315m three-year deal to screen games. The Premiership's £1.6bn contract with BSkyB looks more secure, but even TV deals for the elite are unlikely to rise as rapidly as they have in the past.

And all clubs face the overriding problem of spiralling wages. Premiership salaries are expected to rise 24% to £700m this season compared to a 9% rise in total revenue for clubs. 'Football is a very rich industry with strong core support,' says Rust. 'But the problem is that a vast chunk of the money coming in each week walks out in the players' pockets every Friday.'

But football shares haven't always been chasing the game. In the Eighties they were steady stocks that delivered regular income. Spurs were the first to float in 1984 and others soon followed suit, paying healthy dividends while share price slowly moved higher.

Then in the Nineties, the formation of a premier league made football big business. Football shares went through the roof as investor interest reached fever pitch. When they realised most clubs were spending more than they made, prices took a dive.

Shares in Aston Villa, for example, have fallen more than 85% to 152p in the last five years whilst Tottenham Hotspur have endured a 70% decline to around 29p. Even Manchester United has fallen 11%. But its shares have been more in tune with the media sector than football stocks, waiting for the technology, media and telecoms boom of early 2000 to surge to more than £4 before crumbling to around 130p today.

United stands out from its peers for obvious reasons. Its domination of the Premiership has turned the club into a global brand with vast money-spinning potential. That has made its shares attractive to the City.

Despite this, it faces the same problems as the less stellar clubs. Its financial results last month revealed a wage bill rising 40% against a 14% rise in total income. Management is moving towards substituting steep wage rises with marketing deals for players. David Beckham, for example, accepts 10% of any shirt sales instead of a bigger wage. Analysts welcome any move to curb wage bills but hold out little hope for such initiatives having a significant effect.

Of listed clubs, analysts are most impressed with the way Man United and Sunderland's strict wage structures and suggest these two clubs are probably the best stock picks of a bad bunch. As for the rest, investors may as well call their bookie rather than their broker. But for those brave enough to take a punt, there are some interesting end-of-season stories developing.

Chelsea, Newcastle, Leeds and Tottenham are all chasing Champions League or UEFA places. But remember stock market sentiment is hard to predict. For instance, you may expect Newcastle's share price to leap if it secures a Champions League spot. But the market may have already priced that result in so qualification may merely hold the shares steady. Failure, on the other hand, could see the share price dive.

In Division One, Millwall temporarily reversed its long-term share price decline after a string of good results at the turn of the year made promotion a real possibility. But as it has slipped to the fringe of the play-off zone, so the shares have drifted lower.

Even if the club were to secure promotion, it can often be the kiss of death. Deloitte & Touche estimates that winning the Division One play-off final, 'the biggest financial prize in English football', is worth a staggering £23m for one game.

But promotion heaps greater pressure on clubs to deliver results. They respond by splashing out millions of pounds on buying players and hiking wages in a bid to stay up, perpetuating the vicious circle of spending. The fate of Loftus Road, the parent company of Queens Park Rangers, is a stark reminder of the dangers. It had to de-list last year after being taken to the brink of bankruptcy. The final hope for shareholders locked into poor performing stocks is that a buyer may launch a takeover. However, with media companies, the most likely buyers, limited to owning 9.9% of any club, that scenario is unlikely.

Most stocks have a floor to how far they will far before a vulture company steps in and strips the assets (the ground and players) for a tidy profit. But as Rust points out, it would have to be a firm with a death wish due to the passion of supporters. 'It means there's no floor to valuations,' says Rust.

With decent investment returns as reliable as a penalty shoot-out, football fans would be wise to stay on the stock market sidelines. Otherwise 4-4-2 could look more like your losses than a team formation.