4/2021 Alberto Medici 6 “Bayern & Alaba ”. Value creation process as a mantra for football Clubs. Maggio 2021 Analysis: You might be confused about the Bayern Münich-approach in the Alaba-case – but all clubs should do like them. *We might see significant changes in the business models of Clubs post Covid-19, but management teams pay too much attention to revenues. *There is one place on the balance sheet of all clubs where costs could be – and should be – reduced. And Bayern Münich has led the way. *In this stressed financial environment clubs need to focus on the core-business which – for the vast majority of clubs - is the value-creation that transfers can generate. *Over and over again we see some of the biggest clubs in the world fail in the way they calculate the “terminal value” of players. During the last few months, many experts and executives from the industry have repeatedly said that the future of football lays on developing a new business (revenue) model as well as taking advantage of the pandemic in order to run a deep internal analysis around potential restructuring of the organization. I partially agree with that statement, as an improvement is always desirable in all its forms, but those wishes for the future is more propaganda than measures I expect to be carried out in the near future. Why? Because football will be football. Teams will still be playing 11-a side, media will broadcast matches on TV and on digital platforms and people will be back supporting their clubs live at the stadium when possible. If we take this core scenario as the starting assumption, it is always possible to take some steps into unexplored territory (it could be developing new revenue areas or an internal re-organization), but the core will remain the squad and the process of value creation around the roster. Mind you, I am not saying that working on digital engagement (to attract and retain new and future customers) or doing a business process reengineering inside a company is a wrong, but in times with shortage of resources the executive team need to focus on then very core of the business. The main task will be value creation: for shareholders, stakeholders and fans. In this sense, that claim will be the claim over the next few years. The business model as per today has no flexibility. The revenues of a club are very much reliant on the success on the pitch, but the cost-base related to this revenue-creation, the players’ contracts, does not contain flexibility. There might be a small part of the wages that are connected to the sporting performances, but the vast majority of wages are fixed. On top of that many clubs have players with a book value way far above their market value: in a process of value creation that won’t be acceptable. The casus belli is the recent decision of Bayern Munich not to renew the contract of David Alaba for a € 12m salary (which is expected to have an annual total cost of roughly € 24m) and instead investing a massive € 42.5m fee for French starlet Dayot Upamecano from RB Leipzig. Per hypothesis this would be with yearly wages of € 4.25m (assuming that the yearly wages are 10 per cent of the transfer fee) and then a € 9.25 million in total costs per year. David Alaba is a legend of the club, born in 1992 with an extensive record list of 2 Champions League, 9 Bundesliga and many other trophies with the German powerhouse. So why don’t Bayern Munich extend his contract, instead of making him a “unrestricted free agent” in the market and then sign a new player for a huge transfer fee? It doesn’t seem like a good decision. However, the reason lays on value creation over a financial expenditure. Globally, Alaba (with the previous assumptions) will cost € 120m to the club while Upamecano “only” € 90m. It might happen that the Frenchman will renew the contract over the period with a higher sum of money (with a financial impact), but this doesn’t change the key- learnings if we consider the following aspects. David Alaba is born in 1992 class while Dayot Upamecano was born in 1998. This means that if per hypothesis we consider a 5-year period, at the end of the contract Austrian Alaba will be 34 years old while the Frenchman only 28. Currently, the highest market value for a 34-year-old defender is € 14m for the Real Madrid legend Sergio Ramos while his teammate Raphael Varane is the most valuable 28-year-old defender with a reported transfer fee of € 70m if another club wanted to sign him. Apart from the technical thoughts, financially speaking it seems clear why Bayern Munich took this approach: investing a comparable sum of money for a whole different “terminal value”. Let’s try to adapt this way of thinking – or this concept if you like – to all transfers that took place since 2010/2011 season and how it would change the future if all clubs did like the German giants. (*** TRANSFERS IN-OUT (absolute values) sample of dynamic graph ***) The graph above shows the global amount of fees that top-16 clubs in Europe did spend or collected over the decade for transfers. Man City, Chelsea and Barcelona tops the ranking in terms of fees spent for players that they brought in, but, with reference to net investments, Man United and PSG replace Chelsea and FC Barcelona in the podium. (*** FEES IN PER AGE (absolute values) sample of dynamic graph ***) Now let’s try to give some more context to those figures and let’s introduce a new parameter: players’ age. Distributing the fees as portraited above, the graph showed that the distribution had a left- tail, with the highest value for the 23-years-old players. To add more details, Man City spend almost € 400m on players who had this specific age. The blue line set the average value for the panel. Three clubs spent more than € 100 million for players older than 28-years-old: • Arsenal for five 28-years-old players, including Aubameyang (€63 million) and Mhkitaryan (€34 million) • Juventus for five 29-years-old players, including Higuain (€90 million) and for three 33-years-old players, including Cristiano Ronaldo (€117 million) • Manchester United for five 29-years-old players, including Matic (€44,7 million), Alexis (€34 million) and Van Persie (€30,7 million). (*** FEES IN PER AGE in % (base-1000 values) sample of dynamic graph ***) Now it is time to add another parameter: a common base (.1000) to compare and better understand how clubs would have operated over the last years if they had had the same budget. Which is the blend of purchase with only € 1 available? The distribution is now giving a comparable but different information: the most purchased category of players per age is still the 23-years-old one (representing on average 15 per cent of purchases), but Bayern Munich is now the club that purchased the most. Globally 85 per cent of purchased players is under-27. (*** FEES IN PER AGE (progr. base-1000 values) sample of dynamic graph ***) At the end of the analysis, the progressive base-1000 value shows how quick each club got the 100 per cent threshold: in other terms how young are the players purchased. The graph above shows that the last clubs that reaches the 100 per cent target are FC Internazionale and Manchester United that purchased some 35-years-old (or more) players, but for an irrelevant value (< 0,2 per cent of total expenditures). The club with the most important leap after the 30 years-old threshold is Juventus, mainly due to the massive investment of € 117m for the 33-years-old Cristiano Ronaldo (> 11,1 per cent of total expenditures). The first ones - on the other hand - are Chelsea, AC Milan and Borussia Dortmund (reaching 100 per cent at the stage of 31 years-old). Hopefully this analysis makes it clear how a proper asset management and a more value creation-oriented strategy for clubs will be prevalent in transfers for the future. Clubs that invested the most for young players can experience some benefits: • Higher “terminal value” for the same amount of money invested (i.e., the “Alaba - Upamecano” case) • More temporal distance between massive investments for a player in the same position: Juventus bought the 29-years-old Higuain from Napoli for a reported fee of € 90m, but after four years, the club decided to give the player a free agency. During the 2020/2021 summer, in order to replace him, the bianconeri signed on a two-year temporary loan (plus option to convert it into a permanent transfer) the striker Alvaro Morata for a total fee of € 60m. This means that since 2016/2017 the club has invested more than € 150m for a single striker slot in the roster. In the same comparable period Liverpool signed the 24-years-old Roberto Firmino for a reported fee of € 41m in 2015/2016 and the Brazilian striker is still the starting no.9 in Jurgen Klopp’s team. • With reference to the P&L a longer permanence could have a negative effect in terms of more costs (salary increasement for contract renewal), but on the other side a longer contract will reduce the amortization fee to account. • Technically talking a longer permanence in the club gives the opportunity to the manager and the coaching staff to better train the squad and having higher peaks of performances.