Kroenke Arsenal offer shows sophistication of financing in sport

Out-Law Analysis | 09 Aug 2018 | 2:08 pm | 4 min. read

ANALYSIS: The increasing sophistication in the financing of sports clubs has been highlighted by the offer made by Arsenal Football Club's majority shareholder, Stan Kroenke, for the remaining shares in the club.

Earlier this week, Kroenke's UK business announced to the London Stock Exchange that it had made an offer to buy all the shares in Arsenal that it does not already own – approximately a third. Subsequently, minority shareholder, Alisher Usmanov, has said he has decided to sell his 30% stake in the club to Kroenke.

Kroenke's £602 million offer is being predominantly financed through a £557m bridging loan being provided by Deutsche Bank.

This loan facility links into the statement from Kroenke's company to the LSE that it believes the move to private ownership of Arsenal will "bring the benefits of a single owner better able to move quickly in furtherance of the club's strategy and ambitions".

The value attributed to Arsenal has risen significantly since Kroenke last made a bid to acquire the club – up from £730m approximately seven years ago to the current offer of £1.8 billion. Whilst such valuations have traditionally been the domain of teams within the main US professional sports leagues, this rise in the value of Arsenal reflects the increasing interest and attraction to major investors of acquiring leading European sports teams. This rising tide of club valuation is something we anticipate continuing for some time to come, with a likely cascade effect on other teams and leagues.

How successful that investment is, however, will likely be judged by the wider fan base by reference to the success of a team on the field of play. We are seeing continued growth in the number of investors and funders interested in being a part of this sector either in isolation or as part of a concerted strategy to build a multi-aspect portfolio or book of business. The supply of money coupled with regulatory restrictions on what can be spent on a playing squad, together with a number of other off-the-pitch factors, have become increasingly important in influencing teams performances and the success of a club.

There is growing emphasis on the role of infrastructure, technology and people, in ensuring a club is best placed to succeed.

Advancements are being made in these areas all the time. Many Premier League clubs have either completed or are in the process of stadium redevelopments, have built new training grounds and invested in sports science.

The traditional merry-go-round of managerial appointments and sackings has been replaced, in part, with a more open approach to understanding the skills needed to create a successful management team. Whilst all clubs will rely on software to improve their player scouting and performance analysis we are now seeing substantial investment into the development of bespoke systems to provide cutting edge insight to deliver competitive advantage on the field. This is likely to become an increasingly important method of helping teams to succeed – particularly given that this forthcoming season, for the first time, Premier League managers will have access to real-time electronic data on players during matches.

None of these improvements are possible without the investment underpinning the sector. Kroenke can leverage the loan he has been given as a tool to support investment at Arsenal and the push towards on-the-pitch success. Whilst this is a bridging loan, ultimately needing to be refinanced in the next 24 months, the appetite for funding in this market makes it unlikely that this will become an issue.

The North American market, with Kroenke's interest in Arsenal an example, is a central source of the energy and power that is fuelling growth in investment in the European sports sector. The lessening of Chinese investment, a quieter approach from the Middle East and the sheer level of the values involved makes it very likely that the future trend of ownership across leading European sides will be buoyed by North American interest.

Investors like Kroenke are attracted to the Premier League in particular by the growth in revenues and opportunities for profit. Whilst this stems from the successful blend of a healthy market for broadcasting rights particularly overseas and strong brand recognition which is becoming increasingly global, it also reflects the unique attraction of the business of sport and the teams within it – the Premier League and its clubs now have a global captive audience that offers the chance to explore commercial opportunities in overseas markets and grow revenues.

Against this backdrop, it is unsurprising that finance providers are gaining interest in the market too and partnering with investors to put together innovative new finance models. Over the last 10 years interest in financing the sector has grown exponentially. The structure adopted for the Arsenal deal is typical of financing across many sectors. Alongside that, however, we are working with funders and clubs, as well as governing bodies, that are becoming increasingly adept at using financial tools to meet the demands and capitalise on the opportunities within their specific situations.

It is not just a select few of the biggest clubs in England that are seeing interest in this market.

Earlier this year, Irish club Dundalk FC announced that a consortium of investors, led by Chicago-based group PEAK6 Sports, had completed a deal to buy all the shares in the club from previous owners Andy Connolly and Paul Brown. It is a deal that I advised on together with colleagues from Pinsent Masons' Dublin office. We were similarly involved in a deal announced in 2015 by AFC Bournemouth, which was then a newly promoted Premier League team and is the club I was previously chairman of, which saw PEAK6 acquire a 25% stake in the club.

Only a month or so ago, we organised a dinner in New York for a major European football league, bringing together 10 significant investors that I know who all have interests in sporting teams. That the dinner took place at all, together with the calibre of attendee, thousands of miles away from the country of the league, re-emphasised the global interest this sector is producing.

It is our view that the market should expect the financing of sport and investment deals to become more prevalent and increasingly sophisticated as the sector continues to grow. As the numbers involved in the deals – whether in team values, player transfers or media rights – continue to increase it will only likely fuel the interest further. These are interesting times, particularly as those clubs within the Premier League make their final decisions on who will be part of their squad as the transfer window closes in England and the show begins again.

Trevor Watkins is an expert in sports law and financing at Pinsent Masons, the law firm behind