Ronaldo: Consider the following business plan. Your incoming chairman suggests a capital investment that entails spending 44% of last year’s E366m revenue on assets that will depreciate rapidly over the next five years, cost millions to maintain and which at any point could be hobbled by a cynical two-footed lunge.
Put like that, Real Madrid’s E160m investment in star soccer players Ronaldo and Kaká sounds nuts. The deal for Ronaldo is the game’s most expensive transfer deal ever.
Even capital-intensive companies like Rolls-Royce directed only 3% of revenues to capital spending last year. But for Florentino Pérez, who has recently returned to the Spanish football club as president, it’s nothing unusual. He spent similar eye-watering sums at the start of the decade assembling his team of “galacticos” – Figo, Zidane, Ronaldo and, of course, Beckham.
The team didn’t win much, but they sold. Since 2005, Real has seen double-digit average revenue growth and cemented its status as the world’s richest football club, according to consultant Deloitte.
Pérez might just pull off the same trick, even with a Spanish economy in severe recession. Real’s supercharged revenue growth comes from three drivers. Last year, 28% came from gate receipts and corporate hospitality at the Bernabeu stadium. These sales fell 6%, partly because of the slump and partly because the team didn’t win any tournaments. The heavy lifting came from broadcasting revenues, which contributed 37% of the pie, and from shirt sales and sponsorship, which provided the other 35%.
Real’s broadcast contract with Spanish television group Mediapro lasts until 2012-13. But the shirt-sponsorship deal with betting company Bwin ends next year. It is in the renewal of these contracts that the value of Real’s heady investments may be seen.
The downturn was not expected to have much impact on the shirts renewal - Manchester United recently switched its shirt contract from AIG to Aon for a better fee. But Real’s negotiations will be strengthened by having two global icons on the pitch. That could prompt a bidding war among advertisers, insulating Real from the worldwide slump in ad spend this year.
If the improved revenues don’t materialise, Real’s too-big-to-fail status should mean its Spanish banks will help it survive. In the meantime, aside from bolstering gate receipts once more, Kaká and Ronaldo might mean Real can actually win some trophies.
