Last week I got into a bit of a Twitter tussle with Matt Scott, former Guardian and Telegraph writer who now works for talkSPORT. We clashed a bit on his long running theory that Arsenal’s American owner Stan Kroenke has deliberately allowed the club to build up its cash reserves to decrease leverage from his other sports holdings in Kroenke Sports Enterprises, which includes the Denver Nuggets, the Colorado Avalanche, the Colorado Rapids and the St Louis Rams.
I don’t think this theory is impossible or even necessarily implausible, but there is little evidence to support it. First, though Stan Kroenke has reserved the right to pay himself dividends from his majority share of Arsenal’s stock, he has yet to do so after two years of ownership. Some suggest the dividends option is a financial safety measure (in case of emergency break glass), but we won’t know until it happens.
Second, as Scott admits, KSE’s financial information isn’t publicly available, so we have no clue as the amount Kroenke is leveraged. Scott believes that the fact Kroenke increased holdings in the Rams and Arsenal while “the global financial system was in the depths of a crisis” is evidence he borrowed heavily to do so, though it should be said that if Kroenke retained his shares in Walmart from the early 2000s, his wealth would have been relatively unscathed. If KSE was highly leveraged, surely one or two anonymous sources might be able to lend credibility to the claim.
Third, Stan Kroenke takes a notoriously hands off approach to his teams, preferring to let them operate autonomously. As I pointed out last week, Kroenke’s mandatory offer to the remaining shareholders includes repeated nods to the “self-sustaining” ethos maintained by the Arsenal board. There is evidence via the work of Swiss Ramble that Arsenal’s cash reserves were growing year-over-year before Kroenke took over as majority owner, even before he was appointed to the board as a non-executive board member in 2008. Perhaps it was the Arsenal board’s relative stinginess, plus their considerable investment in the Emirates redevelopment, that enticed Kroenke into purchasing the club. But it’s not at all obvious that Kroenke is actively “preventing” either the board, chief executive Ivan Gazidis or manager Arsene Wenger from spending more on players.
But it’s the final reason that I want to focus on. Scott makes this very bold claim about Kroenke:
One thing is for sure though: Kroenke, who seldom attends matches, is not in Arsenal for the fun of it. It seems instead that making money is the motivation.
But is it that clear?
Here’s the thing…billionaires rarely tell the public exactly why they purchase football clubs. We do have a lot of evidence to reverse engineer a convincing explanation, but that’s not the same thing. Clearly, for example, the Glazers thought they could balance their leveraged buyout of Manchester United by exploiting its global brand to increase commercial revenue and raise its value. On the other hand, it’s pretty clear Roman Abramovic is quite interested in his club chelsea, considering he personally wrote off £970m in loans since first purchasing the club in 2003, even as his personal worth dipped by £9 billion. Finally we have Manchester City’s owners , who interest is gauged to be as motivated by geopolitical influence as much as personal/financial reasons.
I think one of the best explanations for why rich people would want to get involved in a notoriously unprofitable business (pro sports) comes from Austan Goolsbee’s New York Times article from 2007. Goolsbee writes:
Why do [billionaires] line up to buy the teams? Should we really care that it’s a bad business? If a billionaire throws a lavish 60th birthday party, it costs a lot of money. But that doesn’t make it a bad business. It’s a party. It’s not supposed to make money.
Is a sports team really that different?
Owners’ complaints about losses leave out the basic fact that capital gains are profits, too. And when scores of grown men desperately want to buy sports teams, there tend to be big capital gains.
Take the Sonics. The team may have lost $60 million while Mr. Schultz owned it. But he bought it for $200 million in 2001 and sold it for $350 million five years later. So he ended up making something like $90 million (taxed at the favorable capital gains tax rate, no less) on top of the fame, prestige and free tickets he got while he was owner.
If the Cubs do, indeed, sell for $1 billion, Tribune will have earned an annual return of almost 15 percent since it bought the team for around $20 million in 1981. Given the company’s recent problems, it’s probably the best investment it ever made.
So we return to Stan Kroenke. Arsenal look great as an asset. They play in a redeveloped property in one of the most valuable areas of real estate on earth. They are profitable and enjoy incredible revenues. They play in a league that just penned a landmark TV rights deal with a big four American network. Now look at KSE’s other holdings. The Denver Nuggets have doubled in value since Kroenke first paid for them. Despite recent income losses, the Avalanche are also worth more than when Kroenke first purchased them, as are the St. Louis Rams.
But it’s also possible that Kroenke, in the privacy of his own home, among his friends, enjoys sports and owning sports teams. Which would obviously involve a desire to see his teams win, although not necessarily at any cost including cash reserves that the club board might favour as a form of financial security.
Growth! Prestige! Fame! Fun! Leverage! Take your pick. Again, we should really drop the magnifying glass approach to individual team owners to sniff out rhyme and reason, good and bad, and instead look at the fact of private ownership vs public ownership. Because right now the relationship between fan and owner is a bit like that between Greek and god…the former dances about and prays to avoid lighting bolts, while the latter does whatever it wants and isn’t obligated to explain itself.