Bundesliga deal: What does private equity want in football?

The vote was close but, at the second time of asking, the German Football League (DFL) this week finally secured the two-thirds majority required to enter into negotiations with a "strategic partner" from the private equity sector with whom it hopes it will be able to boost the value of its international broadcasting rights.

Of the 36 clubs which make up the Bundesliga and Bundesliga 2, the two top divisions of German football, 24 voted in favor of handing DFL co-CEOs Steffen Merkel and Marc Lenz a mandate to negotiate a deal which could see up to €1 billion ($1.08 billion) of investment in digitalization, internationalization and global marketing in return for an 8% share of TV rights revenues over a period of 20 years.

The four front-runners interesting in sealing a deal with the DFL are all from the private equity sector: Blackstone, Advent, EQT and CVC.

Private equity firms set up funds and raise money from wealthy individuals and institutional investors such as pension funds. They usually buy companies and bring in managers who increase efficiency, often by aggressive cost-cutting and restructuring.

"After about five years, they try to sell them again for a large profit," explained Michael Grote, professor at the Frankfurt School of Finance & Management and director at its Institute for Private Equity and Mergers and Acquisitions.

Why is private equity so interested in sports?

According to unconfirmed media reports, EQT from Sweden has offered to pay €1 billion for a 7.9% stake in DFL's yet to be set up marketing firm, DLF Media. Luxembourg-based CVC is said to want 8% for the same amount, while the offers of Blackstone and Advent seem be less than €1 billion.

CVC is no stranger to investments in global sports, having already negotiated similar deals with France's Ligue 1 and Spain's La Liga, plus Premiership and Six Nations Rugby, the Women's Tennis Association and Indian Premier League cricket franchise Gujarat Titans in recent years.

"Sports is an asset class that has not attracted too many investments until now," said Grote, suggesting that some European football leagues are not making the most of their potential when compared to other sporting competitions around the world.

"There's more turnover possible than is currently being realized. That makes it a particularly interesting target for private equity, so they can level up management and increase returns."

Kieran Maguire, lecturer in football finance at the University of Liverpool in the UK, agrees.

"Private equity funds are particularly interested in football because it is seen as part of an entertainment industry in which prices for theaters, musicals, concerts etc. are going through the roof, and they believe there is room for such increases in football, too," he told DW.

"The value of NFL and NBA franchises in the United States is far higher than most European football clubs, so there's a view that, given that football is a vastly more popular game globally, it could potentially be worth even more."

What about lack of control?

So far, so logical. But the deal which Germany's DFL is now hoping to secure, with stringent "red lines” restricting investor influence to financial matters and preventing an investor from having any say on sporting or competition issues, is unusual from a private equity point of view.

"Typically, a private equity firm would own the whole company they invest in and they would have a very active hand in it, but this will not be the case with the DFL, so they won't be able to decide anything without the clubs' consent," said Grote. "Nevertheless, it's in all parties' interest to increase the Bundesliga's market share globally and they will bring good ideas to the table."

And Maguire has an inkling as to what those ideas might look like.

"We saw with the proposed private equity financing of the Super League [the European Super League is a planned breakaway competition, and the initial project was scrapped in 2021 — Editor's note] that they were keen to suggest splitting matches into four quarters, global TV-friendly kickoff times and games abroad, so these sorts of ideas will surely be dropped into the conversation in German football, even if they can't directly force any such ideas through."

Are long-term private equity deals the 'new normal'?

Another unusual element of the deal is the length of the proposed engagement.

Traditionally, private equity firms will look to take over a business and sell it on within three to five years, but the proposed DFL engagement is set to last 20 years. CVC's deal with La Liga is over 50 years.

"This is an untypical case for private equity," said Grote. "However, the share of untypical private equity deals has risen. Investing in infrastructure over the course of long-term investments, investing in anything that delivers constant returns — this is becoming a new normal."

'Premier League horse hasn't just bolted; it's emigrated'

Given the unique structure of German football, Grote considers private equity investment a logical step. "With 36 different stakeholders, coordination is a major problem," he said. "Investing in the Bundesliga is a risky endeavor, and bank loans will be either very expensive or not feasible."

The DFL consists of 36 independent clubs, the vast majority of which are bound by the so-called 50+1 rule, which stipulates that the clubs themselves must retain majority voting rights in the commercial companies which generally run their professional football operations. Great for the fans, who can ensure that their matchday experience remains affordable and prevent their clubs simply being sold off to the highest bidder, but a turnoff for investors.

After recent attempts to challenge the legality of the 50+1 rule on competition grounds failed, the DFL has committed to the regulation and insists that a private equity deal at league level actually helps protect and preserve member-control at club level. "If this deal goes well, both clubs and private equity will understand each other better," said Grote.

Maguire is also confident that the deal will achieve its aims in bringing about an increase in the value of the DFL's international TV right, but said any attempt to eat into the Premier League's advantage is going to be "very difficult."

"The Premier League horse hasn't just bolted; it's emigrated and started a new life far, far away," he said.

According to Maguire, Premier League clubs have been doing overseas tours for decades, and have the advantage of the English language, making them the first choice for football fans in most countries.

For German clubs, competing for attention will be hard. "Fans only have a limited number of 90-minute slots available per weekend and once they've been locked into the Premier League ecosystem, watching Manchester United, Liverpool, Tottenham, Arsenal and Chelsea on a regular basis, where is the room in their life to watch Werder Bremen vs. Eintracht Frankfurt?"

Maguire added: "It will be very difficult, in my view, even for the skills and wily ways of private equity to break into that market."

Edited by: Rob Mudge