Case Interview-Merger & Acquisition- Acquisition of a Football Club
This is blog#8 in the series of blogs of case interviews. This is a merger & acquisition strategy case interview.
Interviewer: Bharat Sports Private Limited (BSPL)wants to buy W-United, an English football club. You are hired as a consultant to advise them whether they should go ahead with the plan or not. What would you suggest?
Initial Clarifying Questions
Candidate: First of all could you please tell me a little more about BSPL?
Interviewer: BSPL is a subsidiary of Alliance Industries, India and was founded in 2007. It owns various cricket franchises around the globe. BSPL is known to own cricket franchises that win or compete for the top spot every season. They want to now own a football club by buying one of the most successful football clubs in the world with a huge fan following across the globe.
Candidate: Could you please tell me a little bit more about the current owners of W-United?
Interviewer: W-United was bought by Matt Blazer an American businessman in early 2000’s. After his death his sons Andy Blazer and John Blazer are running the club.
Candidate: You have mentioned why BSPL wants to buy the club. Why do Blazers want to sell the club?
Interviewer: A brief history will give you an idea about the Blazers and their ownership of the club. Blazers bought W-United by taking loans which were secured against the club’s assets. Some of the club fans opposed Blazer’s takeover of the club. This is because they realized that the club will be in huge debt after having been debt-free for so many years. Fans were also not happy because the Blazers did not put any money into the club but kept taking huge sums of money out of the club in dividends paid to themselves. Unhappy fans launched a campaign of “Blazers OUT” and have been protesting on the streets, outside and inside the club stadium and also online. Although the club has done well off field in terms of revenues, on field they have not won any English Premier League or UEFA champions league trophies since 2008 which is unusual for the club of the size, stature and history of W-United. W-united has won 12 EPL titles and 5 UEFA Champions League titles till 2008. The global fan base of W-Utd was because of their performance on the football pitch. With no major trophies, the off field revenues have gone down. Also, big and popular football players do not want to join W-Utd which also in turn impacts off field revenue. With the backlash from the fans and decreasing revenues, Blazers want to sell the club.
Candidate: Ok. What is the ask from the Blazers to sell the club?
Interviewer: They want USD 2.5 Billion.
Candidate: Let me summarize my understanding. BSPL, a subsidiary of Alliance Industries in India wants to buy W-United. The owner of W-Utd, the Blazers want USD 2.5Billion for the club. BSPL wants to understand if they should go ahead and buy the football club. Is my understanding correct & can I take a couple of minutes to gather my thoughts?
Interviewer: Your understanding is correct.
This being a hypothetical case, the candidate did not hesitate in asking for clarity about the buyer and seller. That is a great start. Also, the candidate summarized his/her understanding after getting clarity to the clarifying questions. This is also a good practice in any case interview.
Framework
Candidate: I would like to approach the problem in 5 steps
- Understand W-United’s Revenue Streams
- Understand W-United’s costs
- Understand the football market in general to understand if its a good market or not.
- Understand the current team (staff) on the field and off the field.
- Future market growth projections.
First two steps will help us understand profitability of W-United. The reason the 3rd step is important is because W-Utd may be profitable, but what if the football market is declining or stagnant. Step 4 helps us understand if the current staff is worth investing into. Does the current team have it in them to bring back the old golden days of W-Utd? This will also help us understand if new staff needs to be hired. Cost of hiring new staff and losing existing staff could be tedious, time consuming and extremely expensive. This could impact the decision of buying the club.
Does this sound like a plan?
Interviewer: Sounds good to me.
W-United’s Profitability
Candidate: Could you please help me with the revenue and costs of W-United last financial year?
Interviewer: I will. But before that I would like you to list down various streams of revenue and costs that a football club could have.
Here the interviewer caught the candidate by surprise. The candidate has to think on his/her feet to answer the question. This shows problem solving skills of the candidate with limited or no knowledge of a particular domain.
Candidate: Sure. The revenue streams could be as follows.
On field
- Sale of tickets off course during football season
- Sale of food/beverages in the stadium
- Advertisement shown on big screen during the breaks in the stadium
Off field
- Sale of club merchandise like jerseys, t-shirts, coffee mugs, key chains etc.
- Sponsorship deals.
Did I miss anything?
Interviewer: Good job overall.
In football, the players are sold during 2 transfer windows each year. Football clubs make a lot of revenue by selling their players.
The English Premier League (football league of England) distributes TV revenue among its member clubs through a centralized broadcasting deal.
English Premier League divides a significant portion of the TV revenue equally among all 20 member clubs of the Premier League. This equal share provides a baseline level of income for each club, regardless of their performance or TV popularity.
Another portion of the TV revenue is distributed based on a club’s performance in the league. The higher a club finishes in the final standings at the end of the season, the more money it receives. This is intended to reward success and incentivize competitiveness.
Candidate: Thank you for the information. I will now list the costs.
- Player, coaching staff, support staff salaries.
- Salaries of all other employees.
- COGS (cost of goods sold) of the merchandize
- Other cost of operation (maintenance of stadium etc.)
- Marketing and Promotional expenses.
Did I miss anything
Interviewer: In football, when a club buys a player from another club they have to pay transfer fee to the other club.
Also there are player agent fees that club has to accommodate.
Players and coaching staff have to travel for the away matches. There are travel and accommodation costs.
Now. let me help you with the revenue and costs in USD.
Revenue Last financial Year= USD 800 Million
Costs Last financial Year= USD 500 Million
For the sake of this case you can ignore taxes.
In this case, the interviewer has directly given the numbers. In a real case interview, the interviewer breaks it down in several steps and asks you to calculate the revenues, costs and EBIDTA. I have covered this in detail in my Profitability case interview link of which is there at the end of this blog.
Candidate: So, the EBIDTA (Earning before interest, tax, depreciation and amortization) is USD 300 Million. What is the discount rate we can consider for the valuation?
The candidate did a good job asking the discount rate and using the term EBIDTA. Basic financial literacy is important for any case interview. The discount rate is the interest rate used to determine the present value of future cash flows in a discounted cash flow (DCF) analysis.
Interviewer: Please assume 10%
Candidate: Value of a firm= OFCF (Operating free cash flow)/ Discount Rate
Valuation of W-Utd= USD 300 Million/0.1= USD 3 Billion
Now, just from this calculation, the club is under priced. But we have to consider other factors too.
Other Considerations
Candidate: From the framework initially laid out, I would now like to understand the football market, the future prospects of the club and the business. What is the CAGR of the football market in the last 3 years? What the CAGR of W-Utd in the last 3 years?
Interviewer: Football market in UK has been growing at 7% to 8% annually. Man Utd has been growing at 2%–3%.
Candidate: How about the team itself? How is the team doing in the last 3 years?
Interviewer: Like I said no EPL of UEFA champions league trophies since 2008. But last year the club won EFL cup, a smaller competitions in England. This year they reached FA cup (another cup competition) semi finals. The team has a new coach who has changed the way the team plays. The club finished in the top 4 in the last 3 seasons which it had not done for the past 10 years prior to that. Lots of youngsters from academy have been coming through to the senior team and can become future superstars. The club already has some good experienced players.
Candidate: Are there any other costs that the club might have to incur in the next few years? For example renovation of current stadium or building a new stadium?
Interviewer: Great question. The fans have been complaining about the sad state of affairs of the existing stadium and have been demanding a renovation. This could be a huge cost.
Candidate: From what you have explained, W-united has a great legacy which has bene declining due to lack of trophies. The off field revenues will pick up if big players join the club and help the club win trophies. Does the team need major reinforcements in terms of new players and coach?
Interviewer: For the sake of this case, let us assume the team is good and improving. The club may need minor reinforcements during the transfer window. But overall the team is good.
Candidate: From my assessment, clubs like W-united are rarely available for sale at a price below the market price. The market is growing at a good rate. The club is growing at a rate much below the market rate. There is a lot of potential for growth. It will be a great investment for BSPL. BSPL are winners and would want to take W-Utd to winning ways. The fans would also welcome the move because they want the current owners out and would appreciate a group like BSPL who are known to be winners.
The candidate did a great job by covering all bases and factors that impacts the decision of purchasing the club. This shows the interviewer that you are not just looking ta it financially but also approaching the problem in a wholistic manner.
Conclusion
In a merger and acquisition problem, the first step in obviously to understand if the valuation that the seller demands is correct. Understanding the profitability by understanding revenues and costs will help one to estimate the valuation of the firm, the buyer wants to buy. One has to consider other factors too like is the market in which the seller operates worth investing? Are there any other synergies that the buyer can take advantage of from the seller’s firm? Lots of time, buyer buys a competitor either to enter in a market where they don't exist or just to increase market share. It is important to understand all factors before recommending to give a heads up for a merger or acquisition. PESTEL analysis is a good framework that would further help in making a decision on a merger or acquisition. PESTEL is an acronym for Political, Economic, Social, Technological, Legal, and Environment.
PS,
Links to my previous blogs on case interviews are as below.
Blog# 1- Case Interviews#1- Introduction- Click Here
Blog#2- Case Interviews#2- Guesstimate- Click Here
Blog#3- Case Interview#3- Root Cause Analysis- Click Here
Blog#4- Case Interview#4- Strategy-Market Entry- Click Here
Blog#5- Case Interview#5- Product Design- Click Here
Blog#6- Case Interview#6- Strategy-Profitability- Click Here
Blog#7- Case Interview#7- Product Metrics- Click Here
