The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Leicester City just upended the “size is everything” business mantra. With two games to go this season and no other team able to beat its tally, the previously unfashionable midlands soccer team has won the world’s richest league, claimed by only five clubs since 1992. The success of a 5000-1 outsider that spent most of the last decade in lower leagues deserves to embolden businesses – such as those in the highly contested financial services sector – that think they can’t graduate to the next tier.
Most clubs that have managed to secure the English Premier League did so largely due to extremely rich benefactors who financed the acquisition of the world’s best players. Leicester has one too – the Srivaddhanaprabha family that runs duty-free enterprises at Thai airports. But instead of splurging on players, it steadied the club’s balance sheet first.
In March, Leicester reported the best financial results in its history – 26 million pounds of pre-tax profit on 104 million pounds of turnover – helped by lucrative television rights. But a year before that it had had 117 million pounds of net debt. The owner stepped in by buying Leicester’s stadium and turning over 100 million pounds of shareholder loans into equity, according to the Swiss Ramble, a football finance blog.
This has proved a smart move. Next year Leicester could earn over 150 million pounds from television rights alone, helped by an even more lucrative league-wide domestic TV deal due to kick in soon, and the tens of millions of extra revenue from securing a place in next year’s Champions League, a Europe-wide tournament for each country’s best teams. Had it not been promoted to the Premier League in 2014, it would be looking at more like 5 million pounds.
The twist is that financial success has been achieved without ridiculous expenditure on a soccer team’s raw materials – players. Leicester’s wages were only 55 percent of its turnover in 2015, one of the lowest in the Premier League, according to the Swiss Ramble. True, the club has developed a knack of signing underappreciated players – such as Riyad Mahrez and N’golo Kante. But relative financial solidity helps outbid similarly sized clubs at home and overseas.
Leicester is already the 24th biggest club in the world by revenue, according to Deloitte. But its victory is still an unlikely success story. Many sectors dependent on the high remuneration of a small pool of top talent – like investment banks – only tend to change their pecking orders when a new entrant uses financial brute force. Leicester’s triumph has been smarter.