In October 2012, Ghana impounded an Argentine naval ship. In years gone by, such an action could have been seen as a prelude to war, though by all accounts those on board were well-treated by the locals. Far from being an act of aggression though, the Ghanaian authorities were simply enforcing a court judgement granted in favour of an American hedge fund.
Argentina owed millions of dollars to the Elliott Management Corporation, and they were determined to reclaim their debt by any means possible. The same hedge fund has just provided the money for the Chinese takeover of Milan.
To understand Elliott’s involvement, it’s important to first explain why the sale took place.
Since taking over the club in 1986, media tycoon and erstwhile Prime Minister of Italy Silvio Berlusconi had bankrolled Milan to domestic and European success. Some of the greatest players and Coaches strutted their stuff in the red-and-black jerseys, with the President’s smile reflected in the gleam of 29 trophies.
However, the changing face of football meant Berlusconi could no longer afford to back the club as he once had. After failing to retain the Scudetto in 2012, the Diavolo embarked on a cost-cutting drive.
Year-on-year, the club slipped further away from the Serie A summit and the Champions League, finishing below Sassuolo last season to miss out on Europe for the third year in a row - unthinkable for a club which ruled Europe seven times. Something had to change.
On April 13 this year, a sale to Chinese investors was finally completed. It had been a tortured process, with repeated delays.
Following the collapse of a deal to sell 48 per cent of the club to Thai businessman Bee Taechaubol (affectionately known as Mr Bee), Berlusconi instead turned to the Chinese market, signing a preliminary agreement with Yonghong Li and his Sino-Europe Sports fund.
Berlusconi’s holding company, Fininvest, agreed to complete the transfer of all shares - amounting to 99.93 per cent of the club - by the end of 2016, valuing the Rossoneri at €740m with another €220m in debt. As a statement of intent, Sino-Europe Sports paid a non-refundable deposit of €100m and promised to invest significantly in the club when the takeover was completed.
However, it was announced in December that the takeover would be delayed until March, with the prospective new owners paying another €100m deposit.
As the March 3 deadline arrived, rumours began to emerge that the deal would once again be delayed, as Li was struggling to raise the funds necessary for closing. Another €50m, paid in chunks of €20m and €30m respectively, was provided and the deadline was moved to April 13.
With a little over two weeks until the final deadline, Sino-Europe Sports was dissolved. Yonghong Li instead set-up a new company, Rossoneri Sport Investment Lux, which reaffirmed its desire to complete the purchase of Milan. With the collapse of what was supposed to be a wide-ranging consortium of Chinese investors, where was the money coming from? On March 28, we got our answer.
The Wall Street Journal announced that U.S. hedge fund Elliott Management had agreed to provide €253m to fund the takeover: €180m for the actual transaction and a €73m intercompany loan to the club. With the backing of the American investors, Li completed his takeover and promised to return the Rossoneri to their rightful place at the top of world football.
Understandably delighted at an end to years of austerity, few Milanisti questioned his claims. But just who are Elliott Management? And why are they investing in an Italian football team?
Elliott Management currently oversees around $30bn [€27bn] worth of assets around the world. Clearly then, there is no question that the hedge fund has the financial heft to support Li and his new board.
What should be unsettling for Milan supporters, is that a football club is a strange investment for a hedge fund. The website Calcio e Finanza reports that the combined Enterprise Value [EV] of Europe’s top 32 teams is less than half that of American sportswear giant Nike.
While Manchester United reported a revenue of €606m for 2016 and Real Madrid generated €620m, they posted profits of €80m and €30m respectively. Silvio Berlusconi’s 30 years at the helm of Milan brought five Champions League trophies and eight Scudetti, but the club posted a profit in just three of those years.
Put simply, hedge funds exist to make a profit. Football clubs don’t.
Since its founding in 1973, Paul Singer’s fund has brought a 14.6 per cent annual return for its investors. Milan are expected to make a €75m loss for 2016. Something doesn’t add up.
Elliott has been described by the Washington Post, the Independent and others as a “vulture fund”. These funds are involved in buying weak or defaulted debt at a discount, then applying pressure to get a more significant return. The New York Times reported in 2009 that “more than one-third of Elliott’s portfolio is concentrated in… the debt of bankrupt or near-bankrupt companies”.
Of course, Elliott doesn’t only deal with private companies. In 2002, Argentina defaulted on a total of $93 billion. With bondholders seeing little prospect of getting their money back, many tried to cut their losses. Enter the vultures.
Elliott Management bought $617m worth of bonds, for a price which the Washington Post puts at $117m. What followed was a 15-year campaign by Singer’s fund to force Argentina to repay, a battle which occasionally reached farcical levels.
In 2012, the ARA Libertad entered the port of Tema in Ghana. A prized sailing ship for the Argentinian navy, the Libertad still holds the speed record for crossing the Atlantic Ocean under sail power only. Following a court ruling, the ship was impounded in the port, to be released only on payment of $20m.
The majority of the crew returned to Argentina, with 43 staying behind and carrying out their regular naval duties. The UN eventually ruled that the Libertad was immune from seizure as a military vessel, and she was released on December 19. The incident was just one example of the lengths to which the hedge fund would go to recover its debt.
Were it not for a late tip-off in 2007, former Argentinian President Nestor Kirchner’s plane could have been seized, after Elliott moved to have it detained when it landed in the U.S. for maintenance and pilot training. Had Kirchner not cancelled the visit, even the pilots’ fuel money, expected in cash, could have been seized.
These tactics may seem ridiculous, but they were effective. Last year Argentina agreed to a settlement allowing Elliott to walk away with $2.4bn for the unpaid bonds, around 369 per cent of face value.
So why Milan? Following the takeover, La Gazzetta dello Sport reported that the club’s new owners had 18 months to pay back the €253m, with an interest rate of 11.5 per cent on the €180m used for the purchase itself. Should they fail to do so, Elliott would take control of some or all of their shares.
This is another tactic straight out of Elliott’s playbook. In a process known as ‘shareholder activism’, the hedge fund seeks to influence the behaviour of a company by exercising their rights as shareholders.
While investors engaging in this practice don’t actively run the company in question, they can get the board and management decisions swayed in their favour.
Activist Insight notes that activism of this type is on the rise outside of the U.S, particularly Asia and Europe. In its ‘Activist Top Ten’, Elliott Management was ranked number one.
Gazzetta’s inquest states that the Rossoneri board must report to Elliott every two months, while MilanNews believes CEO Marco Fassone is “untouchable” until the loan is repaid. With the Financial Times reporting that the takeover values the club at “four times revenues”, how will the new owners meet the deadline?
Given that San Siro is shared with Inter, the scope for greater match day revenue is limited, so growing television and merchandising revenue in emerging markets appears to be the strategy.
However, Gazzetta dello Sport reported last year that Barcelona, despite commercial revenues more than four times greater than the Rossoneri’s, made just €15m in China.
In broadcasting too it’s not clear where the margins for growth are. Vincenzo Montella’s side won’t be involved in the Champions League next year, immediately cutting off a huge source of television money.
To make matters worse, Mediaset has indicated that it won’t be tenaciously competing for the Serie A rights as it did in 2015. Competition with Sky drove the price for Serie A rights to around €1bn per season, but experts warn of around a 20 per cent reduction from 2018. Funnily enough, Mediaset’s failed gamble on TV rights are what put Berlusconi’s holding company Fininvest in enough financial trouble that he realistically had to sell Milan in the first place.
The Lega Serie A is therefore focused on selling the rights abroad, but the current deal is only worth around €200m: even doubling that would only cover the likely domestic shortfall.
Yonghong Li and his board have pledged to invest in the squad, but will they be able to do so and still pay back what they owe to Elliott?
Despite Berlusconi’s unwillingness to finance lavish transfer spending in recent years, the Rossoneri’s losses were written-off by Fininvest. They were in safe hands. The new owners must now turn an estimated €75m loss into a profit, while paying back a €250m loan.
The vultures will not be as forgiving as Il Cavaliere.