Brazilian Football: Big Opportunity, Big Risk – Financial Services

Current state

Brazil, “o Pais de Futebol”, is arguably the country most synonymous with football. Yet despite the continued success of the national team and some of the largest and most ardent fanbases in the world, Brazilian football clubs lag far behind European clubs in terms of financial firepower. Brazilian clubs only generate 2% of global football revenue.

The COVID pandemic has significantly weakened the already poor financial situation of Brazilian clubs. A recent study of 23 Brazilian clubs by EY identified that:

  • Debt levels in 2020 stood at 10.3 billion reais ($1.9 billion), up 19% from 2019, averaging 450 million reais ($83 million) per club; and

  • Combined revenue fell 14% year-on-year (YoY) to R$5.3 billion (USD 998m). In addition, commercial revenue only accounted for 13% of total revenue, compared to an average of 43% among the European clubs analyzed in the study. Deloitte Money League.

In addition to the precarious financial situation, Brazilian clubs have been plagued for decades by poor governance by elected officials, often unpaid, appointed according to their popularity and offering short-term solutions. As a result, Brazilian football has been an unattractive proposition for many outside investors.

Change in law

With the aim of improving club ownership structures and opening them up to investment opportunities, Law No. 14,193 was enacted on August 6, 2021.

This law created a new corporate structure, Sociedade Anônima do Futebol (SAF, “soccer company”), which can be built in three ways:

  • The club can be directly transformed into SAF;

  • The club can only transfer its assets and football operations to an SAF; Where

  • A new SAF can be created.

The SAF must issue a special type of share, similar to a “preferred stock”, to the original founding legal entity which retains certain veto rights such as changes in the name and symbols of the SAF or the relocation of its location.

Given the indebtedness of Brazilian football clubs, a key element of the new law is that the club of origin, and not the SAF, retains the debts of the clubs with the obligation to settle them, generally within the 10 years. In return for the remaining debt to the founding entity, SAF must pay the originating club a percentage of current income and dividends as a shareholder of SAF.

How will the new law help attract investment?

  • Improved governance and transparency –the new law requires the disclosure of details of the owner and beneficiary of entities holding 5% or more of the capital of the SAF. Additionally, companies will often need to publish corporate and financial information.

  • Simplified tax regulations –for the first five years after their incorporation, football companies will pay a global tax of 5% of their total revenue, excluding revenue from the sale of players. After this period, the tax rate drops to 4% without exclusion.

  • More robust valuation –the assets of the football departments which are to be transferred to the new company, such as player contracts and club-owned stadiums, will have to be valued by specialized companies according to appropriate procedures. This could be a useful tool in negotiations with the home club where passionate opinions do not always reflect economic reality.

Opportunity for investors

There was 874 active Brazilian professional clubsin 2019. The quality of football talent in Brazil is attested by the FIFA World Transfer Report 2021 which shows that Brazilian nationals represent by far the highest levels of international transfers outside of any nationality. For men’s professional football, Brazilian nationals made 1,749 transfers out of a total of 18,068 international transfers for 2021.

Brazilian football has a huge fan base of around 126 million peopleoffering vast business opportunities to potential investors. Particular areas of potential revenue growth are:

  • Broadcast revenue – Brazilian clubs have signed broadcast contracts individually since 2011 and significant disparities in broadcast revenue allocation remain. The television rights contract for the main national tournament (Brasileirão) expires in 2024. As a result, it is possible to collectively negotiate new broadcasting rights by leveraging joint bargaining power;

  • Commercial revenue – including sponsorships, merchandise and match day revenue;

  • new league – top clubs expressed their belief that the new breakaway league, Liga Do Futebol Brasileiro (Libra), led by a new league body independent of the CBF, will generate better financial prospects thanks to:

  • Improvement of the commercial structure;

  • Modified revenue distribution model to level the financial playing field; and

  • Better organization.

It is unclear whether increased investment will result in increased competition. This has generally not been the case in Europe’s top leagues over the past decade, with a handful of ‘super clubs’ continuing to win the majority of domestic trophies despite having independent governing bodies.

Investing activity

The new law has already attracted significant investment from high net worth individuals, investment firms and international football clubs.

Investor Risk Considerations

These huge investment opportunities are not without risk and investors should take a robust approach to due diligence, which assesses factors beyond club finances and operations and is aware of the unique risks of the Brazilian market.

Due diligence should also assess reputational, integrity, legal and regulatory risks, as such issues that could lead to erosion of financial value in the future if they arise.

Here are some key questions investors should seek to answer:

Integrity and reputation:

  • What is the reputation of the existing shareholders who will be the recipients of the investment funds? Are there any potential issues around
    political exposure, sanctions,Corruption, Or other
    regulatory risks?

  • Are those in charge of governance and stewardship on the management of the club in the future
    reliable? Do they have reputation issues which one could threaten culture, image and future success of the club ?

  • Do any of the major third-party vendors or partners have reputational or regulatory issues?

  • Has there been sufficient control of financial information to ensure that it truly reflects the position of the club? Is there an overall understanding of how revenue and cash flow are generated? Has there been a review and verification of earnings quality to make sure they are sustainable and correctly reported?

  • Is it reassuring that society has policies and controls make sure good stewardshipoverinvestment funds? Are appropriate checks to mitigate the risk of financial flight and embezzlement?

  • What checks have been carried out to ensure bribes or kickbacks was not hidden in daily life transactions?

Legal and regulatory:

  • Are there any unforeseen risk for the football company concerning debts of the original club? Is it possible that new owners will become
    jointly and severally liable if debt reduction targets are missed?

  • Were all existing contracts terminated upon the transfer of assets to the new football company? Otherwise, are there any contractual obligationsto take into consideration?

  • What are the regulatory requirements administrative bodies governing the football corporation, such as FIFA and CBF? Is there disciplinary sanctions who can be charged for issues such as non-payment?

Assessing these factors, in addition to financial due diligence, will help investors better understand the football society. This will reduce uncertainty and identify potential issues affecting the price of the transaction.

© Copyright 2022. The views expressed herein are those of the authors and not necessarily those of Ankura Consulting Group, LLC., its management, subsidiaries, affiliates, or other professionals. Ankura is not a law firm and cannot provide legal advice.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.