The Vulture Fund of Serie A
How a billion dollar hedge fund is trying to awake a sleeping giant.
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On 16th December 1899, Nottingham-born footballer Herbert Kiplin founded Italian giants AC Milan. âWe will be a team of devilsâ, he said. âOur colors will be red like fire and black to invoke fear in our opponentsâ.Â
Over the past few years now, AC Milan has been a shadow of its former self, having won the Serie A way back in 2011. Itâs been 9 years now and the Rossoneri is still struggling to compete with Europeâs finest.Â
At the forefront to change the fortunes of the fallen Italian giant is another giant - American investment management firm Elliott Management. Founded in 1977 by Paul Singer after borrowing $1.3 million from friends and family, the Elliott Corporation is now worth $35 billion.
Elliott Management has a kind of cult status in the investing world, with some calling it âthe vulture fundâ, and for good reason. A vulture fund is an investment fund that seeks out and buys securities in distressed investments, such as high-yield bonds in or near default, or equities that are in or near bankruptcy.Â
This is exactly the kind of situation in which Paul Singer and Elliott Management swooped in to take-over the Milan-based club.Â
In April 2017, Chinese businessman Li Yonghong acquired AC Milan for âŹ740m from former Italian Prime Minister Silvio Berlusconiâs investment firm Fininvest, ending his two-decade-long tenure at the club. This acquisition was completed by Yonghong via Rossoneri Sports Investment Luxembourg, a Special Purpose Vehicle (SPV) created to acquire the Italian giants. Â
Yonghong had big hopes for the club. Part of his strategy was to leverage the clubâs massive Chinese fan base and reshape the financial and organizational structure of the club. To execute his vision, Yonghong borrowed loans worth almost âŹ300m from Elliott Management with an interest rate of ~11%.Â
A little over a year later in July 2018, Yonghong could not repay his debts losing around âŹ500m in equity, effectively ending his brief stint at the club. Elliott swooped in, acquiring 99.93% of the stakes of AC Milan for âŹ400m, half of what it was valued at just a few months earlier.Â
Project Milan 2.0
Elliott had a clear strategy for the club - raise the value of the club by winning matches on the pitch, make revenue off it, and sell for a healthy return. Over the past decade, the clubâs annual revenues have hovered around the âŹ200m mark.Â
For perspective, Juventusâ annual return for the 2018-19 season was âŹ494m. This is âŹ94m more than what Elliott bought the entire club for. To solve this problem, the hedge fund first injected a sum of âŹ50m into AC Milan to shore up the clubâs balance sheets.
Elliott also appointed former Arsenal Chief Executive Ivan Gazidis as AC Milanâs new Chief Executive. It also brought in two more important people to the club. Club legend Paolo Maldini was brought in as Technical Director and Italian businessman Paolo Scaroni was brought in as Chairman.Â
To scout players, former Arsenal executive, and LSE alumni Henrik Almstadt was tasked with identifying transfers. So was former AS Monaco head scout Geoffrey Moncada.Â
Another company that played a part in the Milan takeover by Elliott Management is the private investment group, Blue Skye. Founded by Napoli-based businessmen Salvatore Cerchione and Gianluca D'Avanzo, the two are board members at the Rossoneri, with DâAvanzo the Chief Financial Officer of the club.Â
Both founders have had a long-standing relationship with former AC Milan CEO Adriano Galliani. All three of them were on the board of SOPAF - a private equity firm that owned 50% of Blue Skye until 2006. They later sold these shares to another hedge fund DB Zwirn.Â
On March 20, 2017, Blue Skye played its first part in the Li Hongyong takeover when it took control of the Luxembourg Investment Company - the entity that lent the money to Rossoneri Sport Investment Lux, Hongyongâs SPV. On April 4, 2017, the Luxembourg Investment Company changed its name to Project Redblack.Â
On April 10, 2017, Blue Skye ceded control of Project Redblack to two SPVs owned by Elliott management, King George and Genio, in Delaware. Once Elliott gained control of AC Milan, Blue Skye was given a small piece of the AC Milan pie.Â
What now for Milan?
For the 2018-19 season, the first under Elliott management, AC Milan suffered the worst result in the clubâs history with its loss before tax amount increasing from âŹ121m to âŹ143m.
Unsurprisingly, this was also the worst in Serie A by some margin. For perspective, Inter had a total pre-loss amount of âŹ40m and champions Juventus with âŹ27m. The highest profit margin was reported by Atalanta who made âŹ35m while also qualifying for the Champions League.Â
One of the reasons for Milanâs poor numbers is the steep decline in profit on player sales - with the number falling a whopping âŹ23m from âŹ35m to âŹ12m. For perspective, Juventus generated profits worth almost 10x more with âŹ127m.Â
In general, Milan has struggled with earning profits on player sales earning an average of âŹ11m profit a year since 2014. In the same time period, Juventus have made a profit of âŹ417m, Roma âŹ391m, and Inter âŹ185m.Â
Despite Milanâs revenue rising 4% from âŹ220m to âŹ228m, itâs still less than half of Juventus who reported revenues worth âŹ494m and âŹ150m less than Interâs âŹ370m. They are ahead of Napoli though, who reported revenues worth âŹ207m.Â
However, things might be turning around for AC Milan. For instance, in the season recently completed (2019-20), Milan reduced their losses from âŹ143m to âŹ100m. Of these losses, âŹ20m is directly attributable to the COVID-19 outbreak.Â
Unlike other clubs in Serie A, the Rossoneri have no debt on the bond markets or from banks. For comparison, Juventus, Inter, and AS Roma have taken credits or issued bonds worth over âŹ300m.Â
This means that Milan is not answerable to any external investors or institutions. Its assets can also be easily liquidated as 100% of its shares can be sold for cash. Add to that its zero-debt, and Milan certainly appears a promising prospect for investors and sponsors.Â
Plus the Zlatan effect isnât too bad either ;
Could the Elliott formula be working?
For Your Eyes OnlyâŠ
Itâs 1930. The French football team pose for a picture aboard the Conte Verde en route to Uruguay for the World Cup
Romania, France, and Belgium travel to Uruguay in 1930 for the first-ever World Cup aboard the cruise ship Conte Verde
Getting a better view: Belgian fans watching a game against the Netherlands in 1913.
What Else Are We ReadingâŠÂ
- Matt Rogan of Two Circles looks to the future and reports on how sport must fuse their physical and digital offerings
- For the first time, FIFA published its Legal Handbook: A one-stop resource of all relevant FIFA Regulations in one place.
- This cool infographic showing the growing interests of American investors in Serie A, including Elliott Management, Friedkin Group, and others.
- Dutch club FC Emmen have unveiled their new stadium entrance, after agreeing to a sponsorship deal with a sex toy company.
- Balance Sheet of MASH Holdings - the company that owns Newcastle United.
Strike Of The DayâŠ
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