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Why do some joint ventures fail? The cautionary tale of the European Super League

As the dust settles on the attempt at establishing the European Super League, we explore some of the reasons behind its failure and outline the key factors to bear in mind when planning joint ventures.  

There are many benefits of a successful joint venture. Through such partnerships, a company can gain access to new markets and distribution networks, and benefit from a sharing of knowledge and expertise without having to spend excessive amounts of capital. However, as the collapse of the European Super League (ESL) plan shows, not all joint ventures are successful.

There are four typical problems that most joint ventures will encounter and have to address in one way or another. These are: compatibility issues, funding, problems with the Joint Venture Agreement, and differing profit/outcome expectations. It appears the ESL encountered difficulties in each one of these areas. 

About the author

George Thresh

+44 (0)207 710 0935
threshg@buzzacott.co.uk
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There are many benefits of a successful joint venture. Through such partnerships, a company can gain access to new markets and distribution networks, and benefit from a sharing of knowledge and expertise without having to spend excessive amounts of capital. However, as the collapse of the European Super League (ESL) plan shows, not all joint ventures are successful.

There are four typical problems that most joint ventures will encounter and have to address in one way or another. These are: compatibility issues, funding, problems with the Joint Venture Agreement, and differing profit/outcome expectations. It appears the ESL encountered difficulties in each one of these areas. 

Compatibility

Compatibility  

One of the first things to consider when establishing a joint venture is the compatibility of the partners. All parties involved should have aligned motives and be well suited to working together. While the ultimate goal of the ESL founders was likely to make money, the clubs involved were approaching the situation from very different standpoints. Clubs such as Barcelona and Real Madrid are currently in financial difficulty brought on by mismanagement of player wages and transfer fees, and further exacerbated by the drop in ticket revenue caused by the pandemic. For these clubs, the ESL represented an opportunity to help plug a cash hole. On the other hand, American-owned clubs such as Manchester United and Liverpool likely wanted to protect their investments with a closed league, removing the threat of relegation or missing out on a top-four finish in the Premier League (and the drop in revenue this would entail). Finally, it appears there were other parties, such as Manchester City and Chelsea, who were never keen on the project but simply didn’t want to be left behind. When all the parties involved have such wildly different motivations, friction is likely to arise. 

Funding

Funding 

On the surface it appears that funding should have been the least of the worries of the 12 founding members of the ESL. JPMorgan Chase reportedly offered a €3.25bn loan (described as an “infrastructure grant”)  to kick off the project to be divided between each participating club in the form of a €200m - €300m one-off “welcome bonus” on joining. While this would have certainly helped to fill the cash holes that several of the clubs are currently experiencing, there is a longer term picture to consider. Such an astronomical injection of cash into the football economy would have likely brought about both wage and transfer fee inflation (particularly if participating players were forced to give up the chance to play for their respective countries). This typically even occurs after a large one-off transfer has taken place (such as Gareth Bale to Real Madrid or Neymar to PSG) so there is no telling how significant it would be when sums many times greater are involved. This coupled with the fairly significant capital and interest repayments on the loan, the possibility of being removed from domestic competition and potential struggles to fill stadiums (in the wake of fan protests) would have resulted in the clubs being reliant on the excess amounts brought in by (as yet unsigned) new broadcast deals to leave them in a better financial position.

When obtaining funding for a joint venture, it is vital that all factors are taken into account to determine loan serviceability. Chief among these are changing revenue streams, expenses and cash flows; careful modelling should be used to anticipate their impact.

Joint Venture Agreement

Join Venture Agreement 

It is crucial that a clear and thorough Joint Venture Agreement is put in place at the start of any arrangement. This should clearly set out the roles and responsibilities of each party and define key areas such as profit share, control, liability and exit provisions. It appears that the ESL agreement may not have been as binding as first thought. Numerous clubs managed to back out of it through various means, and the Barcelona president stated that it would not be ratified until club members had voted on it. 

Profit/Outcome expectations

Profit/Outcome expectations 

Finally, all parties entering into a joint venture should do so with a clear and aligned expectation of the outcome and expected profits. This is where the ESL made its greatest mistake. By just focussing on the potential profitability of the venture, it failed to properly take into account other factors. Not only was there mass public outcry and protests from the media, pundits and fans, but also disapproval from the employees with many players and managers voicing their opposition to the plans. This helps to clearly illustrate the point that while profit is important there are other outcomes to consider such as employee satisfaction, customer reception and general public goodwill. 

Speak to an expert

If you have any questions about embarking on a joint venture, please get in touch. Our Corporate Finance team provide due diligence services across a number of sectors, and we have a network of venture capitals and private equity firms we can connect you with if you’re looking for funding to grow your business

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