Borussia Dortmund: The Champions League and the land of the forgotten (stock market)

Luis García, fund manager at MAPFRE AM

Yesterday, we saw how Borussia Dortmund knocked out the mighty Paris Saint Germain to qualify for the Champions League final in London. For some time now, the German club's shares have represented the lion's share of the MAPFRE AM Behavioral Fund portfolio, accounting for over 7% of the fund's total. This is in addition to the Black & Yellow team's recent qualification, after months of sporting uncertainty, for next year's European competition and the new Club World Cup to be held in the United States, which, according to information that is gradually coming to light, will generate significant revenues for the participating clubs.

However, following a sharp rise in share price early this morning, the club's total market capitalization stands at just above €460 million. By way of comparison, in March 2020, this figure stood at around €480 million or more. At that time, as we all can recall, the entire globe was panicking about the serious escalation of Covid-19. An undoubtedly minor effect of this was that all major soccer leagues came to a standstill, with no clear idea about how and when they might resume. Nevertheless, the stock market placed a higher economic value on the German club than it currently does, despite its great sporting successes and with the effects of Covid-19 now apparently firmly in the past. It should be noted that the losses suffered during the seasons affected by the pandemic were offset by a capital increase.

To dispel any confusion, given that this article was written amidst Borussia Dortmund's successful qualification for the Champions League final, it's crucial to reiterate, as we have on other occasions, that our investment strategy remains unaffected by short-term sports outcomes, regardless of their nature—positive or negative. We haven't popped open the champagne today (though we welcome the good news), nor are we dismayed, for instance, by Ajax Amsterdam (another club in our fund's portfolio) not making it to next year's top continental competition.

These events, either way, are really not that significant. We invest in these companies because we believe that they are good businesses (in fact, both have paid dividends in the past, and we hope they will do so again now that the worst of the pandemic is over), with particularly healthy balance sheets and available at market prices that make them particularly attractive.

Interestingly, today was also the day chosen by American website Sportico, which specializes in financial information in the sports sector, to publish its list of the most valuable soccer clubs in the world. Borussia Dortmund ranks 12th, with an estimated economic worth of 1.56 billion euros. Over three times higher than the €460 million we mentioned earlier, which is its current market capitalization as shown on Bloomberg screens. Ajax, in turn, is ranked 26th and Sportico estimated its worth at €705 million. Its market capitalization, however, fails to even reach €190 million (almost 4 times lower), despite having a comfortable net cash position.

If we look at other market references, such as the proportion of income paid in recent transactions involving other European soccer teams, the new owners of Chelsea appraised the English club at around 11 times its current sales. For Borussia Dortmund and Ajax, if we consider their market capitalization, this multiple is around 1x (after making necessary adjustments for accurate calculation) in both cases.

The most recent interesting tidbit came last summer, when Borussia Dortmund announced the transfer of Jude Bellingham to Real Madrid, with an estimated positive impact on operating profit (the famous EBITDA) of approximately €75 million. A very significant amount when it comes to a company's stock market capitalization. That day, the German club’s share price increased slightly. You might think that the transfer had been strongly rumored beforehand and was almost taken for granted by the stock market, but this theory loses traction when considering that share prices had not seen major gains in the months prior either.

It doesn't take an expert to see that these numbers make little financial sense and seem to indicate (in our opinion and without implying any kind of recommendation) that the stock market may be wrong when it comes to pricing the shares of these clubs. The reasons for this are difficult to explain.

Perhaps because of the general negative perception of the soccer industry at a financial level, which was well deserved in the past, but not so much today, when you crunch the numbers. Or perhaps because many fund managers are wary of venturing into unusual investments, which can attract attention and create controversy between stakeholders and managers, with the risks that this entails. Or perhaps it's the uncertainty about when these market inefficiencies will be corrected, which is causing distress for investors fixated on short-term results. Or the lack of general knowledge about the financial aspects of the sector and the scarcity (or almost non-existence) of market analysts who specialize in these shares. The fact of the matter is that the stock market has relegated soccer clubs, as Sabina once sang, to the land of the forgotten. Perhaps they are missing out on an interesting investment opportunity by doing so.

In the world of investments, nothing is risk free. And if it is risk-free, then the returns mean it’s not worth the effort. We look for strong, well-priced (or at least, sensibly priced) companies. And in order to find them, and for these opportunities to be available, there’s normally some factor that might not initially seem appealing, but that’s salvageable after careful financial analysis. These companies tend to reside, funnily enough, in the land of the forgotten (by the stock market). Will Borussia Dortmund manage to escape this land after yesterday’s famous victory? Only time will tell.