Costa benefit analysis II – In value terms, Chelsea are in a different league to Manchester United


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

“Have some clubs paid too much for their new players?” wondered a headline on the BBC website just after the football transfer window closed on 1 September. cynics might suggest that question could be answered with a single word but, here on the value perspective – our value senses tingling as they always do when we see the phrase “paid too much” – we clicked on the link hoping for rather more.

Nor were disappointed as the article – inspired in no small measure by Manchester United paying an English-record £59.7m to Real Madrid to secure the services of argentine international midfielder angel Di Maria – introduced us to the work of the Cies football observatory into what may or may not constitute ‘value’ within the curious economics of professional football.

The discovery of this hitherto unknown ally in our quest to spread the value message to every quarter of the globe left us so excited it seemed best to hold off writing anything for a while in order to add some distance and objectivity to proceedings but, as the premier league breaks for a couple of international matches, we cannot hold back any longer from flagging up the observatory’s insights.

Affiliated with the university of Neuchâtel in Switzerland and part-funded by football’s governing body Fifa, the organisation has created a statistical model that estimates the transfer value of every player in the top divisions of England, France, Germany, Italy and Spain based on numerous, mainly statistical, factors, some of which – if we were being picky – appear more relevant than others.

Still, who are we to doubt the observatory’s methods when it can point to evidence – albeit its own evidence – that the valuations indicated by its model are accurate in predicting actual transfer fees in more than 80% of cases. Presumably ‘accurate’ would not in this instance actually mean to the penny but perhaps that is again being picky.

At any rate, the model indicates Di Maria’s Real value was £36m, meaning Manchester United overpaid for him by some £24m this summer – as indeed the club apparently overpaid for Spanish midfielder Ander Herrera (£29m compared with the model’s estimate of £16m) and the teenage English defender Luke Shaw (£32m, once ‘add-ons’ are taken into account, compared with the model’s £27m).

According to the football observatory, the combined £40m-plus difference between its own valuations and what United ultimately paid for the trio can be attributed to both club-specific factors, such as last season’s failure to qualify for the lucrative champions league, and player-specific ones, such as Di Maria’s reluctance to leave Real Madrid.

An alternative viewpoint was, however, provided by football agent Seb Ewan, who suggested that while statistics can give a good indication of a footballer’s value, they have their limits. “We’re not dealing in commodities, we’re dealing with humans,” he argued. “You deal with emotions, you deal with families. These aren’t machines, they aren't robots who …” well, you get the idea.

To cut a long argument short, Ewan sees the Di Maria deal as good value, observing: “somebody like Di Maria doesn’t come along very often and the amount of hope that he can give a club can’t be understated either. If you can go out and make that sort of statement of intent and buy in world stars for your club, it’s never going to be a negative.”

While, as a value investor, I am always wary of the word “never”, as a spurs fan, I can say through long and painful experience of “statement” signings its use in this context is just plain wrong. Clearly the concept of value rarely impinges on the thinking of football agents, which may or may not have anything to do with their receiving a percentage of any transfer fee whenever a client switches club.

Nevertheless, it is of course still possible to pick up bargains – for example, the Italian striker Mario Balotelli – snapped up by Liverpool for £16m, compared with the football observatory’s £28m call – while apparently £20m was knocked off Luis Suarez’s value the moment the Uruguayan striker sunk his teeth into Balotelli’s compatriot Giorgio Chiellini at the world cup.

According to the football observatory, such instances are more an indication of “non-sporting issues” than any lack of accuracy on its model’s part but – whatever your thoughts on that defence – it seems reasonable to suggest some clubs are better than others when it comes to buying and selling footballers during the transfer window.

Take Chelsea, for example, which concluded most of its business before the world cup. Buying well – Diego costa, who cost £32m (£8m below the model’s £40m), has already scored nine premier league goals – the club has sold better. Most strikingly, it scooped £40m (£17m above the model’s £23m) for David Luis, who was at the centre of Brazil’s defence when they were thrashed 7-1 by Germany.

Most fans will love their club no matter what it may do in the transfer market but, here on the value perspective, we would argue good clubs will buy well and sell well. Chelsea has and sits top of the league with 19 points from a possible 21. Manchester United, which looks to have overpaid yet ended up long strikers and short defenders, has gained just 11 points from comparatively weak opposition.

Regardless of what football agents might believe, value looks to be as significant a consideration in football finance as it is in any other kind. What Chelsea appears to have grasped and Manchester United does not, however, is that the laws of supply and demand also apply – the supply aspect of which might neatly be summed up in footballing terms as “there’s only one Di Maria”.

You can see the same dynamics continually at play in the world of mergers and acquisitions – eager buyer, reluctant seller and a potential target that supposedly “doesn’t come along very often” – which leads to someone paying way over the odds. To complete the analogy, you will generally also find an analyst to assure everyone “that sort of statement of intent” is “never going to be a negative”. Whether you are talking investment or football, if you ignore valuation, it can certainly work out that way.



Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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