The Business Behind Real Madrid's Deal for Kaká

Posted by: Mark Scott on June 09

To quote a famous saying: “The way to make a small fortune is to start with a big one and buy a soccer club.” Well, someone forgot to tell Florentino Pérez, the newly-elected president of Spanish soccer giants Real Madrid. Less than two weeks into the job, he signed Brazilian star Kaká on June 8 for a reported $90 million. More multi-million dollar player acquisitions, including possibly Manchester United’s Cristiano Ronaldo — currently Fifa’s World Player of the Year, are set to follow.

Forking out $90 million when Spain’s economy is in the doldrums may sound like madness. But according to Simon Chadwick, director of the Centre for the International Business of Sport at Coventry University in Britain, Kaká could generate $100 million in extra annual revenue for Real Madrid through shirt sales, sponsorship, and match ticket sales. That means Pérez could recoup his investment in just one year — not a shabby investment proposition.

And it’s not just Real Madrid that’s reaping in the rewards.

According to consultants Deloitte's annual review of soccer finance, the combined revenue of Europe's so-called 'Big Five' leagues -- England, Italy, Spain, France, and Germany -- topped €7.7 billion ($10.7 billion) for the 2007/2008 season, a 10% increase over the previous season. England remained the most lucrative league, pulling in almost one-third of total revenue. In a show of financial muscle, Manchester United -- the English Premier League champions -- recently signed a four-year shirt sponsorship deal with Chicago insurance broker Aon worth an estimated $130 million. That replaced a similar, but slightly less lucrative, agreement with struggling insurer American International Group whose logo will remain on Manchester's jerseys until May, 2010.

Yet for every multi-million dollar signing like Kaká, it's easy to forget not everyone benefits from soccer's extravagant revenue-generating spectacle. Only this week, English club West Ham was saved from bankruptcy at the last minute, only to find its new owners may struggle to pay creditors.

Famed Northeast England club Newcastle United, which has been relegated from the country's lucrative Premier League to the second-tier Championship, faces a more humiliating plight. The club's beleaguered owner, Mike Ashley, has put the club up for sale 'at the price of £100 million ($161 million)' after buying the club two years ago for £134 million ($216 million) and investing an additional £110 million ($178 million) to pay down Newcastle's debts. For those interested in buying the club, there's even an email address (admin@nufc.co.uk) to submit bids.

Such mixed fortunes show that for the business of soccer -- just like the matches played out across Europe in front of thousands of fans every week -- sometimes you win, and sometimes you lose.