How would Newcastle United fit with Saudi Arabia’s other investments?

Walt Disney. Facebook. Starbucks.

Already in 2020, Saudi Arabia’s Public Investment Fund (PIF) has spent more than £6.2 billion investing in 24 major companies, many of them world-renowned brands, including those three giants.

PIF hopes to add a 25th name to that list imminently, too, in the form of Newcastle United, subject to Premier League approval.

But, although Newcastle are themselves a globally-recognised institution, acquiring an 80 per cent stake in an English top-flight football club still appears to be a divergence from the sovereign wealth fund’s usual investment strategy.

This, in turn, has led to suggestions that Saudi interest in purchasing Newcastle is nothing more than “sportswashing”, an alleged attempt by the Saudi government to improve its image abroad by owning a leading English club. This is a subject we explored in depth here.

But, beyond the potential reputational upside to the deal, is there any economic rationale behind their desire to buy a majority stake in Newcastle? Here, The Athletic looks into PIF’s background and investment model to find out.

The millionaire financier Amanda Staveley may be heading the consortium to buy Newcastle but her firm PCP Capital Partners would take only a 10 per cent share in the club should the takeover be ratified. The Reuben Brothers, who are worth £16 billion according to the Sunday Times Rich List 2020, would also receive just 10 per cent.

It is PIF, paying about £240 million for an 80 per cent stake, who would become the majority owners of Newcastle United should the £300 million deal pass the Premier League’s owners’ and directors’ test.

In the process, they would become the single wealthiest owner (in terms of assets, not liquid cash) of any football club worldwide. According to the PIF’s governor, Yasir Al-Rumayyan — who is expected to become Newcastle chairman — the group control assets worth $325 billion (about £264 billion).

However, until news of this prospective takeover broke, many football fans had never heard of PIF. Even now, some may not know exactly who or what PIF is.

“The Public Investment Fund seeks to become one of the largest sovereign wealth funds in the world,” a description on its website reads. “To achieve this, the fund is building a world-class, diversified portfolio through investments in attractive, long-term opportunities at both domestic and international level.”

But that ambition for growth has not always been present. In fact, it is only fairly recently that the PIF has started expanding its assets.

Sovereign wealth funds are state-owned investment vehicles which use their nation’s savings — in Saudi’s case, predominantly generated by the sale of oil, given its huge reserves — to invest in assets such as stocks, bonds, real estate and currencies globally. The idea is not only to protect the state’s assets but also for them to grow and eventually see a return.

Oil may appear plentiful in Saudi right now but it is a finite resource and, allied with the global movement to reduce fossil-fuel emissions, it cannot be perpetually relied upon to fund the country’s economy.

While PIF was established in 1971, its resources remained relatively modest for more than four decades; in June 2008, it reported assets worth just £4 billion. It was only in 2015, when Mohammed bin Salman, the Saudi Crown Prince, assumed responsibility for PIF that it began aggressively pursuing rapid growth.

“For most of its history, PIF has been domestically orientated,” David Butter, a Middle East analyst and associate fellow at Chatham House, says. “It was the state’s vehicle for investing in Saudi’s petrochemicals industry, with the dividends from those investments flowing back to the state. Its investments were relatively conservative and it came under the purview of the finance ministry and central bank.”

As part of “Vision 2030”, a project launched in April 2016 to modernise and diversify Saudi’s economy and ultimately lessen the country’s dependence on oil, Prince Mohammed declared that he wanted to make PIF “the largest sovereign wealth fund in the world”.

“Prince Mohammed identified PIF as central to his plans to transform the Saudi economy through Vision 2030,” Dr Kristian Ulrichsen, a Middle East expert at Rice University, says. “It is essential to financing his domestic reform agenda.”

In July 2014, Saudi’s Council of Ministers granted PIF the autonomy to invest in new companies both inside and outside of the country. Since then, they have built up a reported portfolio of around 200 investments, of which just 10 per cent are listed domestically on Tadawul, the Saudi Stock Exchange.

Al-Rumayyan, who is set to be Newcastle’s next chairman, hugs Sergio Garcia at a golf event (Photo: Andrew Redington/WME IMG/WME IMG via Getty Images )

Prince Mohammed appointed Al-Rumayyan as governor in 2015 and, in the five years since, PIF’s assets have more than doubled from $150 billion (£122 billion) to $325 billion (£264.3 billion). Its staff has also ballooned from 40 to 700 during that time. “PIF was totally different in 2015 to what it is today,” Al-Rumayyan declared in March.

For PIF, part of the rationale behind its investments is to preserve the state’s current wealth but also to help it grow and then finance the country in the future. It is also partly funding four “giga” projects in Saudi, including building a £400 billion “futuristic city” at Neom and preparing to host an F1 Grand Prix in Qiddiya from 2023.

“What is different about PIF is that it is the sovereign wealth fund for Saudi Arabia, whereas Dubai, Abu Dhabi, Qatar and so on have several funds that do slightly different things,” Butter says. “PIF is Saudi’s only one and it is looking to the industries of the future, making its economy more diversified and the country seem cooler and more open.

“But Prince Mohammed’s change in focus at PIF should be viewed through the prism of Abu Dhabi and Qatar having already bought European clubs (Manchester City and Paris Saint-Germain respectively) and so they will, too.”

Around 70 per cent of the Saudi population, which was 33.7 million in 2018, are aged under 30. With no personal income tax in Saudi, the state relies on alternative revenue streams to provide public services and to finance Vision 2030, which is why PIF’s role is so important.

“Saudi Arabia is an example of a ‘rentier state’, something that is characteristic of other Gulf states, including Qatar and Abu Dhabi,” Professor Simon Chadwick, who is a specialist in Eurasian sport at the Emlyon Business School, says. “Such states seek to draw incomes from overseas investments, with oil and gas revenues typically funding them. By moving some of their assets offshore, rulers of the likes of Saudi Arabia can protect some of their personal wealth and that of their countries as well.”

When PIF’s stated blueprint for growth is considered, Newcastle United does not immediately appear to fit into their model of becoming the world’s “most impactful investor”.

The sovereign wealth fund’s own mission statement reads that the PIF aims to, “actively invest over the long term to maximise sustainable returns, be the investment partner of choice for global opportunities and enable the economic development and diversification of the Saudi economy.”

It is certainly difficult to argue that purchasing a Premier League club will radically help reshape Saudi’s domestic economy, from which 30 to 40 per cent of the country’s real GDP is derived from oil.

“To the extent there is a strategy to PIF’s investments, it is, on the one hand, to support Vision 2030,” Dr Ulrichsen says. “Also, it is to invest in sectors and firms that can contribute to economic diversification, private-sector development and job creation.”

Appearing on Bloomberg’s The David Rubenstein Show in March, Al-Rumayyan clarified what he looks for when identifying overseas investment opportunities. “We need to have high returns, a positive economic impact, change the diversity of revenues, and also to be the engine of economic growth in Saudi,” he said. “We are opening up the Saudi economy and Saudi is open for business.”

Al-Rumayyan — who Butter describes as wielding “remarkable power” given his reported closeness to Prince Mohammed and his position on the boards of both the PIF and Saudi Aramco, the state oil company — also declared that the wealth fund aims to grow its assets almost tenfold to $2 trillion (£1.6 trillion) by 2030. “That growth will come from performance, the assets that we’re getting from the government, cash injections from the government and the recycling of our profits,” he said.

Yet, while the price of oil has plummeted and coronavirus is destabilising markets across the globe, those factors have not halted PIF’s ambitious expansionism, with a target of increasing its portfolio to beyond $400 billion (£325 billion) by the end of 2020 still an aim. There are also plans to open an office in New York this year, potentially followed by more in London and Asia, as PIF extends its global reach.

To achieve those goals, PIF has already embarked upon a considerable spree during the first five months of this year, even despite global lockdowns recently.

There have already been 24 overseas deals concluded in 2020, worth a combined value of approximately £6.2 billion. Some have been in tourism, entertainment and travel, which represent the diversification of the Saudi economy PIF states it is aiming for, as well as in overseas energy firms, which do not.

These moves have been opportunistic, as the PIF’s own governor admits.

“You don’t want to waste a crisis,” Al-Rumayyan told a virtual conference last month, which was part of the Future Investment Initiative, Saudi’s investment forum. “So for us, definitely we are looking into any opportunities.”

The bid for Newcastle also has a degree of pragmatism about it, given that the consortium aiming to buy the club appear set to pay a reduced asking price following the onset of COVID-19. But, like many of the other deals PIF has concluded in 2020, rather than be deterred by coronavirus, they have used the pandemic to pay a lower rate for their stake.

“If the club is sold for £300 million, then that’s less than Mike Ashley (Newcastle’s owner) was initially looking for, which was closer to £350 million or £400 million,” Kieran Maguire, lecturer on football finance at the University of Liverpool and host of the Price of Football podcast, says. “It’s still a lot of money but it’s chicken feed in the context of PIF’s overall portfolio.”

According to US filings from March 31, PIF has almost $10 billion (£8.1 billion) of assets in the country.

That includes its 4.3 per cent stake in Uber, which is now worth around $2 billion. Its value has decreased significantly from the initial $3.5 billion investment made in June 2016, which Al-Rumayyan claims came about in part because he was impressed by the taxi company’s “amazing app”.

As with previous expenditure on the likes of Virgin Galactic ($1 billion), SoftBank’s Vision Fund ($45 billion) and Tesla ($2 billion), the Uber partnership depicts a “very mixed investment track record”, argues Butter.

“Under Prince Mohammed, PIF has had very much a scatter-gun approach to investment and has often just bought the shiniest item in the shop,” Butter says. “Many of them have been high-risk and even farcical, having exited the Tesla and Virgin deals already, but some have been more strategic.”

The majority of fresh expenditure in 2020 appears to fit into the latter camp.

Some of the additions this year include small but expensive stakes in leisure and entertainment companies such as Facebook ($521.9 million for less than one per cent), Walt Disney ($495.8 million for less than one per cent), cruise operator Carnival ($456.9 million for 8.2 per cent), ticketing company Live Nation Entertainment ($416.1 million for 5.7 per cent) and Starbucks ($77.6 million for less than one per cent).

Sources close to the buyers insist Newcastle, like those other investments, will help to diversify Saudi’s domestic economy and provide outward entertainment for their population.

Yet there have also been minority stakes taken in energy firms BP ($827.8 million), Royal Dutch Shell ($483.6 million) and Total SA ($222.3 million). Rather than representing diversification of the Saudi economy, what they do have in common with the other investments is their share prices have fallen significantly due to coronavirus and could significantly appreciate in value as lockdowns around the world ease.

“If you look at different sectors, like airlines, oil and gas, entertainment; they are all put on hold by the stoppage of the economy,” Al-Rumayyan said last month. “So we think once the economy is opening up we will see a lot of returns.”

Ashley’s asking price for Newcastle was affected by coronavirus, so in that sense it aligns with PIF’s other investments, although to what degree the club’s valuation will rebound post-lockdown is uncertain.

Yet there is one obvious reason why the Newcastle deal is an outlier when it comes to PIF’s investments.

While the £240 million PIF will be spending on Newcastle is ranked 13th in terms of their outlay on individual deals this year, the 80 per cent share they will be taking is significantly higher than the minority stakes they have acquired in other companies.

In addition, unlike their other investments, PIF will need to commit additional funds — in the hundreds of millions — if they expect to make a substantial return on Newcastle.

Ashley himself has insisted previously that he will only sell Newcastle to a prospective owner with the potential to take the club to the “next level” and, in terms of available resources and scope for ambition, PIF certainly fits that.

It is understood that the Staveley-led consortium do have the dual ambition of on-field success — delivering trophies and Champions League football in the medium term — and also of increasing the value of the club so that, in the long run, they are able to make a return on their investment.

While, in terms of assets, Newcastle will have the richest owners in the world, sources connected to the deal insist this is not a mere vanity project and that, because of Financial Fair Play (FFP) regulations, limitless funds cannot just be pumped into the club anyway. Just because PIF controls assets worth £264.3 billion — a large proportion of which are not readily available as liquid cash, anyway — does not mean that boundless resources will be poured into Newcastle.

A profit is expected in the long run and so any investment will be calculated with gains in mind.

If there is to be a decent yield, then Maguire believes competing annually in the Champions League is a must. His most-recent valuation of Newcastle listed the club as being worth £387 million, the eighth most-expensive in the Premier League, while all top-six clubs were £1.2 billion or higher, with Tottenham Hotspur top at £2.6 billion.

“For the value of Newcastle to increase significantly, they’d need to start appearing in Europe on a regular basis,” Maguire says. “The Champions League is very much where it’s at. Liverpool probably made £150 million in 2018-19 for winning it and Spurs well in excess of £100 million. Newcastle’s revenue was £178.5 million (in 2017-18); if you can add another £100 million on top of that, all of a sudden, the business changes in terms of scale.”

Should the club be successful in Europe, then, even if PIF invests hundreds of millions of pounds into Newcastle, it is feasible that it could expect a significant return. Sources close to the buying side insist “careful financial modelling” has taken place and “if the numbers didn’t stack up, PIF wouldn’t be involved because they only undertake investments on sound commercial grounds”.

Champions League football is essential to that. Some of the financial forecasts PIF has drawn up show that qualifying for Europe’s top-level international tournament immediately adds in excess of £50 million to a club’s revenue, a significant proportion of which usually translates into profit because budgets normally cover domestic competitions. As for the Europa League, sources indicate that only reaching the very latter stages of the tournament and winning it really returns significant revenues; it is the Champions League that really “transforms the landscape”.

PIF describes itself as a “patient investor with a long-term horizon… seeking strategic opportunities to generate significant long-term returns”, something that would fit with a model of sustainable growth at Newcastle.

Alongside the potential riches consistent Champions League football can offer, the other significant area of revenue growth PIF could target at Newcastle would be the club’s commercial income.

The club’s accounts for 2017-18 listed Newcastle’s annual commercial revenue at £26.7 million, a full £900,000 down on 2006-07 (£27.6 million), the year before Ashley took control. On Friday, they announced that the club had increased it’s overall profits from £18.6 million to £34.7 million, but that commercial revenue had fallen further for 2018-19, to £26.2 million. This, the club said, was due to “the success, in the prior year, of the three Ed Sheeran concerts.”

The figure has remained relatively steady, between £24 million and £28 million, during the 13 years of Ashley’s ownership (aside from the two seasons spent in the Championship).

Manchester United, who are considered to be among the world’s most-marketable sporting brands, made a staggering £275 million from commercial partnerships in 2019. All of the Premier League’s so-called Big Six, meanwhile, make well in excess of £100 million annually from sponsorship agreements.

To show how far Newcastle have fallen behind in this area, their commercial revenues can be compared to those leading European sides on the chart above, as well as Tottenham, who they have previously outperformed. In 2006-07, the year before Ashley became involved at St James’ Park, Tottenham made £25.4 million from this revenue stream, £2.2 million less than Newcastle. Last year, however,  Tottenham made £135 million commercially, five times’ Newcastle equivalent returns.

This summer, Newcastle’s main shirt sponsorship deal with Chinese betting company Fun88 is due to expire, while they also need a new sleeve sponsor. And, although a one-year extension is believed to have been provisionally agreed with Puma to supply the kit next season, a long-term partnership can still be put out for tender.

Yet, although the figures indicate there is significant potential for commercial growth, PIF cannot suddenly expect to start negotiating with global companies offering tens of millions a year in sponsorship deals.

“There’s an element of chicken and egg about Newcastle increasing their commercial revenue,” Maguire says. “Without success, the growth potential is limited. Newcastle isn’t London and, if we’re talking about global pulling power then, rightly or wrongly, London carries a premium. And, as big of a club as Newcastle is, they don’t yet have the global fanbase of Manchester United or Liverpool, and that’s part of the reason Manchester City still lag behind somewhat.

“But, if Newcastle can get into the Champions League on a regular basis, their ability to negotiate with commercial partners will be transformed. Not only then would they get higher returns from that competition but also from their sponsorship deals. It’s sort of speculating to accumulate but they can only do so under FFP restrictions, so there is a limit to how quickly they could do that.”

But, while global sponsorship deals may take time to appreciate in value, commercial tie-ups with Saudi firms could help increase Newcastle’s revenues more swiftly. Abu Dhabi-owned Manchester City have benefitted from a similar partnership with Etihad Airways, who sponsor the club’s stadium and shirt — though that partnership was at the centre of UEFA’s investigation into the club. Saudi companies may look to exploit the Premier League’s global reach by starting an association with Newcastle.

“Etihad’s connection with Manchester City enhances their credentials at home and reinforces the idea that if you want to visit the area, you should fly with us,” Andy Westlake, chair of the European Sponsorship Association, says. “Perhaps the same could happen with Saudi companies.”

“Global advertising campaigns are expensive and to be linked with Manchester City or Paris Saint-Germain does work in terms of getting lots more people aware of who you are,” a sports marketing expert, who advises multinational firms that sponsor Premier League teams, says. “This is the prism through which sports investments and the sponsorship deals that follow takeovers should be viewed.”

Maguire agrees that this is a more realistic avenue for medium-term commercial growth and sources close to the deal acknowledge that PIF does have the Saudi sporting public in mind when undertaking this investment. “Newcastle has the opportunity to be adopted as ‘Saudi Arabia’s club’,” he says. “That could lead to levels of sponsorship from Saudi at a value that Newcastle could not expect to receive from elsewhere.”

Even this would have a ceiling, though. “I’m sure there will be an influx of Saudi sponsors,” Butter says. “But we’ve already seen Manchester City get into deeper water over this (with a two-year Champions League ban from UEFA), so there is a limit to that.”

But, as Al-Rumayyan has previously acknowledged, profit alone does not shape PIF’s investments. The potential benefits of branching into sport through Newcastle United go beyond solely financial returns.

“The first thing we look at is, of course, the commercial returns if it is international, with no prejudice on geography or region,” Al-Rumayyan told billionaire Michael Milken during a summit of business last year. “(We usually look for) double-digit IRR (internal rate of return)… but, at the same time, if we have a strategic thing, like in sports for instance, we don’t mind to go lower with the IRRs as long as we are bringing something back to the country.”

In Butter’s view, this is where the reputational gains of buying Newcastle outweigh the economic prospects, certainly in the short term. “Dividends from Newcastle itself won’t arrive for a long time,” he says. “But there is no doubt this can be seen as a branding opportunity for Saudi Arabia.”

There have even been suggestions that Newcastle could be the first of several forays into football for PIF, something which could spread Saudi influence across the globe.

Manchester City’s owners have established the City Football Group, which has stakes in multiple clubs worldwide, while energy-drinks firm Red Bull also has a similar blueprint. Some have claimed a corresponding model could be adopted by the Saudis.

Former Al-Nassr director Ahmed Albreki posted on social media earlier this month that, “God willing, one or more (club) will follow (the acquisition of Newcastle) in Spain, Portugal, Switzerland and Belgium, for the purpose of building a bridge between contacts and academies.” Meanwhile, Ricardo Rotenberg, a member of Botafogo’s executive committee, professed that PIF had expressed an interest in investing in the Brazilian club.

Sources close to the deal indicate discussions about a multi-club network have not yet taken place, with the sole focus on completing the purchase of Newcastle, though neither did they dismiss the notion entirely in the long term. If pursuing such a model was to end up being adopted as part of PIF’s vision, then the financial argument for investing in Newcastle strengthens.

“If PIF acquires Newcastle and use it as the mothership for a series of satellite clubs, as Manchester City have done, then that could help with potential long-term returns,” Maguire says. “That would allow you to spread costs over a wider base and potentially train players at one of those clubs before transferring them across or selling them on to increase their value.”

However, the majority of commentators remain cynical about PIF’s financial intentions, given that buying an English top-flight club does not necessarily mirror their previous investments.

“It’s about buying a prestige asset for state-branding purposes,” Dr Ulrichsen told The Athletic earlier this month. “It does not contribute to PIF’s mission to assist in economic diversification or job creation in Saudi. There is an intangible factor which the Saudis will be looking for in such an investment which is more about soft power projection, changing the image of Saudi abroad and utilising the mass appeal of football as a way to reach new constituencies.”

Despite the suspicion, there is also an acceptance that, in the long run at least, Newcastle could, if run correctly, reap economic returns for PIF, regardless of what their primary rationale for buying the club is. Those close to the deal are certainly adamant there is a genuine economic element to PIF’s interest in Newcastle United.

“There are financial investments and there are marketing investments, and this in my view is the latter,” Maguire says. “But that is not necessarily a bad thing, particularly from a footballing perspective. In many respects, it’s actually better than a financial investment because it means that if the owners want to effectively market the nation state then they have to spend money to make Newcastle successful.

“If Newcastle finish 12th every season, then that won’t reflect well on the Saudi state’s image internationally. Equally, if they do start playing in the Champions League and winning trophies, then the club’s value increases and the chances of making a positive return also improve. In that sense they are sort of interlinked, even if I don’t believe the leading motive is making a financial return.”

(Top photo: Owen Humphreys/PA Images via Getty Images)