Two groups celebrate the negotiation of Cruzeiro with Ronaldo. Fans and creditors are relieved with the transaction, as it gives impetus to hire players and support the team’s billion-dollar debt. However, after the acquisition frenzy, can Ronaldo celebrate at the top of his lungs?
There is no doubt that Ronaldo was an example of an athlete and is a recognized businessman. But even successful investors fail in their acquisitions.
For example, no one doubts that Warren Buffet and Jorge Paulo Lemann are references in selecting and acquiring companies. However, as Buffett confessed, his $23 billion buyout of the food company Heinz proved disastrous.
The order of magnitude is not the same, but, proportionally, Ronaldo committed much more of his equity in the acquisition of the Minas Gerais team. A prudent investor should not commit more than 20% of their portfolio to a single asset.
The purchase of the Cruzeiro bears some resemblance to a transaction that took place almost 40 years ago in England.
In 1982, businessman Kenneth Bates bought the British Chelsea team for just one pound. That’s right, less than BRL 8.
Like Cruzeiro, Chelsea were bitterly in the league’s second division and had a considerable debt for the time, but that amounted to just £1 million.
Bates succeeded in transforming the team and two decades later sold it to Russian businessman Roman Abramovich, earning £18 million.
Bates got Chelsea through and profited from it. But would Ronaldo profit if he did the same with Cruzeiro?
To understand this, let me illustrate with the example of Manchester United. It’s reasonable to say that this is a well-run team.
Manchester’s revenue for the twelve months ended June 2021 was £494 million. This revenue can be divided into three groups: 50% from game broadcasting rights, 30% from sponsorship and 20% from licensing and sale of branded products.
Despite sustaining income of nearly half a billion pounds, its operating expenses are higher. Over the past four years, three years have ended at a loss.
Anyone who has invested in Manchester shares over the past five years has done a bad deal. There was a lot of volatility and today it has the same value as it invested 5 years ago. The same is true if we raise the investment horizon to a decade. See below the chart with the evolution of Manchester’s share price in the last decade.
The value of a company is the sum of the value to its rights holders, that is, creditors and shareholders. As a result, the Manchester United Club is now worth £2.4 billion, less than five times its annual revenue. But this assessment is being paid for a supposedly well-run and professional team.
According to Cruzeiro’s annual balance sheet, its revenue in 2020 was R$ 119 million, but its operating expenses are more than double this amount. This revenue dropped more than 50% as the team dropped to the second division in 2019. In the year 2021, its revenue is estimated to be even lower.
Considering Ronaldo’s commitment of BRL 400 million to own 90% of Cruzeiro’s shares, the value of 100% of the shares would be BRL 444.4 million. Adding this amount to the debt of R$1 billion, the value for the club is R$1.44 billion.
Soon, Ronaldo paid for Cruzeiro about 14 times the revenue of 2021. That is, almost three times higher than the evaluation attributed to Manchester United by the market.
Even if Ronaldo manages to get the team back to the top flight, multiply its current income by three and manage to cut costs, he would still have committed, proportionately, to a higher rating than the English team. Remember that buying Manchester shares was not a good deal in the last decade.
So comes the second lesson. A prudent investor does not pay fair value for a badly managed business if it were well managed, because in this case, he would only be anticipating to the seller all the gains he will work to achieve in the future.
Therefore, considering the assumptions of a prudent investor of diversification and a safety margin in the price, it is not possible to say that Ronaldo has done a good deal. But fans and creditors can keep celebrating.
Michael Viriato he is an investment advisor and founding partner of Investor’s House
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I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
