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With its acquisition of AC Milan, the world’s most-feared hedge fund is searching for a formula to crack
the volatile business of football. But Elliott is finding it difficult to turn its ideas into results on the pitch.
By Murad Ahmed and Arash Massoudi
i n c o m e f r o m t h e C h a m p i o n s
League. Around €2bn was shared
between participating clubs last season.
But to regularly qualify, AC Milan must
overcomeintensedomestic competi-
tion from the likes of Juventus, Inter
andRoma.
To run its sporting operations, the
club hired Mr Maldini as technical
director and Zvonimir Boban, another
formerplayer, as chief football officer.
“Our presence here is also kind of a
guarantee to the fans, for the supporters
that it’s not going to take 10 years to get
back,” says Mr Maldini, who says any-
thing less than a return to Europe’s top
competition within three to five years
would amount to total failure.
But they have also had to accept Elli-
ott’s edict that AC Milan must avoid age-
ing stars andacquireyoungplayerswho
have higher transfer resale value.
AC Milan cannot, at the moment, out-
spend the opposition anyway. This sea-
son, itaccepted a one-year ban from
European competition in return for the
authorities ending n investigation intoa
violations of so-called financial fair play
rules between 2015 and 2017.
The club alsoallowedexpensive
player contracts torun downlast season
shaving €20m from the wage bill and
helping reduce the average age of the
squad, now the youngest in Serie A.
The approach has problems. “No
young team, with all young players, wonthe Champions League. That’s a fact,”
says Mr Maldini. “Even a scudetto [Serie
A title],” adds Mr Boban: “Our dream is
to have results tomorrow. [Elliott] have
a different path, they have a different
vision... I think we can find a way that
we’re both happy.”
Some argue that Elliott isexacerbat-
ing the tension between winning now
and building for the future. A person
close to club operations says Elliottset
up a “weird power struggle” by elevat-
ing familiar figures like Mr Maldini and
Mr Boban, while also hiring people
underneath them who advocate a mod-
ern “moneyball” approach of using sta-
tistics to locate undervalued players.
The newcomers include Hendrik
Almstadt, a former Arsenal executive
with degrees from the London School of
Economics and Harvard who is tasked
with identifying transfers, as well as
Geoffrey Moncada, the former chief
scout at AS Monaco.
Yetthree consecutive defeats —
before the Genoa win — had led to
doubts over the position of head coach
Marco Giampaolo, who was hired only
this summer. In contrast, Inter Milan
spent heavily on players and sattop of
the league before this weekend.
Elliott’s attempts to fuse modern
thinking with the club’s historic tradi-
tions remains a work in progress.
“They’ve handed Maldini and Boban
a loaded gun,” says a club insider. “If
they try to fire [Maldini], he’s going
to... say, ‘these owners don’t under-
stand Milan’.
“If they turn it round in a couple of
years, no one will care. But in terms of
bad press, there’s a huge liability
here... The risk/reward of owning a
club like AC Milan for a company like
Elliott seems really bizarre.”
But Mr Maldini and Mr Boban defend
the new owners, arguing they saved the
club from insolvency. For its part, Elliott
believes the scarcity value of such a
renowned club will always ensure a
healthy market of potential buyers.
People with knowledge of its plan sug-
gest executives hope to raise the club’s
value and seek a sale price of over €1bn.
A methodological hedge fund has
become exposed to the vagaries of
sporting luck. “You’ll see the fruits of
this work at the end,” says Giorgio Fur-
lani, portfolio manager at Elliott.
“Whenever the end will be.”I
t was October, 2018 and Paolo
Maldini found himself locked in a
debate about money with Gordon
Singer. Theformer captain of AC
Milan and Italy wanted the head of
the London office of Elliott Manage-
ment, the $38.2bn hedge fund founded
by his US billionaire father Paul, to open
his cheque book.
Earlier that year, in an audacious
move that even Elliott executives con-
sider its most high-profile venture since
fighting thegovernment of Argen-
tinaover its sovereign debts, the hedge
fund gained control over the seven-time
European club football champions.
At Milanello, the Italian team’s coun-
try retreat-cum-training ground,Singer
junior was being asked to sanction a
minor transaction by Elliott’s stand-
ards: a €35m fee to acquire Brazilian for-
ward Lucas Paquetá. But the deal broke
the tight transfer budget its executives
imposed on a club in dire financial trou-
ble. Mr Maldini was arguing it was
worth gambling on a player that could
change AC Milan’s fortunes.
Mr Singer relented: “Let’s do it.”
“That was something that gave us a lot
of energy,” says Mr Maldini, recalling
the scene.“We saw the passion also to
have something nicer and more attrac-
tive and, in the end, more successful for
the business.”
The discussion between the football-
ing legendand the London financier
illustrates one of the most fascinating
questions in both the business of sport
and Italian capitalism — can the world’s
most-feared hedge fundfind a formula
to crack the volatile football industry?
Sensitive to the charge their owner-
ship is a vanity project, Elliott execu-
tives say their plan for theRossoneri—
the Red and Blacks — has a clear profit
motive: win matches on the pitch, raise
revenues off it, all to raise the club’s
value and sell for a healthy return.So farthat has beeneasier said, than done.
This account of Elliott’s plans for AC
Milan is taken from more than a dozen
interviews including with executives at
the two organisations plusbankers,
agents, analysts and rival club officials.
Elliott’s task is to revive a fallen giant.
AC Milan last won Serie A, Italy’s top
league, in 2011. It has failed to qualify
for the Champions League, Europe’s
most lucrativeclub competition, for five
seasons. Over the past decade,its
annual revenues have stagnated at
around €200m, according to the consul-
tancy Deloitte. Those at Real Madrid,
the world’s highest-earning club, have
almostdoubled to around €750m over
the same period. In its heyday, AC Milan
employed greats such as Marco van Bas-
ten and Kaká. Today, it settles for more
unheralded talents like Paquetá.
The stakes are equallyhigh for Elliott.
Failure at AC Milan would be areputa-
tional blow, particularly in Italy, where
the hedge fund is active in battles over
the future ofTelecom ItaliaandCNH
Industrial, the tractor and truckmaker
controlled by theAgnelli family, which
also owns rival club Juventus.
“I think it’s going to be really hard to
turn Milan round and sell it for $1bn,”
says one club executive who declines to
be named. “I keep thinking there must
be a more obvious play here that I’m not
seeing. It could be as simple as Paul
Singer’s son wanted to get involved in
football and they have so much money
that they could just do that.”
That view is rejected by figures close
to Elliott’s leadership, who point to the
fund’s healthy returns to investors over
many yearsas evidence that it does not
succumb to distractions. Largely unno-
ticed, Elliott has also funded a complex
debt deal with the owner of French club
Lille, deepening its presence in the
world’s favourite sport.
Yet, much depends on how the Italian
team performs on the pitch. After los-
ingfour of its opening six league fixtures
the club sat 16th before victory over
Genoa on Saturday moved it up the
table. Last Sunday, fans watching the
team beaten3-1by Fiorentina started
chanting: “This ownership doesn’t
deserve us”.
“We all saw that last year, 14 of the 16
teams that qualified for the second
round of the Champions League had the
highest revenues [in world football],”which previously had no dedicated
sponsorship salespeople. “It is probably
too much to call it Stone Age but [AC
Milan’s] commercial team was defi-
nitely 10 years behind the Premier
League and probably two, three years
behind the top clubs in Italy,” says
Casper Stylsvig, the club’snew chief rev-
enue officer, and a former global spon-
sorship director at Manchester United.
Structural challenges remain. Last
season, Serie A teams shared€1.2bn in
broadcasting revenues, €2bn less than
clubs in the English Premier League.
Instead, Elliott is banking on raising the
value of the club by transforming
Milan’s skyline.Rebuilding on, and off, the pitch
In September, AC Milan played its city
rival Interat San Siro, the 93-year-old
stadium shared by the two clubs. An
hour before the match, AC Milan’s new
chairman Paolo Scaroni greetedMatteo
Salvini, head of the rightwingLeague
party and a man with ambitions to
become Italy’s next prime minister.
Mr Scaroni, who has run Italian
energy groupsEni nda Enel, is known as
one of the country’s best-connected
businessmen. He says Elliott hired
him for tasks considered uniquely“Italian”.Lobbying Mr Salvini, a diehard
AC Milan supporterwearing his faded
red and black jersey, over plans to build
a new stadium, was one such moment.
AC Milan and Inter, owned by China’s
Suning retail conglomerate, are propos-
ing to fund the €1.2bn construction
costs. The new ground would be built by
2023, next to the current site, which is
owned by the local municipality and
faces demolition.
In return, the two clubs would have a
90-year lease on the land and retain all
match day revenues. The clubs estimate
annual income from a new stadiumwould more than doublefrom €40m
today toover €100m, closer o Barce-t
lona which earns almost €145m from
match day revenues.
The San Siro decision s political,i
needing approval by Milan’s mayor, who
will make a decision in October, and will
be influenced by public opinion, hence
the lobbyingof key figures such as Mr
Salvini. The Milan clubs have threat-
enedto build a stadium elsewhere if
they cannot stay at the current site.
“When you have a team like Milan,
you have to climb two mountains at the
same time,” says Mr Scaroni, who is also
deputy chairman of investment bank
Rothschild. “One mountain is the eco-
nomic results... but the other moun-
tain is the sport results, and [they] are
very much connected. If you lose all the
games, your sponsorship [income] goes
down, the stadium is empty and you
don’t have the money to buy players.”Elliott’s risk vs reward
Elliott also needs more immediate
improvements. “We want to win on the
pitch,” says Franck Tuil, a senior portfo-
lio manager. “We want the football to be
attractive to our fans. We want the foot-
ball results to improve in order to move
toward participation in the biggest club
competition, which today is the Cham-
pions League.”
Top Europeanteams are reliant onAC Milan underperformed last season
relative to the cost of its players
League points vs annual playing squad costs,
- Serie A seasonSources: Gazzetta dello Sport; TransfermarktJuventusInterTorino
LazioEmpoli GenoaChievo
Annual player costs (m)League pointsFrosinoneUdineseBolognaCagliari
Club under-
performed
relative to its
financial cloutClub over-
performed
relative to its
financial cloutFiorentinaSPAL Sassuolo
ParmaNapoliAtalantaRomaSampdoriaAC Milan
TRENDLINEsays Mr Maldini. “We’re not magicians.
We know that.”Distressed asset
In April 2017, Li Yonghong, an unknown
Chinese businessman, catapulted him-
self to global attention by acquiring AC
Milan for €740m from Silvio Berlus-
coni, the Italian media mogul and three-
times prime minister who had owned
the club for two decades. The takeover
was funded by high-interest loans worth
more than €300m from Elliott.
According to people familiar with the
talks, Mr Lipresented a radicalplan for
the club basedon exploiting its large
Chinese fan base. Elliott’s executives
were dubious of the strategy. Further
due diligence garnered limited informa-
tion on the origins of Mr Li’s wealth.
Elliott calculated that either the loan,
which carried annual interest of more
than 11 per cent, would be repaid or a
default would give it control of the club.
In July 2018, Mr Li did the latter, losing
around €500min equity overnight. Elli-
ott and AC Milan executives say they
have had no further contact with the
Chinese businessman. He could not be
reached for comment.
Though Elliott injected a further
€50m in emergency financing to shore
up the club’s balance sheet, it effec-
tivelyacquired AC Milan or €400m —f
just over half of what the club had been
valued at months earlier. Instead of
“flipping” the club through a fire sale,
Elliott elected to treat AC Milan as a dis-
tressed asset needing a turnaround.
The first step was to hire competent
managers. Elliott appointed Ivan
Gazidis, who during his previous role as
chief executive of Arsenal played casual
football matches with Gordon Singer, as
AC Milan’s new chief executive.
“It’s not an intellectually challenging
business,” says Mr Gazidis. “It’s emo-
tionally challenging... Fundamen-
tally, we’re talking about a group of 23-
year-old millionaires kicking a piece of
leather into a basket... Millions of peo-
ple around the world invest their self-es-
teem in their ability to do that well.”
The club hasapproached hundreds of
brands in the search for newsponsors.
In the 2017-18, the club made €70.2m in
endorsement agreements, compared to
€143m at Juventus, Italy’s highest-earn-
ing club, and €356.2m at Real Madrid.
This counts as new thinking at a club‘I think it is going to be
really hard to turn Milan
round and sell it for $1bn.
It could be Singer wanted
to be involved in football’
‘Our presence here is also
a kind of guarantee to the
fans, to the supporters,
that it is not going to take
10 years to get back’
The Milan job
Krzysztof Piatek
of AC Milan
shows his
dejection during
last month’s
defeat to Inter
Milan. Below,
Gordon Singer
of Elliott
Management
Tulio M. Puglia/Getty Images,
ShutterstockThe Milan clubs have dropped
out of Europe’s financial elite
Total revenues by season ( m),
Europe’s richest clubs and
selected Italian teams AC MilanInter Milan Real MadridRange from richest to
th richest clubJuventusSource: DeloitteOCTOBER 7 2019 Section:Features Time: 6/10/2019- 17:47 User:nicola.davison Page Name:BIGPAGE, Part,Page,Edition:EUR, 19, 1