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Scoring Profits?

Foreigners hope to earn billions by tapping into Brazil's soccer mania.

LAST YEAR, AFTER DALLAS-BASED BUYout firm Hicks, Muse Tate & Furst took over business dealings for popular Brazilian soccer team Corinthians, some 20 million fans of the Sao Paulo squad couldn't help but wonder what would come of it.

Corinthians, after all, was Brazil's soccer champion in 1998 and 1999. Meanwhile, other foreign investors are eager to see if the deal can turn a profit. Hicks, Muse was wading into relatively untested waters. Its hefty investment--more than an estimated US$60 million in just the first year of a 10-year contract, though Hicks, Muse refused to disclose the total amount--was only the third such transaction of its kind. And the two precedents, in 1998, had been much less costly.

The three deals became possible with passage of the "Pele" Law of March 1998, a measure drafted by and named for Brazil's legendary athlete and former secretary of sports. Designed to attract private capital and professional management to the soccer teams, the law fundamentally changed Brazil's soccer money management and opened the door to foreign investors. Since its passage, investors--mostly foreign--have agreed to pour hundreds of millions of dollars into seven of the top 20 first division teams.

The teams need the money. Since the 1930s, teams were owned by social clubs run by fans. Their unpaid, elected leaders turned most of the teams into money pits. By 1999, the top 20 teams had accumulated $400 million in debt, according to Soccer Investor, a London sports investment research firm.

Most of the clubs had been paying down that debt by selling the transfer rights to some of their best players to foreign teams. In 1998, for instance, the Sao Paulo soccer club sold player Denilson--who, like most Brazilian players, go by one name only--to Betis of Spain for a whopping $32 million. One year later, no fewer than 658 Brazilian professionals were sold to foreign entities. Designed in part to staunch the talent hemorrhage, the Pele Law gave all the social clubs that control athletic teams two years to incorporate as for-profit entities.

Hicks, Muse was quick to spot the opportunity Its directors are banking on the growth potential of the top-ranking leisure activity in this country of 170 million inhabitants.

Good for business, bad for fans? To be sure, that potential hasn't been obvious so far: revenue from all sports--dominated by soccer--accounts for only 0.5% of Brazil's Gross Domestic Product, compared to 3.6% of GDP for sports in the United States, according to Sirotsky & Associados, a Rio de Janeiro consulting firm. However, Sirotsky predicts Brazilian sports revenues could triple to 1.5% of GDP in five years.

"It's hard to imagine a better sector in which to invest in Brazil," says Hicks, Muse partner Charles Tate. "If you add up all the fans of professional baseball, basketball, football and hockey in the United States, that number is lower than the number of Brazilians who are soccer fans." Sirotsky estimates that 106 million Brazilians--64% of the population--regularly follow the game.

Hicks, Muse directors felt so sure of their instincts that, six months after their investment in Corinthians, they took over the business operations of Cruzeiro, a first division team from the east-central city of Belo Horizonte. It's still too early to judge the Cruzeiro move, but Hicks, Muse says the cash it has poured into Corinthians, through the company's PanAmerican Sports Teams portfolio, has been well spent.

Foreign investment may be bringing in money, but it's not delighting all fans.

Corinthians won a world soccer federation (FIFA) tournament in January 2000, one month after clinching its second-straight national championship. Those two triumphs were largely possible thanks to Hick, Muse making a first-year $26 million investment in players to retain Vampeta, Edilson, Marcelinho Carioca and Bincon, four of the team's best players. But, after the FIFA cup win, Hicks, Muse sold transfer rights to two of the star players, netting $12 million. Another player was lured away to a competing Sao Paulo club. Corinthians has not won any major tournaments since.

Carlos Roberto de Mello, Corinthians' vice president for finances, says Hicks, Muse waited too long to reinvest the profits from the trades. "That hurt Corinthians' performance and irritated fans used to a better playing team," he says. He warns that the strategy may cut into future team profits if Hicks, Muse doesn't get busy building the team up again.

But Hicks, Muse's Pan-American Sports Teams President Richard Law defends the decisions. "The reality of any sports franchise is that teams go through cycles as players mature," he says. "Our job is not to turn back the inevitable, but to build Corinthians and Cruzeiro up from the junior ranks," referring to the teams' 16- to 20-year-old players.

Name game. Law sees Corinthians and Cruzeiro as more than teams. He sees them as brand names with money-making potential.

For instance, Hicks, Muse's portfolio firm bought, for an undisclosed amount, the right to market each club's public exposure. That includes television exhibition rights, product licenses and sponsorship rights. The deal also gives the investment group gate receipts and ad revenues from billboards surrounding the field.

In return, Hicks, Muse will bankroll the teams' soccer programs, player salaries and travel expenses for 10 years. Corinthians managers say the investment group's expenditures will total $35 million a year; for Cruzeiro, it may run $20 million.

To help pay the bills, Hicks Muse's portfolio firm has signed a $12 million, two-year deal with Pepsi. The soft drink's name will appear on Corinthians' jerseys. Team players show up in Pepsi marketing campaigns and television ads.

Hicks, Muse also allied with a Brazilian partner to establish a licensing company. The venture seeks to halve the number of Corinthians licensees and improve the quality of products bearing the team's name. Retail sales of some 200 products now bring in $12 million a year, up from $2 million before the takeover. The licensees keep the bulk of the retail sales, giving an undisclosed percentage to Hicks, Muse.

Marketing rights should guarantee a profit for Hicks, Muse by next year, even without the cash from player trades, Law says.

The Hicks, Muse capital infusion also makes it likely that players will be paid on time, regardless of the team's lackluster record. And those athletes stand to receive additional perks: As part of a separate deal, Hicks, Muse plans to build the club a new training center in early 2001 and a new 45,000-seat stadium in the next few years.

Good for the players. "The Hicks, Muse investment in Corinthians gives players a sense of stability," says mid-fielder Ricardinho, one of the team's stars. "Sure, our performance this year hasn't equaled that of 1998-1999 because of a loss of players, but I see this as a temporary and transitional moment."

Cruzeiro Vice President Alvimar Perrella de Oliveira Costa is grateful for the foreign investment. He says it stopped the team's habit of selling transfer rights of top players to keep its books balanced. Cruzeiro has, in fact, sold some top player rights recently but, unlike Corinthians, it has also acquired some stars. The team's performance has not declined.

Hicks, Muse directors view the investments as part of a broader, regional strategy. A similar deal reportedly in the works with River Plate, a top club in Argentina, but Law won't confirm that. He also won't say if the Hicks, Muse portfolio firm is planning further investment in Brazilian teams.

Law does note that sweeping changes to the Pele Law enacted by the Brazilian Congress last July won't influence investment strategy. One change in the law prevents soccer investors from owning or controlling more than one team. But Law says the legislation isn't retroactive and Hicks, Muse technically doesn't control its two teams, so the investments in Corinthians and Cruzeiro are not affected.

Strikingly, legislators boldly reversed the main feature of the Pele Law, making it no longer mandatory for clubs to incorporate as for-profit entities. All that's left of the original Pele proposal are relatively minor requirements such as how much players may benefit from the sale of their own trades.

Despite the legislative action, Law says growing private sector interest in Brazilian soccer won't wane.

"The passion that Brazilians have for soccer creates a huge potential market," he says. "As long as there is such a market, there will be investors anxious to tap into it."
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Publication:Latin Trade
Date:Dec 1, 2000
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