Crikey

The AFL’s Gold Coast expansion received a boost last week as Queensland Premier Anna Bligh committed to spending $60 million to develop a 25,000 seat new stadium. It appears now that the only thing preventing the AFL’s march north is a Liberal-National party victory in Queensland (because the obstacle certainly isn’t the most significant economic collapse since the Great Depression or the fact that the AFL once had a team on the Gold Coast which was a spectacular failure, costing its owners millions).

The Financial Review reported last week that while the 16 club presidents are working on a united solution to cope with the financial downturn, league CEO Andrew Demetriou will not let skyrocketing unemployment, softer corporate sponsorship revenues and a plummeting advertising market ruin his expansion dreams. Demetriou claimed:

We are absolutely committed. We have our budget and our spending in place for the Gold Coast and Western Sydney and see on reason to change that.

In fact, I think it’s a bigger risk if we do nothing. The opportunity is there and we have positioned ourselves financially to support it.

The claim that the risk of inaction is greater than the risk of doing something is commonly proffered by executives and bankers to vindicate dubious acquisitions. It appears questionable that the AFL — which, despite Crikey’s repeated requests, has never publicly released actual financial projections or feasibility studies for the expansion sides —  could possibly be safer spending $300 million of club members’ money than not.

In financial terms, the AFL is betting that increased broadcasting revenues which will stem from a larger audience in Southern Queensland (and later, Western Sydney) will provide a satisfactory return for their initial investment, which is believed to be around $100 million for each expansion club. That investment needs to come from somewhere — that “somewhere” is the existing clubs.

The only problem is, the existing clubs are not exactly a picture of financial health. In the past week, two of the most successful on-field clubs of recent years, Port Adelaide and Sydney, announced significant trading losses for 2008. Port Adelaide lost $1.4 million (and had a crippling debt of $3.5 million), while Sydney recorded a deficit of $800,000 in 2008 and forecast a difficult 2009.

The AFL’s confidence belies the problems being encountered by sporting codes across the United States. Fortune reported recently that:

Sports leagues today are more dependent on economically vulnerable sources of revenue such as corporate sponsorships, luxury suites, and other premium seating. Even if attendance doesn’t nosedive, teams could still find themselves swimming in red ink.

…The Pittsburgh Pirates, another team that recently lost GM as a sponsor, have resorted to selling some season tickets at a 25% discount to 2008 prices. In Arizona the Diamondbacks’ season ticket renewal rate has fallen to 83% - still respectable, but down from 94% heading into the 2008 season. [Arizona Diamondbacks CEO, Derrick] Hall says he knows of other MLB teams  — though he won’t name them - with renewal rates as low as 60%. And as bad as 2009 looks, Chicago White Sox owner Jerry Reinsdorf thinks 2010 could be worse if corporations keep cutting back. “Virtually every team is losing sponsors,”

Of course, it’s not just baseball feeling the squeeze. The Arena Football League has suspended its 2009 season. The LPGA has been forced to cut tour events and prize money. Honda has pulled out of Formula 1 racing. Six Nascar teams have merged to stay afloat. The National Hockey League’s Phoenix Coyotes are at risk of becoming the fifth NHL team to declare bankruptcy since 1995. And attendance has slipped in the NBA, just as it did for the NFL’s regular season.

Australia has been behind the recessionary curve, with our economy yet to technically slip into recession. However, it appears clear that the mining boom which has underpinned a decade long expansion is over, while unemployment is rapidly increasing. The AFL, which relies on discretionary spending, is certainly not immune to the economic factors which are buffeting US sporting franchises. Membership, sponsorship and broadcasting revenues will be adversely affected by economic weakness. If that occurs, it appears likely that several existing clubs will not be able to survive.

To suggest that it is a bigger risk to not spend several hundred million dollars without adequate financial feasibility studies indicates that Andrew Demetriou, and the AFL Commission, care not for the financial state of existing clubs or their long-term members.

More worryingly, it indicates that the AFL Executive, like many corporate CEOs who brazenly conducted debt-fuelled expansions in recent years, have a poor grasp of the effect of the financial crisis on the code they are paid to guide.