The market entry and retreat of Dalian Wanda Group in world football

The market entry and retreat of Dalian Wanda Group in world football

 

On 14th February 2018, Atlético de Madrid announced that its Chinese investor Dalian Wanda Group (DWG) has reached an agreement to sell 17 percent of its 20 percent stake in the Spanish football club for about US$ 50 million. According to the official statement, ‘The decision to divest is part of the global strategy of Dalian Wanda Group’. This strategic reorientation of the Chinese corporation marks a turning point in the international football business.

Chinese economic impact on world football

A few years ago, political reform policies in China to develop national football were followed by increased commercial activities and a high level of capital influx into world football. Several star players under contract at top European clubs were transferred to China for breathtaking amounts. Moreover, Chinese companies started to invest heavily in shares of top-tier European clubs like Manchester City (City Football Group) or acquired them all together, such as the emblematic pair of Internazionale Milan and AC Milan, as well as football-related service companies.

Source: FIFA Transfer Matching System

Regarding the spectacular player transfers to China, Liverpool manager Jürgen Klopp made an interesting comparison. He said in an interview that footballers might go to China for the money, but people in (continental) Europe think the same logic applies to a move to England. Other well-known names of European football, such as Arsene Wenger and Antonio Conte, have not only voiced their concerns about these developments but have portrayed China as a ‘danger’ to European football. The ‘China Threat’ categorisation recalls the statements of the Donald Trump administration in the US, where China is considered not only a ‘whole-of-government threat, but as a whole-of-society threat’.

Wanda’s foray into the international football market

In 2015, DWG acquired a 20 percent stake in Atlético de Madrid, the third most successful club in Spanish football, behind Real Madrid and FC Barcelona, for US$ 52 million. A few weeks later the Chinese company purchased Infront Sports & Media AG, one of the leading sports marketing companies, for about US$ 1.2 billion.

According to Infront’s website, the Fédération Internationale de Football Association (FIFA) has appointed the company as the ‘exclusive sales representative for the distribution of Asian broadcast rights to the 2018 and 2022 FIFA World Cups™ and all other FIFA Events 2015-2022 following an international tender process. The agreement covers 26 countries, including China, Hong Kong India, Indonesia, Singapore and Thailand.’

The president and chief executive officer of Infront Sports & Media AG is Philippe Blatter, the nephew of former FIFA president Sepp Blatter. In May 2015, Wang Jianlin, the founder of DWG and, according to the ‘Hurun Rich List’ of 2017, one of the wealthiest person in China, and Phillipe Blatter attended the 65th FIFA Congress, where Sepp Blatter was re-elected as FIFA president.

A few days after Blatter’s electoral victory, federal prosecutors in the United States disclosed corruption cases of FIFA officials and persons associated with FIFA. Sepp Blatter was banned for six years by the FIFA ethics committee accordingly since he allegedly approved a payment of about US$ 2 million to Michel Platini, former president of the Union of European Football Associations (UEFA). Subsequently, UEFA General Secretary Gianni Infantino was elected as the new FIFA president in 2016.

The corruption allegations had the consequence that some FIFA-affiliated companies such Continental, Castrol, and Johnson & Johnson did not renew their sponsorship contracts. At the same time, DWG became the first Chinese top-level sponsor of FIFA. This agreement was the first commercial deal of Gianni Infantino in his function as FIFA president. On DWG’s website, it is indicated that with the strategic partnership between DWG and FIFA the Chinese company ‘will be better placed to play a role in the bidding process to host major football events such as the World Cup’. The hosting of the FIFA World Cup is one of the dreams of China’s President Xi Jinping.

In an open lecture at Harvard Business School, Wang Jianlin explained the reasons for investing in international football: ‘Our dream is to improve China’s sports industry by adapting to the development of the mainland’s economy and society… If Chinese companies don’t go through the globalisation phase, it’s hard for us to make China powerful or realise the Chinese Dream’. Beyond positioning sport, and football, as drivers of globalisation, this quote also demonstrates that the investment decisions of the corporation are justified by the policy expectations in the era of President Xi Jinping.

Nevertheless, the calculation of DWG did not work out, and the ‘dream’ became a nightmare for the Chinese company.

Wanda under investigation of China’s regulatory bodies

In December 2016, China’s National Development and Reform Commission, the Ministry of Commerce, the People’s Bank of China and the State Administration of Foreign Exchange (SAFE) issued in a press release that regulatory bodies ‘pay close attention to the recent tendency of some irrational outward investment in the fields of real estate, hotels, cinemas, entertainment industry, and sports clubs.’ DWG has invested in all of these fields.

Source: Thomson Reuters

In March 2017, Pan Gongsheng, deputy governor of China’s central bank and director of SAFE, compared overseas mergers and acquisitions with ‘barbed roses’. He added that many investments in foreign football clubs were ‘irrational‘ since Chinese companies ‘borrowed large sums of money’ and had ‘already a high debt ratio’. In the same month, an American company announced that a proposed acquisition by DWG was cancelled. A few weeks later, Wang Jianlin explained that he was turning his attention back to domestic investments.

A few month later, the China Banking Regulatory Commission launched an investigation into the ‘systematic risk’ presented by some large corporations involved in overseas acquisitions, including DWG and other companies that invested in European football. As a result, shares in Wanda Film Holdings, a subsidiary of DWG, fell by 9.9 percent.

Prior to this, China’s central bank governor Zhou Xiaochuan remarked that ‘The experience of the global financial crisis tells us that the first priority is to keep financial institutions healthy so that financial crises could be prevented. We cannot tolerate phenomena such as heavy leverage, low capital and non-performing loans.’ These political interventions may also be connected to the issue that capital outflows via overseas investments have a depreciating pressure on the Chinese currency and might reduce China’s foreign exchange reserves.

According to data released by China’s Ministry of Commerce, from January to June 2017, Chinese overseas investment in culture, sports and entertainment industry dropped by 82.5 percent, accounting for 1 percent of the total overseas investment.

In January 2018, Wang Jianlin promised that DWG will gradually repay all its overseas debt and will not ‘have any credit default anywhere in the world’. The sale of the shares in Atlético de Madrid is, therefore, part of a strategic reorientation of the Chinese company.

Ilker Gündogan

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