Taking one for the team

The best football managers keep their players hungry for success. But sometimes team bosses in China can take this philosophy – perfected by the likes of Sir Alex Ferguson at Manchester United – a little too literally. Sixteen years ago Shenzhen Jianlibao won the inaugural Chinese Super League (CSL). The team was described in the local media as champions on “an empty stomach” because it was owed several months of wages when it clinched the title. “I could not have asked for any more from my players,” their manager sobbed after the final match.

The club’s owner Jianlibao, a power drink producer, was on the verge of financial meltdown. Its founder was mired in controversy over the control of state-owned assets and was subsequently sentenced to 15 years in jail (see WiC414). But more recently, the financial health of the CSL’s newly-crowned champions has also come into question. Again, the team’s owners are in the spotlight, stoking intense interest from investors and football fans in China – and in Italy too…

Hail the CSL champions

On November 12 last year, Jiangsu Suning (also referred to as Suning FC) beat reigning champions Guangzhou Evergrande in the last match of the season, clinching the CSL title for the first time.

In the wake of that success the Yangtze Evening News reported that the club’s players would be gifted a Rmb20 million ($3.1 million) cash bonus by its owner Suning, a retail-to-sports conglomerate based in Nanjing.

That championship bonus never arrived. Instead, the team’s manager Cosmin Olaroiu and his players were presented with certificates of merit, printed with encouraging messages from Suning’s chairman Zhang Jindong.

Joy was far from unconfined. “We received a congratulatory letter from the chairman through his secretary,” Olaroiu told Romanian news outlet Prosport this month (according to a translation from Sina Sport, China’s most followed sporting news portal). “Apart from that there was nothing else… no celebration, no vacation, no nothing. This is the saddest championship I have won in my life.”

There was more bad news for the manager of the CSL champions as the team geared up for the new season. Reportedly the club has been trying to renegotiate his contract, asking the Romanian to take a massive pay cut. Key players including leading scorer Alex Teixeira could also leave as their contracts run out this month.

Sina Sport said the worst-kept secret in Chinese football is that Suning FC is in deep financial difficulties, with players complaining about delayed or unpaid wages since the second half of 2020.

Fixed income investors have been following the news, sensing trouble as well. On the same day that Suning FC was crowned champions last November, the bonds of the club’s owner nosedived in price, amid a broader market sell-off triggered by a slew of corporate defaults (see WiC520).

Nail-biting moments in Milan

If Suning’s financial difficulties exacerbate, another football team could feel the consequences.

In the highest-profile takeover of a European club by a Chinese firm – and probably the last of this type for the foreseeable future – Suning bought a 68% stake in Italian giant Internazionale (or Inter Milan) for about $300 million in 2016. Inter fans were cautious about the takeover when it happened and the team is now unsettled by speculation about its owner’s financial health, with rumours circulating in Italy over deferred wages for the Inter players too.

Earlier this week the Inter chairman Steven Zhang, son of Suning’s boss, denied that the Chinese owner was looking to sell the Milanese club. That did not stop sports tabloids from picking up on stories such as a delay of funds related to a player purchase from Real Madrid, as well as the potential departure of Inter’s head coach Antonio Conte.

Ironically, past investment from Suning has revitalised the team –making it a contender for the Serie A title this year. Halfway through the season, it sits second in the league table, just two points back on crosstown arch-rival AC Milan.

Yet after his team had beaten Juventus, Italy’s nine-time consecutive champions, 2-0 earlier this month, Conte was confronted by journalists about the club’s financial health. “We can’t say it is not of interest, because that would be a huge lie. At the same time, I’ve been very clear with the players and all those who work for the club,” he responded, according to sports website Football Italia. “We must try to do our best, make the fans proud, and then we’ll see. I already knew from August that there were some problems. I hope the situation can be resolved in the best way.”

Zhang junior will want to hang onto control of Inter – this is the 29 year-old’s first major overseas assignment from his father (see WiC39 for our profile of the tycoon) – although a shareholding restructuring looks increasingly inevitable.

Reuters reported this week that BC Partners, a British private equity firm, has hired a company co-founded by former Juventus star Gianluca Vialli as an advisor on a bid to buy Inter. Such a deal could value the former European champions at about $1.2 billion.

Another major shareholder – Lionrock Capital – could sway the dealmaking. The sports-focused private equity firm, backed by former Chinese Olympic gymnast Li Ning, bought a minority 31% stake in Inter from former Indonesian owner Erick Thohir in 2019. The fund has just recouped nearly $70 million in selling British shoemaker Clarks to another company controlled by Li Ning (see WiC525). Perhaps BC Partners might buy out Lionrock’s stake in Inter as well, Reuters reported, though the latter’s intention is not immediately known.

How indebted is Suning?

Pretty much any football fan can tell you that owning a club is a cash-burner for anyone trying to keep their team at the top. But the Covid-19 pandemic has worsened the finances of the elite teams to an unprecedented degree. According to data from Inter’s shareholder meeting last November, the club’s revenues fell more than 10% during the 2019-2020 season and it reported nearly $1.25 billion in losses. Suning FC’s financial data is not publicly available. Nonetheless it won’t be pretty either: annual reports from Guangzhou Evergrande, a close rival, suggest the team has been running up nearly Rmb2 billion ($310 million) in annual losses in recent years, despite the Guangdong club successfully winning the CSL title eight times over the past decade.

Of course, that was prior to the Covid-19 outbreak.

The news is not much better for Suning FC’s corporate parent. Suning started out in 1990 as a small air conditioner store in Nanjing. It grew into a huge chain of electrical appliance stores, before adding to its retail portfolio by acquiring a department store business that belonged to Wanda Group and taking over French supermarket group Carrefour’s Chinese operations.

Suning’s bet was to scale up its bricks-and-mortar retailing empire but it started to backtrack strategically three years ago by closing some of its outlets and refocusing more of its investment in its online sales platform Suning.com, its main listed asset.

But due to brutal competition in the Chinese e-commerce market, Suning.com has been lossmaking at an operational level for six consecutive years. By the end of September, it had amassed Rmb136 billion in total liabilities, of which nearly Rmb37 billion was debt maturing this year.

Suning’s football and sports interests are probably hidden somewhere in the accounts of the unlisted parent firm Suning Appliance Group, 21CN Business Herald reckons. It reported Rmb300 billion in debt against total assets of Rmb407 billion as of June 2020. But there were more worrying signs over the last two months when Suning.com’s shares tumbled to a six-year low in December following the disclosure that Zhang Jindong and his son had pledged their interest in nearly 4% of Suning.com as collateral for loans from a unit of Alibaba.

Zhang senior also pledged his 65% stake in Suning’s real estate arm to Alibaba on the same day.

What has also rattled debt investors is Suning’s interlocking interests with what is in all likelihood the world’s most indebted property firm. That’s because Suning opted to back China Evergrande in a recent debt restructuring, despite the Nanjing firm’s own liquidity pressures.

The bosses of Suning and Evergrande have built up a ‘bromance’ off the pitch?

Suning FC and Guangzhou Evergrande (soon to be renamed Guangzhou Dui or ‘Team Guangzhou’; see WiC525) have been archrivals in the CSL for a few years.

However, before the title decider between the duo last November, a photo of Zhang senior and Evergrande boss Xu Jiayin drinking baijiu together was widely forwarded around the internet.

Sina Sport pointed out that the photo was taken in 2017, when Suning and Evergrande first forged their business partnership. That was also a year after Zhang’s takeover of the Jiangsu football side.

In November 2017, Evergrande announced that Suning had invested Rmb20 billion for a 4.7% stake in its property unit Hengda, which Evergrande was planning to spin off in the A-share market.

Evergrande’s Xu had pulled in at least Rmb100 billion of capital from other investors, with a promise to buy back their stakes if the highly-leveraged developer failed to secure regulatory approval for a backdoor listing in Shenzhen (with a deadline to do so by the end of this current month).

Xu could not get the listing approved. The plan was officially ditched last November, although most of Hengda’s backers had already agreed to hang onto their investment, allowing Xu to avoid draining almost the entirety of his company’s cash (see WiC518).

Zhang played a key role in the restructuring. As the leading investor in Hengda, he sat to Xu’s left during the signing ceremony for Hengda’s recapitalisation plan.

At the time, Suning’s own financial woes were making wider headlines, after the English Premier League (EPL) decided to cancel a $700 million contract with Chinese broadcaster PPTV, another Suning unit. The three-year deal was terminated after barely a season as the two sides could not agree new terms following disruptions to televised fixtures brought on by Covid-19 lockdowns in England (PPTV launched a countersuit against the EPL this month over its monetary losses). The falling out hit headlines last August after the Suning unit withheld a £160 million payment to the EPL, the South China Morning Post reported. Sina Sport had this to say: “Despite Suning’s own financial difficulties, Zhang was still willing to help Xu and sign his name [on Hengda’s restructuring deal]”.

Will Zhang’s ‘circle of friends’ help him out of a tough spot?

Now 57, Suning’s boss has shown an uncanny ability to befriend potential rivals. For instance, when Suning was expanding from a bricks-and-mortar retailer to become a new force in e-commerce, Zhang forged partnerships with two apparent competitors. In 2015 he signed a deal to swap a 19.99% stake in Suning.com for a 1.1% stake in Alibaba. Soon afterwards, he also brought in investment from Wanda, China’s biggest commercial landlord at the time (see WiC296).

For Zhang the former investment has certainly paid off. The company sold down its Alibaba stake in 2017 and 2018 for a profit of Rmb14 billion. The windfall provided much-needed financial relief for the group and the relationship with Alibaba also helped to facilitate loans (secured against Suning stock) to Zhang personally.

What are the chances that Evergrande’s Xu might now return the favour on Hengda and help Zhang out with his finances? Xu and Zhang were spotted dining with Real Madrid’s president Florentino Pérez Rodríguez last June and they have travelled together to Milan to watch Inter play. Sports tabloids in Europe have also been picking up on speculation that Evergrande’s ambitious electric vehicle start-up (see this week’s “Auto Industry”) might replace tyre maker Pirelli as Inter’s shirt sponsor. (Pirelli has partnered with the Serie A outfit since 1995.)

It remains to be seen whether Xu could squeeze further funds out of his financially-constrained property empire to prop up Zhang’s football dream. But what’s clearer is that the wider wave of interest from Chinese firms in international football assets has waned dramatically. That has coincided with a change of heart from the Chinese government since the early days of Xi Jinping’s presidency, when companies seemed to be encouraged to invest in the game. The privations of the pandemic have created a very different mood, putting pressure too on Suning’s core businesses.

The sheer size and diversity of Suning as a group means it sits on trophy businesses and properties that Zhang could sell down in a bid to stave off a worsening crisis. Suning Bank, for instance, is one of the fastest-growing of the private-sector lenders, Xinhua reported last year.

But Zhang’s football teams might be first to be auctioned off, perhaps, so their fans will be watching closely for whether Suning is souring on its soccer investments.

 

 

Keeping track, May 7, 2021: We speculated in January this year that Inter Milan could win the Serie A title in Italy this season. But after what happened to its sister club Jiangsu Suning, that still might not herald a financial golden era for the Italian football team and its players (see WiC526).

After Suning’s Jiangsu club clinched the Chinese Super League title last year, the team’s manager Cosmin Olariou complained that there was no sign of the substantial cash bonuses that the team had been promised.

Instead his players received a congratulatory letter from the team’s owner Zhang Jindong.

Longstanding rumours about Zhang’s financial difficulties have turned out to be accurate and he has since sold the controlling stake in his corporate flagship, a retailer (see WiC530).

The partial nationalisation failed to translate into improved financial backing for the newly crowned CSL champions, however, who pulled out of the league just ahead of the kick-off of the new season.

Inter Milan also clinched the Serie A title last week with four matches to spare. In doing so, the Milan team finally brought an end to the nine-year reign of Juventus as Italian champions (in an eery coincidence, Jiangsu Suning had dethroned Guangzhou Evergrande, eight-time winners of the CSL over the past decade).

There were no reports on whether the Inter players had been given cash bonuses by Suning. But there was another congratulatory letter from Zhang.

“The Scudetto is not the conclusion but the beginning of Inter’s journey. I hope everyone continues to feel the hunger for victory, to give everything for the Nerazzurri colours, to fight for our goals,” he wrote.

“The sporting results, the influence of the Nerazzurro brand, the commercial revenues and the value of the Club have grown, reaching the height of our ambitions and our commitment,” the Chinese businessman added.

Suning promised to deliver success on the pitch when it bought Inter Milan four years ago. And in terms of this year’s title success at least, it has delivered. However, Chinese media was reporting this week that the cash-strapped retailer might still need to contemplate a sale of the Italian champions.

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