Joseph DaGrosa has told Southampton’s majority owner Gao Jisheng to lower his price for the club or the American investor will look elsewhere, with Crystal Palace, Newcastle and West Ham understood to be the most likely alternatives for his first investment in the Premier League.
Gao has never confirmed how much he paid for his 80 per cent stake in the club in 2017 — The Athletic understands it was between £180 million and £200 million — but the Chinese businessman is believed to value Southampton at £200 million, which means he wants £160 million for his shares.
DaGrosa’s Kapital Football Group paid a deposit to enter one-on-one talks with Gao’s representatives last year but its period of exclusivity has expired, with Kapital forfeiting some of that payment.
Speaking exclusively to The Athletic, DaGrosa said: “Southampton are a good club but there are many other good clubs in the league.
“COVID-19 has created a very fluid situation with regards to the financial performance of all clubs. We have to take that into consideration as we contemplate transactions — we pride ourselves on being very disciplined investors.
“Southampton’s management team has done an excellent job, during a very challenging period, in getting a successful refinancing done last summer. Having said that, particularly in this environment, sellers need to have a reasonable expectation of value and it has to be consistent with our view.
“We are open to opportunities that make financial sense. As we evaluate clubs, we are of course looking at not only the price that needs to be paid but capital that needs to be invested subsequently for the deal to make sense.”
DaGrosa’s reference to a “successful refinancing” relates to the almost £80 million loan Southampton took from MSD Capital, American computer billionaire Michael Dell’s private investment company, last summer. This loan replaced an earlier funding arrangement with Australian bank Macquarie.
The details of the new loan were revealed in the annual accounts Southampton posted last month. In the 12 months to the end of June 2020, the club lost £76 million as income fell from £150 million to £124 million, and total debt grew to £93 million.
The accounts also confirmed the MSD loan will cost the club more than £7 million a year to service as the interest rate is just over nine per cent, although Southampton do not need to start making payments until 2025. That said, Macquarie’s typical interest rate is more like seven per cent.
DaGrosa is understood to be relatively comfortable with Southampton’s decision to fill the shortfall, which will be even worse this season, with a loan but the Florida-based investor wants Gao’s price to reflect the club’s changed financial outlook.
The Athletic understands DaGrosa believes the pandemic has wiped at least £50 million off Southampton’s value as any new owner will be forced to deal with several more years of losses, as well as repaying debts. Beijing-based Gao, however, refuses to budge, and it is understood his representatives are now talking to other interested parties, including at least one other US-based group.
This leaves DaGrosa with a predicament as Kapital has now secured funding for its plans with two American investment firms: Ares Capital Corporation and Munro Capital Inc. It is understood they would both lend money to Kapital but also become equity partners.
The strategy is for Kapital to buy a mid-tier Premier League side and make it the anchor of a multi-club group, similar to City Football Group or Red Bull’s football empire. Kapital wants the Premier League side to be linked with three to five satellite clubs and up to nine academies in other countries.
Ares and Munro have not given DaGrosa any fixed deadlines but he knows that in the current economic climate of zero-interest rates and low growth, private equity will not wait forever. This means Kapital must consider other options.
DaGrosa looked at Newcastle in 2019 but his interest never advanced beyond the preliminary stage, although it understood that the club remains high on Kapital’s list of potential anchor clubs. Several sources have told The Athletic that Crystal Palace and West Ham also fit the profile of clubs that Kapital is targeting.
“The Premier League is the largest and safest league in Europe,” said DaGrosa. “It’s the largest because of its broadcast income and that makes it the safest, too.
“We looked into other markets but decided the EPL was the best market for us. It’s easier to be a medium-sized fish in a big pond than a big fish in a medium-sized pond.
“For example, to make one of the big Italian clubs work, you’d have to qualify for one of the European competitions every year, which is pretty hard. Of course, like everyone else, we would like to qualify for the Champions League or Europa League but we view that as icing on the cake.”
There are some in the football industry, however, who believe DaGrosa’s failure to close a deal with Southampton, or progress beyond informal talks with anyone else, is a result of question marks over his track record in football, citing a perceived failure at French side Bordeaux.
The New York native, who made his reputation in business by setting up a company that bought 248 Burger King restaurants out of bankruptcy, led the £60 million takeover of Bordeaux in December 2018 via his Miami-based sports investment firm GACP Sports.
But 12 months later, GACP sold its stake in the Ligue 1 club to investment partner Kings Street Capital after the two groups fell out over mounting losses and future strategy, with several sources suggesting to The Athletic that DaGrosa simply failed to fully understand the French market.
When asked about Bordeaux, Da Grosa would not be drawn, but it has been suggested to The Athletic that both parties offered to buy the other out, with Kings Street bidding more. It would, however, be fair to assume that neither saw COVID-19 nor the collapse of French football’s domestic broadcast deal coming.
It should also be stated that Kapital boasts much more football expertise than GACP Sports could call on, as the senior partners are DaGrosa, Francisco Lopez and Hugo Varela.
Lopez is a former chief financial officer at Barcelona and business director at City Football Group, where he was involved in the purchase of Melbourne City and New York City FC. A former player for Sporting Lisbon, Varela was a players’ agent before moving into club investment. He was closely involved in the Bordeaux deal and helped restructure Malaga and Panathinaikos.
But as well as Lopez and Varela, Kapital has nine senior advisors, including former Everton and USA star Landon Donovan and Relevent Sports Group boss Charlie Stillitano, the man behind the International Champions Cup summer tournaments.
GACP Sports also owns the Soccerex exhibition business, which gives DaGrosa and his colleagues considerable networking opportunities. For example, Southampton chief executive Martin Semmens took part in panel discussion about investing in clubs during last week’s virtual Soccerex gathering.
There is certainly no shortage of talking about investment in European football at present but the only transaction to get over the line in the Premier League recently is ALK Capital’s takeover of Burnley. That deal, however, has raised eyebrows on both sides of the Atlantic, as the American firm used a loan from MSD and the club’s own cash to fund most of the purchase, reminding many observers of the Glazer family’s controversial takeover of Manchester United.
But DaGrosa rejects any comparison between Kapital’s proposed approach and the leveraged buyout model used by new Burnley chairman Alan Pace.
“Our model is fundamentally different because we have a platform approach where we want to invest in multiple clubs,” he said. “I don’t know all the specifics on the Burnley deal but I think it was well done by Alan Pace from a financial engineering point of view.”
On why predominately American investors like him, Pace and others are so interested in European football, DaGrosa said: “From an investment point of view, football clubs have incredible staying power. If you look at most of the clubs in the English Premier League, they’ve been around 50 to 100 years.
“But not every sport is equal. In the US, Major League Baseball is in a death spiral because its audience is aging but the demographics are clearly on soccer’s side.”
