-- Alexander Smith is a Reuters columnist. The opinions expressed are his own --
By Alexander Smith
LONDON, Feb 10 (Reuters) - People are up in arms about bankers receiving bonuses when the banks they worked for have gone down the pan. But isn’t it just as shocking that so many state-backed financial firms still subsidise the eye-popping wages of sporting superstars through rich sponsorship deals?
It’s the same story on both sides of the Atlantic. Citigroup , which received $45 billion from the U.S. government, is sticking with a $400 million deal marketing deal from 2006 which includes the naming rights for the new home of the New York Mets baseball team, which will be called Citi Field.
Meanwhile Royal Bank of Scotland renewed its sponsorship of the 6 Nations rugby competition last month, only 10 days after reporting the biggest loss in British corporate history. And it continues to sponsor the Williams Formula 1 team, a sport known for eating up tens of millions a year.
There is indeed a strange correlation between failed companies and sporting sponsorships.
Manchester United sponsor American International Group (AIG) , Newcastle United supporter Northern Rock and failed British bank Bradford & Bingley, which sponsored not one but two soccer clubs, Bradford City FC and Barnet FC, have all crashed spectacularly since during the credit crisis.
And it isn’t just financial firms which have run into trouble and seen their names stripped from team shirts and hoardings. English premier league club West Ham United lost their sponsor when tour operator XL Leisure Group folded.
But this shouldn’t really be a big surprise. Some have even made a direct link between sporting sponsorship and corporate underperformance. A recent report by U.S. fund advisory firm Advisor Perspectives crunched the numbers for U.S. companies that entered into so-called “naming rights agreements” and believes it has established a statistical connection.
Its study of 69 U.S. naming deals shows the performance of companies that purchase such rights trails the S&P 500 index by 4.7 percent over the course of the deal. If you invested in a company the day it announced a naming agreement and sold when the agreement was done (or still held onto it for current name holders), your portfolio would be down 9.1 percent, versus a fall of 4.5 percent for the S&P 500.
Advisor Perspectives argues that poor corporate governance, leading to risky or bad decisions on capital allocation, is to blame for this underperformance and points out that three of the top five largest bankruptcies in history, Worldcom, Enron and Conseco all sponsored major U.S. sports venues.
They also point the finger at executives who benefit from the luxury boxes, hospitality packages and privileged access to sporting celebrities, all at the expense of shareholders.
So when Royal Bank of Scotland struck its Formula 1 deal with the Williams team, Citigroup signed its Mets deal or AIG paid to have its name on the shirt of the world’s most successful soccer team Manchester United, investors should have read these as clear sell signals for the stock.
Given the financial wall some of the banks have hit it is puzzling why they haven’t pulled the plug on these embarrassing deals. After all the CEOs of RBS, Northern Rock and Bradford & Bingley have all been jettisoned, as have the bosses of Citigroup and AIG.
But with some lengthy sports sponsorship deals, ending them would in most cases be counterproductive, wiping out any value left. And where banks have been nationalised, political factors come into play. In the case of Newcastle United, any damage caused by ending the sponsorship agreement with Northern Rock and alienating a fiercely loyal soccer fan base would have far outweighed the cost savings of scrapping the deal.
So for an early warning signal of a company with a vain or out-of-control CEO, a poor record of capital allocation, a likely share price underperformance and in the worst case scenario an above average chance of going bust, look no further than the big sports signings, not of players but of sponsors.
-- At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, Reuters’ customers can click on --
Editing by David Evans