Financial FairPlay in SOccer
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Malaga's Champions League journey clouded by financial crisis
By Andy BrassellEuropean football expert
When Malaga's status rocketed following a takeover from the Qatari royal family, it appeared that theroute to the promised land of Champions League football would be a smooth one.But the Andalusians head to Athens for the return leg of their Champions League play-off withPanathinaikos on the back of a journey that has taken a twist or two more than even the most thrill-seeking fan would have hoped for.Financial problems have meant La Liga's biggest spenders of last season have become the only teamin Spain not to sign a single player this summer.With little money in Spain outside the Barca and Madrid duopoly, there was a real chance for Malagato become a powerful presence in La Liga following Sheikh Abdullah bin Nasser al-Thani's initial bigimpression.
A net 50m was spent on players last summer - more than either Barcelona or Real Madrid - and12m was pledged to build a smart new facility for the club's youth academy.
Arrival in the group stage - and potential ties against the likes of Chelsea, Manchester United andBayern Munich - have been the aim ever since summer 2010.
And after scraping home in fourth spot on the final day of last season, it seemed like they had takenthat chance.
So the club's current financial troubles have come as a shock to many, at least outside Spain. WhenMalaga should have been strengthening to ensure Champions League progression, they have beenselling to stay afloat with the owners' interest waning.Of course, Arsenal were one of the first beneficiaries of Malaga's problems. Star manSanti Cazorlawas sold to the London club for 15m- 1.5m less than the Andalusian club paid Villarreal for theSpain midfielder last summer.When talented young forward Salomon Rondon and experienced Netherlands defender JorisMathijsen followed him out the door, it looked like a full-blown exodus. High-earning coach ManuelPellegrini's position was also questioned as rumours grew of the club's impending sale.In reality, the warning signs have been there for months. Former Manchester United striker Ruud van
Nistelrooy and Cazorla were among a handful of players to threaten legal action over unpaid wageslast season.The LFP (Liga de Futbol Profesional) hadimposed a transfer ban in January after the club misseda payment to Osasuna for Spain full-back Nacho Monreal.
As the club's staff in Spain struggled to establish a working line of communication with Qatar, matterswere left in disarray by the sudden death of the board's chief advisor Jose Carlos Perez in February,following a stroke.
Another example is Spanish team Malaga, which has gone from La Liga also-rans to European
Champions League qualifiers in just two years thanks to the riches of Sheikh Abdullah Bin Nasser Al-
Thani.
The Qatari spent a reported $80 million in 2012 assembling a squad containing big names like Spain's
double European champion Santiago Cazorla and Dutch defender Joris Mathijsen.
Are footballers on a par with bankers?
In May, Al Thani's expensively assembled team, ably led by former Real Madrid coach Manuel
Pellegrini, completed Malaga's best ever season, finishing fourth in Spain's top division and qualifying
for Europe's top club competition for the first time.
"It is riches to rags in a very short amount of time," Spanish football journalist Tim Stannard told CNN.
"No one has actually given a reason; it has been very, very quiet."
After a single season at the club, Cazorla and Mathijsen havedeparted to Arsenal and Feyenoord
respectively.
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The pair, along with veteran Dutch striker Ruud van Nistelrooy and top scorer Jose Rondon of
Venezuela, launched a complaint with the Spanish football authorities regarding unpaid wages.
Aston Villalost 54m in the year from 1 June 2010 to 31 May 2011, the club has announced. That is a
record loss since the American credit card magnate Randy Lerner bought Villa in 2006, and the club's
losses have deepened every year since. In the previous year, 2009-10, Lerner's UK-based holding
company which owns Villa, Reform Acquisitions, lost 38m, so losses worsened 42% in 2010-11.
Lerner himself continues to fund the club, via an ultimate holding company also called Reform
Acquisitions, registered in the US, and Villa said Lerner has invested a further 25m into the club.
Companies House documents show the total Lerner has invested in return for shares is now 133m;
he has also put money in as loans, but Villa did not release full figures, only the headlines of their
financial results, so the total Lerner has invested is not yet known.
Despite that investment, Villa sit 15th in the Premier League table and with attendances at 42,582-
capacity Villa Park generally in the low 30,000s for matches against all but the biggest clubs. They
announced they spent 12m in "exceptional charges" in 2010-11 relating to changing the club's"management personnel". That apparently refers to Martin O'Neill, who left in August 2010 and
subsequently achieved a financial settlement at a tribunal, and also compensation paid to the
departing Grard Houllier and to Birmingham City for Houllier's replacement, Alex McLeish, although
that change happened in June 2011 after the date of these latest accounts.
Villa pointed to a slight increase in the club's annual income to a record 92m as a pleasing
development: "This was achieved despite a backdrop of instability as the 2010-11 season constituted
one of the most turbulent in the club's recent history," the club said.
In the summer of 2011, Villa sold Stewart Downing to Liverpool for 20m and Ashley Young to
Manchester United for 17m, a total of 37m, with Charles N'Zogbia, for 9.5m and Shay Given, for3.5m, 13m altogether, the major arrivals.
The scale of losses and of subsidy paid in by Lerner, at a time when clubs are seeking to move
towards breaking even to comply with Uefa's "financial fair play" rules, partly explains why Villa
decided they could not refuse the offers for Downing and Young. Since then, the club have tried to
bring down the wage bill, although the figures for spending on wages were not released.
Robin Russell, Villa's chief financial officer, said: "The board is confident that the actions taken since
the end of the 2010-11 financial year have galvanised the longer-term sustainability of the club and
have given us a better financial platform on which to build for future success."
Spanish club Real Zaragoza have applied for voluntary administration despite retaining their Primera
Division status for the 2011-12 campaign.
Zaragoza have a net debt of 110 million and tried to get backing from creditors, but seem to have
failed in their endeavour.
"[The club] is faced with the reality of a cash flow imbalance," Zaragoza said in a statement on their
official website on Wednesday. "The principal origin [of the problem] lies in the losses the entity
suffered when they were relegated three seasons ago, and in the economic effort made to achieve an
immediate return to the Primera division one year later.
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Michel Platini was born on 21 June 1955 in Joeuf, Lorraine, in eastern France.
He enjoyed a distinguished career as a footballer, captaining the France team that won the 1984
UEFA European Football Championship on home soil, and holding the record for the number of goals
in a EURO final round, scoring nine times.
He also took part in three FIFA World Cups, in 1978, 1982 and 1986, reaching the semi-final of the
latter two competitions. In 72 international appearances for France 49 as captain he scored 41
goals, an achievement that stood as a record for a number of years.
Michel Platini played for three clubs AS Nancy-Lorraine (1973-79) and AS Saint-Etienne (1979-82)
in France, and Juventus (1982-87) in Italy. In a career spanning 501 matches, he scored 265 goals,
and won the Ballon d'Or for European Footballer of the Year three successive times, in 1983, 1984
and 1985.
He was then coach of the French national team from 1988 to 1992 before embarking on a career as a
football administrator. From 1992 to 1998, he was co-president of the FIFA World Cup Organising
Committee for the 1998 World Cup in France, and vice-president of the French Football Federation
(FFF) from 2000.
Within world football's governing body FIFA, from 2002 Michel Platini was a member of the FIFA
Executive Committee, chairman of the Technical Development Committee, vice-chairman of the
Football Committee and vice-chairman of the GOAL project. He was a member of the FIFA World Cup
Organising Committee for the 2006 final round in Germany.
From 1988 to 1990, Michel Platini was a member of the UEFA Technical Development Committee.
From 2002, he was a member of the UEFA Executive Committee, and represented the Executive
Committee on the UEFA Technical Development Committee. He also served on the UEFA working
group on clubs and leagues.
Michel Platini was elected as the sixth president of UEFA at the XXXI Ordinary UEFA Congress in
Dusseldorf on 26 January 2007, and was re-elected by acclamation for a second four-year term at theXXXV Ordinary UEFA Congress in Paris on 22 March 2011. He is also a vice-president of FIFA.
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The Union des Associations Europennes de Football (UEFA) was founded in Basle, Switzerland, on
15 June 1954, bringing to fruition the pioneering vision of a handful of key football administrators of
the time.
Since then, the parent body of European football - one of six continental confederations of world
football's governing body FIFA - has grown into the cornerstone of the game on this continent,
working with and acting on behalf of Europe's national football associations and other stakeholders in
the game to promote football and strengthen its position as arguably the most popular sport in the
world.
The guiding principle of the initiators in the early 1950s was the fostering and development of unity
and solidarity among the European football community. Now, over 50 years later, UEFA's mission
remains very much the same. But it has also become the 'guardian' of football in Europe, protecting
and nurturing the well-being of the sport at all levels, from the elite and its stars to the thousands who
play the game as a hobby.
In 1960, UEFA had a full-time staff of just three people. That figure has risen steadily through the
years as the organisation has reacted to changing circumstances. Today, over 340 people of more
than 29 different nationalities administrators, secretaries, IT specialists, coaches, journalists,
translators are employed at UEFA's administrative HQ located in the town of Nyon, on the shores of
Lake Geneva in western Switzerland.
Over the decades, UEFA has developed from a mainly administrative body into a dynamic
organisation that is in tune with the vast requirements of modern-day football. UEFA is a sporting
authority which does not have the powers of a government; it represents Europe's national football
associations, and can only act in accordance with the wishes of these associations.
When UEFA was founded, the body comprised 25 national associations. The number of member
associations rose gradually until the beginning of the 1990s, when political developments in eastern
Europe and the fragmentation of the USSR led to a rapid growth in the number of new associations.Consequently, there are now 53 associations under UEFA's wing.
UEFA's FFP Regulations - Play To Win
So the transfer window is finally over after the customary twists and turns and, as always, has
raised some intriguing questions. Perhaps most perplexing is the decision of previously big spending
Manchester City to slam on the brakes (by their own recent standards) much to the disappointment
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of manager Roberto Mancini. On the fairly safe assumption that this is not due to Sheikh Mansour
struggling for cash, the culprit is likely to be UEFAs Financial Fair Play (FFP) regulations, a
particularly delicate issue for the blue side of Manchester.
Given that looming threat, it is equally puzzling to see that Chelsea, who have had their ownproblems in reaching self-sustainability, have once again started to splash the cash, laying out 32
million on the supremely talented Eden Hazard and 25 million on the precocious Oscar all in
apparent blithe disregard of FFP. It therefore might be interesting to revisit these rules in an
attempt to understand clubs behaviour in the new era of tighter financial regulation. Will they
have a profound impact on the face of European football or merely act as a speed bump, as
predicted by Premier League chief executive Richard Scudamore?
At its simplest FFP is trying to encourage clubs to live within their means, i.e. not spend more
money than they earn. This is UEFAs response to the poor financial health of many clubs, as
evidenced by their most recent benchmarking report, which revealed that in 2010 over half of
Europes top division clubs lost money with total losses surging 30% to 1.6 billion and debts
standing at 8.4 billion. Many clubs have experienced liquidity shortfalls, leading to delayed
payments to other clubs, employees and tax authorities.
"Eden Hazard - everything counts"
Gianni Infantino, UEFAs general secretary, described this as really the last wake-up call. Headded, There was a great risk of crisis, of the bubble bursting. You can see from the losses and the
debts that the situation is not healthy and we cannot go on like this. We had to do something and
financial fair play is the way we designed it. UEFAs president, Michel Platini, is even more
evangelical, considering FFP vital for footballs future.
The aim is to introduce more discipline within club finances, encourage responsible spending and
investment and to curb the excesses and individual gambling on success, which has brought many
clubs into financial difficulties.
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While Infantino conceded that over-spending may be sustainable for a single club, it may be
considered to have a negative impact on the European club football system as a whole. He
explained, The problem is that all clubs try to compete. A few of the biggest can afford it, but the
vast majority cannot. They bid for players they cannot afford, then borrow or receive money from
their owners, but this is not sustainable, because only a few can win. In other words, the richest
clubs drive up players salaries and transfer costs, forcing smaller clubs to over-stretch theirbudgets to compete.
Well explore the moral issues surrounding FFP later, but lets first look at how it will work in
practice. The first point to note is that clubs do not actually have to break-even in the early years
of FFP to meet the target, thanks to the concept of acceptable deviations, which is one way
UEFA has attempted to facilitate the move towards a sustainable model.
The first season that UEFA will start monitoring clubs is 2013/14, but this will take into account
losses made in the two preceding years, namely 2011/12 and 2012/13. Wealthy owners will beallowed to absorb aggregate losses of 45 million (36 million), initially over those two years and
then over a three-year monitoring period, as long as they are willing to cover the deficit by making
equity contributions. The maximum permitted loss then falls to 30 million (24 million) from
2015/16 and will be further reduced from 2018/19 (to an unspecified amount).
This approach was explained by Infantino, You can have losses for one year, because perhaps you
had one bad season and you did not qualify (for Europe). So we are looking at losses over a multi-
year basis. So one year you can make a loss, but not over three years. This makes sense, though
some clubs might simply make operating losses every year and get within the break-even target by
hefty player sales in one year.
UEFAs willingness to give the clubs every chance to meet FFP is also seen by the decision to have
only two years in the first monitoring period, as this means that the annual average loss can be
higher than future monitoring periods.
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"Santi Cazorla - you don't have to spend big"
It is important to note that these are the acceptable deviations only if the owner is willing and able
to put money in. If not (as is the case for many clubs), then they are significantly lower at just 5
million (4 million). For the likes of Abramovich and Mansour, this will obviously not be an issue,but their ability to cover large deficits will be much reduced, as noted by Infantino, I wouldnt say
the era is dead, but I would say what is over is the sugar daddy who can put hundreds of millions
into the clubs. This will no longer be possible.
Note that the rules do not actually force a club to become profitable. All that UEFA are saying is
that clubs will not be allowed to compete in their competitions (Champions League and Europa
League) if they do not break-even, but clubs making losses could continue to compete in their
domestic league. The first sanctions for clubs not fulfilling the break-even requirement can be
taken during the 2013/14 season and the first possible exclusions relating to break-even breaches
would be for 2014/15 season.
OK, thats the theory, so whats the current state of play for the leading English clubs?
The last published accounts available are those for the 2010/11 season, in other words the one
before the first season included in the FFP calculation. Nevertheless, this should still give us a
strong indication of how close clubs are to meeting the FFP target.
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Taking those clubs that qualified for Europe this season as our examples, four clubs made a pre-tax
profit (Newcastle 33 million, Manchester United 30 million, Arsenal 15 million and Tottenham
402,000), while three clubs reported large losses (Manchester City 197 million, Chelsea 67
million and Liverpool 49 million). So, on first glance, those three face a severe challenge to get
their finances in order to meet FFP.
However, there are two major adjustments that need to be made to a clubs statutory accounts to
get to UEFAs break-even template: (a) remove any exceptional items from 2010/11, as they should
not re-occur (by definition); (b) exclude expenses incurred for healthy investment, such as
improving the stadium, training facilities or academy, which would lead to losses in the short-term,
but will be beneficial for the club in the long-term.
Lets be very clear here: so-called exceptional costs will be included in the break-even calculation,
but it is unlikely that they will be at similar high levels to 2010/11, when clubs could take the
opportunity to clean house in the last accounts not to be included for FFP.
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This was a significant factor for all three clubs that reported large losses with Liverpool booking 59
million (mainly writing-off stadium development expenses), Chelsea 42 million (largelymanagement compensation paid to the sacked Carlo Ancelotti and the cost of buying-out Andr
Villas-Boas from Porto) and Manchester City 34 million (mostly writing-down the remaining book
value of certain players).
Excluding exceptional items, Liverpool would have reported a 10 million profit, while the losses at
Chelsea and Manchester City would have come down to 26 million and 163 million respectively,
so things would already look better for them in a normal year (though Chelseas manager pay-offs
have been a fairly regular occurrence and the 2011/12 figures will again be hit, this time by AVBs
departure).
Next, there can be significant costs excluded for the FFP calculation, which is best illustrated by
looking at Arsenals accounts. The costs of building the Emirates stadium are deducted, namely the
depreciation charge on the tangible fixed assets of 12 million and possibly interest on the bonds of
14 million (though the latter is a bit questionable, now that the asset has been constructed). In
addition, they will be able to deduct costs on youth and community development. Unfortunately,
these are not separately identified in club accounts, but we can estimate 10 million and 2 million
respectively for these activities. So, in total Arsenals relevant expenses for the FFP break-even
calculation will be around 39 million lower than the published accounts.
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However, Arsenal will presumably also have to exclude the 13 million profit from their property
development business, as revenue and expenses from non-football activities are not relevant for
FFP - unless it is allowed, because it is "in close proximity to the club's stadium". In our
calculations, we shall adopt a conservative approach and exclude it.
Not all interest expenses can be excluded, e.g. Manchester Uniteds annual 40-45 million is taken
into consideration, as their debt was incurred to help finance the Glazers leveraged takeover, as
opposed to positive investment in the club. Incidentally, if the club ever pays dividends to their
owners, these would also be included. Fortunately for United, these hefty interest payments are
more than covered by their huge operating profits.
After all these adjustments, most of the English clubs look to be well placed for FFP. Even
Chelseas FFP loss has come down to only 8 million, which is well within the acceptable deviations
and helps explain why they felt that they could continue spending in this summers transfer
window, especially as their income will be boosted by more revenue from their Champions League
triumph.
The only club that looks vulnerable is Manchester City, whose loss for FFP is still a frightening 142
million. Indeed, the clubs sporting director Brian Marwood admitted, Weve got a huge amount of
work ahead of us to make sure we are sustainable. They will benefit from rapid revenue growth,
both in terms of distributions from the Champions League and (especially) new commercial deals,
but the chances are that their losses will still be well beyond UEFAs limits in the short-term.
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"Roberto Mancini - it's not about the money, money, money"
However, a safety net might be provided by yet another exemption in the FFP rules, whereby UEFA
will not apply sanctions, if: (a) the club is reporting a positive trend in the annual break-evenresults; (b) the aggregate break-even deficit is only due to the annual 2011/12 break-even deficit,
which is in itself due to player contracts signed before 1 June 2010 (thus excluding wages for the
likes of Carlos Tevez, Gareth Barry, Vincent Kompany, Joleon Lescott and Kolo Toure). Even that
might not be enough, though UEFA will surely take note of Citys 100 million investment in their
academy, plus their relative restraint in the transfer market this summer.
The other point that should be highlighted is the potential importance of profits on player sales to a
clubs accounts, e.g. Liverpools 2010/11 figures were boosted by 43 million (mainly Fernando
Torres to Chelsea) and Newcastles by 37 million (largely Andy Carroll to Liverpool). Excluding
these sales, Liverpools FFP result would actually have been a 20million deficit, so its not quiteplain sailing for them.
By the way, Arsenals FFP figures for 2011/12 and 2012/13 should be hugely positive, thanks to
major profitable sales of Cesc Fabregas, Samir Nasri, Robin Van Persie and Alex Song. This has been
a key element of Arsenals self-sustaining strategy in recent years.
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Of course, Manchester City are by no means the only major club that face a major challenge tomeet FFP (though you might think so from the media) with the leading Italian clubs also having
much to do, especially Milan, Inter and Juventus, whose last reported losses averaged more than
70 million (before FFP adjustments). Indeed, Milan vice-president Adriano Galliani admitted, FFP
hurts Italy. There will no longer be patrons that can intervene. Until now people like Berlusconi and
Moratti would be able to support us, but with the fair play it will no longer be possible.
This helps explain much of this summers activity inSerie A, especially at Milan, who have
effectively been forced to sell Zlatan Ibrahimovic and Thiago Silva to the nouveaux riches at Paris
Saint-Germain, while spending very little on replacements. Clearly, there are other factors here,not least the economic crisis in Italy and Fininvests own financial difficulties, but FFP certainly
played a part in this strategy. In addition, it provides a rationale for Inter selling a 15% stake in the
club to China Railway for 75 million, as this will help fund a new stadium with these costs being
excluded for the purposes of FFP.
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"Robin Van Persie - jumping someone else's train"
At the other side of the spectrum, clubs like Real Madrid and Bayern Munich will have absolutely no
problems with FFP, as they are consistently profitable year-after-year. Bayern have been well-
known supporters of FFP, but even Jose Mourinho has commented on the likely impact, The clubproduces its money by itself, so Real Madrid will be in a much better position when FFP comes.
Barcelonas figures are a bit more up and down, but they recently announced record profits of 49
million for 2011/12, so theyre also looking good.
The stated objective of UEFAs regulations is, to introduce more discipline and rationality in club
finances and to decrease pressure on players salaries and transfer fees and it is true that there
has been a general reduction in transfer spending in European football, particularly Italy and Spain.
However, the 490 million spent by Premier League clubs on transfers in this summer is actually
slightly higher than last summer and second only to the 500 million record outlay in 2008. Of
course, it is arguable that this expenditure would have been higher without the presence of FFP,
but what does seem clear is that some clubs have opted to try to increase revenue rather than cut
costs a classic example of the economic law of unintended consequences.
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Thus, most leading clubs have managed to substantially grow their revenue since UEFA approved
the FFP concept in September 2009, e.g. the revenue at Barcelona, Real Madrid and Manchester
United rose 76 million, 71 million and 53 million respectively, though the 76% increase in
Manchester Citys revenue from 87 million to 153 million is perhaps even more striking (with
much more to come).
Lets look at how clubs have grown (and will hope to grow) their revenue streams in future.
The main driver of higher revenue in England has been the Premier League television deal. For an
individual club, this is partly down to its own success on the pitch, but is far more due to the ever-
increasing amounts negotiated centrally.
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This is because the distribution methodology is fairly equitable with the top club (Manchester City)
receiving around 60.6 million, while the fourth club (Tottenham) gets 57.4 million, just 3.2
million less. You will see that the lions share of the money is allocated equally to each club,
meaning 50% of the domestic rights (13.8 million in 2011/12) and 100% of the overseas rights
(18.8 million), with merit payments (25% of domestic rights) only worth 757,000 per place in the
league table and facility fees (25% of domestic rights) fairly similar, based on the number of times
each club is broadcast live.
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What has really helped clubs top line is the Premier Leagues ability to secure top dollar deals for
its TV rights, as once again shown with the amazing 3 billion Premier League deal for domesticrights for the 2014-16 three-year cycle, representing an increase of 64%. If we assume
(conservatively) that overseas rights rise by 40%, that would mean that the total annual TV deal
from 2014 would be worth 1.7 billion compared to the current 1.1 billion.
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Under current allocation rules, that would imply an additional 30 million revenue a season for the
leading English clubs, not only strengthening their ability to compete with overseas clubs,
especially Madrid and Barcelona, who benefit from massive individual TV deals, but also providing asignificant boost in their FFP challenge in the future assuming that they dont simply pass all the
extra money into the players bank accounts.
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With revenue from the Premier League much of a muchness for the leading English clubs, the
importance of finishing in the top four and qualifying for the Champions League is very evident.
Although it may not be a huge percentage of a clubs total revenue, it is clearly a significant
competitive advantage.
The Europa League is small compensation financially, as can be seen by the sums received in last
years campaign, where Stoke Citys 3.5 million (the highest for an English club) was considerably
lower than the sums received by the Champions League entrants: Chelsea 60 million, Manchester
United 35 million, Arsenal 28 million and Manchester City 27 million.
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This is the great dilemma for clubs like Manchester City. For their commercial strategy to work,
they absolutely have to be playing in the Champions League, but the expenditure required to get
there places them at great risk of failing UEFAs regulations. Its a vicious circle, made worse by
the possibility of exclusion from Europes flagship tournament, which would then make it even
more difficult to meet the FFP target, as the club would lose at least 25 million revenue.
In terms of match day revenue, here are a number of ways of increasing revenue, the best of which
is to be successful, which should result in more games played, due to cup runs, Champions League,
etc. A somewhat less palatable tool has been for clubs to raise ticket prices, though the current
economic climate means that this has slowed right down this season with prices frozen at Arsenal,
Chelsea, Liverpool and Manchester United. Championship side Derby County has even introduced
demand based pricing services for single match tickets for the 2012/13 season.
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Of course, a real quantum leap in match day revenue can only be achieved via stadium expansion
or building a new stadium. This can be very clearly seen with Arsenals revenue rising by nearly 50
million a season since they moved from Highbury to the Emirates. Its not just the higher capacity,
but also many more premium customers and indeed higher prices. The Glazers willingness to raise
ticket prices plus the completion of the upper quadrants at Old Trafford (and, yes, more of the
prawn sandwich brigade) has also helped Manchester United to substantially increase their match
day revenue to well over 100 million.
This has resulted in United and Arsenal both earning much more than their peers per game: 3.7
million and 3.3 million compared to Chelsea 2.5 million, Tottenham 1.6 million and Liverpool
1.5 million. This explains why all of those clubs have been looking at stadium moves for some
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time, though their struggles have highlighted how difficult this is. On the bright side, if they found
the right site, any costs associated with a move could be excluded for FFP though there would
then be the small matter of actually finding the money to finance the project.
Another interesting factor here is that the FFP regulations explicitly include membership feeswithin relevant income, which is a major benefit to clubs like Barcelona and Real Madrid, who take
in around 20 million a year from their members. Arguably, this is a form of capital injection from
the clubs owners, so should not be treated as relevant revenue, but UEFA have decided that this is
different from one large payment from a wealthy owner.
Traditionally English clubs have not focused much on the commercial side of operations, as they
have been able to sit back and rely on the TV money, but that has been changing. Many have made
great strides recently, most notably Manchester United who have broken the 100 million barrier,
but they are still left in the shade by their continental peers, especially Bayern Munich 161
million, Real Madrid 156 million and Barcelona 141 million.
Nevertheless, there has been a significant increase in the value of shirt sponsorship deals in Englandwith Liverpool and Manchester City both going from 7.5 million deals to 20 million with Standard
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Chartered and Etihad respectively. Tottenham have introduced an innovative split of their shirt
sponsorship between software company Autonomy (now Aurasma, one of their products) for the
Premier League and asset management group Investec for all cup competitions worth a total of
12.5 million, much better than the previous 8.5 million deal with Mansion.
However, United are still undoubtedly the daddy when it comes to sponsorship deals. They
switched to Aon from AIG in 2010/11, increasing the annual value from 14 million to 20 million,
but have recently announced a truly spectacular deal with Chevrolet. Not only will this rise to an
astonishing 45 million ($70 million) in 2014/15, but the sponsor will also actually pay them 11
million in each of the previous two seasons while Aon are still the sponsors. Amazing stuff, butthis is the club that has racked up numerous secondary sponsors and persuaded DHL to pay 10
million a season to sponsor their training kit.
Even the noble Barcelona have been forced to take shirt sponsorship, switching from the unpaid
UNICEF to a very lucrative 24 million a year with the Qatar Foundation. Other clubs have also been
keen to get in on the act with Newcastles 10 million Virgin Money deal being 7.5 million higher
than Northern Rock and Sunderlands barely credible 20 million Invest in Africa deal being just the
19 million more than the previous Tombola deal.
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All of this is leaving Arsenal way behind the rest with a measly 5.5 million Emirates deal, a legacy
of a deal that helped finance the stadium construction. There will no doubt be a major increase in
2014 when the deal runs out, but you cant help thinking that the clubs commercial team should
have done more, especially when you compare their tiny revenue growth to Uniteds.
"John W Henry - FFP's No. 1 fan?"
Similarly, clubs have done well in improving their kit supplier deals, e.g. Liverpools 25 million kit
deal with Warrior is more than twice the amount received from Adidas and is about the same level
as Manchester United, Real Madrid and Barcelona. United themselves are in discussions to extend
their deal with Nike, looking for an increase of at least 10 million a season.
Merchandising, retail, hospitality and overseas tours can all swell the coffers, but the Holy Grail for
football clubs is stadium naming rights. The only club that has (reportedly) inked such a deal for ameaningful sum is Manchester City, as an element of their long-term Etihad sponsorship, while
clubs like Chelsea have to date failed to secure a deal, despite many years of searching.
Many have expressed scepticism over Citys Etihad deal, including Liverpools owner John W Henry,
who asked, How much was the losing bid? and Arsenal manager Arsene Wenger, If FFP is to have
a chance, the sponsorship has to be at the market price. It cannot be doubled, tripled or
quadrupled, because that means it is better we dont do it and leave everybody free.
UEFA tackle such deals by assessing whether they represent fair value and then deducting any
excess (not the entire agreement) from the clubs income for the purposes of the FFP break-even
calculation. Given the rate of change of such sponsorship deals, my view is that they are unlikely to
exclude this deal.
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"Arsene Wenger makes his point"
If they do, the lawyers will be out in force, asking UEFA to also look at other clubs, such as
Chelseas sponsorship deal with Russian energy company Gazprom, who bought Roman
Abramovichs stake in Sibneft in 2005. Questions could even be asked of squeaky-clean BayernMunich, where two of the most prominent sponsors, Adidas and Audi, each own around 10% of the
club.
Clearly, any egregious attempts to get round the regulations, such as an owner buying 200 million
of replica shirts or paying 50 million for a super-VIP executive box, will be thrown out, but, as we
have seen, there is still scope for some serious revenue improvement in commercial operations.
There have been some interesting developments that clubs may use to boost revenue, such as RealMadrids $1 billion resort island in the United Arab Emirates and Trabzonspors plan to build a
hydroelectric power station. On the face of it, any revenue from such activities would have to be
excluded from FFP, as it is clearly and exclusively not related to the activities, locations or brand
of the football club. However, the same clause does confusingly allow the inclusion of revenue
from non-football operations if those operations are clearly using the name/brand of a club as
part of their operations with no reference to location. Another one for the lawyers.
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UEFAs hope, of course, was that FFP would act as a soft wage cap, though there has been little
sign of this up to now at the leading English clubs, especially Manchester City where wages have
surged from 36 million to 174 million in just four years, resulting in a wages to turnover ratio of
114%. As well as recruiting new players, the wage bill is under pressure from better deals for
current players (to avoid sales on a Bosman) and bonus payments (which can sometimes end up
costing more than the additional revenue from success on the pitch).
Some clubs have spent a lot of time trying to reduce their wage bill by offloading deadwood, butthis is easier said than done, given the high wages they tend to be on, leading to cut-price sales or
elaborate loan deals where much of the wages are subsidised (raising more questions in terms of
FFP).
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Although English clubs have high wage bills, they are not actually the highest in Europe, an
honour that belongs to Barcelona and Real Madrid. A root cause of the Italian clubs problems
with FFP can be seen with the bloated wage bills at Milan and Inter, hence the release of so many
experienced (expensive) players in the last two seasons. However, it is difficult to compare across
countries because of differing tax rates, which mean that clubs in England and Italy have to pay
higher gross salaries for their players to receive the same net salary.
Given the prevalence of third party ownership in many countries, there is a risk that a clubs
overall wage bill could be massaged by a sponsor paying part of a players package. This is
addressed in the FFP guidelines, but it might not be totally straightforward for UEFA to identify any
such arrangements.
The impact of transfer fees on a clubs accounts is not easy to understand for many non-accountants, as the full expense is not booked immediately, but instead is written-down
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(amortised) evenly over the length of the players contract. The reasoning is that the player is an
asset, but could potentially leave for nothing at the end of his contract on a Bosman, when the
value would be zero. So, if a club like Chelsea signs a 40 million player on a four-year contract,
the annual amortisation is 10 million, i.e. 40 million divided by four years. Incidentally, the
accounting treatment is the same regardless of when the cash payment is made (all up front or in
stages).
In this way, a clubs accounts will not show the full extent of major transfer activity immediately,
though it will be reflected in growing player amortisation. This can be seen very clearly with
Chelsea, where amortisation rocketed from 21 million to a peak of 83 million after Abramovichs
initial burst of expenditure, but then fell to 40 million after the taps were closed. Manchester
Citys 2010/11 amortisation was 84 million, but they would hope that this would fall after their
recent parsimony.
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It stands to reason that wealthier clubs can reduce their annual amortisation by signing players on
longer contracts, but this can also be achieved by extending player contracts. For example, if our
40 million player were to extend his contract after the first two years of his initial four-year
contract by a further two years, the remaining 20 million valuation in the books would then be
amortised by the new four years remaining (original two plus extended two), leading to annualamortisation falling from 10 million to 5 million.
The impact of third party ownership should not be underestimated here, as it enables clubs in many
countries, notably Portugal and Spain, to acquire players at a fraction of their total cost. This
places Premier League (andLigue 1) clubs at a disadvantage, as they have outlawed this practice, so
they have lobbied UEFA to adjust the FFP rules to take this into consideration. Apparently, they
have agreed, but it is not clear how this will work in practice.
Returning to the intricacies of player trading, it is also important to note how clubs report profit onplayer sales, which is essentially sales proceeds less any remaining value in the accounts. This
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means that a club can potentially book an accounting profit on sale even when the cash value of
the sale is less than the original price paid, e.g. if our 40 million player is sold after three years
for 15 million, then the cash loss would be 25 million, but the accounting profit would be 5
million, as the club has already booked 30 million of amortisation.
Up to now, this has surely only interested accountants, but its become very relevant for FFP.
Furthermore, any players developed through a clubs academy have zero value in the accounts, so
any sales proceeds represent pure profit.
There are other angles addressed by the new regulations. For example, many clubs these days have
an intricate inter-company structure and there were fears that a club might argue that the football
club itself was profitable, while large expenses such as interest payments were paid out of a
different company. Clearly, that does not make sense to any reasonable man and UEFA have caught
that one, If the licence applicant is controlled by a parent or has control of any subsidiary, then
consolidated financial statements must be prepared and submitted to the licensor as if the entities
were a single company.
"Our finances are special"
On the other hand, the exclusion of non-football operations might benefit clubs like Barcelona, as
they would presumably deduct the losses made on other sports, such as basketball, handball and
hockey, which amounted to around 40 million in 2010/11.
Clearly, the introduction of FFP will not be without difficulties with Platini himself admitting, It is
not easy, because we have different financial system in England, France and Germany. Just one
example is the 167 million paid by the Premier League in parachute payments, solidarity payments
and football development, which might be treated as 8 million of (allowable) charitable
deductions for each club if they were not top-sliced from central payments.
Although the FFP regulations explicitly state that adverse movements in exchange rates will be
taken into account, it is not explained how this will work. This is important for English clubs, as the
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weakening of the Euro means that any Sterling losses will be higher in Euro terms than when the
rules were first drafted.
While the majority of clubs are in favour of FFPs attempts to tackle footballs economic woes,
there is a concern that far from making football fairer, all this initiative will achieve is to make
permanent the domination of the existing big clubs: survival of the fattest, if you will. The
argument goes that those clubs that already enjoy large revenue (like Real Madrid, Barcelona,
Manchester United and Bayern Munich) will continue to flourish, while any challengers will no
longer be able to spend big in a bid to catch up.
In almost any business, you have to invest before the revenues start flowing and in football this
means brining in new players and paying high wages in a bid to reach the lucrative Champions
League. Critics have asked whether there really is any difference between contributions from
wealthy owners and corporate sponsors. This is one of the reasons why the Premier League has
reservations with chief executive Richard Scudamore saying that he was opposed to any limits being
set on the ability of owners such as Sheikh Mansour to invest money in their clubs.
In any case, UEFA have now announced a sliding scale of sanctions for clubs that breach FFP rules,
which works like this: a warning, fine, points deduction, withholding of prize money, preventing
clubs from registering players for UEFA competitions and ultimately a ban. This implies that a ban
is the last resort, but UEFA has recently banned two Turkish clubs, Bursaspor and Besiktas
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(suspended), AEK Athens and the Hungarian club Gyori for FFP breaches. These decisions were
backed by the Court of Arbitration for Sport (CAS).
"Qu'est-ce que c'est, ce FFP?"
UEFA were also given some comfort by the European Commissions confirmation that there is
consistency between FFP and EU State Aid policy, though this has not been fully tested in the
courts. There is still plenty of scope for a powerful club to pursue a competition law case, if it was
banned
Some have questioned whether the regulators will have the bite to go with their bark. Expelling
teams from the Champions League works fine on paper, but would UEFA really risk damaging their
main cash cow? If, for example, they banned Manchester City, Milan, Inter, PSG and Juventus, they
would risk killing the goose that lays their golden egg and increase the prospects of a European
Super League.
Indeed, key proponents of FFP have expressed doubts over UEFAs willingness to act, such as John
W Henry, The question remains as to how serious UEFA is regarding this. It appears that there are
a couple of large English clubs that are sending a strong message that they arent taking them
seriously. Even Arsene Wenger admitted, UEFA want to create a situation where clubs with
deficits cannot play in the Champions League, but I question whether they will be able to force itthrough.
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"Hulk hears of an incredible deal"
That said, UEFAs credibility would be severely compromised if a major club that was in breach of
the rules was not effectively punished. Listening to public pronouncements, they have consistently
said that this will not be the case. Only last week, Platini was unequivocal, We are never goingback on Financial Fair Play. I want the clubs to spend the money they have, not the money they
dont have. We will be enforcing these rules.
Its certainly an interesting challenge for UEFA, not least with the arrival on the scene of big-
spending Paris Saint-Germain and Zenit St Petersburg (who this week splashed 64 million on the
Brazilian striker Hulk and the Belgian midfielder Axel Witsel), but, as we have seen, they have
cleverly built a fair bit of leeway into their regulations (and sanctions), so the vast majority of
clubs should be just fine with FFP, particularly those in England.
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