The Swiss Ramble

Sheffield United - Blades Rediscovering Their Edge?

2012-02-03T09:38:00.021+01:00

Sheffield United have made a promising start to life in League One, as they seek to gain promotion back to the Championship at the first attempt. Although many Blades fans were against the appointment of Danny Wilson as manager, because he previously held a similar role at bitter local rivals Sheffield Wednesday, his experience has helped guide United into the play-off places.

Although the nucleus of last season’s squad has been retained, some key players were sold in the summer, with the likes of Jamie Ward, Mark Yeates and Darius Henderson opting to remain at the higher level. However, others have come to the fore with goals being provided by Welsh international Ched Evans, ably supported by the veteran striker Richard Cresswell and Chris Porter, a new signing from Derby County. The defence has also looked more solid, as Neill Collins has formed an effective partnership with academy graduate Harry Maguire.

Nevertheless, nobody is taking promotion for granted at Bramall Lane, as the club has become accustomed to disappointment over the last few seasons, starting with their relegation from the Premier League after just one season in 2006/07. This came about in controversial circumstances, as West Ham narrowly evaded the drop, even though the East London club breached league rules relating to third party agreements with the signing of influential forward Carlos Tévez.

"Right Said Ched"

Having narrowly missed out on promotion in 2008/09, when they lost the Championship play-off final 1-0 to Burnley, things went from bad to worse, when they were relegated last season to English football’s third tier for the first time since 1988.

At various times, Kevin McCabe, the chairman of Sheffield United PLC, has attributed the club’s decline to ill fortune, complaining that “fate was against us” last season and previously wondering why the “rub of the green” eluded them. Although Napoleon once commented that he would prefer lucky generals to good ones, others might describe Sheffield United’s decline as a textbook example of a failed strategy. Indeed, McCabe himself was moved to personally “apologise to all shareholders and supporters” in the most recent annual report.

There were two elements to McCabe’s grand vision: (a) an ambitious plan to turn Sheffield United into a global force that could be variously described as innovative, unorthodox or plain foolhardy; (b) diversification off the pitch into a number of non-related football activities, such as property development, a new hotel, conferences and events and a health club.

"We need to talk about Kevin"

The first step towards worldwide domination was the appointment of former England captain Bryan Robson as manager in the vitally important first season after relegation to the Championship. Although “Robbo” possessed the requisite high-profile name, his managerial skills were less evident and his brief reign was an unmitigated disaster, as he wasted the club’s best opportunity to bounce straight back, despite the boost of substantial Premier League parachute payments.

Further evidence of the club’s imaginative approach came with the creation of an international network of overseas clubs that, according to McCabe, would “be commercially profitable as well as nurturing the best academies in those countries.” The joint development of young players was known as the “Blades Way”, featuring feeder clubs in China (Chengdu Blades), Hungary (the famous Ferencvaros) and Australia (Central Coast Mariners), as well as partnerships with clubs in Belgium, Brazil, India, the Ivory Coast and the Caribbean. However, it is highly debatable whether this substantial focus on overseas expansion has produced the desired results.

Of course, it may have worked out better if the team hadn’t suffered the ignominy of relegation, though this was exacerbated by a string of mistakes made in the aftermath, when the club speculated in a forlorn attempt to try to get back to the top flight. As the 2008 annual report explained, “The board made a strategic decision to maintain both the level of investment and the salary level the club had supported in the Premier League to underpin its key business objective of promotion.”

"Meet Danny Wilson"

Following the recruitment of expensive players like James Beattie, Gary Naysmith and Lee Hendrie, Sheffield United were saddled with one of the highest wage bills in the Championship, one that the board admitted was “far in excess of the revenues generated by the club.” They also lavished considerable sums on a vast array of short-term contract and loan players, resulting in a huge turnover in the squad.

This was also partially as a result of numerous changes in manager, each of whom wished to sign players conducive to a different playing style. In fact, when Danny Wilson was appointed, he became the club’s fourth (permanent) manager in a crazy ten months. The inexperienced Gary Speed replaced Kevin Blackwell in August 2010, before leaving to take charge of the Welsh national team in December that year, when he was succeeded by Micky Adams.

In short, too much money was squandered on wages, loans and the managerial merry-go-round. McCabe commented, “We’ve speculated to get promotion – we’ve not succeeded.” Former chief executive, Trevor Birch, agreed, “The club has to hold its hands up and acknowledge that we got it wrong.”

"The mighty Quinn"

The other aspect of Sheffield United’s unique business model (for a football club) was the attempt to build the business through diversification. This was explained thus: “The target of our business divisions off the pitch is to generate revenue and profits to fund first team and youth development football.” The aim was to “broaden income streams and reduce risk.” That sounds mighty impressive, but the only problem was that it didn’t deliver the hoped for results.

In fairness, this is partly down to bad timing, as this strategy coincided with one of the worst economic recessions for many a year with “unprecedented turmoil in the banking and property markets.” As just one example, the impressive Copthorne hotel that was opened in January 2009 was impacted by a dramatic fall in occupancy rates in Sheffield hotels.

Although the 2011 annual report noted an improvement of £5.2 million in the bottom line, this only represented a reduction in the annual loss before tax from £18.8 million to £13.6 million. In other words, Sheffield United have lost an astonishing £32 million over the last two seasons. As the current chief executive, Julian Winter, somewhat unnecessarily stated, the club’s approach “has not worked” resulting in “significant annual losses.”

Some might point to the hefty £10 million impairment charge in 2010, but on the other hand that year also included a sizeable £10.6 million profit on player sales, mainly arising from the sales of Kyle Walker and Kyle Naughton to Tottenham plus Matthew Kilgallon to Sunderland.

Even the £5.8 million profit reported in 2009 is not all it seems, as this includes the net £18.1 million settlement from West Ham for the Tévez affair. If this exceptional item were excluded, the club would have made a £12 million loss that year, which would have meant aggregate losses of around £50 million in the past four seasons. Former chief executive, Trevor Birch pulled no punches when describing this sorry state of affairs, “Since we have been relegated, we have made losses which are unsustainable going forward.”

The only season when a genuine profit was made was unsurprisingly 2006/07, when the club was playing in the Premier League, and even that was only £0.4 million. Following relegation, the chief executive at the time, Jason Rockett, stated, “the Sheffield United business plan is not reliant on Premier League football.” At the risk of sounding like a pantomime audience, “Oh yes it is.” In fact, a few years later, McCabe confirmed this, when he said that the model now in place needed the club to be a Premier League force.

Of course, few clubs actually do make money in the very demanding world of football. Of the 24 clubs that competed in the Championship in 2010/11, only four actually reported profits (Burnley, Leeds United, Reading and Swansea City). That said, Sheffield United’s loss of £18.8 million was by some distance the worst in the division, so they cannot draw too much comfort even from that comparison.

Sheffield United is a fairly complex business to analyse by the standards of football clubs with the profit and loss statement complicated by: (a) numerous exceptional items; (b) continuing operations, discontinued operations and joint ventures; (c) non-football activities. I have tried to present this in a clear format, but however the figures are displayed, these factors still have an impact.

In this way, the 2011 results were boosted by £2.2 million profit on the sale of the hotel, though this was offset by a £0.9 million loss on the sale of assets, plus £1.3 million grant income (included in Other Operating Income) that was released following the disposal of the Blades Enterprise Centre. Without the net £2.6 million gain from these events, the total loss would have been even higher at £16.2 million.

As stated earlier, the diversification into non-football activities has not been a financial success. Since 2006, this decision has adversely impacted the financials, increasing the magnitude of Sheffield United’s losses, especially in 2010, when £13.1 million of the total £18.8 million loss came from these divisions, leaving the football club (UK) loss at “only” £5.7 million. On the other hand, the impact was considerably smaller in 2011 at only £0.6 million with football contributing almost all of the £13.6 million total loss.

This was partly due to the directors deciding to sell or dispose of these loss-making businesses. In the last couple of years, they have sold the Copthorne hotel and the Blades Enterprise Centre, though have retained options to repurchase as and when finances allow, and also disposed of their interest in Chengdu Blades. Following the downturn in commercial property, they sold their 50% interest in Blades Realty Limited, while they also sold the Thames Club and entered into an outsourcing arrangement with Compass for their conferences and events business.

Even where these divisions made operating profits, they were eaten up by high interest charges and the need to make provisions to cover lower asset values, hence the board’s decision to adopt a different approach. McCabe said that the board had “used these difficult experiences to reassess the whole way the Blades are run.” These disposals are part of that process, as they have helped reduce debt, so that the club will benefit from lower finance costs in the future (net interest payable has averaged £3.4 million over the last four years).

However, it is important to understand that even after the club has finished cleaning house the picture is still bleak. The underlying business model for the “pure” football club is broken and is only sustainable through the financial support of McCabe and his companies.

If we take 2011 as an example, the football club made a loss of £13 million on turnover of £13.4 million. Put another way, for every Pound of revenue that the club generates, it pays out two Pounds in expenses. OK, at least £4 million of that loss relates to non-cash items, such as player amortisation and depreciation, but remember that these accounts relate to last season, which was in the Championship, and revenue will be a fair bit lower in League One.

Actually, Sheffield United’s revenue has not been too shabby. At £20.5 million, it was the eighth highest of the 24 teams that competed in the Championship in 2010/11 (using 2009/10 accounts, as figures are not available for all clubs for the latest season). That’s pretty good, but is effectively even better than it appears, as revenue for six of the clubs above them was boosted by the Premier League: Portsmouth, Hull City and Burnley all played in the top flight that season, while Middlesbrough, Reading and Derby County all received £12 million parachute payments.

Excluding these factors, the Blades had the fourth highest revenue in the division, though a good chunk of that (£5.9 million) came from non-football activities. Even if that is ignored, Sheffield United’s football revenue of £14.7 million was more than acceptable in the Championship. To place that into context, it was higher than two of the three teams promoted to the Premier League in 2010/11, namely QPR and Swansea City, and only just below the third team, Norwich City.

However, revenue has plummeted by nearly 60% (£23 million) since they were in the Premier League, falling from £39 million to £16 million. The decline has come in three distinct stages: (a) the initial £7 million impact of relegation from the Premier League in 2007/08; (b) a further £12 million in 2009/10 after the parachute payments stopped; (c) £4 million in 2010/11 due to disposal of non-football businesses, mainly the hotel £1.4 million and Chengdu Blades £1.2 million.

The football business also suffered last season with gate receipts dropping £0.7 million and commercial income deteriorating by £1 million, only offset by a £0.4 million net improvement in TV money. However, even though all revenue streams have taken a hit following relegation, it is undoubtedly television that has contributed the most to the lower revenue, falling by £15.2 million from £20 million in 2006/07 to £4.8 million last season.

The influence of television on a football club’s finances is undeniable and Sheffield United are no exception. Relegation from the Premier League lead to an immediate £6 million decrease, even though the fall was cushioned by annual parachute payments of £12 million for the next two seasons. However, when these stopped in 2009/10, the club’s finances were dramatically affected.

The impact would have been even worse if the Football League distribution to all Championship clubs had not increased from £1 million to £2.5 million that season. The remaining money came from a £1.3 million solidarity payment from the Premier League plus facility fees payable each time the club was televised live. Last season’s rise was largely due to the solidarity payment being increased to £2.2 million, though this was mitigated by less money from the cup competitions.

Sheffield United will receive even less TV money this season in League One, as the central distribution and the solidarity payment are much smaller in that division, being £656,000 and £335,000 respectively, so the total earned will be only just over £1 million.

"Neill Collins - See Those Eyes"

Although there is never a good time for a football club to be relegated, it is fair to say that Sheffield United’s timing was particularly unfortunate, as they missed out on the significant growth in TV deals, e.g. West Ham received £40 million for finishing bottom of the Premier League last season compared to the Blades’ £18 million in 2007. Similarly, while their relegation was eased by £24 million of parachute payments, West Ham will receive £48 million (£16 million in each of the first two years, and £8 million in each of years three and four).

The other cloud on the horizon is the new Football League three-year Sky TV deal that kicks off in the 2012/13 season, which will be £69 million lower than the current contract at £195 million, a reduction of 26% or £23 million a season. This reflected what Football League chairman Greg Clarke called, “a challenging climate in which to negotiate television rights.” Whatever the reason, it will mean a reduction in the payments distributed to each club.

There are two ways of looking at the attendance figures at Bramall Lane. On the one hand, last season’s average of 20,632 was the eighth best in the Championship (and the 27th highest of all English clubs). On the other hand, they have been steadily falling since the peak of 30,684 in the Premier League and this season’s average to date has further shrunk to 18,373, though this is still the second best in League One, only behind neighbours Sheffield Wednesday (20,360), which highlights the commitment of the fan base. Incidentally, when they played in the top flight, the Blades had the 11th highest attendance, which is a sign of the club’s potential.

The other interesting point here is that the club’s gate receipts are low relative to the size of the crowds, as evidenced by looking at the money generated by the clubs with the ten largest attendances in the Championship in 2009/10. This shows that Sheffield United’s gate receipts of £4.9 million that season were the lowest of those ten clubs, even though their crowds were the third highest. The money further reduced to £4.2 million last season, meaning that this revenue stream had fallen 45% from the £7.6 million earned in the Premier League.

The income is partly dependent on progress in the cup competitions, so the comparatively high £6.9 million received in 2008/09 was helped by the run to the play-off final.

The club has introduced some worthy initiatives to “make attendance affordable”, such as cutting season ticket prices. A couple of years ago McCabe noted, “We’re going into a recession, and if we have to adjust our prices to keep our lifeblood here, we will.” Indeed, a recent BBC survey suggested that Sheffield United provided the fifth cheapest day out at a League One club (taking into consideration ticket, programme, pie and tea) with only Rochdale, Preston, Walsall and MK Dons costing less.

Bramall Lane is described as the world’s oldest major football stadium, having staged its first game in 1862. Obviously, it has been extensively modernised since then, though the England 2018 World Cup committee still favoured Hillsborough, home of Wednesday, as the Sheffield stadium for the unsuccessful bid. Planning consent is in place to increase the capacity from its current 32,609 to 40,000, though this has been put on hold until the club regains (and maintains) its Premier League status.

Commercial income has mirrored the performance at the gate, falling by 46% from £8.2 million in the Premier League to £4.4 million last season. Sponsorship deals are (understandably) lower in the less prestigious division, as the 2008 annual report explicitly noted, “much of this reduction was directly linked to contractual reductions arising from relegation.”

Merchandising revenue was also adversely affected by the economy with customers having less disposable income. In addition, Sheffield United had to make stock clearances, which reduced the gross retail margin from 46% in 2009 to just 2% in 2011.

"Don't sit down 'cause I've moved your hair"

The Blades have been quite innovative in their sponsorship arrangements. Their previous shirt sponsor, the Maltese Tourism Authority, was the first time a government had supported a major UK football club. Their current shirt sponsors are shared with Sheffield Wednesday with Westfield Health on the home shirts and Gilder Motor Group on the away shirts (it’s the other way round for Wednesday), as these local companies did not want to sponsor only one club for fear of appearing partisan.

United also have a deal with Nexis Holdings that will see the club receive company shares in return for its logo appearing on the back of the home shirts. It is not clear how much this deal might be worth, though Nexis has itself announced that it has suffered a “most difficult year.” Nor do we know how much Macron pay for the kit supplier deal, though this has been reported as a “seven-figure” deal.

On the cost side, the Blades’ wage bill has been one of the highest in the Championship, e.g. in 2009/10 it was the sixth largest at £19.4 million. As the 2009 annual report put it, “Make no bones, the budget Sheffield United FC has is well in excess of the majority of our competitors in the Championship.” Indeed, McCabe admitted, “Our wage bill is two to three million higher than we wish it to be.”

Last year, chief executive Julian Winter outlined he problem, “Strong support from the parent company meant United long maintained a wage bill far in excess of the revenues generated.” Although wages have been cut by £7.2 million (28%) from the £25 million peak in 2007/08 to £17.8 million, in the same period revenue has halved from £32.4 million to £16.2 million, so the wages to turnover ratio has risen (deteriorated) from 77% to a deeply worrying 110%. To place that into context, the ratio at big spending Manchester City is only slightly higher at 114%.

Of course, these are the wages (and turnover) for all divisions, but we can be reasonably sure that football accounts for the lion’s share, as a player’s wages will be substantially higher than, say, a hotel employee.

In any case, the club is painfully aware of this issue with the latest annual report stating, “We seek to drive down the player wage bill.” It goes on to explain why this is the case, “The club is no longer in a position to fund above average wages as done so in previous years.” That is one of the reasons why (relatively) high earners, such as Henderson, Yeates, Rob Kozluk and Ryan France were offloaded in the summer.

Directors’ remuneration increased from £0.6 million in 2010 to £1.1 million, though this was almost entirely due to redundancy payments of £0.5 million. In this way, the highest paid director earned £745,000 last season, though this was only £233,000 the previous year. As is the norm, the accounts do not identify who this is, but the obvious candidate is Trevor Birch, given that he resigned in May 2011.

There has been a fair bit of upheaval at the executive level in recent years with Chris Steer replacing McCabe as chairman of the football club, though the latter stays on as chairman of the PLC. The company also de-listed from AIM in January 2009 after 12 years on the stock market, due to the financial and administrative burdens.

It is instructive to look at Sheffield United’s transfer dealings over the last decade, as they form an almost perfect “game of two halves” with the club being a net purchaser (£20 million) in the five years up to season 2006/07, but a net seller (£23 million) since relegation. In fairness, the Blades have never been particularly big spenders with their transfer record being the £4 million they paid to Everton in August 2007 to secure the services of James Beattie.

The last season of major expenditure was 2006/07 when a total of £16 million was splashed out on the likes of Matthew Kilgallon, Claude Davis, Rob Hulse, Luton Shelton and Colin Kazim-Richards. There have been isolated instances of relatively high investment, e.g. Ched Evans was the most expensive acquisition in the Championship in 2009/10 at £3 million. However, the last two seasons have seen the club “strengthening” the first team almost exclusively with free transfers. In that time, they have only paid (small) fees for a couple of players: Neill Collins and Ryan Flynn.

Instead, they have opted to “throw money at too many loan players”, as McCabe said in the annual report, concluding that this approach “does not work for Sheffield United.” The chief executive concurred, “One of the lessons to be learnt from relegation is that reliance on such a high number of loan players is flawed.” In 2009/10 the club had an incredible 13 players on loan, but this was more than matched in 2010/11, when the “loan stars” included the varied talents of Marcus Bent, Andy Reid and Nyron Nosworthy amongst many others.

Net debt was cut from £57 million to £32 million in 2011 as a consequence of two steps: (a) a re-financing exercise in November 2010; (b) conversion of £17.2 million of loan notes into equity. This is obviously good news, but the fact remains that the debt is still approximately twice annual turnover, which is far from comfortable.

The re-financing resulted in the settlement of all outstanding HBOS debt through the raising of a £15.5 million loan from Santander, secured on the future receipts from West Ham in respect of the Tévez case. It is planned to repay this debt as the money is received over the next three years. In addition, the hotel assets were sold to Scarborough Partnership Limited (a McCabe company), which assumed responsibility for the remaining hotel debt.

This is important, as it has strengthened the balance sheet, though it should be noted that the financing required for property ventures was one of the reasons for the rising debt over the past few years.

"Cresswell - tricky Ricky"

Much of the debt can be described as “soft” debt, given that it is owed to McCabe’s companies. Although this is preferable to external bank debt, it would be a mistake to believe that this is problem-free, as it is not clear what would happen if his companies got into financial difficulties or if McCabe were to walk away, as has happened with benefactors at other clubs. This may be considered unlikely, because he is clearly a Sheffield United fan, but you never know.

In passing, we should note that the club also owes £0.4 million for deferred player signing-on fees plus a potential £2.1 million in transfer fees that depends on factors like number of appearances (though the accounts state that this “is not expected to be payable”).

The balance sheet now shows net assets of £6.1 million, up from £2.5 million the previous year, mainly due to £25 million of tangible fixed assets, very largely the stadium and the training ground. In addition, the players are only valued at £2.1 million in the accounts, including nothing for those developed in the Academy, while their market value in the real world is much higher - £15 million according to the respected Transfermarkt website.

"Chris Morgan - Rage Hard"

However, there are net current liabilities of £3.4 million, which is cause for some anxiety. Indeed, the accounts feel the need to mention that the McCabe family has committed sufficient working capital “to ensure that the funding of the club for the 2011/12 season is assured.” The business review explains that the company can continue as a going concern, but this assumes “that the group is able to continue raising further financing facilities, reduce costs, sourcing additional equity investment or selling assets to generate cash”, though the directors “are confident that such funds can be raised.”

That’s not exactly comforting to the club’s supporters, but it’s nothing new under the sun at Sheffield United. The cash flow statement shows that the club is cash negative before financing, though this has come down to less than £2 million in 2011 after substantial deficits in previous years. These losses have only been funded by taking on new loans, the sale of assets and the issue of share capital (either through a share offer in 2006 or the acquisition of a subsidiary in 2007).

McCabe has provided Sheffield United with plenty of financial support, examples including a £10 million loan in 2007 so that key projects could continue to be funded in spite of relegation and, of course, the recent conversion of a £17 million loan into equity. In total, he has probably ploughed more than £50 million into the club via share issues and loans.

However, there have been concerns that in some way his companies have benefited from the various transactions made with the club. For example, the loans made to the club have been at a relatively high rate of interest (e.g. 10%, 8%, LIBOR + 4%), producing £4.3 million of interest payments to related parties in the last four years. In addition, some asset sales to his companies have either been at a loss, e.g. £1.4 million loss on disposal of the Blades Enterprise Centre to Scarborough Enterprise Centre Limited, or at a low market value, e.g. the hotel to Scarborough Partnership Ltd.

"Tonight, Matthew, I'm going to be..."

There is little doubt that he has made mistakes, but these have also hurt him financially. If the economy had not tanked, then his strategy might just have worked, but the fact is that it did not, which has cost both him and the club.

The question is whether he will continue to support Sheffield United financially going forward. He has already relinquished the role of chairman of the football club, but he claimed that was due to being based in Brussels rather than the poor financial results, and he obviously maintains an interest as an owner. The indications are that he will not want to put in as much money as in the past. A couple of years ago, Trevor Birch said, “McCabe has funded those (high) costs and he is now saying ‘enough is enough’. The club has to stand on its own two feet.”

Reading between the lines, it looks like McCabe would make an exit if possible. His property company has suffered in the recession, his grand plan for Sheffield United has failed and he risks becoming a hate figure unless performances on the pitch improve. However, finding new investment is easier said than done. The club appointed bankers to look at a possible sale back in May 2010 with the annual report that year mentioning discussions with two prospects, but no concrete offer has been received to date.

"It was this wide"

As a supporter McCabe is unlikely to consider external investment unless it is in Sheffield United’s long-term interests, which should re-assure any fans that were unsettled by the “Dispatches” television documentary that focused on mysterious Asian investors looking to make a quick buck from investing into English clubs and featured a visit to Bramall Lane.

The latest annual report says that “once the club has become self sufficient financially it will become a more attractive option” to potential investors, which is undoubtedly true, though this does rather beg the question: will they be able to become sustainable through football income alone, especially in League One?

What would be more appealing to investors, I would have thought, is the possibility of Sheffield United at some stage returning to the lucrative Premier League. This might seem like pie in the sky at the moment, but it is the club’s stated “medium term objective”, even though they admit that the introduction of higher, four-year parachute payments makes this task even more difficult. The size of the prize is, however, clear as seen by a comparison between revenues generated in the different leagues with Blackburn’s £58 million in the Premier League being substantially higher than Sheffield United’s (football) revenue of £13 million in the Championship.

Of course, it’s a long way back from the third tier, so the Blades have to (ahem) cut their cloth according to a far lower budget for the time being. As they stated in the annual report, “With the reality of life in League One and football’s new Financial Fair Play Regulations, it is essential for the long term health of Sheffield United that the club now becomes financially self sufficient.”

"Michael Doyle - when Irish eyes are smiling"

By the 2012/13 season, that division’s Salary Cost Management Protocol will not allow clubs to spend more than 55% of their turnover on player wages, which implies some serious cost cutting at Bramall Lane if they don’t manage to gain promotion.

Like many other clubs, they may have to place their trust in youth. Fortunately, they have an excellent Academy set-up, which is run by former defender John Pemberton, who succeeded the respected Ron Reid in 2010. Last season a talented young team reached the FA Youth Cup final, only succumbing to Manchester United. It may be too early for those players to make an impact in League One, but the club has a good record of progressing talent into its first team, most notably Harry Maguire. This was endorsed by McCabe, who said, “There will have to be changes in player personnel, young players will have to be given their opportunity at the right time.”

However, the price of success is that larger clubs will come sniffing around, leading to the departure of some good prospects. This was exactly what happened last summer with the sale of striker Jordan Slew to Blackburn Rovers for around £1 million. Danny Wilson conceded that the sale was drive by financial needs.

"Hurry up, Harry"

The club faces a difficult balancing act, as they struggle to improve their finances while targeting promotion. The task of eradicating their large losses will be made even more challenging with the lower revenue in League One, which will inevitably mean slashing the wage bill, probably by off-loading some of the higher earners, such as the prolific Ched Evans, as there are few non-football assets left to sell – unless McCabe arranges a sale and leaseback of the stadium. That will obviously make the manager’s job even harder, though it’s not impossible to achieve both objectives, as Southampton demonstrated last season.

We will have to wait until the end of the season to see whether Sheffield United take the first step back to the big time. There’s little doubt that they have the potential to reach the Premier League, as they play in one of England’s largest cities in a good stadium in front of good-sized crowds. However, they still have to produce the results on the pitch if they want to banish the Steel City blues.

Southampton - Saints Alive

2012-01-20T09:34:00.023+01:00

“Are we keeping up with you?” That was the chant aimed at Nigel Adkins by Brighton and Hove Albion fans after a particularly ill-advised comment made by the Southampton manager during last season’s League One promotion tussle. As it turned out, Southampton finished second to the Seagulls, but crucially achieved their primary objective of promotion to the Championship.

In truth, that has been one of the few mistakes made by Adkins, whose side currently sits proudly atop the Championship league table, threatening to emulate Norwich City’s feat of back-to-back promotions that propelled then from League One to the Premier League in two seasons.

Adkins’ managerial vision and ability to build a team was established at Scunthorpe United, where he moved up from the role of club physiotherapist to twice secure promotion to the Championship, an impressive achievement on a shoestring budget. After joining Southampton in September 2010, some feared that he would not repeat these accomplishments at a bigger club, but so far they have been disappointed, as the positive momentum has been maintained in the higher tier, largely with the same group of players that got them out of League One.

"Making plans for Nigel"

Not only do the Saints lead the Championship, but they are also the division’s highest scorers, mainly thanks to the experienced forward duo of Rickie Lambert (73 goals since being bought from Bristol Rovers in August 2009) and David Connolly. The midfield creativity is provided by England Under-21 international Adam Lallana, one of the top young prospects in the country, and the Brazilian Guly Do Prado, snapped up from Cesena in Serie A.

For the first time in a while the future looks bright at Southampton, following the acquisition of the club out of administration in July 2009 by Markus Liebherr, a wealthy German businessman based in Switzerland. The football club was days away from going out of business, as the bid from another consortium had collapsed, so it is no exaggeration to say that Liebherr rescued the club. His investment initially provided much needed stability off the pitch and then the funds to start rebuilding the playing squad. Although the new owner sadly passed away in August 2010, his legacy continues to fund Southampton’s recovery.

Before the arrival of the new ownership, it had largely been doom and gloom in recent years for Saints fans, starting with relegation from the Premier League in 2005. This came as a huge blow to a club that had graced the top flight for 27 straight years, finishing as high as eighth and reaching the FA Cup Final (where they lost to Arsenal) just two years earlier in 2003. Further back, they actually won the FA Cup in 1976 (when the competition still meant something), memorably defeating Manchester United 1-0 with a goal from Bobby Stokes.

"Markus Liebherr - international rescue"

Relegation was all the more painful, as the club was taken down by Harry Redknapp (belying his Houdini reputation), who had previously managed bitter rivals Portsmouth. Southampton failed to bounce back, though they came close in 2007, when George Burley’s team lost a dramatic penalty shoot-out to Derby County in the play-off semi-final.

This really stretched the club’s finances, as some players were retained on Premier League wages, and more money was spent in order to mount a further challenge for promotion to the Premier League, but the decline continued apace. After Burley left to become Scotland manager in January 2008, Nigel Pearson took the reins, but the team only avoided relegation on the final day of the season.

Due to the financial constraints, Pearson’s contract was not renewed, as the club went down the route of employing little-known, cheap Dutch managers, first Jan Poortvliet, then Mark Wotte. Although they produced some good football, the need to focus on young players led to inconsistency and the club’s problems were compounded by a further relegation to League One in 2009.

While the 2006 annual report drily noted, “the financial dynamics of today’s football industry mean that it is a priority to be a member of the Premiership”, former chairman Rupert Lowe was somewhat more pithy, describing relegation from the top tier as a “catastrophe”.

"Whoa, whoa, Guly"

From a financial perspective this was undoubtedly true, as the club had to confront a huge reduction in revenue, especially after the parachute payments ran out. This was exacerbated in Southampton’s case by the need to service the mountain of debt incurred as a result of building the new stadium at St Mary’s, which was a luxury they simply could not afford outside the Premier League, especially as crowds started to fall without the attraction of top flight football.

Southampton’s problem was that they continued to operate as a Premier League club without the money. If a relegated club adopts such a strategy, it is imperative that they return to the lucrative top tier within a short timescale or they will be in trouble financially (unless they have a benevolent benefactor) – and that’s exactly what happened to the Saints.

They have attempted to shore up the finances by selling players, but that sent them into a vicious circle, whereby they sold players to raise the funds needed outside the Premier League, but that reduced their chances of getting back to the Premier League, as they then had to rely on less talented players plus youngsters from their Academy. The club’s directors appreciated this dilemma, “player sales will undoubtedly diminish Southampton’s prospects of achieving promotion”, but they had few other options.

The player sales took a couple of distinct stages. Initially, many players left straight after relegation from the Premier League, including Peter Crouch, Antti Niemi, Kevin Phillips and Nigel Quashie.

"It's Hammond time"

Thereafter, top clubs continually plucked youngsters from the Academy, most notably Theo Walcott and Gareth Bale. Former chairman, Michael Wilde, explained, “It is not beyond the realms of possibility that at some stage in the future we will be required to dispose of some of our better young players in order for the club to satisfy its banking covenants.” These financial problems were emphasised when Southampton later gave up millions of fees contingent on future appearances of Walcott and Bale in return for early payment.

This was just one example of the financial incompetence that plagued the club, partly as a result of almost continual boardroom infighting. Much of the blame for this has been attributed to Rupert Lowe, who was chairman for 10 years before resigning in June 2006 “in the hope that it would bring unity” to the club.

The hockey loving Lowe cut a rather bizarre figure at the football club. On the plus side, he delivered a magnificent new stadium, but this over-extended the club and was at the price of investing in the playing squad, which was certainly a contributory factor to the disastrous relegation, hence many fans’ obvious dislike for him. Ironically, for a club that ended up in debt trouble, it may have made more sense to spend a little more on players to have a better chance of staying in the Premier League.

"Adam Lallana - eat to the beat"

The other charge against Lowe is that he meddled far too much in the club’s football management, making numerous changes during his tenure, including some truly inexplicable appointments. The idea of recruiting England’s World Cup winning rugby coach, Clive Woodward, as Technical Director, to join forces Harry Redknapp, the ultimate old school manager, was just one example of this idiosyncratic approach.

Lowe’s board of directors was replaced by the authors of the manifesto, “Saints: Planning for Success”, including the club’s largest shareholder, Mike Wilde, who became chairman of the football club, while Ken Dulieu was appointed chairman of the holding company. They were later joined by Leon Crouch, the second largest shareholder, who became acting chairman (yes, another one) for a few months in 2007.

Yet another twist in this tortured tale came in May 2008, when Lowe teamed up with his former foe, Wilde, and returned as chairman of the holding company. He blamed the previous board for the club’s financial woes, asserting that the large player sales were a sign of their mismanagement, though he neglected to mention the impact of the significant revenue reduction following relegation, which occurred on his watch.

"Kelvin Davis - twist and shout"

In fairness, he did have a point, as Southampton should have done much better, if you consider the financial advantages they enjoyed compared to other clubs in the Championship, such as large crowds, all that money from player sales and parachute payments.

Notwithstanding Lowe’s strident criticism of his predecessors and indeed the club’s Corporate Statement (“to establish and maintain Southampton football club as a financially robust business”), the new board fared no better and it was clear that the club was struggling.

This was echoed by the auditors, who in the last published accounts (2008) of the former holding company, Southampton Leisure Holdings Plc, warned of “a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern.” In particular, they noted that the company was “reliant on the continuing support of its bankers and loan note holders.”

"Put a Cork in it"

Despite the board “working tirelessly to bring our costs more into line with our dwindling revenues”, there was little doubt that additional investment was required. The finance director hit the nail on the head back in 2007, “Our financial position remains precarious and reliant on recapitalisation or promotion, or preferably both.”

There were expressions of interest from some investors, e.g. in April 2007 it was rumoured that Paul Allen, the American entrepreneur who formed Microsoft with Bill Gates, might launch a takeover bid, while an actual offer for 55% of the shares was received from hedge fund, SISU Capital, in October the same year, though that group subsequently acquired Coventry City. Given the Sky Blues’ travails, that might be considered a bullet missed.

The trigger for the club entering administration in April 2009 was Barclays’ decision to reduce its overdraft facility. For at least two years the bank had intimated that they would not passively sit by and watch the liquidity position deteriorate, but Lowe still attacked them for “sentencing the club to financial death.” However, given that this facility was reportedly cut by just £1 million (from £5 million to £4 million), that indicates just how delicate Southampton’s financial position was. Either way, Lowe admitted that administration was the best way to ensure the club’s survival, hoping that it would attract investment.

"Fonte of wisdom"

Lowe then resigned from the board for a second time with the club having debts of around £30 million. The majority of this was the £24 million owed to Aviva (formerly Norwich Union) for the construction of St Mary’s with most of the remainder being the Barclays’ overdraft. Wages were paid late for a couple of months, while the club relied on the support of its creditors and fans, whose Save Our Saints campaign raised £130,000.

Money was also raised via a fire sale of some players (Andrew Surman to Wolves for £1.2 million, David McGoldrick to Nottingham Forest for £1 million and Nathan Dyer to Swansea City for just £400,000). Inevitably, when a football club is in trouble, other clubs take advantage of this fact by paying less than players are actually worth.

Another negative result of administration was that the Football League imposed a 10-point deduction to be applied the following season in League One after Southampton’s relegation. Although the club protested that this penalty should not apply, as it was the holding company that went into administration and not the football club itself, the League rejected this argument, ruling that they were “inextricably linked as one economic entity.” Significantly, this deduction was enough for the Saints to miss out on the 2009/10 play-offs by one place.

"Jos Hooiveld - Dutch courage"

It also proved an insurmountable barrier for the Pinnacle Group, a consortium fronted by former Saints legend Matthew Le Tissier that had expressed interest in acquiring the club. They had gone as far as paying a £500,000 non-refundable deposit that gave them 21 days exclusivity to tie up a deal (and also allowed wages to be paid), but withdrew from the race, as their backers would not accept the points deduction.

Just as it looked like the club would have to fold, the cavalry arrived in the shape of Markus Liebherr, whose DMWSL 613 Limited acquired the share capital of the football club (and other group companies) from the administrators of Southampton Leisure Holdings Plc on 8 July 2009. Not only did the new owner save the club, but he also paid the debts in full, as opposed to many new owners who only pay a few pennies in the pound for debts owed, leaving many small business and public authorities out of pocket.

Liebherr’s initial statement was equally encouraging, “I believe we have a superb opportunity to rebuild this great club. This will require resources, planning, hard work and patience. We should not expect instant success, but our fans, employees and stakeholders can expect 100% commitment from me and my team.”

Importantly, Liebherr cleared the debts to the bank, tax authorities and trade creditors as part of the acquisition, replacing them with a £20 million shareholder loan that is not repayable for at least five years. This gives Southampton a major advantage compared to many other clubs that are still burdened by debt. Indeed, Football League chairman Greg Clarke has stated, “Debt’s the biggest problem. If I had to list the 10 things about football that keep me awake at night, it would be debt one to 10.”

So, the club is now financially stable, even after Liebherr’s death. His estate “is committed to the continued investment in order to achieve success for Southampton football club.” Although nobody should expect the new owners to throw money around, they have ambitious objectives, as outlined by current chairman, Nicola Cortese, “The plan remains the Premier League by 2014.”

Cortese is a key figure at the club, though has received mixed reviews. His background providing services to the sports industry at Swiss banks has not always enamoured him to the English football community, especially after he sacked manager Alan Pardew just three games into the 2010/11 season, even after he won the Johnstone’s Paint Trophy. This has been compounded by excluding press photographers from the stadium and a number of spats with former players. That said, few could argue with the club’s progress over the last two seasons.

Looking at the losses reported for the last few years highlights the need for change, as the last time that the club made a profit was in 2005. Even then, this was only £0.2 million and would have been a loss without an exceptional gain of £3.1 million from the sale of the old Dell stadium.

It’s a somewhat confusing company structure, but essentially the full picture is revealed at the holding company level. Although this entity owns many companies, the principal activity of the group is the football club, as can be seen in 2010, when the figures were quite similar: loss – holding company £9.1 million, football club £7.8 million; and revenue – holding company £14.8 million, football club £14.3 million.

Unfortunately, no accounts were produced for the holding company in 2009, because of the administration, but the football club continued to publish its figures, so we can get a reasonable idea of the trend. However, there’s another complication here, as the growth in revenue from £8.9 million to £14.3 million in 2010 is largely due to season ticket revenue being transferred from St Mary’s Stadium Limited. The other factor to be noted en passant is that the accounting close date was changed in 2006 from 31 May to 30 June, so that year includes 13 months.

Whichever way you slice the figures, they don’t look very good, especially as they have been boosted by hefty profits on player sales. This was particularly the case in the three years following relegation from the Premier League, when the club made £31 million from this activity, which is a vast amount compared to the £64 million of revenue in the same period. Major sales in that period included Crouch to Liverpool, Walcott to Arsenal, Kenwyne Jones to Sunderland and Chris Baird to Fulham.

Effectively, player sales have helped cover structural deficits. Put another way, the reported losses would have been much larger without these player sales, as can be seen in 2009 and 2010 when less money was raised from the transfer market.

Of course, the major problem for Southampton has been the declining revenue, which has fallen by two-thirds (or £30 million) from £45 million in the Premier League in 2005 to £15 million in League One in 2010. The majority of that (£19 million) hit them immediately in 2006 with the remainder coming two years later after the parachute payments ran out.

As the accounts state, “The principal risks are associated with the performance of the team and the league in which the football club operates, as revenues, particularly those from broadcasting, are substantially lower when the club is in the lower leagues.” This is equally true for match day income and commercial revenue.

That said, even after the double relegation, Southampton’s revenue was still fairly impressive. Indeed, their 2009/10 revenue of £15 million, when they competed in League One, would have placed them around the middle of clubs in the Championship that season, despite that division’s far superior TV deal.

Obviously, this particular ranking is distorted by the impact of money from the Premier League, either through direct funding or parachute payments, but we can safely say that all other things being equal Southampton will have one of the highest revenue generating capacities in the Championship. It is also worth pointing out that their League One revenue was higher than QPR and Swansea City, who both secured promotion to the Premier League the following season.

Southampton’s television revenue has been decimated from £20 million in their last season in the Premier League to around £1 million in League One. Although the pain was initially eased by two annual parachute payments of £6.5 million, they still lost £12 million on relegation. The impact was most noticeable in 2008, even though the Championship introduced a £1.3 million solidarity payment from the Premier League.

At the risk of stating the obvious, there is never a good time for a football club to be relegated, but it is fair to say that Southampton’s timing was particularly bad, as they missed out on the significant growth in TV deals, e.g. West Ham received £40 million for finishing bottom of the Premier League last season compared to Southampton’s £19 million in 2005. Similarly, while Southampton’s relegation was cushioned by £13 million of parachute payments, West Ham will receive £48 million (£16 million in each of the first two years, and £8 million in each of years three and four).

The good news is that Southampton’s TV revenue for the current (2011/12) season will be considerably higher than League One, approaching £6 million. This is mainly sourced from the Football League central distribution of £2.5 million that is made to all clubs, a £2.2 million solidarity payment plus facility fees payable each time the club is televised live.

However, the new Football League three-year TV deal that kicks off in the 2012/13 season will be £69 million lower than the current contract at £195 million, a reduction of 26% or £23 million a season, reflecting what Greg Clarke called, “a challenging climate in which to negotiate television rights.” As there was no interest from BBC, ITV or even ESPN, the only game in town was Sky, who could get away with a much lower bid. The annual reduction for each Championship club has been estimated at £766,000 by Ipswich chief executive, Simon Clegg.

Match day revenue has also slumped from £17 million in 2005 to £10 million in 2010, due to a combination of lower attendances and reduced ticket prices (e.g. cut by 20% in 2008), though the impact was partially offset by the greater number of home games in the lower leagues compared to the Premier League. In addition, match day hospitality and catering has also fallen – it was virtually halved from £2.4 million to £1.3 million following the Premier League relegation.

Attendances dropped from nearly 31,000 in the top flight to less than 18,000 in the annus horribilis of 2008/09, when corners of the ground were shut in a bid to save money, but they have been on the rise ever since the club’s rebirth. Indeed, their average of 21,161 last season was not only by far the best in League One, even way ahead of Sheffield Wednesday, but was actually the 25th highest in England, which is very impressive for a team in the third tier and highlights the club’s potential.

As does the splendid St Mary’s stadium, though this has been something of a double-edged sword for the club since the move in 2001. The £32 million cost of constructing the new ground was one of the primary factors behind Southampton’s financial difficulties, so much so that the local council at one stage entered into negotiations to buy it, but it now offers hope for future progress.

It was clear that the club would have to move from the 15,000 capacity The Dell, as this was a long way below Premier League standards, but there were worries that the club would struggle to fill the 32,690 capacity stadium, especially as this was higher than Southampton’s record crowd at the time. Nevertheless, in the last season in the Premier League, attendances never fell below 30,000. The record attendance of 32,152 was established just last October against Championship rivals West Ham in another indication that the club is on the up.

"St Mary's prayer"

All commercial revenue streams are also down contributing to a reduction in income from £7.4 million in the Premier League to £3.2 million in League One, which was not exactly what the club intended in 2006 when it “restructured the commercial side to maximise off-field earnings.”

The club’s long-standing shirt sponsor Flybe ended their deal in 2010, describing their four-year association with the club as a “rollercoaster of a ride”. Thanks to its stronger financial position, Southampton opted to play in a shirt free of sponsors in the 2010/11 season, when they celebrated their 125th anniversary with a rather wonderful red sash on a white shirt. This season, Umbro have returned to the traditional red and white stripes, with the club signing a three-year sponsorship deal with Aap3, a Southampton-based business and IT Solutions provider. The financial terms of the deal have not been officially divulged, but Sports Pro Media reported that it was worth $300,000 (just under £200,000) a year.

When Southampton were in the Premier League, their wages to turnover ratio was a very respectable 59% (using figures from the football club), but this shot up following relegation to a very worrying 105% in 2008, though it has come down to 83% in 2010. Even though Southampton have managed to more than halve the wage bill from £26 million in 2005 to £12 million in 2010, partly as a result of wage cuts due to relegation clauses in player contracts, the problem is that revenue has plummeted by £30 million in the same period.

In 2008 the wage bill actually increased following the signing of experienced (and higher paid) players and a large number of loan deals, not to mention termination payments of £0.6 million to former directors. That’s the other side of the coin when a club consistently sells its young talent: if they are replaced by older players, their salaries are invariably higher.

Wages also rose from £11.4 million to £12.3 million in 2010, which is hardly surprising given the remarkable growth in headcount: football – from 117 to 153, administrative – 48 to 60. As the costs increased by less than £1 million, the implication is that either average salaries are falling or the new employees were recruited towards the end of the accounting year.

Assuming that the wage bill remains at the same level (though it will probably have risen in the Championship), revenue would have to grow by £5.6 million to produce a wages to turnover ratio of 60%, which is not out of the question, particularly with higher TV deals and better crowds.

In addition, the holding company accounts reveal that one director was paid £600,000 in 2009/10. This is widely believed to be Cortese, who was appointed as a director on 15 December 2009, so this would imply an annual salary of well over £1 million, though a club spokesman stated that this represented remuneration for a whole year. This might sound a bit “toppy” for a League One football club, but in fairness the chairman could easily match or surpass that in a Swiss bank.

Southampton have been a selling club for a long time with net sales proceeds of £56 million in the last nine years, as purchases of £41 million were more than compensated by £97 million of sales. The impact of relegation from the Premier League is evident with purchases of £30 million in the three years before that unfortunate event, but only £22 million in the following seven years.

The analysis is a little misleading for the period since the Liebherr takeover, as the net figures are distorted by the large £12 million fee paid by Arsenal for Alex Oxlade-Chamberlain in the summer. Excluding this one transfer, the new owners have splashed out around £5 million in the last two seasons to drive their promotion bids.

Nevertheless, they can hardly be accused of simply spending their way towards success, as their net spend over the last three years is in fact one of the lowest in the Championship, a long way below the likes of Birmingham City, Leicester City, Nottingham Forest, Burnley and Brighton.

This relatively low expenditure also helps explain why player amortisation, the annual cost of writing-down the cost of a player’s transfer over the length of his contract, has fallen from £7.6 million in 2005 to £1.8 million in 2010.

The balance sheet of DMWSL 613 Limited, the snappily named new holding company, shows net liabilities of £9 million, but a few points need to be considered here, most importantly that the principal indebtedness is the £20 million loan from the owners. In addition, the players are only valued at £3.8 million in the accounts, including nothing for those developed in the Academy, while their market value in the real world is much higher - £19 million according to the respected Transfermarkt website.

Furthermore, the stadium is only valued at £9.5 million, including £3.4 million of land, after an impairment charge of £17 million was booked in the subsidiary St Mary’s Limited following the “distressed sale circumstances”.

On the other hand, the notes to the accounts reveal that there are contingent liabilities of £7.5 million: (a) £3.5 million transfer fees to other clubs dependant on number of appearances and international debuts; (b) up to £4 million to a former creditor if the club is promoted to the Premier League before 2015/16.

It is clear that the owners’ support is still crucial for Southampton’s finances. In 2010, there was a cash outflow of £13 million plus repayment of £4 million of old loans before the books were balanced by the new £20 million shareholder loan. No accounts were published for the holding company in 2009, but 2008 should have set alarm bells ringing, as the net cash outflow was £9 million, even after raising £7 million from player sales, which was completely unsustainable.

So, Saints’ fans are fortunate that they now have such a wealthy owner. Indeed, the magazine Four Four Two had the Liebherr family at number five in their 2010 Football Rich List with a fortune of £3 billion, only behind Sheikh Mansour (Manchester City), Lakshmi Mittal (QPR), Alisher Usmanov (Arsenal) and Roman Abramovich (Chelsea).

There has been some speculation that others might want to invest in Southampton now that their prospects have improved, but Cortese has firmly stated that “the club is not for sale.” He also maintained that Liebherr’s death would not derail their plans, “Nothing has changed. This is a long-term project. This was never a financial transaction. It was done with the strong belief that we can achieve something here which is going to be special.”

"Cortese - the Italian job"

This would be reinforced if the owners were to convert their loans into equity, as Mansour has done at Manchester City, but to date they have lived up to their promises. In any case, Cortese says that there would be other options if the Liebherr family decided to exit stage left, “If there's any lack of commitment, we have a plan B. I know people with money who would have the same attitude as Markus who would join us on this. But, just to underline, the commitment of the family is 100%.”

The foundations for the future have been laid with Southampton’s highly successful Academy, which has an impressive rack record in developing young talent, such as Walcott, Bale, Oxlade-Chamberlain and Lallana. Their facilities are among the best in the country, but they are investing more money to produce a state-of-the-art complex with the aim of replicating the success of Barcelona’s famous La Masia. That does not mean a string of titles, but to have half the first team coming from the Academy, according to Les Reed, the head of football development (and briefly Charlton manager in 2006).

"Oxlade-Chamberlain - give youth a chance"

Southampton spend over £2 million a year on this facility, but it looks like money well spent, as the production line continues to churn out promising players. The current crop includes James Ward-Prowse, who has already appeared for the first team, England Under-17 internationals Luke Shaw and Calum Chambers, plus Harrison Reed and Jake Sinclair.

It is too early to say what impact the new Elite Player Performance Plan (EPPP) will have on Southampton’s youth policy, but it does appear that the days of a young star moving for large sums might be coming to an end, which on the face of it would hurt the club’s finances. However, it is believed that Southampton will be one of the few academies classified as Category One, so the club might end up being a beneficiary of the new system.

If Southampton remain in the Championship, they will also be affected by the introduction of new Financial Fair Play regulations from the 2012/13 season, so they will need to balance their books fairly quickly. They should be reasonably placed for this, given the higher revenue in this division and their ability to make money from player sales, especially as they will be able to exclude costs for their stadium and academy from the break-even calculation.

Of course, it will be a whole new ball game if they gain promotion to the Premier League, where the TV money is worth at least £40 million a season. Although there is a concern that the club might eat into that higher revenue by increasing wages and other costs, the net effect is still likely to be positive. If we look at the three teams that were promoted to the Premier League in 2008/09 (using the last available figures from 2009/10), we can observe this phenomenon with Wolverhampton Wanderers, Birmingham City and Burnley, but all three of them still went from operating losses in the Championship to profits in the Premier League.

"Rickie, don't lose that number"

This explains why Southampton might splash a little cash in the January transfer window. They have already signed Japanese international striker Tadanari Lee and Spanish Under-21 international midfielder Yago Falque from Tottenham on loan, but there are also reports that they have offered an incredible £6 million to Celtic to re-unite forward Gary Hooper with Adkins, his former manager.

The weight of expectation hangs heavily on Southampton, but they have as good a chance as any of making it, as summed up by the administrator when the club was bought, “Markus Liebherr was attracted to Southampton by a number of qualities which include the club's rich sporting heritage, loyal fan base, first-class stadium and training facilities and the potential for the Saints to regain their rightful place in the higher echelons of English football.” That would be a fantastic prize for the club’s long-suffering fans. For the time being, they’re happy enough just to be once again more saints than sinners.

Juventus - Black Night, White Light

2012-01-05T08:59:00.030+01:00

As the Italian league entered its winter break, Juventus could look back on a highly successful campaign so far. Not only were they were joint leaders along with Milan, but they were the division’s only undefeated team, having won nine and drawn seven of their matches. In their best start for many years, the bianconeri have beaten both of their rivals from Milan and look poised for a return to their former glories.

Juventus have won a record 27 domestic league titles, not including two that were lost after the events of the 2006 Calciopoli match-fixing scandal, and have triumphed six times in Europe (two Champions League, three UEFA Cups and one Cup Winner’s Cup), so the current team has a long way to go before it can be mentioned in the same breath as its illustrious predecessors, but the early signs are promising.

However, nobody is taking anything for granted in Turin, especially as Juventus also started well last year before fading badly over the second half to finish seventh for a second successive season, which meant that they failed to qualify for Europe. In fact, by their own lofty standards, this has been a particularly barren period for Juventus, as they have not won a trophy for five long years.

"Conte - Shout to the top"

This season somehow feels different following the appointment of former Juventus captain Antonio Conte, who replaced Luigi Delneri in May. Although relatively inexperienced at the top level, Conte has managed to lead two clubs (Bari and Siena) to promotion to Serie A. Described by president Andrea Agnelli as “the first piece in the jigsaw to return to winning ways”, Conte has “brought a new mentality to the club”, according to the tenacious midfielder Claudio Marchisio.

The emphasis is on the team with every player working his socks off, though Conte has also impressed with his willingness to change tactics depending on the opposition. Although he is famed for his intense, attacking style, the young manager has also tightened up his side’s defence, largely with the same personnel as last season.

That said, there has been a lot of activity in the transfer market with general manager Beppe Marotta responsible for a major overhaul of the playing squad since his arrival from Sampdoria in May 2010. Although the club’s fans may have been disappointed that no major star arrived this summer after talk of Sergio Aguero, Giuseppe Rossi and Alexis Sanchez, this was compensated by the arrival of some very capable players.

"Lichtsteiner - Run, Forrest, run"

Midfield experience was recruited in the shape of Andrea Pirlo from Milan and Michele Pazienza from Napoli, while the exciting young Chilean Arturo Vidal from Bayer Leverkusen has provided much energy to the engine room. The weakness at full-back was addressed by the signing of the athletic Swiss Stephan Lichtsteiner from Lazio, while Mirko Vucinic from Roma has added some attacking guile.

The other major change this season has been the new stadium, where the fans are much closer to the action and can provide the proverbial 12th man. It is not clear how many points this has been worth to Juventus, but their record at home since the move has been strikingly good.

So this is in many ways a “Newventus”, but there are still a few important links to the club’s past. In the dressing room, this is provided by club captain, Alessandro Del Piero, who is in his final season, while the Agnelli family has long played an important custodial role. Andrea’s late father Umberto was also president between 2003 and 2005, while his uncle Gianni (“l’avvocato”) is a legendary figure at the club.

Although Juventus have shown a significant improvement on the field of play, it’s a different story off the pitch, as they reported a huge loss of €95 million for the 2010/11 season, a dramatic worsening from the previous year’s €11 million loss, when the club actually made a small €2 million profit before being hit with a hefty €13 million tax charge.

Unsurprisingly, this is the largest loss in Juventus’ history and it was described as “intolerable” by Agnelli, though he did add that these accounts were “the fruit of a desire to maintain Juve’s competitiveness.” That’s a fairly standard excuse from a director of a football club, but in fairness Juventus have paid the price for their attempts to transform the club, both through the investment in the new stadium and particularly the many changes on the staff side.

Up to this year’s annus horribilis, Juventus had made a pretty good job in balancing their books, recording profits before tax in three of the preceding four years, even when they were demoted to Serie B in 2006/07. That year, they were forced to offload many players in order to trim the wage bill, which also had the benefit of delivering outsize profits on player sales of €40 million.

"Marchisio - Black & White Boy"

Last season this activity produced €17 million profit, which is lower, but still not too bad. The real damage was done at the operating level, largely due to expenses of €195 million being considerably higher than revenue of €154 million, leading to negative EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) of €41 million, which was exacerbated by very large non-cash flow expenses of €61 million.

On the face of it, these are indeed disastrous figures, but a closer analysis of the reasons for the increase in the size of the loss provides some cause for optimism, as much of it is due to once-off factors that should not be repeated to the same extent in future years.

Of course, there are also some fundamental factors behind the larger loss, most notably the double whammy in television income, which has dropped by €43 million from €132 million to €89 million. The reduction was split evenly (more or less) between the move to a centralised sale of Italian TV rights and the failure to qualify for the Champions League, which was only very slightly offset by participation in the Europa League group stage.

Although total wages slightly increased by €2 million to €140 million, the underlying player wage bill was actually cut by €9 million, which was disguised by a €3 million rise in bonus payments and higher leaving incentive, which grew €8 million from €4 million to €12 million, thanks to pay-offs to Mauro Camoranesi, David Trezeguet and Jonathan Zebina in order to get them off the payroll.

Other once-off staff costs include a €6 million increase in the write-down of player values from €6 million to €12 million, partly for players that have already left (Tiago and Zdenek Grygera) and partly for those who no longer figure in the club’s plans (Amauri). There is also a €12 million provision for dismissed staff and a €12 million increase in the cost of purchasing temporary player rights from €3 million to €15 million (mainly Quagliarella €4.5 million, Pepe €2.6 million, Matri €2.5 million and Marco Motta €1.3 million).

Exceptional items have increased by €10 million year-on-year, as last season’s €3 million credit for the transfer of the commercial area around the new stadium has been replaced by a €7 million provision for a tax inspection for the years between 2001 and 2008. Finally, it should be noted that the 2011 figures were “boosted” by the tax charge being €11 million lower than the previous year.

All in all, this set of accounts represents a classic example of a company cleaning house, so it would be surprising if the expenses were as high the next time around, even though there may still be a few once-off charges to process.

Of course, most football clubs do make losses and Italy is no exception, e.g. in 2009/10 (the last year when we have published accounts for all the clubs), only four clubs in Serie A managed to break-even: Fiorentina €4.4 million, Catania €2.5 million, Livorno €1.8 million and Napoli €0.3 million.

So, it is perfectly understandable that Juventus made a loss, but it is the sheer size of the loss in these accounts that came as a bolt from the blue, especially as over the previous two seasons (2008/09 and 2009/10) Juventus had looked like a good example of sustainability with aggregate losses of just €4 million. That was a drop in the ocean compared to the losses suffered by the other big clubs in the same period: Milan €77 million and Inter (an astonishing) €223 million.

However, the tables have well and truly turned and it is now Juventus that have the dubious honour of the highest loss in Serie A in 2010/11 with their €95 million surging ahead of Inter €87 million and Milan €70 million.

Much of this unfortunate reversal is clearly due to the steep revenue reduction. In 2009/10 Juventus’ revenue of €205 million was not far behind Inter’s €225 million, about the same as Milan’s €208 million and importantly comfortably ahead of all other Italian clubs with Roma the next closest with just €123 million, but this was no longer the case in 2010/11. In particular, Roma’s revenue of €144 million, aided by their Champions League run, was only €10 million below Juve’s €154 million.

This will also impact Juve’s seat at Europe’s top table. In 2009/10 they were placed tenth in Deloitte’s European Money League, which would be the envy of many clubs, but is a long way short of their peers abroad. For example, the Spanish giants, Real Madrid and Barcelona, generate around €400 million, which is twice as much as Juventus, as they continue to benefit from substantial individual TV deals.

Both Manchester United and Bayer Munich also earn around €100 million more, the English taking advantage of significantly higher match day revenue, while the Germans’ commercial expertise puts Italian clubs to shame. This vast revenue discrepancy will make it difficult for Juventus to achieve their stated objective of “being a leading club in Europe”. Indeed, the revenue reduction in 2010/11 is likely to mean that they will fall out of the top ten in next year’s Money League.

Juve’s challenge is not helped by the underlying problems in Italian football. Andrea Agnelli went so far as to complain of “a penalising regulatory situation for the top teams in Italian football” where government regulations were “to the detriment of investment.”

His views were supported by a report from the Italian Football Federation (FIGC) this year that concluded, “The current business model is difficult to sustain and not very competitive.” Its president, Giancarlo Abate, noted that in particular match day income, sponsorships and merchandising were in need of urgent attention to reduce the reliance on TV money. Juve’s courageous move to construct a new stadium is very much the exception to the rule with other clubs’ revenue growth potential significantly restricted by the fact that their grounds are owned by the local council (to whom they have to pay rent).

These problems have been reflected in the lack of revenue growth of Italian clubs. In 2005 Juventus were as high as third in the Money League, but their revenue has actually declined by 33% (€75 million) since then. Milan’s revenue also fell during that period, while Inter’s growth of 32% is less than half that achieved by other leading European clubs, e.g. Barcelona 115%, Manchester United 99%, Arsenal 96%, Real Madrid 74% and Bayern Munich 69%.

Even more striking is the absolute difference between the clubs. As an example, in 2005 Juventus’ revenue of €229 million was around €20 million better than Barcelona, but it is now nearly €300 million less. In fact, this year’s revenue is only 9% higher than they generated in Serie B in 2006/07 (lower if you include profit on player sales).

The reality is that Juve’s revenue has essentially been flat for many years, only really growing when they qualify for the Champions League. The driver for the investment in a new stadium is obvious when looking at the club’s revenue mix, which shows match day income at a pitiful 8% of total revenue. That is by far the lowest of any team in the top 20 clubs in the Money League with the next lowest being the other Italian clubs (Milan 13%, Roma 16% and Inter 17%).

In 2009/10 Juventus earned an impressive €110 million from their domestic TV rights deal, which was the highest in Italy, even more than Milan €96 million and Inter €89 million, and considerably more than all other Italian clubs, e.g. Napoli, Lazio and Fiorentina only got around €40 million, which was just over a third of Juve’s income.

Years of protest at this lack of a level playing field finally led to a new collective agreement being implemented at the beginning of the 2010/11 season. There is a complicated distribution formula, which still favours the bigger clubs, though the result is a clear reduction at the top end. Under the new regulations, 40% will be divided equally among the Serie A clubs; 30% is based on past results (5% last season, 15% last 5 years, 10% from 1946 to the sixth season before last); and 30% is based on the population of the club’s city (5%) and the number of fans (25%).

Juventus had forecast that this would result in a revenue reduction of €9 million in a presentation to analysts in March 2011, but, as they admitted in the latest accounts, there was “an additional penalisation compared to what was expected” and the actual difference was a massive €23 million.

There has been much discussion over how the number of fans (worth 25% of the deal) would be calculated, but this was resolved in November. An article in La Gazzetta dello Sport suggested that this would produce an additional €4 million revenue for Juventus, but the net reduction would still be a painful €19 million.

The decrease would have been even higher if the total money negotiated in the new collective deal by media rights partner Infront Sports had not been approximately 20% higher than before at around €1 billion a year. This cemented Italy’s position as the second highest TV rights deal in Europe, only behind the Premier League, but significantly ahead of Ligue 1 and La Liga. In fact, Italy’s deal is worth twice as much as the Bundesliga.

That’s particularly impressive, given how little is received for foreign rights, though it was recently announced that the incumbent rights holder, MP & Silva, will pay an additional 30% for these rights for the three years starting from the 2012/13 season (up from €90 million a year to €115-120 million). It is still not completely clear what will happen with the 2013-15 deal for domestic rights, but €2.5 billion has already been secured from Sky/RTI for 12 of the 20 Serie A clubs, so this is likely to show a small increase as well.

One of the key risks identified in the Juventus annual report is failure to qualify for the Champions League, which “could potentially have an adverse impact on the company’s financial position and income statement.” In truth, there’s no doubt about this, e.g. in 2010/11 Juventus earned just €1.8 million from the Europa League, while the previous season they received €21.5 million from their adventures in the Champions League, leading to a €20 million fall in revenue.

The prize money for Europe’s flagship tournament increased last season, so Roma received €30 million for reaching the last 16, while Inter got €38 million for going a round further. The same is true for the Europa League, but the highest pay-out there was only €9 million. Those are just the television distributions, but there are also additional gate receipts and bonus clauses in various sponsorship deals.

Juve’s failure to qualify for this season’s Champions League will again hurt them financially, which is why it is imperative that they achieve that goal this time around. Unfortunately, their task is even more difficult now, as the Italian league has lost a place to the Bundesliga, due to lower coefficients. From this season, only the top two teams in Serie A will be assured of direct entry, while the third-placed team goes into the preliminary qualifying round. Ironically, this has been Italy’s best season in the Champions League for a while with three teams reaching the last 16 (Milan, Inter and Napoli).

Although the most popular club in Italy, Juventus have struggled to convert this support into meaningful match day revenue. This is an issue for all Italian clubs, but especially Juventus, where this revenue stream fell from €17 million to €12 million last year, largely due to €3.2 million lower fees from friendly matches. This is just behind Roma’s €19 million, but is far below Inter (€33 million) and Milan (€31 million), who generate much more revenue at San Siro.

The comparison is even worse when looking at leading clubs abroad, which is perhaps best illustrated by a comparison with Manchester United and Arsenal, who earn €126 million and €108 million respectively. This works out to around €4 million revenue a match, which is over ten times as much as Juventus (€0.4 million).

Not only do Juventus have the lowest average attendance of the top European clubs in the Money League at around 22,000, partly because many of their fans are located in the south of Italy, but this was only the 10th highest in Serie A last season, lower than clubs like Palermo and Genoa. In comparison, Inter’s average crowd was over 58,000, while Milan and Napoli averaged 50,000 and 45,000 respectively.

Of course, Juventus were limited by the capacity of their old ground, which was very low at 28,000, and this also suffered from having hardly any premium seats or corporate boxes, which are the money spinners elsewhere. This is why Juventus decided to move to a new stadium that could maximise their revenue earning potential.

A splendid inauguration ceremony took place on 8 September including a friendly match against Notts County, the team who gave Juventus their famous black and white striped shirts in 1903. The new 41,000 capacity stadium has been built on the site where the reviled Stadio Delle Alpi once stood and features 8 restaurants, 24 bars and 4,000 parking places.

"All my colours"

The atmosphere and visibility are far superior to the old ground, as the closest seats are just 7.5m from the pitch. Although not as large as some modern stadiums, chief executive Aldo Mazzia explained, “We believe that it’s better to have a stadium that’s a bit smaller but almost always full and closer to the team than to have a much bigger one that only gets sold out for a few games.” Indeed, every game to date has been a sell-out, though there have been quite a few empty seats, due to ticket agencies unable to fully sell their allocation.

The cost has increased to €150 million, including €15 million for the Juventus Museum that is scheduled to open in the first half of 2012, but it has largely been financed by two important initiatives.

First, Sportfive acquired the stadium naming rights for a guaranteed minimum of €75 million, of which €42 million has already been paid to the club and the remaining €33 million will be paid over the next 12 years in equal annual installments of €2.75 million. From 2011/12, this will be booked as €6.25 million annual revenue. Although a sponsor has yet to be identified, this is only an issue for the broker and does not affect Juventus financially. Second, Juventus sold the commercial land adjacent to the stadium for €20 million to Nordiconad, who will build a shopping area called Area 12.

"Money don't Matri 2 night"

This meant that Juventus only had to take on additional debt of €60 million, which was provided by Istituto per il Credito Sportivo. As at 30 September 2011, €52 million of this had been loaned to the club.

The new stadium looks the business in both senses of the word, as it will be a seven-day a week operation, hosting numerous events and guided tours of the museum. Indeed, the club has estimated that match day revenue will increase significantly from the current €12 million to €25-35 million, with the number of premium seats being particularly important, e.g. Arsenal make 35% of their match day revenue from just 9,000 premium seats at the Emirates.

The first quarter results for 2011/12 support these claims, as the number of season tickets rose by 61% to 24,137, which is impressive enough, but the revenue increased by 183%. Although there have been some teething troubles with the safety inspections, Mazzia predicted that the new stadium would give it a competitive advantage over its Italian rivals of “at least four or five years”, which makes sense if you consider that Juventus signed their stadium agreement with the city of Turin way back in July 2003.

Commercial revenue is not too bad at €54 million, though it is €2 million lower than 2009/10, mainly due to performance clauses linked to Champions League participation. In Italy, Inter have now caught up, while Milan still do better commercially. Perhaps of more relevance is the fact that Juventus are a long way behind leading clubs abroad, e.g. Bayern Munich earn an astonishing €173 million.

This is one of the problems of being tainted with Calciopoli, as Juve’s commercial income has not yet reached the heights they achieved before those events (€75 million in 2006). In 2005 Tamoil signed a five-year shirt sponsorship deal that was believed to be the highest in football history at €22 million a season with a possible five-year extension worth even more. This was more than twice the size of any other deal with an Italian club, but was cancelled in the light of the scandal.

These days, Juventus have adopted an innovative dual shirt sponsorship strategy with BetClic paying €8 million for the first team shirt and Balocco €3.5 million for the second shirt and youth sector. Both of these deals are in their last season, so there is an opportunity to sign better deals, though Juventus have cautioned that the “current economic situation has a negative impact on the sport sponsorship market.” In contrast, the long-term partnership with kit supplier Nike has been extended until 2015/16 for an impressive €12.4 million a year.

On the plus side, Juventus’ sponsorship deals compare favourably with those at other Italian clubs: (a) shirt sponsors: Milan – Emirates €12 million, Inter – Pirelli €12 million, Napoli – Lete €5.5 million and Roma – Wind €5 million; (b) kit suppliers: Milan – Adidas €13 million, Inter – Nike €12 million, Roma – Kappa €5 million and Napoli – Macron €4.7 million.

However, the issue is that these agreements are worth much less than those at foreign clubs. For example, the following all have shirt sponsorships worth more than €20 million a season: Barcelona, Bayern Munich, Manchester United, Liverpool, Manchester City and Real Madrid.

Like all football clubs, the most important expense for Juventus is their wage bill, which was €140 million in 2010/11, split between players €127 million and other personnel €13 million. They have admirably managed to hold this at around the same level for the last three years. In fact, last season they actually cut underlying player wages by €9 million, though this was off-set by leaving incentives.

Nevertheless, the important wages to turnover ratio has worsened from 67% to 91%, due to the substantial revenue reduction. This takes it way above UEFA’s recommended upper limit of 70%, so Juve need to either grow revenue or cut costs.

Despite their efforts, their wage bill remains one of the largest in Italy, albeit a long way behind Milan and Inter, who cut theirs to “only” €190 million in 2010/11, thanks to lower performance bonuses. An analysis by La Gazzetta dello Sport this summer of salaries for the first team squad reinforced Juve’s third place in the wages league with €100 million, behind Milan €160 million and Inter €145 million, but it’s far from certain that their figures are accurate.

The other major element of player costs, namely amortisation has been on a rising trend, up from €22 million in 2007 to €35 million in 2011, though it is still less than the €52 million reported by Inter last season.

Amortisation is the annual cost of writing-down a player’s purchase price, which is booked evenly in the accounts over the length of his contract, e.g. Milos Krasic was signed for €16 million on a 4-year contract, so his amortisation works out to €4 million a year.

The growth in amortisation would imply that Juventus have been active spenders in the transfer market and this is indeed the case. Apart from the year that they were relegated to Serie B, they have been very much a buying club. In fact, over the last three seasons their net transfer spend of €129 million is the highest in Serie A with only Napoli coming anywhere close with €98 million. The next highest is Roma with €35 million, while both Inter and Milan have actually had net sales proceeds in this period.

This summer alone they splashed out nearly €90 million, though €37 million of that was due to exercising options on players such as Matri €15.5 million, Quagliarella €10.5 million, Pepe €7.5 million and Motta (yes, really) €3.75 million. In addition, large sums were spent on Vucinic €15 million, Vidal €10.5 million, Lichtsteiner €10 million and Eljero Elia (from Hamburg) €9 million.

This was part of what the club has described as the “profound upgrading of the first team” in order “to return as soon as possible to stably competing at a high level in Italy and Europe.” However, Beppe Marotta has warned that the club will not be making any big money signings in the January transfer window, which probably explains the loan signing of wayward striker Marco Borriello from Roma, though there have been faint whispers of Carlos Tevez arriving from Manchester City.

This high level of transfer activity has contributed to an increase in Juve’s debt, though the main reason is obviously the investment in the new stadium. For the last few years, the club’s focused approach meant that it actually enjoyed net funds, but financial debt was up to €121 million at the 2011 year-end. This comprised €61 million bank loans, €45 million of stadium debt to ICS (a 12-year loan at 4.383%) and €18 million of finance leases to Unicredit (mainly for the Vinovo training ground).

The financial position would have been worse without the phased payment of transfer fees, which means that Juventus owe other football clubs €63 million (though they are, in turn, owed €33 million by other clubs).

That said, they did improve their net debt by €25 million in the first quarter of 2011/12, largely thanks to a €72 million advance payment by Exor, their 60% majority shareholder controlled by the Agnelli family, which was their share of the €120 million capital increase. Exor has also undertaken to pay €9 million corresponding to the rights of LAFICO (the Libyan Arab Foreign Investment Company), the club’s second largest shareholder with 7.5%, but whose stake has been frozen as a result of sanctions applied to the North African country.

The remaining €39 million should be covered by the other, smaller shareholders, though this will require an act of faith on their behalf, as the share price is less than half the €1.30 four years ago when the club launched a similar €105 million recapitalisation. Indeed, it was €3.70 when the company was floated back in 2001.

Assuming that the money is raised, Mazzia said that it would “finance the club’s life for the next five years”, though this must assume a return to a self-financing model. Although recent years have required two sizeable capital raisings and new loans, there have been special circumstances (Calciopoli and the new stadium), so this is not entirely unfeasible, though it will require improvements on the pitch.

However, it is likely that Juventus will still have to rely on the support of Exor, which has always been forthcoming, but their fortunes to a large extent depend on the performance of their other companies, notably Fiat, which is struggling along with all other car manufacturers.

The club’s balance sheet has been weakened by last year’s gigantic loss, so it now has net liabilities of €5 million, as opposed to the €90 million net assets the year before, though it should be acknowledged that player values in the accounts are certainly lower than their worth in the real world.

From now on, Juventus will also have to confront the challenge of UEFA’s Financial Fair Play (FFP) regulations, which will ultimately exclude from European competitions those clubs that fail to live within their means, i.e. make a profit.

Fortunately, the big loss in 2010/11 is not taken into consideration, so all those cost provisions begin to make sense. That said, UEFA will take into account losses made in 2011/12 and 2012/13 for the first monitoring period in 2013/14, so Juve’s accounts need to rapidly improve.

However, they don’t need to be absolutely perfect, as wealthy owners will be allowed to absorb aggregate losses (“acceptable deviations”) of €45 million, initially over 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 from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

Although Juventus’ stated plan is “to develop a sustainable business model”, they have also admitted that 2011/12 will show another “significant loss”, though not as bad as that reported last season. Worryingly, the €26 million loss for Q1 2011/12 was actually €8 million worse than the prior year, but that is largely timing, due to fewer games played.

In terms of how their figures will look in the future, the first thing to do is to adjust for all the exceptional items in 2010/11, which would have a €43 million positive impact. This assumes: (a) no further need for provisions for tax and dismissed staff; (b) reducing (but not eliminating) charges for player write-downs, leaving incentives and temporary purchases to more normal levels.

Aldo Mazzia has stated that the revenue from the new stadium will increase to €32 million, including the doubling of gate receipts and €6 million for naming rights. This would deliver an additional €20 million revenue, though there will also be a rise in associated costs, such as new staff. In addition, the club will have to bear depreciation on the stadium investment and interest on the loans, though these are excluded for the purposes of the FFP break-even calculation.

"Vidal - Ears are not enough"

Of course, the major swing factor is qualification for the Champions League, which would be worth around €30 million, maybe more depending on progress. This helps explain the heavy investment in the playing squad, which can be considered a bet on success.

It is difficult to speculate on what will happen to the wage bill. My analysis of the arrivals and departures, based on the gross salary figures published in La Gazzetta dello Sport, suggest that there will be a small fall next year, but it is safer to assume the same level. On the other hand, player amortisation is almost certain to increase (€3 million in Q1), so I have assumed €10 million per annum. In addition, if the club qualifies for the Champions League, then bonuses should rise to previous levels, meaning an increase of €8 million.

Profit on player sales is by its nature lumpy business, but Juventus have been fairly consistent over the past four years, generating €14-17 million a season. It is therefore reasonable to assume that they will produce similar sums in future, though they might struggle to match this in 2011/12, as they reported less than €6 million from the summer transfer window. They might add to this in January, perhaps with the departures of the out-of-favour Krasic and Amauri.

All those adds and drops would produce a far more palatable loss of €18 million, which would be well within the FFP acceptable deviation. For the purposes of FFP, UEFA also exclude some expenses that are considered to represent positive investment, such as youth development (€6 million per the analysts’ presentation) and community (estimated at €2 million), which would bring the figure down to a €10 million loss.

There is yet another get-out clause in UEFA’s regulations that states that clubs will not be sanctioned in the first two monitoring periods, so long as: (a) the club is reporting a positive trend in the annual break-even results; and (b) the aggregate break-even deficit is only due to the 2011/12 deficit, which in turn is due to player contracts undertaken prior to 1 June 2010.

Although the estimates above are by no means a fait accompli, if Juventus do get reasonably close to those figures, my guess is that UEFA would look favourably on their finances, as they would clearly be moving in the right direction and setting the right example.

"Celebrate!"

This is further evidenced by Juventus’ focus on the youth sector, as seen by the money spent on the training centre. The results are clear to see with all but one of their youth teams leading their respective leagues at the end of 2011, including the important Primavera.

This investment is a sure sign that this is intended to be a long-term project. As Conte put it earlier this season, “After three months of work you cannot talk about a finished house with a roof ready.” The return to former glories is a long way off, but there is no doubt that Juventus have taken some important first steps on a long journey.

Tottenham - Grounds For Optimism Or Concern?

2011-12-14T10:01:00.028+01:00

In spite of their somewhat controversial defeat at Stoke City last weekend, Tottenham Hotspur have enjoyed a splendid season to date. Even though it did not get off to the most auspicious of starts with successive maulings at the hands of the two Manchester clubs, Spurs then embarked on a 12-match unbeaten run in the Premier League, comprising 11 victories and just one draw. The team has been in fine form, adding an unexpected consistency to their usual attacking flair.

This is all the more impressive, as it follows a difficult summer in the transfer market, traditionally a time when seasoned observers would expect manager Harry Redknapp to be heavily involved. Instead, it was dominated by the Luka Modric saga, a transfer that did not actually take place, even though the talented midfielder’s desire to move to Chelsea was made clear to all.

Chairman Daniel Levy’s staunch refusal to countenance the Croat’s departures could have had negative repercussions in the dressing room, but to his credit Modric has performed to his customary high levels so far. He has been greatly helped by the tenacious Scott Parker, who was signed from West Ham for a bargain fee of £5.5 million. In fact, very little money was spent, as the experienced goalkeeper Brad Friedel arrived on a free transfer and powerful striker Emmanuel Adebayor is on loan from Manchester City.

"Itching to leave?"

In contrast, many fringe players have been offloaded with Peter Crouch, Wilson Palacios and Jonathan Woodgate all heading to Stoke City, Alan Hutton moving to Aston Villa, Jamie O’Hara to Wolves and Robbie Keane taking his extravagant goal celebrations to LA Galaxy. In addition, Villa and West Ham have somehow been persuaded to take Jermaine Jenas and David Bentley on loan for the season.

Following the numerous departures and the lack of high-profile signings, it would have been legitimate for Spurs’ fans to lower their expectations this season, but Redknapp believes that this might be his best Spurs squad yet, capable of going further than the one that qualified for the Champions League two years ago. He said, “I think we’ve got the potential to be up there all year”, which might have sounded foolhardy a few weeks ago, but now does not seem so unrealistic, as Spurs currently sit in fourth place in the Premier League with a game in hand on the three teams above them.

Results have been equally encouraging off the pitch, as there was a solid improvement from last year’s £6.5 million loss before tax to a £0.4 million profit for the 2010/11 season. That was mainly due to the impressive run in the Champions League, which not only took Spurs to the quarter-finals before elimination by the mighty Real Madrid, but helped grow revenue by 36% (£44 million) from £120 million to £164 million, though this was largely offset by a 35% (£34 million) increase in operating expenses, primarily a booming wage bill. In addition, profit on player sales fell £7 million, though net interest payable also reduced by £4 million.

It should be noted that Spurs have a small property business segment, which made a small loss of £1 million, so the actual football profit was slightly higher at £1.4 million.

Tottenham are very profitable at the cash level with EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) of £40 million being one of the best in the Premier League, only behind Manchester United and Arsenal, though non-cash expenses like player amortisation and depreciation lead to operating losses before player sales usually save the day.

In fact, profit on player sales has been a strong factor in Tottenham’s financial prowess over the last few years. If money from this activity were to be excluded, then Spurs would have consistently reported losses. This is most obvious in 2009, when the hugely profitable sales of Dimitar Berbatov to Manchester United and Robbie Keane to Liverpool produced an incredible £57 million gain, leading to a £33 million pre-tax profit. Without these sales, the club would have reported a thumping great £23 million loss.

Last year’s loss would have been even higher without the sales of Darren Bent to Sunderland, Didier Zokora to Sevilla and Kevin-Prince Boateng to Portsmouth. On the other hand, the 2011 profit would have been even healthier if Spurs had repeated their usual £15+ million profit here. Instead, the profit was relatively low at £9 million with the club receiving only a small fee from QPR for Adel Taarabt plus contingent receipts from prior year sales.

You might be thinking, “So what? This is a fairly standard part of any football club’s business” and you would be right. However, it is worth making the point that without the boost of Champions League money, it is very likely that Spurs will have to sell players if they wish to make a profit.

Of course, very few football clubs actually do make money, as can be seen by looking at the financial results for Premier League clubs for 2009/10 (the last season for which we have published accounts for all clubs). Only four of those 20 clubs were profitable: Arsenal, Wolves, West Brom and Birmingham City. All the other 16 clubs lost money with ten of them reporting losses higher than £15 million.

Of the big clubs to report 2010/11 results, Manchester United have swung back to a £30 million profit, but Arsenal’s profit has significantly reduced from £56 million to £15 million, while Manchester City’s loss has further widened to an astonishing £197 million.

Tottenham are cut from a very different cloth, as they have reported pre-tax profits in six of the last seven years, which is a powerful testament to how well Daniel Levy runs the club. Even Harry Redknapp, who undoubtedly would wish that the chairman loosened the purse strings, was forced to admit, “He’s a businessman, a clever businessman, with a fantastic business brain.”

On the face of it, it should be no great surprise that Spurs are doing well financially. After all, their 2009/10 revenue of £120 million was enough to place them 12th in the Deloitte Money League for European clubs (up three places from the previous year). Furthermore, the increase in revenue to £164 million should take them into the top ten when the 2010/11 review is published, over-taking Manchester City (£153 million) and Juventus (no Champions League).

However, that first glance is a little misleading, as Spurs are still a long way behind the leading English clubs, e.g. Manchester United’s revenue has now increased to £331 million, which is more than twice as much as Spurs, while Arsenal still generate over £60 million more than their North London rivals. Furthermore, the Spanish giants are on an other planet, also reporting substantial gains in 2011: Real Madrid from £359 million to £420 million and Barcelona from £326 million to £392 million.

That said, Tottenham’s revenue is still the envy of many clubs, as it is considerably higher than the next tier of challengers, e.g. Aston Villa are around the £90 million level, while Everton have only just broken the £80 million barrier.

In terms of revenue growth, Spurs also look impressive. They have managed to increase revenue from £71 million to £164 million in the last six years with a cumulative growth rate of 132%, which is only bettered by Manchester City’s 152%. However, it has to be remembered that this is from a smaller base, so is a little misleading. As a famous investor once said, “Elephants don’t gallop.”

In fact, despite the notable growth in their revenue, Tottenham have hardly made any impression on the absolute gap against other clubs. The difference is virtually unchanged relative to Chelsea and Manchester City, while it has actually expanded against Arsenal and especially Manchester United (from £95 million in 2005 to £165 million in 2011). They have only managed to get closer to Liverpool, thanks to the Reds’ absence from the Champions League.

Over the last four years, the driving force behind Tottenham’s revenue growth is clearly television. In that period £41 million (84%) of the £49 million total revenue increase from £115 million to £164 million has come from TV, with only £6 million from the much vaunted commercial operations and £2 million from match day income.

Please note that Tottenham include corporate hospitality in their commercial income, so I have added an estimated £10 million to gate receipts to produce a revised match day figure of £42 million. This is based on a review of similar re-allocations performed by Deloitte in their Money League split for the last three years.

Of course, the main reason for the dazzling revenue growth in 2010/11 is the glorious run in the Champions League, which featured a number of exciting performances, notably when Spurs defeated the trophy holders Inter Milan at a packed White Hart Lane. The fans may remember Gareth Bale’s arrival on the world stage via a hat-trick in San Siro, but the club’s board will look equally fondly on the additional £37 million from prize money and gate receipts.

Around £27 million (€31.1 million) of that is included in TV revenue, comprising €7.2 million participation (awarded to every team that plays in the group stages), €9.5 million performance bonus for reaching the quarter-final and €14.4 million from the TV (market) pool. Not much to complain about there, though the allocation for the TV pool is lower than the other English clubs (Chelsea €27 million, Manchester United €25.9 million and Arsenal €16.6 million).

This is because of the methodology used to allocate this element, which is as follows: (a) Half depends on the position that the club finished in the previous season’s Premier League with the team coming first receiving 40%, second 30%, third 20% and fourth 10%. As Spurs came fourth in the 2009/10 Premier League, they receive much less than the others. (b) Half depends on the progress in the current season’s Champions League, which is based on the number of games played. So Spurs received more than Arsenal, as they got a round further, but less than Manchester United who reached the final.

The other problem for Spurs is that they missed out on qualification for the Champions League last season (by one place), so they will have a hole to fill in the 2011/12 accounts. Although they are competing in the Europe League, this is a lot less lucrative financially. Last season, Liverpool and Manchester City only received €6.1 million for their laborious efforts in Europe’s junior competition, while the highest prize money was the €9 million awarded to Villarreal.

Although Levy insisted, “We shall fully embrace the Europa League this season”, his manager did not seem so convinced. Towards the end of last season, Redknapp lamented, “Teams who get into the Europa League want to get out of it. Half of them put reserve teams out in the early stages and it’s difficult to play every Thursday and Sunday.” From a financial perspective, it does provide some compensation via additional gate receipts, but it really is the poor relation of the Champions League.

That can be seen by looking at the TV money received by the leading English clubs last season, where the advantage enjoyed by those teams participating in the Champions League is clearly evident. In contrast, there is not a huge difference between the payments from the Premier League, due to the equitable nature of the distribution methodology.

Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£17.9 million). However, facility fees (25% of domestic rights) depend on how many times each club is broadcast live with £9.2 million for Spurs. Finally, merit payments (25% of domestic rights) are worth £757,000 per place in the league table, giving £12.1 million to Spurs. In total, this added up to £53 million.

That represented a £3.6 million increase over the previous season, even though the merit payment was lower, based on league position of fifth compared to fourth, and the facility fees were lower, due to only being shown live 17 times compared to 20. However, this was the first year of the Premier League’s latest three-year TV rights deal, which was worth more thanks to much higher payments for overseas rights.

The massive growth in TV revenue can be appreciated when looking at the near doubling of the money Spurs received last season compared to 2007, when they also finished fifth.

Gate receipts are heavily influenced by the number of cup matches, as the underlying income from the Premier League is flat, hovering around £20 million for the last three seasons, which is to be expected as the stadium is filled to capacity for every home game. There’s not much scope to raise ticket prices, as these are already among the most expensive. According to a recent BBC survey, the most expensive tickets are the third highest in the Premier League (only behind Arsenal and Chelsea), while the cheapest tickets are the fifth highest.

"van der Vaart generator"

Given that the annual report states that total revenue from the Champions League was £37 million and we know that the prize money was £27 million, we can conclude that this tournament contributed £10 million in additional gate receipts for six home games. The reason that the revenue growth was not higher is that Spurs only played two domestic home cup games in 2010/11 compared to five the previous season.

Last season Tottenham 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. These are both two-year deals running until 2012, the former worth £10 million a year, the latter £2.5 million. The total of £12.5 million is much better than the previous £8.5 million deal with Mansion and is the fifth highest deal in England, only behind Manchester United (Aon), Liverpool (Standard Chartered), Manchester City (Etihad) and Chelsea (Samsung).

Similarly, Spurs have announced a “record breaking” five-year deal with kit supplier Under Armour from the 2012/13 season. This is reportedly worth £10 million a year, which is double the £5 million paid by current partner Puma. That’s good progress, but still a fair way below the £25 million paid to Manchester United and Liverpool by Nike and Warrior respectively.

Merchandising income rose an impressive 23% to £9.6 million, aided by (yes, you guessed it) the Champions League.

Progress has also been made with secondary sponsors, such as a four-year extension with travel partner Thomas Cook and a new agreement with Sportingbet.com, who become Tottenham’s official online betting partner, though there is a long way to go before they come close to emulating the success of clubs like Manchester United, described by commercial director Charlie Wijeratna as being “three to four years ahead of us in this.” He suggested that much more could be done to leverage global interest in the club’s “distinctive brand around the issues of flair, style and adventure”, especially in Asia.

On the cost side, wages have shot up by 36% from £67 million to £91 million, which the club attribute to “a large squad playing in both domestic and European competitions”, backed-up by the growth in headcount for players and football administration staff from 142 to 159. Although not separately analysed, some of the rise is surely also due to performance bonuses following Champions League success.

Although the size of the increase might well raise eyebrows, Spurs are “only” sixth in the English wages league, still a long way behind Manchester City £174 million, Chelsea £173 million (2009/10), Manchester United £153 million, Arsenal £124 million and Liverpool £114 million (2009/10). Funnily enough, the gap between Arsenal’s wage bill and Tottenham’s of £33 million is exactly the same as the difference in 2005. Go figure.

The problem for Spurs is that even after this substantial rise, their wage bill still pales into insignificance compared to Manchester City. As Redknapp complained, “I think the wages have gone crazy. It’s gone beyond all belief in the last little spell.”

"Clap Your Hands Say Yeah"

This has inevitably put pressure on Tottenham’s famously rigid wage structure, where the top salary is reportedly only £70,000 a week, though it can be increased with performance bonuses. You and I might just about get by on that, but it is peanuts for a world-class footballer. It means that the club struggles to attract the top talent, e.g. on-loan striker Adebayor has said that he would not accept a pay cut to make his move permanent. He can only ply his trade at White Hart Lane now, because Manchester City subsidise his £170,000 weekly wage to the tune of £100,000.

Modric is looking to increase his weekly wage up to £100,000, aided and abetted by that old spendthrift Redknapp, “You can’t say he is worth £40 million and want to pay him the wages of someone who is worth £5 million. You have to look after the boy.” The trouble is that if the club accedes to his claims, then others will not be far behind in seeking a pay rise.

Daniel Levy is at pains to emphasise the club’s tight financial control, “We continue to work on driving revenues to ensure that the wages to revenue percentages remain within our key performance targets.” In fairness, Tottenham have managed to do that to date, maintaining the important wages to turnover ratio in a narrow range of 54-56%, which is very respectable. Furthermore the wages growth of 124% since 2006 is almost exactly in line with the revenue growth of 121% over the same period.

The quandary facing Spurs in the next set of accounts is that they will no longer have the benefit of £37 million of Champions League revenue and the Europa League is not likely to provide more than £10 million compensation. Ceteris paribus that would increase the wages to turnover ratio to 67%, which is by no means disastrous (Manchester City’s is 114%), but is probably higher than Levy would feel comfortable with.

That is one reason why so many players left in the summer, either permanently or on loan, as the club attempted to follow Levy’s edict to “streamline the squad where appropriate.” On the other hand, the annual report states that “core players” have been given new, longer-term deals on “higher, competitive salaries”, so the wage bill might not come down by as much as some people might expect.

"Fast company"

My guess is that the club is still keen to trim the fat, especially as Levy has noted the other challenge facing Spurs in terms of players, “We currently have one of the largest squads in the Premier League and given the 25-man squad rule, it is no longer practical to retain players who are unlikely to qualify within that limit.” It would therefore be no great surprise if the exodus continued with many players poised to leave, including Heurelho Gomes, Niko Kranjcar, Roman Pavlyuchenko, Sebastien Bassong, Giovani dos Santos and William Gallas, though that may be easier said than done, given their decent wages.

So Levy has done a fine job in keeping wages down, but he has proved equally adept at negotiating his own remuneration, which has increased from £250,000 in 2004 to £1.8 million in 2011 (up from £1.35 million the previous year), though, in fairness, this is not an outrageous sum when compared to the money earned by some of his peers (Garry Cook, David Gill and Ivan Gazidis).

The other aspect of player costs, namely amortisation, rose steeply in 2008 from £19 million to £37 million, but has barely increased in the last three years. To explain this, when a new player is bought, football clubs do not expense the cost immediately, but instead book it onto the balance sheet as an intangible asset and write it off over the length of the contract. As an example, Rafael van der Vaart was bought for £8 million on a four-year contract, so the annual amortisation charge is £2 million.

The sudden increase in amortisation, followed by little movement, suggests that Tottenham’s spending in the transfer market first rose, then slowed down, and this is indeed the case. If we split the last nine years into three equal periods of three years, we can see that the net spend was £37 million up to 2006, it then increased to £77 million up to 2009, but has fallen dramatically to net sales of £1 million in the last three years. Redknapp is a renowned big spender, but it looks as if he has more than met his match in Levy.

Of course, it would have been difficult to keep spending at the rate of a few years ago without getting rid of some of the dead wood. If we look at the last six years, Tottenham have actually still outspent Manchester United (£57 million) and Arsenal (net sales of £46 million), while they have spent about the same as Liverpool (£84 million). They are way behind Manchester City (£437 million) and Chelsea (£145 million), but that is only to be expected.

Another intriguing point to emerge recently was that Tottenham were the second highest spenders on agents’ fees in 2010 with £7.6 million, only surpassed by Manchester City £9.7 million.

The reduced activity in the transfer market has helped the club reduce its net debt (for the first time in many years) from £64 million to £57 million, despite continued investment in capital projects. There is no longer any classification issue with the Convertible Redeemable Preference Shares, as these have were all converted to ordinary shares or redeemed last year.

The debt comprises £52 million of bank loans, including a £15 million short-term revolving loan from HSBC, a £30 million facility with the Bank of Scotland at a floating rate linked to LIBOR and a new £7 million facility from Investec specifically for funding the new training ground; plus £25 million of loan notes at an interest rate of 7.29% repayable in equal installments by September 2023; less £21 million of cash.

In addition, trade creditors include £21 million for outstanding transfer fees, though this is partially offset by £3 million transfer fees owed to the club in trade debtors, while there are contingent liabilities (depending on success of the team and individual players) of £24 million with contingent assets of £11 million.

Nevertheless, the balance sheet remains strong. In fact, thanks to the reduction in liabilities, net assets have increased from £71 million to £81 million, including tangible assets of £150 million, comprising White Hart Lane and current training ground £39 million, new stadium project £83 million and the new training ground in Enfield £28 million, and intangible assets (players) of £101 million. Of course, the market value of the players in the books is far higher than the carrying value in the accounts with the respected Transfermarkt website estimating a value of £240 million.

However, as the accounts say, “This huge investment over the last six years has been funded through profits, equity contributions and long-term debt financing.” Although the club generates a lot of cash from its operating activities (£163 million in the last five years), this has not been enough to cover player purchases (£112 million) and property investments (£117 million), which has required £72 million of additional funding, either via new loans or additional share capital. Even then, most years have seen a net cash outflow, though last season again benefited from the Champions League.

This is a mere drop in the ocean compared to the funding that would be required to build the proposed new stadium. Although there are many risks involved in such a project, Levy is adamant that an increased capacity stadium is “critical to our continued success” and “central to delivering our ambitions for this club.”

White Hart Lane’s limited capacity of 36,000 cannot compete financially with Old Trafford’s 76,000 or The Emirates’ 60,000 and is a source of frustration for the 35,000 Spurs fans on the season ticket waiting list. Manchester United and Arsenal earn £3.7 million and £3.3 million every match, which is more than twice the £1.6 million generated by Spurs, leading to a revenue shortfall of £50-60 million a season. Without this additional revenue, it would be virtually impossible for Tottenham to match their wage bills.

The club has been pursuing two options: (a) the Northumberland Development Project (NDP) in the area around White Hart Lane; (b) relocation to the Olympic Stadium in Stratford.

Although Spurs’ interest in the Olympic Stadium initially appeared to be little more than a negotiating tactic, it became clear that this was in fact the club’s preferred alternative, as it would have been significantly cheaper (around £200 million less than redeveloping White Hart Lane) and there are excellent transport links already in place. So Tottenham prepared a comprehensive bid along with their partner AEG, the operator of the O2, which included plans to host major concerts and other events in a stadium purpose built for football plus a healthy return to the taxpayer.

"My wage packet is this big"

Crucially, they did not agree to retain the running track, even though they offered to fund a much improved athletics facility at Crystal Palace that would be available 365 days a year, so West Ham were selected as the preferred bidder. Given that Tottenham were encouraged to bid, they must have felt that, ahem, the goalposts had been moved.

Even though a club survey showed that very little of its support actually comes from the Tottenham catchment area with the vast majority coming from Hertfordshire and North Essex, many Spurs fans were understandably against Stratford. In addition, there was the small matter of Premier League rules, which stated that any move should not adversely affect clubs in the immediate vicinity, which was surely the case with Leyton Orient.

Although Tottenham mounted a legal challenge against the decision, they have now formally said that the Olympic Stadium “has ceased to be an option”, though ironically the deal for West Ham to move there has now collapsed.

"The light pours out of me"

So Spurs are now “totally committed” to the NDP development that Levy described as unviable earlier in the year on account of its prohibitive expense. Development restrictions have increased costs and reduced the amount of residential property that could be built to help fund the construction cost of the proposed 56,250 capacity stadium.

Beyond saying that it would require “hundreds of millions”, the club has not confirmed the total cost, though they have already invested £60 million in buying land and £26 million on the planning process. Incidentally, the latter fees have been capitalised and would have to be written-off if this project were to be abandoned.

Planning permission was granted in September 2011, but the summer riots in Tottenham that caused the opening match of the season to be cancelled have made investment less appealing. Indeed, the club stressed that public money must be spent on improving the infrastructure of the area before the club will be convinced to invest themselves. They have been offered £17 million of public money from the Greater London Authority and Haringey Council in order to help persuade them to stay in the area, though Orient’s ebullient chairman Barry Hearn has described this as a “bung”.

"Hey, Heurelho, you're now No. 2"

The club has announced that they will de-list from AIM to help the prospects of raising funds. Apparently potential investors said that this would be easier if the club were privately held, though this seems dubious to say the least and it is more likely that the club’s owners are just fed up with the exchange’s compliance requirements.

Although interest rates for bank loans are at historic lows, Tottenham have explored other ways to finance the construction, including stadium naming rights, where the cash could be front-loaded like Arsenal did with the Emirates, ten-year premium seating packages along the lines of Club Wembley and a supermarket. The objective is to reduce the amount of debt that the club would have to take on.

However, some fans might ask why the club is enduring such contortions when it is owned (via ENIC) by one of the world’s wealthiest men, Joe Lewis, who is worth an estimated £2.8 billion. Surely he could put his hand in his pocket in the same way as Sheikh Mansour or Roman Abramovich instead of scrambling for public money?

Whatever mix of funding they secure, it will take at least four years before the new stadium is completed.

"Everybody's happy nowadays"

UEFA’s new Financial Fair Play (FFP) rules, which mean that clubs can only spend the income they generate through the activities of the football club, provide an added incentive to build a new stadium. As Levy has pointed out, “If you look at the stadium capacities of the top 20 clubs in Europe, they all exceed ours.” Not only that, but UEFA’s new regulations actively encourage such investment, as any costs incurred for a new ground, such as interest on loans, is excluded from their break-even calculation.

This is important for Spurs, because, although the club has publicly welcomed UEFA’s attempts to “level the playing field”, as this should vindicate their prudent approach, it will not be easy for them to break-even without the infusion of Champions League money – or selling players.

Furthermore, FFP underlines Tottenham’s focus on investing in young talent, as youth development costs are also excluded from the break-even calculation. Last season four academy graduate played for the first team: Jake Livermore, Steven Caulker, Danny Rose and Andros Townsend. In addition, Spurs are scouting for talent overseas, such as Souleymane Coulibaly, the Ivory Coast forward who won the Golden Boot at this summer’s U-17 World Cup.

"Miss me blind"

The new training centre in Enfield, due for completion in summer 2012, is designed to “help us attract, develop and retain the highest quality talent.” Even before that is ready, Tottenham’s youngsters are progressing well, as seen by them winning their group in the NextGen Series, thrashing Inter Milan and PSV Eindhoven en route.

In the short-term, it is likely that Tottenham will make a loss in 2011/12, as they are now in the unfortunate position of having a squad on Champions League wages without actually gracing the tournament with their presence. Although they have removed quite a few players from the payroll, this is almost certainly insufficient to cover the revenue loss. There will also be profit on these player sales, but my calculations suggest that this will not be a great deal more than last season unless more leave in January.

In other words, it is very important that Spurs qualify for next season’s Champions League, but as Redknapp himself said, “It’s very hard to get into that top four… very, very difficult.” The likely elimination from the Europa League should help, as it removes that distraction, and the team certainly looks a good bet at the minute. However, it’s a funny old game and Spurs suffered a terrible drop-off last season, following an injury to the dominant Bale and van der Vaart’s loss of form.

"King without a crown"

If they don’t make it, then the smart money has to be on a series of player departures, including the aforementioned Bale and Modric for starters. Although Levy has argued against this, “We have a great squad with exceptional talent and none of the main players will be leaving in January”, that does not rule out next summer and there have been many precedents in the past for such big money sales when there was a need to balance the books.

Furthermore, there are weaknesses in the Spurs side that need to be addressed sooner rather than later, most notably in defence where Ledley King and Michael Dawson are increasingly injury-prone, William Gallas is too old and Sebastien Bassong is not trusted by the manager.

If only Spurs had a wheeler dealer in charge who knew how to work the transfer market…

Speaking of which, there are a couple of whispers about ‘Arry that might just slow down the positive momentum that Tottenham have enjoyed for a while. He is an obvious candidate to succeed Fabio Capello as England manager after next summer’s Euros, while he might also be prompted to leave by health problems (he underwent minor heart surgery recently) or by legal issues, as he faces trial in January on charges of tax evasion. Although Redknapp has his critics (including this writer), his achievements in establishing Tottenham in the elite should not be under-estimated, so his departure would be damaging.

"Reasons to be cheerful, part 3"

The other threat to Spurs’ stability is the possibility that the current owners might look to sell the club, especially if they put together a credible plan to build a new stadium. Levy denied this, “We haven’t put this amount of effort into building up Tottenham with the intention of moving it onto someone else. We want to see this project through.” That’s fairly unequivocal, though nagging doubts remain.

In the wonderful film “In Bruges”, the character played by Colin Farrell muses, “Purgatory's kind of like the in-betweeny one. You weren't really shit, but you weren't all that great either. Like Tottenham.” Spurs appear determined to challenge that stereotype and this season it looks like they just might succeed in doing so.

In any case, they have done very well to compete at the highest levels without compromising the financial future of the club. Going forward, whether they can manage to address the twin challenges of regularly qualifying for the Champions League and building a new stadium is a whole new ball game.

Money's Too Tight To Mention At Inter

2011-12-07T14:54:00.027+01:00

It’s fair to say that Inter have had better starts to the season. Although they qualified from the Champions League group stage with a game to spare, they currently languish in 16th place in Serie A. Admittedly they have a game in hand, but they are still a colossal 14 points behind league leaders Juventus with a third of the season gone.

The triumphant 2009/10 season when the nerazzurri became the first Italian team to win the treble of the scudetto, the Coppa Italia and the Champions League in a single year under the guidance of José Mourinho seems a distant memory. Inter fans have become accustomed to success, as that triumph meant that their team had won five league titles in a row (including the one awarded to them for 2005/06 by the courts after the calciopoli scandal).

There are many reasons behind this decline, not least an aging squad, but most of the problems are off the pitch. The board’s lack of a long-term strategy is evidenced by the rapid turnover in coaches since the “special one” moved to Real Madrid in the summer of 2010. Rafael Benitez’s miserable six-month reign did not reach Christmas, while past Brazilian international Leonardo lasted little longer, as he joined Paris Saint-Germain in June 2011.

His replacement, the former Genoa boss Gian Piero Gasperini, fared no better, as he was unceremoniously sacked after four defeats in five games, notable only for a plethora of formations that confused his own team rather more than the opposition. The current incumbent, Claudio Ranieri, brings vast experience to the role, but he is Inter’s fifth manager in less than two years.

"Should I stay or should I go?"

The club’s confusion is further highlighted by the names of the other managers that they approached for the position, including the likes of Fabio Capello, Guus Hiddink, André Villas-Boas and Marcelo Bielsa. If you can discern any similarities in their tactical approaches, then you’re a better man than me. Unsurprisingly, they all rejected the poisoned chalice.

The other explanation for Inter’s woes is financial, namely that the club no longer splashes out the vast sums on recruiting players that it has done in the past. Their modus operandi under long-serving president Massimo Moratti has been to run the business at a huge loss ever year, which has only been made possible by the owner covering the deficit with continual capital injections.

In fact, in the 16 years since Moratti took over, the club has accumulated losses of around €1.3 billion with the president personally putting in over €750 million. Moratti has been criticised by many Inter fans, but he can hardly be accused of not putting his money where his mouth is. Even if his decisions have not always been the best, the reality is that the president’s financial support has been an absolutely essential part of the club’s success.

However, this approach will not work in the future, as Inter are faced with the new challenge of UEFA’s Financial Fair Play (FFP) Regulations, which will ultimately exclude from European competitions those clubs that fail to live within their means, i.e. make a profit.

This effectively means that Inter need to slash their spending, especially transfer fees and wages. Although the new rules have destroyed Inter’s traditional business model, they were initially welcomed by Moratti, ”Some thought that FFP was against owners like me, but I say that at last it means that I can stop putting money into football every day. Inter are so expensive that I wouldn’t recommend it to anyone. I hope that FFP allows us to experience football in a different way.”

The impact on Inter’s activity in the transfer market has been dramatic. In the 12 years up to the end of the 2009 season, their net spend was €473 million (with staggering gross spend of €831 million), while the last three seasons has seen net sales of €24 million. Even when Mourinho spent big on the likes of Samuel Eto’o, Diego Milito and Wesley Sneijder, this was more than covered by the amazing fee received from Barcelona for Zlatan Ibrahimovic.

The new regime was explained this summer by chief executive officer Ernesto Paolillo, “We have to sell, then after we have sold we will see what Inter will buy. Absolutely, we are thinking of FFP.” His views were echoed by sporting director Marco Branca, when explaining that the club could no longer afford the fees commanded for top talent like Alexis Sanchez, “We have to organise our finances for the financial fair play rules in the next two years. We are looking for younger players now with great talent, who we can develop.”

That policy has meant the arrival of youngsters like Ricardo Alvarez, Yuto Nagatomo and Philippe Coutinho, but the reluctance to spend also contributed to the departure of Rafael Benitez, who had issued the club with a “back me or sack me” threat.

This belt tightening is clearly evident when looking at the net spend in Serie A over the last three seasons with Inter’s net sales of €24 million only exceeded by Udinese, a famous selling club. Although it is true that most clubs have reduced their transfer expenditure, it is noticeable that in the same period two of Inter’s main rivals, Juventus and Napoli, lead the way with over €100 million apiece. Juventus currently lead the league, while Napoli are going great guns in the Champions League…

Of course, that is the downside of turning the taps off, as there is a good chance that the team will become less competitive, at least in the short-term. There has clearly been a diminution in Inter’s offensive capacity with Ibra and Eto’o (21 goals in Serie A last season) being followed by Mauro Zarate and Diego Forlan, especially as the Uruguayan is ineligible for the Champions League group stages.

The fundamental reason that the club needs to address its finances is, of course, its massive losses. Over the last five years, these have amounted to a shocking €665 million. Eat your heart out, Manchester City. A couple of years ago, Moratti attempted to explain this, “The considerable loss is justified to keep our team at the top level worldwide.” In other words, it’s the price of success.

There are a couple of ways of looking at the trend. On the one hand, the losses have been largely reducing since the €207 million reported in 2007, but on the other hand there was certainly plenty of room for improvement. The best result in recent years was the €69 million loss in 2010, though that was heavily influenced by the Champions League success and the sale of Ibrahimovic.

What is quite worrying is the deterioration last season to an €87 million loss, especially as the word on the street was that the deficit would be “only” €60 million, thus raising grave concerns that the plan to be in line with FFP was already in tatters.

Of course, Inter are by no means alone among Italian teams in making losses. If we look at a schedule of the profit and loss accounts of Serie A teams over the last two (fully reported) seasons, it’s a sea of red ink with only six clubs profitable over that period. However, it’s the magnitude of Inter’s losses that is striking with the club recording the largest losses in each of those seasons. Their cumulative loss of €223 million was far higher than the next worst club, Milan with €77 million.

The other negative point to note is Inter’s high reliance on player sales. In fact, if we exclude profit from this activity plus the largely positive impact of exceptional items, then the situation becomes even more stark, as the underlying loss has averaged around €150 million over the last four years.

Profit on player sales was worth an impressive €72 million in 2010 (largely Ibrahimovic €54 million, Biabiany to Parma €5 million and Maxwell to Barcelona €4 million) and a net €31 million in 2011 (mainly Balotelli to Manchester City €22 million, Burdisso to Roma €8 million and Destro to Genoa €5 million). The latter sum would have been even higher if Inter had not had to write-off an incredible €21 million on some player sales, notably Quaresma to Besiktas (€13 million) and Mancini to Atletico Mineiro (€5 million).

Both 2006 and 2007 were adversely impacted by a change in the accounting treatment for the amortisation of transfer fees, while 2006 was boosted by the sale of Inter’s brand to a subsidiary. In the last couple of years, profits have been enhanced by €16 million compensation paid by Real Madrid to secure Mourinho’s services and a €13 million payment by RAI for the right to use the image library.

It’s not as if Inter’s revenue is too shabby. In fact, for 2009/10 (the last season when all Italian clubs have published their accounts), their revenue of €225 million was the largest in Serie A with only Milan and Juventus anywhere near them. Roma were the only other club with revenue above €100 million, while the others were miles behind the nerazzurri.

Inter’s revenue also places them 9th in Deloitte’s European Money League, which on the face of it is pretty good, though problems begin to emerge when we take a closer look, as they are a long way short of their peers abroad. Real Madrid and Barcelona, generate around €400 million, which is around twice as much as Inter. As well as benefiting from substantial individual TV deals, the Spanish giants are also allowed to count membership fees as income (instead of capital increases).

Both Manchester United and Bayer Munich earn around €100 million more, the English taking advantage of significantly higher match day revenue, while the Germans’ commercial expertise puts Inter to shame. This vast revenue discrepancy makes it difficult to compete, especially when that shortfall in turnover occurs every year.

Those of you who take a keen interest in football finances may be wondering why the revenue figures used in the Money League are lower than those reported in Italy. The reason for the difference is that Italian accounts report gross revenue, while Deloitte uses net income, as this is consistent with the approach used in other countries. Therefore, for 2009/10 this excludes the following: (a) gate receipts given to visiting clubs €3 million; (b) TV income given to visiting clubs €18.4 million; (c) revenue from player loans €1.1 million; (d) change in asset values €3.4 million. Adding the €25.8 million adjustments to the €224.8 million in my analysis gives the €250.6 million reported in Italy.

Inter’s challenge is made all the more difficult by the underlying problems in Italian football. This year a report form the Italian Football Federation (FIGC) concluded, “The current business model is difficult to sustain and not very competitive.” Its president, Giancarlo Abate, noted that in particular match day income, sponsorships and merchandising were in need of urgent attention to reduce the reliance on TV money.

Ten years ago the total revenue of clubs in Serie A of €0.9 billion was only just behind the Premier League’s €1.1 billion and practically double the other major leagues (Bundesliga, La Liga and Ligue 1), who all earned around €0.5 billion. Last year, the picture looked very different with the Premier League’s revenue surging to €2.4 billion, while the Bundesliga and La Liga had both caught up with Serie A at €1.5 billion with Ligue 1 trailing at €1.2 billion.

This is reflected in the revenue growth of leading European clubs. Although Inter’s growth looks pretty good against other Italian teams, it pales into insignificance compared to top teams in Spain, England and Germany. Two examples will illustrate that: first, Arsenal’s revenue in 2005 was €28 million less than Inter’s, but is now €48 million more; second, Barcelona’s revenue was only €47 million higher six years ago, so just about within striking distance, but is now far over the horizon at €234 million higher. As Milan’s CEO, Adriano Galliani said, “Twenty years ago Milan invoiced more than Real Madrid, today only half. That’s the real problem.”

Overall, Inter’s revenue has only grown by 13% in the last five years from €188 million to €213 million. Like all the big Italian clubs, the majority of Inter’s revenue (59%) comes from television with €124 million. According to the FIGC report, Serie A has the highest dependency on TV income of any of the leading five leagues at 65%, compared to France 60%, England 50%, Spain 38% and Germany 32%.

The flaws in Inter’s business model are clear with only 25% generated by commercial operations (€54 million) and 15% from match day (€33 million). In the last two years, these last two revenue streams have barely increased at all and only television has contributed any meaningful growth, largely due to a more lucrative Champions League contract.

In 2009/10, Inter earned an impressive €138 million from television, which was the highest in Italy, thanks to a combination of an attractive domestic individual deal and those Champions League millions. Only Juventus and Milan were in the same ballpark (for identical reasons), while all other Italian clubs received considerably less money, e.g. Napoli, Lazio and Fiorentina got less than half those sums at around €40 million.

Years of protest at this lack of a level playing field finally led to a new collective agreement being implemented at the beginning of last season. There is a complicated distribution formula, which still favours the bigger clubs, though the result is a small reduction at the top end. Under the new regulations, 40% will be divided equally among the Serie A clubs; 30% is based on past results (5% last season, 15% last 5 years, 10% from 1946 to the sixth season before last); and 30% is based on the population of the club’s city (5%) and the number of fans (25%).

So, the larger clubs will lose out from the new arrangement, but mid-tier clubs should benefit. There has been much discussion over how the number of fans (worth 25% of the deal) will be calculated, leading to a major dispute between the larger clubs and the smaller clubs, but this now looks to have been resolved.

An article in La Repubblica suggested that Inter would lose €8 million, but the reduction reported in the accounts is far smaller with the domestic TV money falling just €3 million from €89 million to €86 million, though it is not clear whether this is a final figure or just an estimate while negotiations continued.

One reason that the decrease might be lower than anticipated is that the total money guaranteed in the new collective deal by media rights partner Infront Sports is approximately 20% higher than before at around €1 billion a year, which cements Italy’s position as the second highest TV rights deal in Europe, only behind the Premier League, but significantly ahead of Ligue 1 and La Liga. In fact, Italy’s deal is worth twice as much as the Bundesliga.

That’s particularly impressive, given how little is received for foreign rights, though there is some optimism that this will increase in the next round of contract negotiations. On the other hand, it is not completely clear what will happen with the 2013-15 deal for domestic rights. Although €2.5 billion has been secured from Sky/RTI for 12 of the 20 Serie A clubs, the league is still to determine how to handle rights for the eight clubs not included.

Somewhat puzzlingly, I can find no trace in Inter’s accounts of prize money for the UEFA Super Cup (runners-up €1.2 million) and the FIFA Club World Cup (winners $5 million) that were both disputed in 2010, so it might be the case that this money will only be booked in the 2011/12 accounts.

The Champions League has been kind to Inter financially with over €115 million received in the last three years in participation and prize money alone, though Europe’s flagship competition can be something of a double-edged sword, as their revenue declined by €11 million in 2011 from €49 million to €38 million, due to Inter only reaching the quarter-finals compared to winning the trophy the previous season. Those are just the television distributions, but there are also be additional gate receipts and bonus clauses in various sponsorship deals.

The Europa League's TV distribution is very low in comparison, so last season the four Italian representatives only earned around €2 million each. Although none of them progressed further than the last 32, the highest pay-out was still only €9 million. However, at least this tournament still delivers additional gate receipts.

One glaring weakness for Inter is match day revenue, which is very low at €33 million, down from €39 million the previous year, largely due to a reduction in Champions League gate receipts from €17 million to €7 million.

Although this is the highest in Italy, it is tiny compared to leading clubs abroad. This is perhaps best illustrated by a comparison with Manchester United and Arsenal, who earn €126 million and €108 million respectively. This works out to around €4 million revenue a match, which is over three times as much as Inter (€1.3 million), even though their stadiums are smaller.

Inter’s average attendance of 58,000 in 2010/11 is impressive (again the highest in Italy) and was actually the eighth best in Europe, but San Siro suffers from having hardly any premium seats or corporate boxes, which are the money spinners elsewhere.

This is why Inter have been exploring opportunities for moving to a new stadium that could maximise their revenue earning potential, including naming rights, as explained by Paolillo, “In Europe the stadium makes money seven days out of seven.” Not only that, but Inter have to pay €4.3 million rent a year to the local council, who own the stadium.

Unfortunately for Italian clubs, Italy failed in their bids to host either the 2012 or 2016 Euros, which would have been a catalyst to upgrade. Juventus are the only top club that owns its own stadium, which they hope will double their match day income. Even that project was beset with bureaucratic delays, which is why Paolillo hopes that new laws will be introduced to facilitate the construction of new stadiums. Patience will still be required, as Moratti recently explained that it would not be possible to move “in the short-term”.

Even after a €6 million rise in commercial revenue in 2011 from €48 million to €54 million, this is still fairly low for a club of Inter’s history. Perhaps understandably it’s less than Milan and Juventus, but it’s only just higher than Roma and Napoli. More pertinently, it’s significantly lower than Bayern Munich, who earn an astonishing €173 million.

Inter have enjoyed very long-term relationships with commercial partners, but this may have prevented them from taking up more lucrative opportunities elsewhere. Pirelli have been Inter’s shirt sponsor since 1995, but only pay €12 million a year. Similarly, kit supplier Nike have been partners since 1998, also paying €12 million a year.

To be fair, this compares favourably with deals at other Italian clubs: (a) shirt sponsors: Milan – Emirates €12 million, Juventus – BetClic €8 million, Napoli – Lete €5.5 million and Roma – Wind €5 million; (b) kit suppliers: Milan – Adidas €13 million, Juventus – Nike €12 million, Roma – Kappa €5 million and Napoli – Macron €4.7 million.

The issue is that these deals are much lower than leading clubs abroad. For example, the following clubs all have shirt sponsorships worth more than €20 million a season: Barcelona, Bayern Munich, Manchester United, Liverpool, Manchester City and Real Madrid.

Belatedly, they are looking to make more from global opportunities, hence playing the Italian Super Cup match against Milan in the Bird’s Nest stadium in Beijing, but they have a lot of ground to make up.

The other factor damaging Inter is one facing all Italian clubs, namely a problem with fake merchandising. They can seemingly do little to prevent this, but have asked the state to tackle the issue. That’s a generic issue, but one specific to Inter is the annual €16 million payment for use of the brand after the earlier operation to sell this to one of its subsidiaries.

However, the most important challenge for Inter is their wage bill. The good news is that they managed to cut this by €44 million in 2011 from a frightening €234 million to €190 million, thus reducing the important wages to turnover ratio from 104% to 89%, so it now comprises player salaries €149 million, coaching staff €16 million, bonus payments €13 million, other staff €6 million and social security €6 million.

On the face of it, this is a notable achievement, but it masks some worrying factors. The main reasons for the decrease were a €38 million cut in bonuses, due to the Champions League payments the prior year, and a €9 million reduction in coaching salaries, following the departure of Mourinho. The player salaries actually rose by €3 million, which was not in the plans, probably due to the number of “senior citizens” still on the books.

In addition, this is still a very high wage bill by anybody’s standards. As a comparison, it’s only €10 million below big-spending Manchester City’s €200 million (the highest wage bill ever reported by an English club). It’s also more than a third higher than the €142 million paid by Inter as recently as 2006.

Furthermore, it remains one of the largest wage bills in Italy, e.g. in 2009/10 Inter’s wages were about the same as Juventus and Roma combined. An analysis by La Gazzetta dello Sport this summer suggested that Milan had overtaken Inter in the wages stakes (at least for the first team squad) with €160 million compared to €145 million, but it’s far from certain that their figures are accurate. In any case, a wage to turnover ratio of just under 90% is nothing to write home about and is much worse than UEFA’s recommended maximum limit of 70%.

The other element of player costs, namely amortisation has also been reduced in 2011 from €61 million to €53 million, though it is still two thirds higher than it was in 2008, and is higher than other leading Italian clubs with Milan, Juventus and Napoli the closest at around €40 million.

For non-accountants, amortisation is the annual cost of writing-down a player’s purchase price, e.g. Gianpaolo Pazzini was signed for €19 million on a 4½ year contract, but his transfer is only reflected in the profit and loss account via amortisation, which is booked evenly over the life of his contract, i.e. €4.2 million a year (€19 million divided by 4.5 years).

"Old man river keeps rolling along"

Despite Inter’s history of large losses, they have publicly welcomed FFP. Paolillo said that the initiative was the right one for the football industry in order to avoid the collapse of clubs, likening the state of the sport’s finances to the sub-prime banking crisis. More specifically, he added that Inter was up for the fight, “We will be ready to meet all the standards set by UEFA and we are working on various fronts. That means cutting costs and increasing revenues.”

All of the losses made to date are not considered for FFP, as the first accounts to be included in the calculation are those for 2011/12. Inter seem quite optimistic about their ability to meet the targets with talk of reducing the loss to €30 million this season and reaching break-even in two years, which would be within UEFA’s acceptable deviation of €45 million for the first two years.

However, that is by no means a done deal, especially as Inter’s track record for financial planning is not the best, as seen by last year’s figures where the loss widened to €87 million, much worse than the forecast improvement to €60 million.

"Me and Julio down by the school yard"

So let’s try to project Inter’s loss for 2011/12, based on the information we already have. This is accompanied by a health warning that this type of analysis will never be 100% accurate, as some of the reported figures are not certain, e.g. transfer fees, wages and contract extensions. Nevertheless this exercise should give us a strong indication of whether Inter are at all close to achieving their objectives.

1. Exceptional Items

By definition, the 2010/11 once-off €13 million payment for use of the image archive should not be repeated every year, so this should be excluded.

2. Financial Fair Play Adjustments

It is not generally appreciated that UEFA’s break-even calculation is not the same as a club’s statutory accounts, as it excludes certain expenses that are considered to represent positive investment, such as expenditure on youth development (€10 million) and community (€2 million) plus depreciation on tangible fixed assets (€4 million), which gives a total of €16 million to be deducted.

Youth development and community investment are not separately disclosed in the accounts, so these values are estimates based on similar reviews of other clubs.

"Two Diegos for the price of one"

3. Revenue

Even though there is much potential for growing revenue in the long-term, Inter have limited scope for increases next year. Nothing will happen on the stadium front, the TV deal is unchanged and the club is locked in to its main sponsorship agreements. The only wild card is how far Inter progress in the Champions League – though there is also the issue of what happened to the €5 million revenue from the UEFA Super Cup and the FIFA Club World Cup.

All in all, I have assumed that revenue remains flat.

4. Profit on Player Sales

The post-balance sheet events section in Inter’s accounts inform us that they have already made €25 million profit on player sales, largely due to Eto’o going to Anzi Makhachkala and Davide Santon to Newcastle United. Unless further sales are made in the January transfer window, this means a €6 million reduction year-on-year, as 2010/11 included €31 million profit here.

The problem for Inter is that they would need to maintain this level of player sales each year (unless they can compensate for €25 million elsewhere), so their fans can expect at least one star, such as Sneijder, Maicon or Julio Cesar, to be sold next summer. Indeed, Sneijder has already admitted, “Inter need money and I’m for sale if the right offer comes in.”

Of course, a strategy of “selling the family silver” is finite (and potentially counter-productive), unless Inter acquire an ability to develop players for sale, maybe through their academy. What’s for sure is that Inter will never repeat the mega profits made from the Ibrahimovic coup.

5. Wages

Inter are attacking their wage bill on a number of fronts: (a) a “salary cap” of €3 million for a first team player, unless he is a superstar; (b) the future remuneration package will have a lower basic salary with a higher bonus element geared to success; (c) contracts for older players will extended at a lower salary; (d) expensive, fringe players will be offloaded when possible, e.g. Sulley Muntari; (e) high earners like Eto’o, Mancini and Suazo will be allowed to leave; (f) and replaced with younger, cheaper players.

This all sounds very logical, though some strange decisions have still been taken, such as the recent contract extension for Lucio, who has been a great player, but whose best days are clearly behind him.

Using the salaries published in La Gazzetta, the impact of new signings in 2011 is estimated to increase the wage bill by €22 million. Note that Pazzini, Ranocchia and Nagatomo were all recruited in January 2011, so the cost impact for 2011/12 is only six months.

"Ricky, don't lose that number"

For the departures, I have taken the net salaries from La Gazzetta and uplifted them by 50% to calculate the gross cost with the exception of Eto’o whose cost has been widely reported as €20 million. That produces savings of €39 million in 2011/12.

Similarly, the net impact of loan deals (Zarate and Poli in, Pandev and Mariga out) is a €1 million saving.

In total, the wage bill should come down by €18 million – though there will obviously also be the impact of Primavera moves, any new contracts and bonus payments.

There is talk of slashing the wage bill to around €120 million, but that is a long way off.

6. Player Amortisation

Although the 2011 signings have relatively low salaries, they also increase the costs via the amortisation of their transfer fees, which I have estimated as €18 million per annum, though the impact in 2011/12 will be only €14 million, due to some costs being booked last year for players purchased in January.

The €12 million forecast reduction in amortisation should be fairly accurate, as these figures are taken directly from Inter’s accounts. There is no improvement shown for some departures, as the players were either home-grown (so no amortisation) or have been fully amortised in the accounts, e.g. Marco Materazzi.

The net impact is a small increase of €2 million, though I would expect Inter’s frugal policy in the transfer market to eventually bear fruit, leading to a sizeable reduction in a few years.

Adding up all of the factors above (1 to 6) would produce a 2011/12 loss of €88 million for Inter, though this falls to €72 million once the FFP adjustments are excluded. Little wonder that Moratti warned, “We are not yet able to balance the books. I don’t know how Italian clubs will play in the Champions League in future, if UEFA’s fair play is confirmed.”

Looking at the projected figures, his recent pessimism is perfectly understandable, but there is a clause in the small print of the FFP regulations (Annex XI) that states that clubs will not be sanctioned in the first two monitoring periods, so long as: (a) the club is reporting a positive trend in the annual break-even results; and (b) the aggregate break-even deficit is only due to the 2011/12 deficit, which in turn is due to player contracts undertaken prior to 1 June 2010.

In other words, Inter would be allowed to exceed the “acceptable deviation” of €45 million by the costs of pre-June 2010 signings, so long as the 2011/12 deficit was only due to this factor.

Assuming that this clause refers purely to wages (and does not include player amortisation), I have calculated this exclusion for “big name” players to be €66 million. Note that players whose contracts have been extended since 1 June 2010 are not counted (as explicitly noted in the regulations), so I have not included Milito, Zanetti, Sneijder and Lucio.

This would reduce the FFP result for the break-even calculation to just €6 million, which I am sure UEFA would look on favourably.

So it seems that Inter’s old boys might have saved them once again. Although this is a temporary factor, it does at least buy Inter more time to get their house in order, though, as we have seen, that effectively means more work (a lot more work) on the wage bill.

Of course, the greatest threat to Inter’s bottom line next year is if they fail to qualify for the Champions League (for the first time in 10 years). Given their awful start, that is no longer a formality, especially as Italy now only has three places following the loss of one to Germany this season, though it should be remembered that their form in the second half of last season was superlative and they should be helped by the return of some of their stars from injury.

"King Money"

Some have suggested that UEFA would never apply the ultimate sanction of throwing a leading club out of their competitions, but Moratti is not so sure, “I do believe they will go ahead with it, so you can’t pretend it’s not happening.” His view are supported by UEFA’s General Secretary, Gianni Infantino, “We will apply these rules strictly in order to safeguard the future of our game.”

In the meantime, Inter are pushing ahead with their plans, including a focus on youth, not just in terms of buying less experienced players, but also their own academy. Even if their youngsters do not progress to the first team, they can be sold profitably or used as makeweights in deals, as Biabiany was when buying Pazzini from Sampdoria.

From the perspective of FFP, it would make little sense for Moratti to step aside, as benefactors are no longer allowed to support losses by putting in money. That said, it is possible that a Sheikh or Russian billionaire might be better placed to secure “friendly” sponsorship deals, as Manchester City have done with Etihad.

For the time being, it looks like Inter will have to continue on their path of austerity, echoing the philosophy of the new Italian government. In truth, they are caught between a rock and a hard place, as they need to rapidly cut costs, but at the same time their squad is in urgent need of rejuvenation. It’s a tricky problem, but they somehow need to resolve it if they wish to once again compete at the highest levels.

Manchester City - The Masterplan

2011-12-01T14:28:00.024+01:00

After many years in the wilderness, these are good times to be a Manchester City fan. Last season their team recorded its best ever performance in the Premier League by finishing third, thus qualifying for the Champions League for the first time, and won its first major trophy for 35 years when defeating Stoke City in the FA Cup final.

Their momentum has continued this season (at least on the domestic front), as they lead the Premier League by five points after a series of impressive victories, including an astonishing 6-1 triumph against local rivals Manchester United at Old Trafford, and have reached the semi-finals of the Carling Cup. However, they have found life more difficult in Europe, where they now have to rely on others to avoid elimination at the Champions League group stage.

Nevertheless, the force appears to be with the Citizens, boosted by the £800 million or so that Sheikh Mansour has invested since his Abu Dhabi United Group bought Manchester City three years ago. Quite simply, this is a club transformed.

Of course, that is most clearly seen in the huge amounts of money spent on recruiting new players, which has had a dramatic impact on the club’s performance, both on the pitch and on the financial side of the “project”.

In fact, they have just announced the largest loss in English football history of £197 million, which easily surpassed the previous record of £141 million reported by Chelsea in 2004/05, the first full year after the acquisition by their Russian benefactor Roman Abramovich. In fairness, £34 million of the deficit was due to exceptional items that should not be repeated in future seasons, but the loss would still have been a hefty £163 million.

Admittedly, most football clubs are loss-making with only 4 of the 20 Premier League clubs registering profits in 2009/10, but few have burned through the cash like City, who have accumulated losses of £411 million in the last three years: 2009 £93 million, 2010 £121 million and 2011 £197 million. This is not quite unprecedented, as Inter suffered aggregate losses of around £440 million in the three years between 2007 and 2009, but it’s rare for large clubs to lose this sort of money.

Bayern Munich and Real Madrid are consistently profitable, the German club reporting profits for an incredible 19 years in a row, while even Manchester United managed to make money last year, despite the significant interest burden on the loans taken out by the Glazers.

However, perhaps the closest equivalent to City are Chelsea, whose wealthy owner also chose to aggressively splash money on talent in a bid to compete with clubs that generate more revenue. Here there is some encouragement for City’s financials, as Chelsea have managed to reduce their losses over the years – though they are still a long way from break-even.

City are looking to follow that example, though they would hope to improve on the end result. As such, they tried to place the latest loss into context, “This result is consistent with the guidance provided in the first MCFC annual report that losses would peak in the 2010-11 financial year, as a result of the accelerated investment programme that the club undertook between 2008 and 2011.”

Chief Operating Officer, Graham Wallace, went further, “These financial results represent the bottoming out of financial losses at Manchester City before the club is able to move towards a more sustainable position in all aspects of its operations in the years ahead.”

The main reason for City’s increasing losses is the investment in the playing squad, which is at the core of that “accelerated recruitment process.” As an example, the 2010/11 figures reflected the signings of Yaya Toure, David Silva, Mario Balotelli, Aleksandar Kolarov, James Milner, Jerome Boateng and Edin Dzeko for the first time.

This acquisition policy has resulted in the wage bill more than tripling since 2008 from £54 million to £174 million, again the highest ever recorded in English football, just above Chelsea’s £173 million in 2009/10. Similarly, player amortisation, namely the cost of writing off transfer fees over the length of a player’s contract, has also grown by more than 200% in the same period from £25 million to £84 million.

As would be expected, the important wages to turnover ratio has also been rising (deteriorating) from a respectable 66% in 2008 to 114% last season. Although some Premier League clubs with very low revenue also have uncomfortably high ratios, City are the only club where the wage bill actually exceeds turnover – and by a whopping £21 million. As a comparison, England’s other Champions League qualifiers have much lower ratios: Manchester United 46%, Arsenal 55% and Chelsea 82%.

The good news is that City’s revenue is rapidly growing, increasing by 22% in 2011 alone from £125 million to £153 million, breaking through the £150 million threshold for the first time in the club’s history. All revenue streams rose: gate receipts by 8% from £18 million to £20 million; media by 28% from £54 million to £69 million, partly due to success on the pitch, including good runs in the FA Cup and Europa League, and partly due to the new Premier League TV rights deal; and commercial income up 22% from £53 million to £65 million.

City’s commercial operations have been the engine driving their growth with revenue surging from £23 million to an impressive £65 million since 2009, mainly due to the impact of new partnerships with Etihad Airways, Umbro, Aabar, Abu Dhabi Tourism Authority and Etisalat, though the new retail agreement with Kitbag has also contributed. City’s commercial income is now only second to Manchester United in England, though Liverpool and Chelsea may have also advanced in the last financial year (accounts not published yet).

What is clear is that City’s revenue growth has been explosive compared to other clubs. Since 2009 their revenue has increased by an amazing 76% (from £87 million to £153 million) with Tottenham the only leading English club to come anywhere close with 46%, almost entirely due to their participation in the Champions League last season. Manchester United and Chelsea achieved a decent 19% and 18% respectively, though were left in City’s slipstream, while Arsenal and Liverpool barely grew at all.

Even before this year’s growth, City had established themselves as one of Europe’s elite in terms of revenue, rising to 11th in Deloitte’s 2009/10 Money League with £125 million. That’s no mean feat, yet, paradoxically, only serves to emphasise the magnitude of City’s task, as the leading clubs generate significantly higher revenue, e.g. last year’s top five earned as follows: Real Madrid £359 million, Barcelona £326 million, Manchester United £286 million, Bayern Munich £265 million and Arsenal £222 million.

While it is true that City’s revenue has since grown to £153 million, the problem is that the revenue is still growing apace at many of the top clubs. Manchester United have advanced to £331 million in 2011 on the back of significant commercial deals, while the Spanish giants have also reported substantial gains in 2011: Real Madrid to £417 million and Barcelona to £392 million.

City’s position in the Money League is even more impressive if you consider that they are the highest ranked of the clubs that did not qualify for the Champions League, a failing that they have obviously resolved this season. The importance of this additional revenue to a club’s finances cannot be over-stated, as seen by the sums earned in Europe last season by English entrants. The four Champions League qualifiers received an average of £35 million in TV money, ranging from £26 million for Arsenal to £47 million for Manchester United, while City and Liverpool both earned just £5 million for their adventures in the Europa League.

The revolution in the blue half of Manchester can be starkly demonstrated by their activity in the transfer market, where they have massively outspent the other leading English clubs in the last five years. In fact, their net spend (purchases less sales) of £440 million is more than the combined net spend of the other five leading clubs: Chelsea £149 million, Liverpool £68 million, Manchester United £53 million, Tottenham £52 million and Arsenal (net sales) £29 million.

Up until the recent injection of funds, City had actually been a selling club with net sales of £5 million in the five years up to 2007. However, last season the club reduced its activity in the transfer market with net spend of “only” £57 million compared to over £100 million in each of the three preceding years.

Of course, the purchases of Sergio Aguero, Samir Nasri, Gael Clichy and Stefan Savic would still be beyond the means of most clubs, but this was at least in line with the promise made by Chairman Khaldoon Al Mubarak regarding the 2011 budget, “It won’t be like last summer or the summer before. What you will see this year is strengthening the squad in areas that we feel require more depth.”

None of this big spending would really be an issue if it were not for the advent of UEFA’s Financial Fair Play (FFP) regulations, which essentially aim to force clubs to live within their means, i.e. break-even. Clearly, City are currently a long way from achieving this, a point acknowledged by Chief Football Operations Officer Brian Marwood, “We’ve got a huge amount of work ahead of us to make sure we are sustainable.”

City’s challenge was highlighted by no less than UEFA President, Michel Platini, when he specifically mentioned the club last year during the announcement of the new financial rules, “Manchester City can spend £300 million if they want to, but if they are not breaking-even in three years, they cannot play in European competition.”

However, City’s former chief executive Garry Cook never seemed too concerned, “We have a very open dialogue with UEFA. We have had several meetings with them and they are very supportive of our plans.” This is a theme echoed by Graham Wallace, “As we undertake the club’s commercial transformation, we are cognisant of the incoming UEFA Financial Fair Play regulations and consequently we continue to maintain positive and ongoing dialogue with all appropriate football authorities.” As the actor Bob Hoskins used to say in the BT advert, “It’s good to talk”, but what does FFP mean in practice?

The first season that UEFA will start monitoring clubs’ financials is 2013/14, but this will take into account losses made in the two preceding years, namely 2011/12 and 2012/13, which means two things: (a) the £197 million loss in 2010/11 is not relevant for the FFP calculation; (b) City’s accounts need to be in better shape pretty quickly.

However, they don’t need to be absolutely perfect, as wealthy owners will be allowed to absorb aggregate losses (so-called “acceptable deviations”) of €45 million (£39 million), initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions, which is a fairly safe assumption in the case of Sheikh Mansour. The maximum permitted loss then falls to €30 million (£26 million) from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount). Note that these sums represent aggregate losses, not a yearly loss.

"Silva and Gold"

Even with all these allowances, the popular view seems to be that City have little chance of reaching break-even in the near future, as expressed by Bayern Munich chief executive Karl-Heinz Rummenigge, who is also chairman of the European Club Association, “Maybe they know a trick I don’t that will allow them to take part in the Champions League.”

Clearly, City have a long way to go to reach break-even, but it’s not completely out of the question, as we shall see from the 15-point plan below, which looks at how City can improve their finances both in the short-term (over the next two seasons) and in the long-term, starting from their current pre-tax loss of £197 million.

It should be noted that this plan is not necessarily a prediction of City’s next set of financials, but merely an example of how they could substantially improve their figures. A number of assumptions have been made particularly regarding transfer fees and salaries, which are notoriously untrustworthy even though they are widely reported. Nevertheless, any minor inaccuracies should not materially affect the principal conclusions.

1. Exceptional Items

The 2010/11 loss included £34 million of exceptional items, comprising £29 million for the impairment of player registrations and a £5 million provision for a “disputed employment costs settlement”, which is not explained, but probably relates to the departure of former manager Mark Hughes and his coaching team.

Impairment is an accounting term for reducing the value of players in the books, as the club decides that they are no longer worth so much. Although the names of the players are not divulged, my guess is that this relates to those players who were released for free (namely Craig Bellamy and Jo) and those who are unlikely to command a fee in future, due to their high wages (e.g. Roque Santa Cruz and Wayne Bridge). My calculations suggest that writing the value of those four players down to zero would have cost almost exactly the £29 million impairment charge.

In any case, such charges by definition should not be repeated every year. Similar treatment might be required for Carlos Tevez and Emmanuel Adebayor, though their net book value in the accounts is probably now low enough to be covered by reduced transfer fees.

"Samir's Town"

2. Financial Fair Play Adjustments

It is not generally appreciated that UEFA’s break-even calculation is not exactly the same as a club’s statutory accounts, as it excludes certain expenses, including depreciation and finance costs on tangible fixed assets plus expenditure on youth development and community development activities.

In City’s case, this means that £6 million of depreciation can be removed right off the bat. Finance costs are not so clear, but I have also excluded the £3 million charge on stadium finance leases, though I have not considered the £5 million interest charge, as the link to tangible fixed assets is not clear-cut.

It is also difficult to assess the youth development expenditure, as this is not separately disclosed in the public accounts, but we can make a reasonable estimate of £10 million based on similar reviews of other clubs. The formation of the Elite Development Squad plus other investment in the academy should easily justify such a sum. In addition, I have excluded a notional £2 million for community development, which may be a little conservative, given City’s strenuous efforts in this area.

Therefore, in total, the Fair Play rules allow City to reduce their expenses by £21 million: £6 million depreciation, £3 million stadium finance lease charges, £10 million youth development and £2 million community development expenditure.

3. Wages – New Signings

The 2010/11 accounts do not include the cost of any new signings after 31 May 2011, which means that we need to add the wages for Aguero, Nasri, Clichy and Savic. Taking Nasri as an example, his wages have been estimated at £150,000 a week, which works out to £8 million a year. In addition, Dzeko joined in the January 2011 transfer window, so the last accounts did not include a full year salary, meaning the remainder has to be added to future years. Although players’ salaries are not divulged, we can make reasonably accurate estimates, giving us a total of £30 million increase in the wage bill.

4. Wages – Departures

On the other hand, six high-profile players left this summer, namely Jerome Boateng, Jo, Shay Given, Shaun Wright-Phillips, Craig Bellamy and Felipe Caicedo, which should have removed around £22 million from the wage bill. It is true that Bellamy and Caicedo were on loan last season to Cardiff City and Levante respectively, but rumour has it that the vast majority of their salaries were still covered by City, so that should not be too much of a factor.

5. Wages – Loans

One consequence of City’s large squad is that they loan out many players to other clubs. Although this also happened last year, it is clear that this policy has been ramped up this season with the annual report noting that the club have “successfully loaned out 22 players.” Therefore, it seems a fairly safe assumption that this has taken a further £5 million off the wage bill. Note that I have not included Adebayor (loan to Tottenham) or Santa Cruz (Betis) in this calculation, as they will be covered by a later point (15).

6. Wages – Normalised Level

As a result of City’s accelerated acquisition of players, their wage bill has surged to £174 million. As recently as 2008, this was lower than Chelsea, Manchester United, Arsenal, Liverpool and Tottenham, but has overtaken all of them in just four years.

However, there are three reasons to expect this to fall in future: (a) City should be able to offload those fringe players who are unlikely to feature for the first team again and are thus surplus to requirements, notably those bought during the Mark Hughes era, such as Adebayor, who would save nearly £8 million alone. (b) Up until recently, City have had to pay a premium to attract players from more established clubs, but a period of success should remove that. (c) More players should progress from the academy.

In theory, the wage bill could be slashed, but I have conservatively assumed a reduction long-term of £21 million to £153 million to be in line with Manchester United’s latest figures, though well ahead of Arsenal’s £124 million. Chelsea’s last reported 2009/10 figures of £173 million are out of date and likely to fall, as the departure of many high earners should have offset the arrival of new signings.

7. Reduced Player Amortisation

When a player is purchased, his costs are not immediately booked to the profit and loss account, but they are capitalised as an asset and written-off over the length of his contract, so there will be a cost impact for a few years. As an example, it was reported that Sergio Aguero was signed for £35 million on a 5-year contract, so his annual amortisation is £7 million (£35 million divided by 5 years).

The impact of signings and departures in 2011 on the next accounts can therefore be reasonably estimated and works out to an increase of £20 million for new arrivals less £14 million for those leaving.

However, City have also been quite astute with their impairment in 2010/11. If I am right in my assumption that they have written-down the value of Santa Cruz and Bridge to zero, that means that there is no more amortisation for those players, reducing the annual charge by £6 million.

Adding together all the adds and drops suggests that the player amortisation will be more or less unchanged next year, though it should fall over time as players come to the end of their contracts, especially if City continue to lower their activity in the transfer market. There is an obvious precedent for this, as Chelsea’s player amortisation decreased from £83 million in 2005 to £38 million in 2010.

"Captain Sensible"

One incentive for City to sell Tevez at a bargain price is to remove his player amortisation from the accounts, which could be worth as much as £9 million a year.

Another policy that I would expect City to apply is to extend player contracts, as any remaining written-down value is amortised over the extended period, which means that the annual amortisation will reduce. For example: a player is bought for £20m on a 4-year contract, so the annual amortisation is £5m. After 2 years, his contract is extended by a further 2 years, meaning that he now has 4 years left on his contract. At the point of renegotiation, his value was £10m (£20m cost less 2 years amortisation at £5m). The new amortisation charge would be £2.5m a year (the remaining £10m divided by the 4 years now left on the contract).

My assumption is that in the long-term City will manage to lower player amortisation by £34 million from £84 million to £50 million, which is still 25% higher than other leading clubs (Liverpool £40 million, Manchester United £39 million and Chelsea £38 million).

8. Etihad Sponsorship

The astonishing 10-year sponsorship deal with Etihad Airways was not included in last year’s figures and will have a major impact. The financials have not been divulged, but a range of £350-400 million has been widely reported. Given City’s need to improve the figures, I shall assume the higher figure, which means £40 million a year. Again, the split of the deal has not been published, but in an earlier piece I assumed that the shirt sponsorship is worth £20 million a year, the stadium naming rights £10 million and the campus another £10 million.

UEFA have yet to decide whether this deal falls foul of their “fair value” ruling, but it is my belief that this will be passed. In any case, even if UEFA rules that City’s deal is above fair value, it is only the excess that would be deducted from the club’s income for the purposes of the FFP break-even calculation and not the entire agreement, so if the deal is worth £40 million a year and UEFA consider the fair value to be £35 million, only £5 million would be deducted.

As Etihad already pay £7.5 million for shirt sponsorship, the uplift would be worth £32.5 million.

9. Other Commercial Deals

City have already gone great guns in increasing commercial income, adding partners like EA Sports, Mansion Group, Thomas Cook, Jaguar and Heineken, but are gearing themselves up to really boost this activity, e.g. by establishing a permanent office in London in a bid to emulate Manchester United’s record-breaking performance here.

Recently, the national media reported that they were set to agree a new £200 million kit deal with Umbro at the end of the season. Even though they are only three years into a 10-year deal, City’s progress means that this can be reviewed and there is talk of a significant increase in the annual payment from £6 million to £26 million. This might seem outrageously high, but is on a par with the sum Umbro already pays for the England team and is around the same level as the sums received by Liverpool from Warrior and Manchester United from Nike (though the latter is likely to rise to £35 million).

"Hand to Mouth"

As well as the £20 million increase from Umbro, I have assumed four more secondary sponsorship deals at £1.5 million a time, which would produce another £6 million, giving a total increase of £26 million. In the long-term, I have been very cautious by only adding a further two secondary deals (worth £3 million), giving long-term growth of £29 million.

That does not include any potential clauses for increases in sponsorship deals from competing in the Champions League. Nor have I attempted to assess any additional commercial revenue from City’s ambitious Etihad Campus development.

10. TV – Premier League

One of the reasons for City’s revenue growth last season was an additional £6 million from the Premier League, giving £55 million, mainly due to the substantial increase in overseas rights for the new three-year deal. At the top of the league, there’s not an enormous financial difference between finishing places, due to the equitable nature of the distribution methodology.

Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£17.9 million). However, facility fees (25% of domestic rights) depend on how many times each club is broadcast live, and this was worth £10.2 million. Finally, merit payments (25% of domestic rights) are worth £757,000 per place in the league table (£13.6 million).

However, if City were to maintain their current first place and be shown more often live on television, they would receive around £60 million, i.e. an increase of £5 million. In the long-term, it is likely that TV rights will be worth even more, but again I have been conservative by only assuming an additional £5 million, partly because it is unlikely that City will win the Premier League every year.

11. TV – Champions League

Last season the lowest sum received by an English club in the Champions League was €30 million (£26 million) for Arsenal, who were eliminated in the last 16. I have assumed that City do not make it out of the group, so will not receive the €3 million performance prize for the last 16 and will receive less money from the TV pool, working out to €23 million. I have also added €2 million for money earned from dropping down to the Europa League, giving a total of €25 million (£22 million), which is £17 million higher than the £5 million earned last season in the Europa League.

In the long-term, I have assumed that City will be more effective at European level and earn £30 million, which would represent growth of £25 million. Of course, if they were to reach the final, that would be worth at least £45 million.

"Kompany man"

12. Bonus Payments

The price of success on the pitch is higher bonus payments. Frankly, this is impossible to accurately estimate without knowing how much was paid last season (but this is not separately analysed in the accounts) and each player’s remuneration scheme, so I am only going to include a placeholder of a £10 million increase in the short-term (up to £20 million in the long-term). This may be on the low side.

13. Profit on Player Sales

City made £5 million profit on player sales in 2010/11, but it is not unreasonable to assume that they could make £10 million a year from this activity, especially if the academy really starts to deliver. According to my calculations, that is what they should gain in 2011/12 (assuming that the value of Bellamy and Jo was impaired).

Even though there is a temptation to get players off the wage bill, Roberto Mancini has argued that the club should not let players leave for nothing, “They are good players and if there is a club that wants one of them, they must pay.” That might be bravado, but even if players are sold for a cut-price fee, there may well be a resulting profit after cumulative amortisation is taken into consideration.

Of course, City could easily raise significant funds by selling the likes of Silva, Yaya Tore and Balotelli, but that sort of defeats the object.

14. Match Day

City’s Achilles’ heel is their very low match day income, which is only £26 million (gate receipts plus re-allocation from commercial revenue per Deloitte Money League). This works out to around £1 million a match, which is very low compared to Manchester United £3.7 million and Arsenal £3.3 million. It’s not just a question of stadium capacity either, as Chelsea and Liverpool earn £2.4 million and £1.6 million, even thought their grounds are smaller than City’s.

City have partially addressed this shortfall via a new agreement with the council, whereby the club pays them a fixed amount regardless of the attendance instead of the previous percentage, but there is surely room for further growth. This might mean raising ticket prices, increasing the corporate seats or expanding the capacity of the stadium. The first two moves would be unpopular with fans, though a logical ghastly consequence of FFP, while the stadium expansion would be longer-term in nature.

Plans exist to increase the capacity of the stadium from 48,000 to at least 60,000, but this would not be entirely straightforward, due to its awkward design. There have been some concerns that City would struggle to fill a larger stadium, even though their attendances have always been good (4th highest in the Premier League), but this season their crowds have been virtually at full capacity (99%).

Given the higher attendance, especially in Europe, I have assumed a 10% (£3 million increase) in the short-term, while a reasonable long-term aspiration would be to match Liverpool’s match day revenue of £43 million, as the grounds have similar capacity and both clubs operate in the north-west of England (as opposed to the wealthier south), resulting in growth of £17 million.

15. Wages – Players signed pre-June 2010

The small print in the FFP regulations (Annex XI) states that clubs will not be sanctioned in the first two monitoring periods, so long as: (a) the club is reporting a positive trend in the annual break-even results; and (b) the aggregate break-even deficit is only due to the 2011/12 deficit, which in turn is due to player contracts undertaken prior to 1 June 2010.

In other words, City would be allowed to exceed the “acceptable deviation” of €45 million by the costs of pre-June 2010 signings, so long as the 2011/12 deficit was only due to this factor.

Assuming that this clause refers purely to wages (and does not include player amortisation), I have calculated this cost for “big name” players to be £53 million. Note that players whose contracts have been extended since 1 June 2010 are not counted (as explicitly noted in the regulations), so I have excluded Joe Hart, Pablo Zabaleta, Adam Johnson and Micah Richards. This might explain why City are delaying extending contracts for the likes of Vincent Kompany and Nigel De Jong.

In truth, this still does not completely satisfy the condition that the entire 2011/12 break-even deficit is due to these costs (unless player amortisation is also considered), but it is so close that my guess is that UEFA would look favourably upon this, especially if the trend was going the right way.

So, there you have it, Manchester City’s loss could come down to £88 million (still enormous), but for the purposes of FFP this would represent a break-even deficit of only £14 million. This is clearly by no means a done deal, but if they achieved that in the short-term, it would be extremely difficult for UEFA to throw the book at them.

Longer-term, this plan would produce a comfortable FFP result of £11 million (with a loss of just £10 million reported in the accounts). This would require revenue to grow from £153 million to £266 million, almost entirely from commercial operations, which would need to rise by around 100% from £59 million to £120 million. On the face of it, that might sound absurd, but with the Etihad sponsorship and an improved Umbro deal, it’s not completely pie in the sky. As Ian Cafferky, City’s Chief Commercial Officer said in a recent interview with Sports Pro Media, “We’re trying to double our revenues approximately by 2017.”

As a comparative, Manchester United’s current revenue is £331 million, but we know that this will increase, again largely due to commercial gains, so City’s revenue projection is aggressive, but not unrealistic.

"Toure of Duty"

In any case, many believe that UEFA will never throw a leading club out of their competitions, as this would be the equivalent of biting the hand that feeds. Their General Secretary, Gianni Infantino, talks a good fight, “We will apply these rules strictly in order to safeguard the future of our game”, but exclusion is considered to be very much a last resort only to be applied to repeat offenders.

However, UEFA will be acutely aware of the threat of legal reprisals. As Arsenal manager Arsene Wenger, a staunch supporter of FFP, forlornly commented, “With what happened with Sion challenging UEFA, they have lost a lot of power.” A sliding scale of sanctions is set to be announced in January, to be ratified by UEFA’s congress in March, and is likely to feature a number of financial penalties, including fines and the withholding of participation money, and potentially transfer bans (though even these could be challenged as being a restraint of trade).

In the background, City have been lobbying hard to convince UEFA that the club is committed to a sustainable future, based on the significant investment in the academy, which will be seriously impressive, catering for up to 400 young players, with 16 football pitches, a 7,000 capacity stadium for youth matches and on-site accommodation.. As the annual report stated, “In order to achieve this long-term ambition, youth development must be, and is, our top priority.”

"Baldrick, I have a very cunning plan"

This is completely aligned with UEFA’s objectives, as are the community benefits from the ambitious plans to regenerate the local area. Andrea Traverso, UEFA’s head of club licensing, has already visited the Etihad Stadium for a briefing on City’s intentions and he surely won’t be the last to be given the grand tour.

Anyhow, it’s by no means an impossible dream for City to get close enough to break-even in order to satisfy FFP. It’s not quite the Masterplan that their famous fans, Oasis, once sang about, but it’s a smart strategy that has every chance of succeeding – as long as the team continues to do the business on the pitch.