The Swiss Ramble

UEFA Prize Money - Rhapsody In Blue

2013-05-07T15:52:00.001+02:00

The Europa League has long been regarded by leading clubs as a poor relation to the far more lucrative Champions League, but Chelsea’s prodigious efforts after parachuting in to the junior competition might just give pause for thought, as they will end up earning more from Europe this season than any other English club.

Although they earned €5 million less than Manchester United from the Champions League after exiting at the group stage, they will receive at least €6.5 million from the Europa League, even if they lose the final. If they repeat last season’s victory in the Champions League, the sum earned will rise to around €9 million.

This means that Chelsea will receive at least €40.9 million (Champions League €34.4 million + Europa League €6.5 million), rising to as much as €43.4 million if they win the Europa League. Of course, the bad news is that this will still be significantly less than last season’s €59.9 million for the Champions League triumph - though the blow will be somewhat softened by money from the UEFA Super Cup (€2.2 million) and the FIFA Club World Cup ($4 million).

The other three English Champions League qualifiers should still be smiling though, as they have all actually earned more money this season, thanks to a substantial increase in the available prize money (around 22%).

Manchester United’s income rose €4.1 million to €39.3 million, though the difference falls to €2.9 million once the €1.2 million they received from dropping down to the Europa League in 2011/12 is taken into consideration. Similarly, Manchester City’s income increased by €5.8 million to €32.4 million, reducing to €4.6 million after deducting last season’s €1.2 million from the Europa League. Finally, Arsenal will receive €34.5 million, which is €6.2 million higher than the previous season.

As an aide-mémoire, the money for UEFA’s two tournament is divided into two parts: (a) prize money based on participation and results; (b) TV (market) pool.

Prize Money – Champions League

Each of the 32 teams that qualify for the Champions League group stages is guaranteed a participation base fee of €8.6 million even if it loses every single game. There is also a performance bonus of €1 million for each victory in the group stage plus €500,000 for a draw. So if a team manages to win all six of its group matches, it will get €6 million on top of the base fee.

If a team qualifies for the first knock-out round (the last 16), it is awarded a further €3.5 million, while there are additional performance prizes for each further stage reached: quarter-final €3.9 million, semi-final €4.9 million, final €6.5 million and winners €10.5 million. So if you go all the way and win the trophy, you would earn a total of €37.4 million (not counting the TV pool share), which is up from €31.5 million in 2011/12.

Prize Money – Europe League

The principle is the same in the Europa League, though the sums involved are much smaller. Each of the 48 clubs involved in the group stages receives a participation base fee of €1.3 million. In addition, there is €200,000 for each win and €100,000 for each draw in the group stage. A new addition this season, presumably to encourage clubs to give their all, is qualification bonuses for teams that progress to the round of 32: group winners earn €400,000 and runners-up €200,000.

Turning to the knock-out stages, clubs competing in the round of 32 will receive €200,000 each, clubs in the last 16 €350,000, the quarter-finalists €450,000 and the semi-finalists €1 million. The Europa League winners will collect €5 million and the runners-up €2.5 million.

That’s now a pretty good incentive, compared to the €3 million paid to Atlético Madrid, the 2011/12 winners. In fact, the winning club could now receive a maximum of €9.9 million, 54% up from last season’s €6.4 million.

Although the Europa League’s 2012/13 prize money is higher as a proportion of the Champions League (26% v 20%), the gap between the two is actually growing (€27.5 million v €25.1 million).

Nevertheless, it can still be a very useful boost to clubs like Chelsea that drop down from the Champions League, especially if they reach the final, which is worth either €6.5 million or €9 million (assuming €2 million for the Europea League TV pool, based on previous years). It does require Stakhanovite efforts on behalf of the playing squad, which may jeopardise their chances in their domestic league, but, as the figures above indicate, it can make a big difference.

TV Pool

In addition to these fixed sums, the clubs receive a share of the television money from the TV (market) pool, which is allocated according to a number of variables. First, the total amount available in the pool depends on the size/value of a country’s TV market, so the amount allocated to teams in England is more than that given to, say, Spain, as English television generates more revenue. Clubs can also potentially do better if fewer representatives from their country reach the group stage, as the available money is divided between fewer clubs.

In the case of the English clubs in the Champions League, the allocation works as follows:

(a) Half depends on the position that the club finished in the previous season’s Premier League with the team finishing first receiving 40%, the team finishing second 30%, third 20% and fourth 10%.

(b) Half depends on the progress in the current season’s Champions League, which is based on the number of games played, starting from the group stages.

However, the 2012/13 allocation for the element based on the previous season’s Premier League finish was changed following Chelsea’s Champions League win as follows: Manchester City (1st) 30%, Manchester United (2nd) 25%, Arsenal (3rd) 15%, Chelsea (5th) 30%. So, the first three clubs lost a portion of their TV pool following Chelsea’s remarkable success.

TV Pool – Allocation

The TV pool allocation methodology can produce some results which seem strange at first glance, e.g. Manchester United and Arsenal were both eliminated at the last 16 stage, but United received €4.3 million more than Arsenal (€23.2 million v €18.9 million).

This is entirely due to United finishing one place ahead of Arsenal in the 2011/12 Premier League, so receiving 25% of that half of the TV pool (€10.8 million), compared to Arsenal’s 15% (€6.5 million). Of course, both clubs received exactly the same (€12.4 million) for this season’s Champions League progress, which incidentally was more than the €9.3 million for Chelsea and Manchester City, who both went out at the group stage.

Thus, from a purely financial perspective, it is important not just to qualify for the Champions League, but also to qualify in as high a position as possible. Fourth place may be considered a trophy these days, but second or third place are worth even more to the bank balance.

A club’s finances are also boosted if the club finishing fourth fails to win the qualifier for the group stage, as this would mean that the TV pool would then be split between only three teams instead of four. In the same way, it is better financially if the other English clubs do not progress as far as your team.

Note that these calculations assume that the total English TV pool is the same as last season, based on the Sky/ITV deal being more or less the same size, though there are some indications that it might be slightly lower.

However the money is split, there is no doubt that all the English clubs playing in the Champions League have a considerable monetary advantage over the rest of the Premier League, as can be seen by the above analysis of Media revenue from last season – and that was before the 2012/13 increases. As The Clash once sang, it is indeed a “Safe European Home”, at least for a privileged few.

Manchester United - Higher Than The Sun

2013-05-03T14:31:00.002+02:00

The week after they clinched the Premier League title, Manchester United announced record third quarter turnover of £91.7 million, more than 13 clubs in England’s top flight achieved in the whole of the 2011/12 season. To further place United’s incredible ability to generate revenue into context, this quarterly result was about the same as Newcastle United’s revenue last season – and Newcastle have the seventh highest revenue in England.

Revenue was up 30% with all categories posting impressive growth: commercial 32% to £36.0 million, match day 28% to £34.0 million and broadcasting 28% to £21.7 million.

Match day revenue growth is due to the club staging three additional home matches in this quarter compared to the prior year quarter: four more FA Cup ties, offset by a one game reduction in European matches (one Champions League match less two Europa League matches).

Broadcasting revenue growth is largely due to United progressing to the Champions League round of 16, as opposed to exiting at the group stage the previous year.

However, it is the 32% commercial growth that is most impressive, driven by the addition of several new sponsorship deals. In fact, sponsorship revenue is up a cool 52% to £21.0 million, while retail & merchandising grew 10% to £9.2 million and new media and mobile rose 14% to £5.8 million. At this rate, United’s commercial revenue for the whole year could be around the same level as Real Madrid and Barcelona (around £150 million).

These figures include some money for the new Chevrolet shirt sponsorship deal, even though this does not fully kick in until the 2014/15 season, when it will be worth an astonishing £45 million ($70 million) compared to Aon’s current £20 million. However, United somehow negotiated for Chevrolet to pay them £11 million in each of the previous two seasons – while Aon are still the incumbent shirt sponsors. Amazing stuff.

Furthermore, the latest results do not include the new deal signed with Aon last month for the naming rights to the club’s Carrington training centre and sponsorship of the training kit and overseas tours. The club has not divulged how much this deal is worth with press estimates varying between £120 million and £180 million for the eight-year agreement, but it will certainly represent a significant uplift to the DHL £10 million training kit deal.

In addition, more money can be expected when the kit supplier deal is renegotiated for the 2014/15 season. Nike currently pay £25.4 million a season, but any replacement deal will generate considerably more with some analysts believing that this sum might double.

It’s not all good news in these figures, as wages have again grown by an unexpectedly high 25% to £44.9 million following expensive arrivals in the summer (including Robin van Persie from Arsenal and Shinji Kagawa from Borussia Dortmund), renegotiated contracts for existing players and growth in United’s commercial team. That said, the important wages to turnover ratio actually fell 2% to 49%

Similarly, other operating expenses rose a hefty 50% to £21.8 million, primarily due to the costs involved in staging the additional home games.

Once again, United’s profits were hit by net interest payable, which increased £14.8 million to £18.3 million, even though gross debt was £56 million lower than this time last year at £368 million. The increase was largely due to £15.7 million of adverse exchange rate movements after translating the US dollar denominated senior secured notes into Sterling. It should be noted that this is an unrealised FX loss that has no cash impact until the secured notes mature in 2017.

In fact, the interest payable is enough to produce a small £3.6 million pre-tax loss (compared to £2.8 million profit last year), though this becomes a £3.6 million post-tax profit after booking £6.7 million of non-cash tax credits (reflecting a lower effective tax rate).

Of course, one swallow does not make a summer and we should not attempt to draw too many conclusions from one quarter in isolation. If we look at the first nine months of the 2012/13 season, revenue of £278 million is 13% up on the same period for the prior year. That’s still very impressive, but not as much as Q3’s 30%.

In much the same way, wages have grown “only” 15% to £129 million, leading to a very good wages to turnover ratio of 47% for the period.

Nevertheless, profit before tax rose 22% to a very healthy £19.2 million (up from £15.7 million in 2011/12) with profit after tax even higher at £40.3 million, thanks to £21 million of tax credits. This could be a factor for a while in United’s figures, as the Q2 statement referred to £60 million of unrecognised deferred tax assets being available (of which £6.7 million was used in Q3).

All football clubs are affected by the seasonality of revenue, especially the phasing of matches, which not only affects gate receipts, but also TV money (in terms of Premier League merit payments and European distributions). This means that traditionally most revenue is recognised in Q2 and Q3.

United have said that they expect total 2012/13 revenue to be between £350 million and £360 million. Taking the mid-point of £355 million would imply Q4 revenue of £76.9 million, only £2.4 million higher than Q3 last season. That would mean a £35 million (11%) increase over the £320 million reported for 2011/12.

After that growth, United would remain the club with the third highest revenue in the world, though the gap to Real Madrid and Barcelona would reduce (based on the Spanish clubs’ budgets). In 2011/12 United were £71 million behind Barcelona in second place with £391 million, but the difference would be only £25 million at current exchange rates. In fact, the real gap would be even smaller, but for the weakening of the Pound, which has boosted overseas clubs’ revenue in Sterling terms.

If we annualise United’s nine month wages of £129 million, that implies an annual wage bill of £173 million, which would be around the same level as Chelsea’s 2011/12 figure and is around £20 million more than Arsenal’s estimate of £150-155 million. Of course, the calculation is not quite that simple (e.g. if we were to annualize Q3 alone, that would give £180 million), but it’s an interesting indication of the continuing wage inflation facing Manchester United.

The good news is that gross debt continues to fall, down from £437 million in June 2012 to £368 million in Q3 following the repurchase of £63 million of bonds. In fact, gross debt has been greatly reduced since the £773 million peak in 2010 with the hideously expensive PIKs now repaid. That said, United’s debt is still far higher than any other club in the Premier League with the next highest being Arsenal at £246 million.

United again demonstrated their ability to generate vast amounts of cash from their football operations with £57 million, spending a net £33 million on players (£41 million player purchases less £8 million sales), £11 million on infrastructure (property and equipment) and £2.7 million to complete the purchase of the club’s own TV channel, MUTV.

However, they also shelled out £46 million in interest payments and used the £69 million net proceeds from the IPO to fund £67 million of debt repayment. In the whole of 2011/12 United paid out £46 million in net interest, which was about the same as all other Premier League clubs combined.

So, this is a very good set of figures from Manchester United with even more growth to come, both from the seemingly never-ending stream of new sponsors and the blockbuster Premier League TV deal, which should be worth at least another £30 million. Indeed, Ed Woodward, the executive vice-chairman who will succeed David Gill as chief executive in July, said that the club still had plenty of untapped markets where they could sign sponsorship deals: “The opportunity remains huge.”

Wages growth is cause for some concern, though this will not be a major issue if revenue continues to grow apace. Moreover, under the Premier League Financial Fair Play (FFP) regulations, clubs with wage bills above £52 million will only be allowed to increase their wages by £4 million per season for the next three years. That said, the restriction only applies to TV money, so clubs are free to spend any additional income from ticket sales or commercial deals on wage growth. This caveat gives United plenty of flexibility with their demonstrable talent for increasing commercial income.

The one major irritant for United fans remains the high debt incurred as a result of the Glazers’ takeover, resulting in another £46 million leaving the club in the form of loan interest in the first nine months of 2012/13. Whatever praise the owners receive for their commercial acumen, there is no doubt that this money could be better used elsewhere. As the late, great Ian Dury once said, “What a Waste”.

Show Me The Money

2013-04-29T08:55:00.001+02:00

In the past few years there has been tremendous progress in football fans’ knowledge of their clubs’ finances. Some might say that this is not a good thing and we should focus on matters on the pitch. That’s perfectly fair, indeed I would also personally much prefer to watch a great game, such as Borussia Dortmund’s recent demolition of Real Madrid, rather than investigate the minutiae of their balance sheets.

However, it is important that fans are aware of what is going on at their club, so that they understand the board’s strategy and any constraints that impact their activities, e.g. why a club might sell its best players every summer or why a club does not splash out on the world-class striker that might take them to the next level.

Traditionally, supporters have concentrated on a club’s profit and loss account, which is not surprising, because: (a) that is what the media tends to report – on the back of press releases from the clubs; (b) it is intuitively easy to understand, being essentially revenue less expenses (mainly player wages).

Nevertheless, the reported figure is an accounting profit, which is not necessarily a “real” profit, as it is based on the accountant’s accruals concept and this can be very different from actual cash movements. This was noted recently by, of all people, Simon Jordan, the former Crystal Palace chairman, on Sky’s excellent Footballers’ Football Show, as he claimed that the reported profit at football clubs was depressed by non-cash items.

"Jordan: The Comeback"

The perma-tanned, Spandau Ballet look-alike, actually has a point. As the old saying goes, turnover is vanity, profit is sanity, but cash is king. The main reason that football clubs like Portsmouth fail is cash flow problems. It does not matter how large your revenue is (or your profits are), if you do not have the cash to pay your players, suppliers or the taxman, then you are going to crash into the rocks.

Therefore, this blog is going to focus on the cash flow at each of the Premier League clubs in 2011/12 (the last season where all clubs have published detailed accounts). It will start with the familiar profit and loss account, highlighting the accounting shenanigans, and then reconcile this with the cash flow statement.

We shall then examine how football clubs really spend their money, revealing the different business models that are employed and explaining why certain clubs act as they do, including a review of the top seven clubs in the league (Manchester United, Manchester City, Chelsea, Arsenal, Tottenham, Everton and Liverpool).

Profit and Loss Account

The total turnover in the 2011/12 Premier League amounted to a hefty £2.3 billion, but still only produced an operating loss of £363 million, mainly due to wages of £1.6 billion, giving a wages to turnover ratio of 69%. There were also other expenses of £535 million and player amortisation, player impairment and depreciation of £544 million.

Only three Premier League clubs made operating profits last season: Manchester United £35 million, Swansea City £18 million and Norwich City £17 million. At the other end of the spectrum, Manchester City reported a massive operating loss of £104 million, followed by Aston Villa £58 million and Chelsea £46 million.

Clubs’ figures were boosted by £224 million profits on player sales (with the largest being Arsenal’s £65 million), though there is also £78 million net interest payable (most notably Manchester United’s £50 million), leading to £197 million loss before tax (and £179 million loss after tax).

Cash Flow from Operating Activities

The starting point for a football club’s cash flow statement is the operating profit (or more likely loss), which is converted into cash flow from operating activities via two adjustments: (a) adding back non-cash items such as player amortisation, depreciation and player impairment; (b) movements in working capital.

(a) Non-cash Items

First of all, we need to understand how football clubs account for transfer fees. Instead of expensing these completely in the year of purchase, players are treated as assets, whereby their value is written-off evenly over the length of their contract via player amortisation. As an example, Manchester United signed Robin van Persie for £22m on a four-year contract, so the annual amortisation is £5.5 million (£22 million divided by four years).

Similarly, tangible fixed assets like a club’s stadium and training ground are also depreciated, though their useful life is considerably longer. Player impairment occurs when the club decides that the value of a player in its accounts is too high, e.g. the player suffers a career threatening injury, loss of form or is in dispute with the management.

Incidentally, this also highlights why profit on a player sales is not a real cash figure, as this represents sales proceeds less the carrying value in the books. So, if van Persie were to be sold after three years for £7 million (i.e. £15 million lower than his £22m cost), there would still be a reported profit of £1.5 million, as his value in the accounts would be only £5.5 million (£22 million cost less three years amortisation at £5.5 million a year).

(b) Movements in Working Capital

Working capital is a measure of a club’s short-term liquidity and is defined as current assets less current liabilities. Changes in working capital can cause net income (in the profit and loss account) to differ from operating cash flow. Clubs book revenue and expenses when they occur instead of when the cash actually changes hands, e.g. if the club buys equipment from a supplier it would record the expense even before it pays the cash.

If current liabilities increase during the year, the club is able to pay its suppliers more slowly, so the club is (effectively) temporarily holding onto cash, which is positive for cash flow. On the other hand, if a club’s debtors increase, this means that it collected less money from its customers than it recorded as revenue, so that would be negative for cash flow.

In most years, the working capital movements will not be that significant, though it can be a high figure, e.g. £43 million at Manchester City and £39 million at Chelsea.

Adding back £544 million non-cash items and £(95) million working capital movements to the reported operating loss of £363 million does indeed make a big difference, as the cash flow from operating activities becomes a positive £87 million.

In fact, 12 of the Premier League clubs have positive operating cash flow (up from 3 with operating profits) with Manchester United leading the way with an impressive £80 million, followed by Norwich City £30 million, Arsenal £28 million and Tottenham £27 million. Even Manchester City’s negative operating cash flow of £53 million is only about half of their £104 million operating loss, mainly because their P&L includes an enormous £83 million player amortisation, arising from their big spending in the transfer market.

Cash Flow before Financing

The operating cash flow is in theory what is then available to the club to spend on buying players, investing in infrastructure or paying interest on loans and (occasionally) tax, though additional financing may be secured to cover any shortfalls.

(a) Net Player Purchases

This represents the genuine cash payments for player purchases less any sales and is often very different from the net spend reported in the media, largely because of stage payments, though it can also be affected by agents’ fees and conditional payments, e.g. based on number of appearances or trophies won. It is the only authentic figure publicly available for transfer fees, but it can also be misleading, as it may not cover the entire fee due to stage payments.

Paying transfer fees in stages can be a significant source of financing for some clubs, e.g. Juventus owed €93 million to other clubs (“for the acquisition of players”) as of June 2012, though they were in turn owed €41 million by other clubs.

On a cash basis, the highest net player purchases in the 2011/12 Premier League unsurprisingly came from Manchester City with £95 million (£123 million purchases less £28 million sales), followed by Manchester United £50 million, Chelsea £46 million and (shock, horror) struggling QPR and Stoke City, both with £23 million.

Four clubs actually made net player sales, i.e. used the transfer market as an additional source of funds: Aston Villa £16 million, Blackburn Rovers £12 million, Everton £11 million and Tottenham £6 million.

Arsenal just about balanced their books with £57 million purchases and £56 million of sales, giving net player purchases of £2 million. It is worth noting that this is considerably lower than the £65 million profit on player sales reported in the accounts.

(b) Investment in Fixed Assets

Clubs invested £142 million in fixed assets in 2011/12, mainly for development of the stadium and training centre, with 77% coming from just four clubs: Tottenham £42 million, Manchester City £30 million, Manchester United £23 million and Wolves £15 million.

(b) Net Interest Paid

This is very largely interest paid on bank loans net of any interest received from cash balances. One figure stands out here and that is the £46 million paid by Manchester United, which is over three times as much as the nearest “challenger”, namely Arsenal with £13 million. Given that United still had £437 million of gross debt at the time of the 2012 accounts, way more than any other club in the Premier League, this is not too unexpected. It has also not proved to be a major obstacle to United’s financial stability, as their cash flow is more than sufficient to cover the annual interest payments.

We should also note here that interest paid is not necessarily equal to the interest payable figure in the profit and loss account, as interest is sometimes accrued (so not paid), thus increasing the size of the debt, e.g. this is the case with a number of Championship clubs, including Cardiff City, Leicester City and Ipswich Town.

Even though nine Premier League clubs reported profits before tax in 2011/12, only four (Arsenal, Manchester United, West Bromwich Albion and Tottenham) actually paid any tax. This is a very complex subject, but, essentially, use of prior year losses and other allowances helped prevent tax payments.

After all this expenditure, we have cash flow before financing, which is perhaps the purest reflection of how a club has run its business. By this metric, the newly promoted Norwich City and Swansea City shine with positive cash flow of £18 million and £6 million respectively. Most clubs clearly strive to break-even with many hovering around zero net cash flow.

Interestingly, and maybe disappointingly, the three clubs with the largest negative cash flows feature strongly at the top of the league: Manchester City £(184) million, Chelsea £(72) million and champions elect Manchester United £(41) million.

Financing

However, that is before financing and this is where the owners play their part, either via issuing share capital (Manchester City £169 million) or making additional loans (Chelsea £71 million, subsequently converted to capital). Other clubs required funds from their benefactors, notably QPR £39 million, Bolton Wanderers £24 million, Liverpool £24 million and Blackburn Rovers £16 million.

On the other hand, some clubs actually used funds to reduce debt, including Wigan £39 million (converted to share capital), Manchester United £29 million, Newcastle United £11 million, Arsenal £6 million and Norwich City £5 million.

Cash Flow after Financing

After this financing, we can see that almost all clubs are within the range of £18 million positive cash flow and a manageable £18 million negative cash flow. The one exception is Manchester United, which is a special case as a result of the Glazers’ leveraged buy-out. In 2011/12 alone, United paid £85 million to support this transaction: £46 million interest, £29 million loan repayments and £10 million dividends to the owners.

Let’s look at how cash flow has impacted the actions of the seven leading clubs in the Premier League.

Arsenal

Long admired for their financial prowess, Arsenal have consistently reported large profits. Not only did they register the highest profit before tax (£37 million) in the Premier League in 2011/12 on the back of £235 million turnover (3rd highest in England, 6th highest in the world), but they have also made an incredible £190 million of profits in the last five years. Indeed, the last year that they made a loss was a decade ago in 2002.

However, much of this excellent performance has been down to profits from player sales (e.g. £65 million in 2011/12) and property development (e.g. £13 million in 2010/11), while the operating profit has been steadily declining with the club actually reporting an operating loss of £16 million last season.

That said, once sizeable non-cash expenses (amortisation and depreciation) and working capital movements are added back, the cash flow from operating activities was £28 million, which was actually the third best in the Premier League.

The problem is that Arsenal have spent very little of this on improving their squad: in 2011/12 the net expenditure on player purchases was just £1.8 million – only four clubs spent less than the Gunners. Most of the available funds have instead gone towards financing the Emirates Stadium: £13.1 interest and £6.2 million on debt repayments. A further £8.6 million was invested in fixed assets for enhancements to Club Level, more “Arsenalisation” of the stadium and new medical facilities and pitches at the London Colney training ground.

Arsenal have cleared all their property development debt, but still had £253 million of gross debt arising from long-term bonds that represent the “mortgage” on the stadium (£225 million) and the debentures held by supporters (£27 million). Once cash balances of £154 million were deducted, net debt was only £99 million, but the interest/debt payment schedule remains punishing.

Another logical result of Arsenal’s years of reported profits is that they are one of the few Premier League clubs that pay corporation tax: £4.6 million last season (the highest in the league).

"Mind over Money"

So Arsenal’s self-sustaining approach is clearly evident in the cash flow statement, though they did have a small negative cash flow after financing in 2011/12 of £6.6 million. The supporters would almost certainly prefer to see the club spending more on players, rather than areas off the pitch, but the reality is that the debt and interest payments are not going away anytime soon.

This was made very clear by Arsène Wenger, “We want to pay the debt back from building the stadium and that’s around £15 million, so it’s normal that at the start we have to make £15 million or we lose money.” In fact, as we have seen, it’s more like £19 million, but the point remains valid.

However, the lack of investment in the squad is still galling, especially with Arsenal’s cash balances standing at £154 million last summer (almost as much as the rest of the Premier League clubs put together) following many years of positive cash flow, e.g. 2010/11 £33 million, 2009/10 £28 million, 2008/09 £6 million, 2007/08 £19 million and 2006/07 £38 million.

In the future, cash should be boosted by commercial income rising with the recent Emirates shirt sponsorship agreement and a new kit supplier deal, but Champions League qualification will also be important.

Manchester City

Despite rapidly growing their revenue to £231 million (4th highest in England), City still reported a pre-tax loss of £99 million, largely because of a £202 million wage bill, though in fairness this was nearly £100 million better than the previous year’s £197 million loss. The improvement is due to success on the pitch (2011/12 Premier League winners and Champions League qualification) and new sponsorship agreements, especially the Etihad deal.

City can add back £90 million for non-cash expenses, mainly £83 million player amortisation, but they also have £39 million negative working capital adjustments, due to an increase in debtors, leading to £53 million negative operating cash flow (the worst in the league).

Nevertheless, City spent much more than anybody else on player purchases (net £95 million) and £30 million on fixed assets, mainly on the Etihad Campus, including the City Football Academy, plus some stadium refurbishment.

"The minute you walked in the joint..."

They also have to pay £6 million interest, despite no debt from the owners Abu Dhabi United Group, as the club still has some old loan notes and finance leases.

That business model produces an enormous negative cash flow before financing of £184 million, which is then almost entirely covered by financing from the owner in the form of new share capital.

In the future, City should continue to grow their commercial income, while we have also seen a slowing of their player investment in the light of UEFA’s Financial Fair Play regulations.

Chelsea

Very similar to Manchester City’s strategy, but the football club actually reported a £1.4 million profit in 2011/12 after their Champions League success, though this was also due to an £18.4 million exceptional gain after the cancellation of preference shares owned by British Sky Broadcasting and £29 million profit on player sales. Net turnover rose to £256 million, but the £176 million wage bill was only surpassed by Manchester City, giving rise to an operating loss of £46 million.

Chelsea’s large non-cash expenses of £61 million are added back, but they also have £43 million negative working capital adjustments, mainly due to a large decrease in creditors, leading to £27 million negative operating cash flow.

Again, they spent heavily on players (net £50 million) and invested £5 million in fixed assets. Cash was also boosted by £6 million from the acquisition of a subsidiary, Chelsea Digital Media Limited, which was transferred from a joint venture to a 100% owned subsidiary.

"From Russia with Money"

All that produced a hefty negative cash flow before financing of £72 million, the second worst in the league, which was covered by an additional loan from the parent company, Fordstam Limited, owned by Roman Abramovich. As per previous years, this loan was subsequently converted into share capital, so the football club has no debt.

That said, it is not really true to say that Chelsea is debt-free, as these loans still exist in the holding company, amounting to £895 million as at June 2012. They are interest free, but are repayable with 18 months notice. It must be considered unlikely that Abramovich would ever call in this debt, but it is theoretically possible.

It looks like Chelsea are trying to reduce their wage bill to ensure they break-even, but their revenue will be under some pressure, as last season was boosted by the Champions League triumph, though new commercial deals were signed in 2012/13, notably Gazprom and Audi.

Liverpool

Despite their accounts only covering 10 months, due to a change in accounting date, Liverpool’s reported revenue of £169 million was still the 5th highest in England. Deloitte estimated that it would be £189 million for a full year. However, the Reds’ loss of £41 million was the second worst in the country, due to a £109 million wage bill (£131 million on an annualised basis) and £10 million of termination payments to coaching staff.

The £35 million operating loss was improved by adding back £46 million non-cash items (mainly £34 million player amortisation, but also including £9 million for player impairment), offset by £12 million working capital movements, to give negative operating cash flow of around £1 million.

Only five clubs had higher net player purchases than Liverpool’s £14 million, though this still placed them behind QPR and Stoke City, both with £23 million. This figure is a little misleading, as Liverpool spent relatively high on player purchases (£45 million), but largely compensated for this expenditure with £31 million from player sales.

"May you live in less interesting times"

Liverpool also made £3.7 million interest payments, though this was significantly lower than the sums paid during the dark days of the Hicks and Gillett era, which were as high as £45 million in 2010.

The £21 million negative cash flow before financing was fully covered by additional bank loans, leading to a small positive cash flow of £2 million.

Liverpool’s debt in the last annual accounts was £92 million, split between £70 million bank loans and £22 million to the owners Fenway Sports Group, but since then John W. Henry and his fellow investors have put in £47 million to reduce bank debt in August. These loans are interest-free, so interest payments should further reduce (at least until new loans are taken out for stadium development).

Redevelopment of Anfield should boost match day revenue in the future, though it will require substantial funding. In the meantime, Liverpool continue to sign impressive commercial deals, e.g. Chevrolet and Paddy Power, though lack of qualification for the Champions League places them at a severe financial disadvantage to other leading clubs.

Tottenham Hotspur

Tottenham made a £7.3 million loss before tax after revenue fell to £144 million (from £164 million the previous year), due to only qualifying for the Europa League instead of the more lucrative Champions League. The wage bill was held at £90 million, leading to an operating loss of £11 million.

Adding back £35 million for player amortisation and depreciation plus £3 million for working capital movements, due to a rise in creditors, means that cash flow from operating activities was a healthy £27 million.

This was boosted by net player sales of £6 million (player sales £33 million, purchases £27 million) with Spurs being one of only four Premier League clubs to generate cash from this activity.

"Stadium Arcadium"

At the moment Spurs are investing almost all their surplus cash in fixed assets, having spent £42 million last season on plans for a new stadium (Northumberland Development Project) and the new training centre in Enfield. This was more than any other Premier League club spent on infrastructure in 2011/12. In addition, they paid £4.5 million interest, as debt climbed to £86 million, made up of bank loans and securitisation funds.

After the significant investment off the pitch Tottenham’s cash flow before financing was a negative £13 million, partly financed by £8 million additional bank loans, leading to negative net cash flow of £5 million.

Tottenham’s financial future will be dictated to a very large extent by what happens with the stadium development, though they would be greatly helped if they could again qualify for the Champions League. The club estimated that the 2011/12 Europa League campaign brought in £31 million less revenue than the previous season’s foray into the Champions League.

Everton

Everton made a loss of £9 million from revenue of £81 million and a wage bill of £63 million (10th highest in the Premier League). The operating loss of £19 million was improved by adding back £14 million of player amortisation and depreciation less a working capital adjustment of £2 million, giving a negative cash flow from operating activities of £7 million.

Everton’s need to box clever is highlighted by the fact that even after net player receipts of £11 million (sales £23 million, purchases £13 million), they do not quite manage to break-even with negative cash flow after financing of £2 million. All other things being equal, they need to sell a player every season to stay afloat.

This is due to £4 million interest payments and £0.9 million repayment on assorted loans. The club’s debt stands at £49 million with an £11 million overdraft plus £24 million loan notes (borrowed against future season ticket sales) and £14 million loans (borrowed against future TV money). The lending arrangements with Barclays Bank expire on 31 July 2013, so these will have to be renegotiated in a few months.

Manchester United

Despite having the highest revenue in England (£320 million) and incidentally the 3rd highest in the world (only beaten by Real Madrid and Barcelona), United made a £5m loss before tax in 2011/12. This had very little to do with the club’s underlying business, as United’s £35 million operating profit was actually the highest in the Premier League, even after a £162 million wage bill.

No, the negative bottom line is due to £50 million net interest payable which is the consequence of the Glazer family’s leveraged takeover that placed over half a billion pounds of debt on the club’s balance sheet in 2005.

In fact, after adding back £46 million of player amortisation and depreciation less a minor working capital adjustment, United’s cash flow from operating activities is a highly impressive £80 million (in the previous year this was an almost unbelievable £125 million). To place that into context, this is £53 million more than the widely praised Arsenal. Quoting Staines’ finest, Hard-Fi, United are a veritable “cash machine”.

Over the last few years, relatively little of this wealth has been spent on improving the squad. Indeed, between 2009 and 2011, United actually had net sales proceeds of £3 million – though this was admittedly greatly helped by Ronaldo’s £80 million sale to Real Madrid. However, in 2011/12 the Glazers turned on the taps with United allocating £50 million to net player purchases, only surpassed by their neighbours Manchester City.

They also invested £23 million in fixed assets, mainly land and buildings around Old Trafford.

However, what really stands out is the £46 million interest United had to pay. This is by far the highest in the Premier League with Arsenal the only other club having to make a double-digit interest payment (£13 million). In fact, United pay about the same amount of interest as all the other Premier League clubs combined.

"Brass in Pocket"

A £3 million tax payment resulted in £41 million negative cash flow before financing, while £29 million loan repayments and £10 million dividends to the Glazers (to repay loans borrowed from the club in 2010) meant £80 million negative cash flow after financing – the worst in the Premier League.

It really is a game of two halves at United with £80 million of operating cash flow converted into negative cash flow after financing of £80 million. That £160 million swing can be broadly split between £72 million healthy spend (player purchases £50 million and property investment £23 million) and £88 million unwanted spend (interest £46 million, debt repayment £29 million, dividend £10 million and tax £3 million).

Although debt has been significantly reduced from the horrific £773 million peak in 2010, it still stood at £437 million (net £366 million after deducting £71 million cash) as at 30 June 2012, mainly senior secured notes attracting interest rates between 8.375% and 8.75%.

Looked at another way, without the burden of the Glazers’ debt, United could afford to spend £80 million every season on new players. And that is before the amazing new commercial deals with Chevrolet (shirt sponsorship) and Aon (training ground naming rights) kick in, not forgetting the likelihood of a major uplift when the kit supplier deal is re-negotiated (Nike runs to July 2015).

"Come on, Alex. You can do it."

Obviously, United have not done too badly in recent years, but they might well have done even better with those additional funds being made available to the manager, especially in Europe, where they have struggled for the last two seasons. Arguably, that’s the best argument in favour of the Glazers, namely that they have made it easier for other clubs to compete. Without their grasping presence, United would, quite literally, be laughing all the way to the bank.

That said, there are signs that this financial burden may be easing, as half of the proceeds from last August’s IPO were used to reduce debt to £367 million by December 2012, so annual interest paid should fall, though it is difficult to estimate a precise figure, given the many factors involved, such as exchange rates on the USD element of the debt.

If the club uses the additional revenue from its own commercial growth and the new Premier League TV deal (worth at least another £30 million a season) for more debt reduction, then the interest payments will become less significant, freeing up even more cash – though that might just be used to pay the Glazers dividends…

"Running up that Hill (A Deal with God)"

Of course, the new Premier League TV deal that commences next season will benefit all clubs in the top flight and should make a real difference to their ability to generate cash, especially in conjunction with the new Premier League Financial Fair Play (FFP) regulations. These state that clubs are only allowed to make a total loss of £105 million providing this is covered by the owner (and £90 million of that is injected into the club in the form of equity).

Furthermore, clubs with wage bills above £52 million will only be allowed to increase their wages by £4 million per season for the next three years, though that restriction only applies to TV money, so clubs are free to spend any additional income from ticket sales or commercial deals on wage growth.

One of the objectives behind these regulations is that, in contrast to previous deals, the increase in TV money will not simply disappear into the players’ wage packets. This could markedly improve clubs’ cash flow, though there is a chance that any surplus may be simply used to pay dividends to the owners, as opposed to, say, reducing ticket prices, investing in youth development or improving facilities for the fans.

"A Change is Gonna Come"

Similarly, UEFA’s FFP regulations will encourage clubs to live within their means and are even more stringent. Wealthy owners will only be allowed to absorb aggregate losses of €45 million (£38 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 (£25 million) from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

To coin a phrase, this will be a whole new ball game for football clubs’ business models with the financing of large deficits by wealthy benefactors expected to significantly reduce. Whatever happens, those wishing to understand a football club’s finances and consequently the impact these have on its strategy should, as always, follow the money. That means not just focusing on the profit and loss account, but also dipping a toe into the mysterious world of the cash flow statement.

Borussia Dortmund - Back In The Game

2012-10-29T10:05:00.005+01:00

Last season was truly memorable for Borussia Dortmund’s many supporters, as their beloved Schwarzgelben retained their Bundesliga title and also secured the first double in the club’s 103-year history by winning the DFB Cup too. Not only did they avoid the dreaded second season syndrome, but they actually did so in record-breaking style by setting the highest points total (81) and the longest unbeaten run in a single season (28 matches). Germany’s leading sports magazine, Kicker, compared this achievement with Bob Beamon’s “unbelievable” long jump record in the 1968 Olympics.

They have admirably managed to cope with the loss of key players each season, so when they sold influential captain Nuri Şahin to Real Madrid in the summer of 2011, his place in midfield was effectively taken up by Shinji Kagawa, whose return from injury meant no loss in momentum. Similarly, when the Japanese international was sold to Manchester United this summer, Dortmund had already signed his replacement, the highly talented Marco Reus from Borussia Mönchengladbach.

In the club’s own words, Dortmund’s performance in Europe was “not as impressive”, as they finished bottom of their Champions League group behind Arsenal, Marseille and Olympiacos, betrayed by their young team’s lack of experience at this level. However, they appear to have remedied this weakness (so far) this season with fine victories over Real Madrid and Ajax plus much the better of an away draw with Manchester City.

"Götze - super Mario"

All this has been done with Dortmund playing an exciting, attractive brand of football that has been appreciated by fans everywhere. Under charismatic manager Jürgen Klopp, this is a side that attacks with pace and defends with great intensity, proving that teams can win with style.

They have also achieved the seemingly impossible task in football of combining victories on the pitch with financial success, though it is equally true that sporting success has helped lead to improved economic results. In 2011/12 Dortmund’s revenue rose by an imposing 42% to a record €215 million (€189 million excluding player sales), while pre-tax profits surged to a hefty €37 million. Despite higher bonus payments, the wage bill of less than €80 million can still be described as “merely average” for the Bundesliga.

These figures provide the most tangible evidence yet that Dortmund have made a remarkable recovery from their financial difficulties of a few years ago when they flirted with bankruptcy. In 2002 the club was forced to sell its famous Westfalenstadion to a real estate trust, having squandered the funds from its flotation on the German stock exchange.

Worse was to come as the club splashed out on expensive signings and high wages, effectively gambling on regular qualification for in the Champions League to fund this massive spending. When this was not achieved, they only succeeded in building up huge debts, leaving the club in a “life-threatening situation”.

"Hummels - Mats entertainment"

The club was saved by the “never say die” spirit of their supporters, whose “We are Borussia” campaign resulted in Dortmund’s community of citizens, companies and public authorities combining to help repair the finances. This included some very understanding creditors and bank managers, who deferred stadium rent and interest payments until 2007.

Dortmund also had to take out yet another loan to help pay the players’ salaries, while they were forced to shore up the balance sheet in 2006 with significant capital increases, which enabled the club to obtain a more manageable debt structure and improved interest rate terms. In particular, the club took out a 15-year loan of €79 million with Morgan Stanley, which facilitated the repurchase of the remaining stake in their stadium from the property fund.

The restructuring process was completed two years later, when €50 million of cash received after signing a new 12-year marketing agreement with Sportfive was used to fully repay the Morgan Stanley loan many years ahead of schedule. The club promised that this move would not only further reduce its liabilities, but would free up funds to improve its sporting competitiveness. Two Bundesliga titles later and it’s fair to say that the club has been true to its word.

"Lewandowski - Pole dance"

Dortmund have learned from their past mistakes (and excesses) and adopted a far more sustainable business model in the past few years. They now employ a solid financial strategy, based around the over-riding principle of “achieving maximum sporting success without taking on more debts.” The focus is primarily on youth, as explained by managing director Thomas Treß, “We learned that you have to invest in your youth, to develop your own stars, adding to your team with young players of potential.”

This investment in relatively cheap, promising young players, rather than he expensive finished article, has been assisted by the foundation in 2011 of the BVB Academy, a modern training centre to develop players between the ages of 19 and 23. Dortmund’s youth academy has been a veritable production line for the first team, turning out talent like Mario Götze, Marcel Schmelzer and Kevin Großkreutz, while other youngsters like Mats Hummels and Sven Bender have been further developed at Dortmund. Most of these players have signed long-term contracts with Dortmund until 2016 or 2017.

Bayern Munich’s outspoken president Uli Hoeneß took a pot shot at his rivals’ approach, “They had to do it that way, because they don’t have the money.” Well, exactly. Very few clubs have the financial power of Bayern, but it is surely better to make your suit from the cloth available, rather than spend money you don’t have on a fancy new outfit that falls apart a couple of years later.

Dortmund’s revised, more sensible approach has been epitomised by their dealings in the transfer market. In the five years leading up to the fateful 2004/05 season, the club’s net spend was a chunky €97 million, before their debt problems forced them to offload players, generating surpluses over the next three years, followed by very modest spend, so that “transfer income and expenses are balanced.” Over the last nine years, the club had net sales proceeds of €5 million – a stark contrast to their extravagant era.

Under sporting director Michael Zorc, Dortmund’s scouting has been focused on “value development”, so that “transfers should create substantial earnings potential”, as well as “sustainable sporting competitiveness”. This means that the young talent is likely to leave “to secure large transfer income”, though the club acknowledges that this strategy creates a conflict between financial considerations and sporting criteria. This can lead to a lack of squad depth, hence the uncertain start to this season in the Bundesliga.

In fact, over the last three seasons no fewer than nine clubs in Germany’s top flight have spent more than Dortmund’s net €2 million. In fairness, very few Bundesliga clubs spend big on transfers with the obvious exception being Bayern Munich, who spent €116 million in the same period. Dortmund’s chairman, Hans-Joachim Watzke, accepted this discrepancy, “I must point out that we continue to operate in different spheres. Bayern spent €70 million this year, including €40 million on Javi Martinez.”

Thomas Treß added, “We are not able to compete in the European soccer market with British or Spanish clubs in respect of transfer pricing.” That’s true, but you can also add a few more countries to that list, as can be seen by the above graph, which highlights the massive difference with other leading Europe clubs. At one end of the spectrum, we have Dortmund with €2 million; at the other end, three clubs, fueled by oil-rich owners, have splashed out around a quarter of a billion pounds: Chelsea, Manchester City and Paris Saint-Germain.

This summer saw a slight change of emphasis with the €17 million capture of Marco Reus, though even this was compensated by the €16 million received for Kagawa. Bayern’s former sporting director, Christian Nerlinger, conceded, “With this transfer they have established themselves as a major rival for the championship.” Dortmund claimed that this signing demonstrated that they were “the team to be for young, ambitious Bundesliga players”, though in fairness there were special circumstances here, as Reus grew up as a Dortmund fan and his parents live in the area.

Nevertheless, the suspicion remains that if they receive the right offer, Dortmund will continue to sell their best players, such as the prolific forward Robert Lewandowski. Watzke recently denied this, “We won’t give up Robert for any money in the world. We don’t want to open a bank”, but few would be surprised if the Polish international were to leave next summer.

Indeed, player sales contributed nearly half (€17 million) of Dortmund’s very impressive 2011/12 pre-tax profits of €37 million, which were €27 million higher than the previous season’s profits of €10 million. After tax was taken into consideration, profits increased from €5 million to €28 million. That was much more than the previous five years when player sales produced profits on average of less than €5 million a year.

Operating profit grew by €17 million to €24 million, as revenue grew by an amazing €51 million (37%) from €139 million to €189 million, more than off-setting increases in the wage bill (£18 million) and other expenses (€17 million). Other operating income, largely due to payments from national associations for the release of Dortmund’s players, also improved by €3 million to €8 million.

As a technical aside, I am using the Deloitte definition of revenue here in order to facilitate comparisons with other European clubs, so have excluded transfer income of €26 million. Adding that to my revenue of €189 million gives the €215 million announced by Dortmund. The profit on player sales of €17 million is then obtained by deducting transfer expenses of €9 million and is largely due to the sales of Kagawa to Manchester United and Lucas Barrios to the Chinese club Guangzhou.

It is clear that “Borussia has developed itself economically and on a sporting level continuously over the last few years”, as Watzke put it. The profits made in the last two seasons represent a spectacular turnaround, as the club had previously reported losses in five of the last six years, including €55 million in the annus horribilis of 2004/05 and €23 million the year after.

In comparison, Bayern Munich, the “alpha male” of the Bundesliga with 22 league titles and four Champions League victories, have made profits 19 years in a row, consistently bettering Dortmund’s results off the pitch – except last season, when the Schwarzgelben’s €9.5 million was slightly higher than the Bavarians’ €8.8 million. Bayern will also have to go some to match Dortmund’s €37 million in 2011/12.

Dortmund re-entered Deloitte’s Money League in 2010/11 in 16th position with revenue of €139 million, even without the benefit of Champions League money. Their 2011/12 revenue of €189 million would have placed them 11th, assuming no growth at other clubs.

That is more than respectable, but the problem is that it is far below the leading clubs, such as Real Madrid €479 million, Barcelona €451 million, Manchester United €367 million and (crucially) Bayern Munich €321 million. The magnitude of Dortmund’s accomplishment in overcoming Real Madrid last week can be seen by the relative revenue figures last season with Madrid’s €514 million being nearly three times as much as Dortmund’s record €189 million.

Bayern’s revenue of €321 million is by far the highest in Germany, giving them a major competitive advantage over their rivals: Schalke 04 €202 million, Dortmund €189 million, Hamburg €129 million, Werder Bremen €100 million and Stuttgart €96 million (all 2011 figures, except Dortmund 2012). Moreover, only Dortmund have kept pace with Bayern’s insatiable revenue growth: since 2007, they have both increased revenue by just under €100 million. Schalke also grew revenue by €88 million, but their 2012 figure is very likely to fall back after the absence of Champions League revenue, which was worth €40 million in TV distributions alone in 2011.

Even though Dortmund’s revenue has been going great guns, rising 80% (€84 million), while Bayern’s actually dipped €2 million last season, the gap between the two clubs is still a mighty €132 million. This is nonetheless a lot better than the colossal €218 million shortfall in 2010, when Bayern’s revenue was literally three times as much as Dortmund’s.

Even so, Dortmund’s revenue growth has been hugely impressive, more than doubling from €90 million five years ago, especially as it was relatively flat during the three years between 2008 and 2010 at around the €105 million level. Last season all revenue streams contributed to the €51 million rise to €189 million: TV €28 million (mainly Champions League participation) to €60 million; commercial €19 million to €97 million; and match day €4 million to €31 million.

As we can see, the largest revenue category is commercial income. In fact, in 2010/11 Dortmund had the highest percentage of their total revenue from commercial (57%) of any Money League club. Although this has fallen to 51% in 2011/12, mainly due to Champions League money, this is still a very high proportion for a football club.

To place that into context, it is worth comparing the revenue mix with Arsenal, where commercial activities contribute only 23% of total revenue. In contrast, match day is worth 41% at the North London club, compared to only 17% at Dortmund. Looked at another way, the majority of Dortmund’s revenue is generated from companies, while fans bear most of the burden at Arsenal.

In fact, Dortmund’s striking commercial revenue of €97 million means that they are only behind the four marketing behemoths of the football world: Real Madrid €187 million, Bayern Munich €178 million, Barcelona €167 million and Manchester United €130 million.

The club’s commercial strategy is to secure long-term partners, as seen by their agreement with marketing partner Sportfive, who have signed with the club until 2020, by which time they will have been the club’s marketing partner for 20 years. All three main sponsorship deals are long-term in nature: shirt sponsor Evonik, whose agreement has been in place since 2006, extended from 2013 to 2016; stadium naming rights partner Signal Iduna also extended from 2016 to 2021; while new kit supplier Puma signed up until 2020.

Another objective is to sign up many secondary sponsors, known as “champion partners”, and a lengthy list now includes the likes of Opel, Sparda Bank, Sprehe, Wilo, Brinkhoff’s, Flyer Alarm, Hankook, Yanmar and West Lotto.

Dortmund have managed to grow all aspects of their commercial revenue: sponsorship and advertising rose 16% to €58 million, mainly due to new partners and an increase in the VIP hospitality occupancy rate to 100%; while merchandising and catering was also up an impressive 41% to €37 million.

Over a third of merchandising revenue is now earned through the online shop, while a fifth fan shop was opened in the city of Dortmund in September 2011. According to a survey by PR Marketing, die Borussen sold between 250,000 and 500,000 replica shirts in the 2011/12 season with only eight clubs selling more. Catering revenue also rose 9% to €10 million.

Despite these successes, Dortmund’s commercial income is still only around 55% of Bayern’s, partly due to the €38 million revenue the Bavarians earn from the Allianz Arena, though their sponsorship and advertising is also €23 million higher. Our old friend Uli Hoeneß said that Dortmund would need to have a more consistent track record of winning trophies if they hoped to match Bayern’s global appeal, but in truth they’re doing very well compared to almost every other club on the planet.

Evonik, a chemical company, has increased its shirt sponsorship to €10 million, according to the Frankfurter Allgemeine Zeitung, though this is still lower than deals struck by some other German clubs: Bayern (Deutsche Telekom), Schalke (Gazprom) and Wolsburg (Volkswagen). It is also a long way behind the mega deals at the likes of Real Madrid and Barcelona, though it does include hefty add-ons for sporting success. The Evonik chairman said that he was very pleased with Dortmund as a partner, due to their large crowds and title wins (“in a very exciting way”).

German clubs have proved very adept at securing valuable shirt sponsorship deals. Although the total value of such deals is higher in the Premier League, the average value of each deal is actually higher in the Bundesliga, as it has two fewer clubs (according to a study by International Marketing Reports).

Signal Iduna, the naming rights partner, has also increased its annual payment from €4 million to between €4.5 and €5 million after the deal extension.

Dortmund’s new kit supplier, Puma, is reportedly paying €6-7 million a season from July 2012, replacing Kappa, whose deal was only worth €4 million. Rather wonderfully, the new shirt has the inscription “Echte Liebe” (true love) on the inside of the collar. That’s good news, but it is still far below Bayern’s €25 million deal with Adidas (and, for that matter, Real Madrid’s €38 million agreement with the same company).

Paradoxically, BVB are helped commercially by the weak digital television market, which means that German clubs are televised more frequently on terrestrial channels than their counterparts in England, Spain and Italy, thus providing more exposure for their sponsors. As the old saying goes, it’s an ill wind that blows no good.

However, this also means that television income is not very high in Germany, as can be seen from the 2010/11 Money League, where Dortmund sat in 19th position. Their revenue of €32 million was around one sixth of the €184 million earned by Barcelona and Real Madrid, who benefit greatly from their individual domestic deals.

In 2011/12, Dortmund’s TV revenue rose €28 million to €60 million, very largely due to the €25 million from the Champions League with the remainder coming from the DFB Cup, which they won compared to a second round exit the previous season.

They received around €28 million from the Bundesliga distribution, a small increase on the previous season. TV revenue in Germany is largely divided among clubs via a points system based on their league position over the past four years, though some money is also allocated per the number of games televised live.

Performance is weighted in favour of the more recent years, so last season a factor of 4 was applied to 2011/12, 3 to 2010/11, 2 to 2009/10 and 1 to 2008/09. However, a form of equality is then applied, as the club with most points from this algorithm only receives twice as much money as the club that has the lowest number of points. In this way, as top club in 2011/12 Bayern Munich received €24 million for performance (excluding live fees), which was double the €12 million for last placed Augsburg.

The Bundesliga recently announced an increase in the value of their TV rights with the domestic deal for the four years from 2013/14 to 2016/17 rising 52% from €410 million to €628 million and the overseas rights increased by a similar rate to €72 million. The new total of €700 million will take it ahead of La Liga (€655 million) and Ligue 1 (which actually fell to €642 million). The Bundesliga’s chief executive, Christian Seifert, was ecstatic, “ We didn’t expect results like this, it clearly exceeded our expectations”, while Bayern’s chief executive, Karl-Heinz Rummenigge, described it as “a milestone in the history of the Bundesliga.”

Nevertheless, the TV rights for German football are still lower than Serie A (€944 million) and only half the Premier League deal (€1.4 billion). That is before the new English deal from 2013/14, which is estimated to be worth at least €2.2 billion, i.e. three times the “historic” Bundesliga deal.

Dortmund’s share of the TV revenue should rise to around €40 million, but this is still a lot less than the money earned by English clubs. Last season’s Premier League winners, Manchester City, pocketed €75 million, while even the bottom club, Wolverhampton Wanderers, received €49 million. The new Premier League deal is likely to deliver €110-120 million to the leading English teams.

Once again demonstrating their innovative spirit, Dortmund were the first German club to offer their own TV package, BVBtotal!, in January 2011, run jointly with Deutsche Telekom.

Dortmund’s allocation from the Champions League was worth €25.4 million in 2011/12, considerably more than the €4.5 million they received from the Europa League the previous season, even though they went out at the group stage. However, this was still a lot less than the €42 million Bayern received for reaching the final.

Interestingly, Dortmund (€17 million) still received more than Bayern (€14.8 million) from the TV (market) pool, due to the methodology used to allocate this element, which is as follows: (a) half depends on the progress in the current season’s Champions League, based on the number of games played; (b) half depends on the position that the club finished in the previous season’s domestic league. As three German clubs reached the group stage this season, the split will be: Dortmund 45%, Bayern 35% and Schalke 20%. The Champions League will be worth even more, as the overall prize money for the 2012 to 2015 three-year cycle has increased by 22%, but it will be higher for German clubs, as their TV deals have risen considerably, thus boosting their market pool.

"Grosskreutz - we need to talk about Kevin"

The Europa League is much less lucrative, though German clubs benefit from relatively high TV deals, so last season Schalke earned the same (€10.5 million) as the winners Atlético Madrid, even though they were eliminated in the quarter-finals.

Therefore, Dortmund will be gratified that Germany’s number of places in the Champions League has increased from 3 to 4 (at the expense of Italy), due to the improving UEFA coefficients. However, this might prove to be a double-edged sword, as it could mean that Germany’s TV pool has to be shared between more clubs.

European money has clearly made a substantial difference to Dortmund’s revenue, but Watzke has claimed that the club is not economically dependent on Champions League money and they could survive three seasons without it, thanks to their long-term sponsorship contracts – though they would have to make cuts.

Last season Dortmund’s incredible average attendance of 80,500 was the highest in Europe, ahead of Barcelona 79,600 and Manchester United 75,400. This was easily the largest average in Germany with the next highest teams being Bayern 69,000 and Schalke 61,200. The Dortmund fans’ interest shows no sign of slowing down, as they have just established a new Bundesliga record for season tickets for 2012/13 at a mighty 54,000 – and that was capped to ensure an adequate supply of tickets on the day of the match.

It is therefore a little perplexing to see that Dortmund have one of lowest match day revenues in the Money League with only €28 million in 2010/11 (€31 million in 2011/12), while the likes of Real Madrid, Barcelona, Manchester United and Arsenal all collect more than €100 million. There are two obvious reasons for this huge discrepancy: less matches and low ticket prices.

There are two fewer home games every season in the Bundesliga, while last season Dortmund only played three Champions League home games, bringing in €4.4 million, and one in the DFB Cup. This resulted in a total of 21 home games compared to 28-29 for the leading English and Spanish clubs.

Dortmund’s high attendances (and small match day revenue) can be partially attributed to the large number of standing places for which season tickets are priced as low as €187 (€109 for youths). Nearly 25,000 of these can be found on the famous Südtribüne terrace, known as the “Yellow Wall”, which is the largest standing area in European football and provides each home game with an intensely passionate atmosphere. Occasionally, that enthusiasm can go too far, such as the hooliganism seen at the recent Schalke derby when there were 200 arrests and water cannon had to be used.

It is surely no coincidence that the Bundesliga has the lowest ticket prices of Europe’s five major leagues and consequently the highest attendances. This is an important part of football culture in Germany, as seen recently when Dortmund fans staged a protest against Hamburg’s steep prices for away standing tickets, leaving their block after 10 minutes. Klopp gave them his support, “The league needs to think just how far they want to push prices.”

There are no such problems in Dortmund’s imposing stadium, now officially named Signal Iduna Park, which is the largest football ground in Germany and the sixth largest in Europe. This is obviously an extremely valuable asset that can also be used to host international matches, when the capacity is reduced to 67,000 by converting the standing areas to seats. The Times described it as the “most beautiful stadium in the world”, writing, “Every Champions League final should be held in Dortmund. The place was built for football and its fans.”

Even though the wage bill has risen by 67% (€32 million) since 2010 to stand at €80 million, this is still very much under control, as revenue has grown at an even faster rate of 80% (€84 million). In fact, the important wages to turnover ratio has actually fallen to a very creditable 42% from the peak of 48% in 2009, which is even better than the 50% targeted by the Bundesliga.

The €18 million increase in the total wage bill in 2011/12 was largely due to sporting success, namely higher performance-related bonus payments, though there was also a rise in administration staff. Treß emphasised that the club had a “very flexible cost structure”, so any lessening in performance on the pitch should mean a smaller wage bill. The wage bill is not analysed in the accounts, but the cost of the football squad has been estimated at €60 million.

Even after this growth, Dortmund’s total wage bill of €80 million is still only about half of Bayern’s €158 million, though the gap has come down a fair but from 2010 when it was as high as €118 million. In fairness to the Bavarians, their revenue is also substantially higher, but that does not make it any easier for BVB to compete.

This point is even more relevant on the European stage, where some of the leading clubs can boast wage bills far higher than any in Germany, e.g. Barcelona, Real Madrid, Manchester City and Chelsea are all above €200 million (though the Spanish figures are inflated by other sports). To provide an English comparison, Dortmund’s wage bill is about the same as Sunderland, Everton and Fulham, which shows just how extraordinary their achievements have been.

That said, the price of success is that Dortmund’s wage structure will come under pressure, as their policy of signing stars to long-term contracts will mean higher salaries, as seen with Götze’s improved deal.

Dortmund’s executives have also been handsomely rewarded for the club’s success with Watzke earning €2.2 million in 2011/12, including a €1.4 million bonus, and Treß trousering €1.4 million, including an €875,000 bonus.

The other staff cost, player amortisation, is incredibly low at €8 million, which is a perfect demonstration of Dortmund’s conservative transfer policy. As a comparison, player amortisation at big spending Manchester City and Real Madrid is around €100 million, while Bayern book €33 million.

To explain this concept, football clubs do not expense transfer fees completely in the year of purchase, but treat players as assets. So the cost of buying players (in accounting terms) is spread over a number of years by writing-off the transfer fee evenly over the length of the players’ contract via amortisation. As an example, Marco Reus was bought for €17 million on a five-year deal, meaning the annual amortisation is €3.4 million.

In contrast, other expenses of €74 million seem fairly high, though this does include €25 million for match operations, €17 million advertising, €12 million materials (primarily merchandising) and €11 million administration. Note: I have excluded transfer expenses from my definition.

There is further strong evidence of Dortmund’s financial recovery with the decrease in net debt (financial liabilities) from €150 million in 2006 to €42 million in 2012, including an €18 million reduction last season alone. This is made up of €47 million gross debt, largely a state-backed loan for stadium expansion of €32 million (repayable in 2026) and a €12 million fixed-interest loan (repayable in 2013), less €5 million cash. The average weighted interest rate of the long-term liabilities is 5.5%. The club also has access to an additional €15 million overdraft facility.

In fact, the balance sheet is quite strong with net assets of €155 million, including €183 million of property assets, namely the stadium, former offices at “Am Luftbad” and the training ground at Dortmund-Brackel. In addition, the club possesses what it describes as “hidden reserves” among the playing staff, following its policy of recruiting young talent with a lot of potential. Their value in the books is only €26 million, while their real worth in the transfer market is considerably higher – €211 million according to the Transfermarkt website.

Dortmund have generated positive net cash flow for the last two years: €7.8 million in 2011 and €6.4 million in 2012. As a sign of the board’s confidence, the club has proposed a dividend for the first time since it went public in 2000 with a total payment of €3.7 million scheduled to be discussed at the Annual General Meeting in November.

"Weidenfeller - the Roman empire"

The Bundesliga itself is in fine shape, as Klopp explained, “We have the most competitive and the most attractive league in Europe with the best stadiums. The fans are great.” This is reflected in the situation off the pitch: only the Premier League (€2.5 billion) has higher revenue than the Bundesliga (€1.7 billion), while the German league is more profitable at an operating level (€171 million) than its English counterparts (€75 million) with all other major leagues reporting losses.

As part of the German rules, clubs have to provide a balanced budget before each season in order to receive a license, which forces them to act in a sustainable manner, as seen by an average wages to turnover ratio of 50% (compared to 70% in the Premier League).

In addition, the “50+1” rule, which dictates that members must own a minimum of 50% of the shares plus a deciding vote, theoretically prevents the club being subject to the whims of an individual owner and taking on excessive debt. This has very largely worked, e.g. debt levels in the Bundesliga are less than a third of those in the Premier League, but the system is not completely foolproof, as seen by the problems experienced by Dortmund and Schalke among others.

A club as well run as Dortmund should be one of the main beneficiaries of UEFA’s Financial Fair Play (FFP) regulations, which encourage clubs to live within their means. As Watzke explained, “If FFP is implemented and rigorously enforced, we have a chance to be one of the strongest teams in Europe.”

Even the losses made between 2008 and 2010 were within UEFA’s limits: the allowable losses are an aggregate €45 million for the first two years (then three years), but this is only €5 million if losses are not covered by the owners, which might be more relevant here. In any case, they can exclude certain expenses, including depreciation on tangible fixed assets and expenditure on youth development and community activities, which I estimate would be worth around €13-15 million.

Watzke himself has gone further, imploring the regulators to act tough, “UEFA must find the thin line between sponsorship and excessive back-door funding – they must show strength to expel big clubs. No tycoon should be allowed to pump crazy money into a club with sponsorship from five companies he controls. If that happens, financial fair play will fail.” Of course, some might find such a talk a little rich, given Dortmund’s own checkered history, especially as they were given a €2 million loan at the height of their problems by Bayern Munich (of all people).

"Bender - Sven you're young"

As to the future, Dortmund are cautiously optimistic. Watzke sees “additional growth potential” with net profit for 2012/13 likely to be “in the single digit million range”, assuming exits at the group stage of the Champions League and the second round of the DFB Cup.

The chairman said that Dortmund were at the fifth stage of a five-point plan: “The first was the struggle for survival, the second restructuring, the third was development of a sporting philosophy, the fourth implementation and the fifth is sustainability.” This is not just a reference to the club’s financial status, but also the ability to maintain their performance levels on the pitch. It will indeed be a tough challenge to establish themselves in Europe, while also figuring prominently in the race for the Bundesliga title.

The club has attempted to ensure management stability by extending the contracts of the “holy trinity” of Watzke, Zorc and Klopp to 2016, but there are no guarantees in football. If Klopp were to leave, that might be a hammer blow to Dortmund’s ambitions. No manager is irreplaceable, but whoever followed the magnetic Klopp would certainly have a tough act to follow.

"Rolls Reus"

In the meantime, we should simply enjoy the fabulous spectacle at Dortmund, where they have proved that a football club does not have to throw money at the problem, but can win in the right way. First-class management, astute scouting and a belief in youth development have delivered trophies to some of the best fans around, while the team’s dazzling displays have gained admirers throughout Europe.

That’s some accomplishment, especially as they have combined their sporting excellence with a remarkable recovery from near collapse to a solid financial position. Coldplay may not be everyone’s cup of tea, but the lyrics from their breakthrough single seem strangely apposite; “Look at the stars/Look how they shine for you/And everything you do/Yeah, they were all yellow.”

Real Madrid And Barcelona - Leaders Of The Pack

2012-10-19T09:19:00.001+02:00

A couple of weeks ago Barcelona and Real Madrid produced an enthralling 2-2 draw in El Clásico with two goals apiece from their superstars Lionel Messi and Cristiano Ronaldo. It seemed appropriate that the latest match in a series of titanic struggles finished level, as there has been little to separate the two Spanish giants recently.

Their dominance in La Liga has become unquestioned, as they have shared the last eight league titles between them, Barcelona winning five times, while Madrid have been victorious on three occasions, including last season. In Europe, Barcelona have led the way, winning the Champions League twice in the last four years. Although Madrid have not been quite so prominent recently, they have reached the semi-finals of the last two tournaments, and they have won the trophy more than any other club (nine times).

"Xavi - little triggers"

Despite an uncharacteristically nervous start to the season by these two powerhouses, few would bet against La Liga once again turning into a two-horse race. Indeed, when questioned about Malaga’s potential, their exciting young star Isco’s downbeat response spoke for many, “Atlético Madrid and ourselves have begun well, but there are two teams superior to the rest and there are no others that can fight them for the title.”

They also appear to be doing fantastically well off the pitch, both reporting revenues of around half a billion Euros for the 2011/12 season. More importantly, both clubs registered hefty profits: Barcelona’s €49 million was their all-time record, while Madrid’s €32 million was also a notable achievement. Equally significantly, they have also been reducing their sizeable debts to a more manageable level.

In fact, Madrid claim that their turnover of €514 million is the highest of any sporting club in the world after 7% (€34 million) growth from the previous year’s €480 million. However, expenses shot up €48 million with wages rising 8% (€18 million) from €216 million to €234 million and other expenses surging 26% (€30 million) to €146 million, partly due to a tax law change and higher provisions.

This meant that Madrid’s cash profits, defined as EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) declined from €148 million to €134 million. This is still hugely impressive, being €20 million more than Manchester United and €90 million more than Arsenal, two of England’s most financially astute clubs.

After a €5 million increase in player amortisation and depreciation, operating profit fell €19 million to €24 million, though this was boosted by €20 million profit on player sales (and other asset disposals), which was €17 million higher than the previous season. Net interest payable rose €12 million, almost entirely due to a once-off financial gain the prior year not being repeated in 2011/12.

"Casillas - number one"

This produced a profit before tax for Madrid of €32 million, which was €15 million lower than the €47 million achieved in 2010/11. This was still more than respectable, as club president Florentino Pérez affirmed, “These results are spectacular, especially given the economic circumstances we are living in.”

Barcelona’s revenue also rose 7% from €452 million to €485 million (excluding €10 million revenue from player sales), though they also managed to cut the wage bill by 3% from €276 million to €268 million. This helped increase their EBITDA by a stunning 39% from €89 million to €123 million, just €11 million behind Madrid. In fact, their lower player amortisation, arising from their policy of developing players from the La Masia academy, means that Barcelona’s operating profit of €51 million was more than twice as much as Madrid.

However, Barcelona only made a negligible €3 million profit on player sales, as the €11 million gain made from selling the likes of Jeffrén and Maxwell was almost wiped out by the €8 million loss from removing Alex Hleb, Gabriele Milito and Henrique from the books. That still represented an improvement from the previous season, when the club made an overall loss of €22 million on player sales, as the profitable sale of Yaya Touré to Manchester City was not enough to compensate for the large losses made on selling Zlatan Ibrahimovic to Milan, Dmytro Chygrynskiy to Shakhtar Donetsk, Martin Cáceres to Sevilla and Thierry Henry to New York Red Bulls.

"You've got to fight for your right to party"

Following the debt reduction, Barcelona’s net interest payable dropped €8 million to just €5 million, leading to the record €49 million profit before tax. That’s pretty impressive for a season in which Barcelona did not win the Spanish league title or the Champions League, particularly when they did not sell any players for large amounts of money. No wonder their president Sandro Rosell described this season as “excellent in terms of numbers”, though the fans might have preferred more silverware.

In fact, without the huge losses on clearing out some of the former regime’s expensive mistakes (the loss on Ibrahimovic alone was reported to be an incredible €37 million), Barcelona said they would also have made a pre-tax profit in 2010/11 of €34 million.

Actually, the picture for the football club is even better, as these figures include large losses reported for Barcelona’s other sporting activities. These amounted to €40 million in 2011/12 (basketball €22.9 million, handball €7.7 million, 5-a-side football €5.9 million, hockey €2.4 million and other sports €1.4 million), so the pre-tax profit for the football club alone would be a mighty €89 million.

It’s a similar story for Real Madrid, though unfortunately their annual report no longer analyses the profit and loss account by activity. The last report to do so (in 2008/09) listed the basketball loss as €23 million. If this were the same level today, Madrid’s profit before tax for the football club would be €55 million.

In spite of their massive expenditure, Madrid have been consistently profitable, amassing €230 million of pre-tax profits over the last six years, including €44 million in 2007, €51 million in 2008, €25 million in 2009 and €31 million in 2010. According to their annual report, the last time they reported negative EBITDA was way back in 2001/02. The club is again budgeting for a €32 million profit in 2012/13.

Barcelona’s figures have been less impressive, though they have reported profits in four out of the last six years, albeit generally much lower. The annus horribilis of 2010 with its €83 million loss was largely due to the new board taking what Javier Faus, the vice-president of economic affairs, described as a more conservative approach and booking €89 million of audit adjustments, including provisions for TV rights disputes, player transfers and land sales/valuations.

At that point, Faus admitted that Barcelona could not “allow itself to continue losing money”, leading to a more austere approach, since when substantial progress has been made on the club’s finances, resulting in this year’s mega-profits and a budgeted pre-tax profit for 2012/13 of €36 million. Nevertheless, there is no room for complacency, as Faus acknowledged, “We’re taking this with caution. We’re not euphoric. We want to wait two to three years to see if we can stabilise the trend.”

In stark contrast to the big two, very few other Spanish clubs are doing well financially. According to a study by the University of Barcelona for the 2010/11 season, only eight of the 20 clubs in La Liga were profitable – and Real Madrid were the only one of these to report a profit higher than €5 million. While the two Spanish giants gorge themselves, the other teams are starving. As Professor Gay said, “Everyone is concentrated on Madrid and Barca, who are the kings of the banquet, while the rest live an uncertain future.”

The picture is not too different on the broader European stage, as the only leading club making similar profits are Arsenal, who reported €44 million of pre-tax profits in 2011/12, though it should be noted that they would have made a €38 million loss without the benefit of €82 million of player (and property) sales, ironically including Cesc Fàbregas to Barcelona.

Bayern Munich also reported a solid profit of €9 million, the nineteenth year in succession that they have been in the black, but Manchester United slipped to a €6 million loss (before tax), dragged down by €60 million of interest charges, though in fairness they did make a €36 million profit the previous year.

At the other extreme, those clubs operating with a benefactor/sugar daddy model reported enormous losses. Manchester City’s €237 million loss in 2010/11 was the largest ever recorded in England, while Juventus, Inter, Chelsea and Milan all registered losses at around the €80 million mark.

The source of Madrid and Barcelona’s financial supremacy is their astonishing ability to generate revenue. Domestically, they are so far ahead of the other clubs that it is questionable whether they are even competing in the same race. In the 2010/11 season, their respective revenue of €479 million and €451 million (very slightly adjusted to be in line with the Deloitte Money League) was around four times as much as the nearest challengers: Valencia €117 million, Atlético Madrid €100 million and Sevilla €83 million. The rest were absolutely nowhere with two of the clubs in Spain’s top division reporting annual revenue less than €10 million.

That’s bad enough, but the problem is that it’s getting worse, as only the big two have managed meaningful revenue growth over the last few years, while the others have been stagnating. In the three years between 2008 and 2011, Barcelona and Madrid increased their revenue by €142 million and €113 million respectively, while the closest to that was €21 million by Atlético Madrid and €16 million by Valencia. Athletic Bilbao’s revenue has been flat, and it has actually declined at Sevilla and Villarreal.

In 2012 it’s more of the same with the two giants both adding a further €34 million to their revenue. In short, the gap between the elite and the “working class” is already immense – and it’s getting wider every year. As Sevilla’s outspoken president José Maria del Nido said, “Revenues are making the big get bigger and others smaller.” The chances of Sevilla (or indeed anyone else) mounting a sustained challenge in Spain are virtually zero, unless one of the big two somehow implodes.

In fairness to the Spanish clubs, the theme is essentially the same in Europe with Madrid and Barcelona earning around €100 million more than the third placed club, Manchester United, and €150 million more than Bayern Munich. Their revenue is an incredible €200 million more than Arsenal, Chelsea and Milan. Moreover, they earn the highest television money and only one club betters them on commercial revenue (Bayern Munich) and one splits them on match day income (Manchester United).

Furthermore, the distance to the chasing pack is also growing year after year. Since 2005, the first year that Madrid topped the Money League, their revenue growth has been considerably higher than the other leading clubs. In that period, Madrid’s revenue rose by €204 million, while Barcelona’s growth of €243 million was even more impressive. The next highest increases were barely half that: Bayern Munich €131 million and Manchester United €121 million.

The distance to their peers has been steadily increasing from €39 million in 2009 to a staggering €130 million in 2012. In other words, everyone else has massively lost ground in relative terms. Given this significant competitive advantage, Real Madrid and Barcelona should at the very least reach the Champions League semi-finals every season (and this is indeed one of their budget assumptions).

It’s more of the same in 2012, as the Spanish leaders continued their growth story, while the only other clubs to publish their results for last season either only grew slightly (Arsenal) or even fell back (Manchester United – due to earlier elimination in the Champions League).

Part of the widening disparity reported in 2011 was down to currency movements, as the exchange rate that Deloitte used for their last publication was 1.11 Euros to the Pound. Since then, the Euro has weakened, but even if we apply the current exchange rate of 1.25, the picture is basically unchanged. Since 2009, the growth rate at Barcelona (€119 million) and Real Madrid (€113 million) has been at least twice as fast as their nearest rival (Manchester United €52 million). Of course, Bayern and Chelsea have yet to publish their 2012 figures, but that is unlikely to significantly distort the picture.

We should note that both clubs have provided moderate revenue projections for the 2012/13 season: flat for Madrid, as lower revenue from the summer tour (because of Euro 2012) is compensated by growth in other areas; and a 5% decrease for Barcelona, partly due to no European Super Cup or Club World Cup, with Faus admitting, “Each year it’s harder to find new revenue streams.” However, it should also be acknowledged that they have often managed to beat their revenue budget in previous years.

One other positive aspect of their revenue is how evenly balanced it is between the three revenue streams. The split is almost identical: broadcasting – Madrid 38%, Barcelona 40%; commercial – Madrid 36%, Barcelona 35%; match day – Madrid 26%, Barcelona 25%. As Madrid’s annual report puts it, this diversified structure provides economic stability, cushioning the impact of potential revenue fluctuations arising from sporting factors or the prevailing economic conditions.

Even though they have been remarkably successful in producing a balanced revenue model, broadcasting revenue still provides them with a key competitive advantage over their foreign counterparts, thanks to their lucrative domestic deal. Unlike all the other major European leagues which employ a form of collective selling, Spanish clubs uniquely market their broadcast rights on an individual basis, so Madrid and Barcelona each received €140 million in 2011/12, which was three times as much as the nearest competitors, Valencia €48 million and Atletico Madrid €46 million, followed by Sevilla €31 million and Betis €29 million.

In other words, Madrid and Barcelona on their own received around 43% of the total TV money in La Liga or 11 times as much as the €13 million given to the last club on the list (Racing Santander). This unbalanced deal produces the most uneven playing field in Europe and compares unfavourably to the 1.6 multiple in the Premier League between first and last clubs. Such a revenue disadvantage is bad enough for one season, but it makes a gigantic difference over time. As Sevilla president del Nido complained, “The two giants have earned €1,500 million more than the next club in the last ten years.”

Looked at another way, they received about twice as much from their domestic deal as Premier League champions Manchester City, though the gap should be halved from the 2013/14 season when the new English contract kicks in. In fact, their TV revenue is more than the total revenue of all but eight other clubs.

Both clubs have TV agreements in place until 2014/15, which highlights one potential problem, as the rights holder Mediapro has experienced severe difficulties leading to the company seeking bankruptcy protection over a dispute with Sogecable. Furthermore, other TV channels have spoken of not bidding for rights for matches in future, due to the high price and depressed advertising market. That probably explains why Faus admitted, “Media income has peaked and we don’t expect increases in the next five years.”

"Every little thing he does is magic"

However, the strongest threat to this revenue stream is the other clubs’ desire to move to a collective structure, as summarised by Atlético Madrid’s president Miguel Ángel Gil Marín, “We want a league that is solvent and competitive. To achieve that, it is fundamental that the gap in budgets and revenues is narrowed and there is a fairer distribution of TV rights.”

To date, this has been staunchly resisted by Madrid and Barcelona, but Spain’s sports minister José Ignacio Wert believes that they are now “receptive” to the idea of a more equitable distribution. Indeed, last year Sandro Rosell said, “The television rights are negotiated individually now, but in three, four, five years’ time, we will have to put them all in one pot and make La Liga as it is in Italy and the Premier League”, though his price is a reduction in the number of clubs from 20 to 16.

That might sound like yet another slice of “pie in the sky”, but there are reasons to believe that this might happen, not least that collective agreements tend to be worth more than the sum of their parts. La Liga’s TV rights revenue of €655 million is a long way behind the Premier League’s current €1.4 billion (rising to an estimated €2.2 billion in 2014). In fact, they have now been overtaken by the Bundesliga (€0.7 billion) and Serie A, whose return to a collective deal helped grow TV rights to just under €1 billion.

That is a huge prize to go after, especially overseas rights, which is the reason why so many in Spanish football are now actively pushing to make the “product” more attractive to viewers abroad, as articulated by former Real Madrid legend Emilio Butragueño, “We want … a brand like the Premier League. The best players in the world are here in Spain and we have to profit from it.” Of course, that is easier said than done, especially in the current harsh economic environment.

TV money has been boosted by participation in the Champions League with both Madrid and Barcelona receiving around €40 million last season from the central distribution. This again drives a wedge between them and other Spanish clubs, as the less successful Valencia (€19 million plus €3 million for parachuting into the Europa League) and Villarreal (€14 million) earned much less. It was even worse in the Europa League, as Atlético Madrid and Athletic Bilbao only earned around €10 million, even though they both reached the final.

Barcelona have consistently earned more money from Europe’s flagship tournament than Madrid, thanks to their superior results, notably the €51 million garnered when they won the trophy in 2010/11. That said, Madrid’s improved performances under José Mourinho have resulted in revenue rising €12 million to €38-39 million in each of the last two seasons. The Champions League bonanza shows little sign of slowing down, as the prize money for the 2012 to 2015 three-year cycle has increased by 22%.

Both clubs have adopted a strong commercial philosophy. Marcel Planellas of the famous Easde business school compared Barcelona’s strategy to a movie studio, “Just like Disney, you’ve got your stars, your world tours, the box office, the television rights, the t-shirts and all the other merchandising.” That description could equally apply to Real Madrid, who have recently announced plans to build a $1 billion “football island” holiday resort in the United Arab Emirates to strengthen their presence in the Middle East and Asia.

In 2010/11, their commercial revenue (Madrid €172 million, Barcelona €156 million) was only surpassed by Bayer Munich’s barely credible €178 million, but was a fair way ahead of other clubs with Manchester United being the nearest at €114 million. In Spain, it’s less of a gap to the next clubs, more of an abyss with the difference being at least €125 million to Atlético Madrid €29 million and Valencia €23 million. Note that Deloitte appear to have re-classified membership fees to commercial income in their analysis.

Perhaps unsurprisingly, the shirt sponsorship and kit supplier deals are the highest in football. Barcelona’s five year deal with Qatar Foundation, running until 2015/16, is worth €30 million a year (plus €15m for “commercial rights” in 2010/11) and is their first ever paid shirt sponsorship. Rosell argued this was due to the arrival of wealthy owners at other clubs, “If we did not have to fight against competition which has capital, I would never sell anything on the shirt.” Madrid’s agreement with Bwin, reportedly also worth €30 million, runs until 2012/13.

It’s not so rosy at other Spanish clubs with almost half of the clubs in La Liga starting last season without a shirt sponsor, including Valencia, Sevilla and Villarreal. However, the bar is continually being raised at the leading clubs with Manchester United recently announcing a spectacular deal with Chevrolet, which will be worth an astonishing €56 million from 2014/15.

For kit suppliers, Madrid have just extended their deal with Adidas to 2019/20 for €38 million, while Barcelona renewed their Nike deal in 2008 for €33 million to 2012/13 (with an option to extend to 2018). The closest to them are Manchester United (Nike) and Liverpool (Warrior), who both earn around €32 million. An indication of Madrid’s commercial strength came from the five-year secondary sponsor deal that Emirates Airlines signed for €5 million a season, purely for some “prominent” advertising space within the ground.

In terms of shirt sales, a survey by PR Marketing suggested that Madrid and Manchester United lead the way with annual sales of 1.4 million, followed by Barcelona with 1.15 million.

Commercial income has also been helped by uplifts from success like winning the Champions League and other activities, e.g. stadium tours, ticket exchanges, though there are limits with both clubs unwilling to play the Spanish Super Cup in China. Indeed, Faus cautioned, “advertising is not immune to the current economic climate.”

Stop me if you’ve heard this one before, but Madrid and Barcelona are also at the top of the league for match day income: in 2010/11 Madrid were first with €124 million and Barcelona third with €111 million. The next highest in Spain were again miles behind: Atlético Madrid €30 million, Valencia €27 million and Athletic Bilbao €25 million. This figure is impacted by the number of matches played, e.g. progress in Europe, and other events, such as Madrid hosting the Champions League final in 2010.

In recent years, the clubs have avoided raising ticket prices too much. Indeed, Barcelona’s new board promised not to increase them for two years, which they extended an additional year for the 2012/13 season. However, there are hints that this may change with Faus talking about wanting “to have a debate” on prices.

Both clubs also benefit from membership fees with Barcelona reporting revenue of nearly €20 million from their 170,000 members. Madrid do not explicitly break out their income, though they do list the fees paid by their 93,000 members, implying revenue of €10 million.

Attendances are among the highest in Europe with Barcelona overtaking Madrid three years ago, though their crowds fell last season to 76,000, around 1,000 more than their great rivals, even though Faus said that “ticket sales have been spectacular.” One caveat here is that Spanish attendance figures are notoriously inaccurate, as explained in this interesting article from Estadios de Fútbol en España.

Last month both clubs made announcements regarding possible stadium development. Madrid unveiled four models to “turn the Bernabéu into a world class arena”, which would cost €250 million, according to El Pais, and take three years with the work starting next summer. Just two months after Rosell said that Barcelona would put planned stadium renovations on hold until the club’s debt had been further reduced, he announced a referendum whereby members could decide whether to: leave the Nou Camp unchanged; redevelop it (last year there were plans to add 10,00 seats and install new VIP boxes); or build a new stadium. Faus indicated that redevelopment would cost €300 million, while a full stadium move would be €600 million.

It is clear that both clubs have made efforts towards cost containment. In particular, Barcelona cut their wage bill from €241 million to €233 million in 2012. This gave some support to Rosell’s claim that “austerity will be a pillar of our day-to-day management”, though sporting salaries still rose by €17 million to €155 million, following the arrival of Fàbregas and Alexis Sánchez. This was off-set by a €24 million reduction in bonus payments to €44 million, as the club failed to retain La Liga and the Champions League.

In fairness, the wages to turnover ratio has improved from 59% in 2010 to a very creditable 48% in 2012, though Faus conceded that “it’s difficult to reduce the (wages) figure further and still maintain stability.”

As a technical aside, I have used the wages from Barcelona’s detailed accounts here to be consistent with the University of Barcelona analysis. The business review section of Barcelona’s annual report lists salary costs as €268 million (sports €237 million, other €31 million), as this also includes other costs, mainly image rights of €24 million.

In contrast to Barcelona, Madrid’s wage bill rose from €216 million to €234 million (almost identical to their rivals), presumably due to bonus payments for winning the league, though they managed to maintain their superb wages to turnover ratio at 46%. This may come under pressure from the abolition of the so-called “Beckham Law”, which allowed foreigners to benefit from a lower tax rate. As many players, such as the occasionally “sad” Ronaldo, are paid net, the club potentially faces a sizeable increase in its costs from 2015, when the tax rate increases from 24% to 52%.

Again, these wage bills are considerably higher than other Spanish clubs – at least €150 million higher in 2010/11 with Atlético Madrid and Valencia the closest at just €64 million and €61 million respectively. Some of the comparatives are almost laughable, e.g. Levante’s wage bill of €7 million is about 3% of Madrid’s.

As with revenue, it’s getting worse for the rest of Spain with the wages gap ever widening. Between 2008 and 2011 Barcelona’s wage bill rose €72 million, while Madrid’s increase by €49 million. In the same period, the wage bills at Atlético Madrid, Valencia and Sevilla actually fell, while Bilbao’s €14 million growth only took them to €49 million.

Their wages are also the highest in Europe, though Manchester City and Chelsea were quite close with €209 million and €202 million respectively. However, there are a couple of caveats. First, the exchange rate can play a part, so City would have been higher than Madrid in 2010/11 at today’s rates. Second, both Spanish clubs’ wage bills are inflated by other sports. In Barcelona’s case, this amounted to €31 million in 2011/12, while Madrid included around €23 million. Barca have targeted these for future savings.

Despite this factor, Madrid’s wages to turnover ratio of 45% was still better than both the financially prudent clubs (Manchester United 46%, Bayern Munich 49%, Arsenal 55%) and the more profligate ones (Manchester City 114%, Inter 90%, Milan 88%, Chelsea 75%).

The other expense impacted by investment in the squad, player amortisation, rose last year at both clubs: from €92 million to €98 million at Madrid and from €56 million to €61 million at Barcelona. For non-accountants, amortisation is simply the annual cost of writing-down a player’s purchase price, e.g. Karim Benzema was signed for €35 million on a six-year contract with the transfer reflected in the accounts via amortisation, which is booked evenly over the life of his contract, so around €6 million a year.

The only other major football club with similarly high player amortisation to Madrid is Manchester City with around €100 million. The €37 million difference with Barcelona highlights their different approaches: Madrid tend to buy in their stars, while Barcelona look to develop their youngsters in-house. As Faus said, “There’s no need to spend €80 million, as we have La Masia”, which has produced Xavi, Iniesta and Lionel Messi (among many others).

This can be seen by the net transfer spend: in the last seven years, Madrid’s €477 million was almost 80% higher than Barcelona’s €266 million. That said, there has been a sea change at Madrid with a distinct slowing-down in the last three years, with net spend of “only” €128 million compared to €349 million in the previous four years, when they launched the second version of the Galácticos project, buying Ronaldo, Kaká, Xabi Alonso and Benzema. It’s a similar story at Barcelona where they have spent just €65 million (net) in the past three years, less than a third of their €202 million outlay in the previous four years.

Faus has said that Barcelona’s average annual budget for new signings will be €40 million. He added that any over-spend would be compensated in future years, “Last year we surpassed our transfer budget with the signings of Cesc Fàbregas and Alexis Sánchez. We cannot overspend our budget by 20 or 30 million euros each year, it would put our business plan at risk. It wouldn’t be sustainable.”

Even with this more reasonable approach, the big two continue to outspend the other Spanish clubs. In the last three years, most have actually made money in the transfer market: Valencia €62 million, Athletic Bilbao €27 million, Atlético Madrid €19 million and Sevilla €5 million. The only leading club with a net spend is Malaga and that looks like a temporary blip after their ownership problems.

Transfer spending was down 70% in La Liga this summer to just €116 million with over half coming from Madrid and Barcelona (on Luka Modric, Alex Song and Jordi Alba). Some clubs didn’t spend a single Euro on player recruitment.

Given their financial weaknesses (and inability to compete), the other Spanish clubs are effectively forced to sell their stars, thus creating a vicious circle where the dominance of Madrid and Barcelona becomes more firmly entrenched. As an example, in the past few years, Valencia have lost David Villa, David Silva and Juan Mata, while Atlético Madrid have sold Sergio Aguero, Diego Forlán and David de Gea. They either move abroad or actually join Madrid or Barcelona.

Where the Spanish giants have to be careful is that they are no longer the only game in town. In fact, over the last three years they have been outspent by new money, particularly Chelsea (€272 million), Manchester City (€244 million), Paris Saint-Germain (€242 million) and Zenit Saint Petersburg (€151 million). Money talks, but oil money talks louder.

The most worrying issue for the Spanish giants, widely reported in the media, has been their large debts, though this is open to interpretation (as explained in this earlier blog). The press tend to use the broadest possible definition of debt, namely total liabilities, which includes trade creditors, accruals and even provisions. In 2012 this gives enormous headline figures for Madrid and Barcelona of €590 million and €471 million respectively. To place that into perspective, is the same measure were to be applied to English clubs, Arsenal, universally applauded for their financial prudence, would have “debt” of €585 million, about the same as Madrid and more than Barcelona, while Manchester United are much higher at €890 million.

Under the more standard definition of net debt, Madrid’s balance is only €30 million (bank loans of €143 million less cash €113 million), while Barcelona have €99 million (gross debt €136 million less cash €37 million). Both of these are lower than Arsenal (€124 million) and Manchester United (a hideous €458 million). However, Madrid also have significant net transfer liabilities owed to other football clubs (included in UEFA’s debt definition) of €55 million.

In 2010/11 Madrid (€590 million) and Barcelona (€578 million) had the highest debts in Spain, but this is cushioned by very good debt coverage (revenue/debt) of around 80%. This ratio highlights the bigger debt challenges faced by other clubs such as Atlético Madrid (debt €514 million, cover 19%) and Valencia (debt €382 million, cover 31%), though a promising sign came last month from Miguel Cardenal, Spain’s secretary of sport, who said that football club debts were declining for the first time in decades.

Madrid have succeeded in slashing debt from €327 million in 2009 to €125 million in 2012, largely because of a significant reduction in transfer liabilities. This is under their own definition, which is essentially the same as UEFA’s (bank debt plus net transfer fees payable) plus selected creditors (essentially stadium debt).

Similarly, Barcelona have cut debt by 22% in two years from €430 million to €334 million, again using an in-house definition. This is a fine achievement, considering the issues in 2009, when the club had to seek an emergency €155 million to overcome short-term cash flow problems, including paying the players. Faus has admitted that the debt is “still too high for us to be able to dictate our future” and the club’s strategic plan aims to reduce the balance to €190 million by 2015/16.

Madrid’s balance sheet is quite strong with €275 million of net assets, which is much better than Barcelona’s net liabilities of €20 million (though this has improved €49 million in 2012). However, Barcelona have “hidden” assets, as the players are only included in the accounts at book value of €143 million, while Transfermarkt estimates their real market value at a mighty €601 million.

Based on their strong financial performance in 2011/12, UEFA’s Financial Fair Play (FFP) regulations, which force clubs to live within their means if they wish to compete in Europe, should not prove overly problematic for Madrid and Barcelona. The allowable losses are an aggregate €45 million for the first two years (then three years), but this is only €5 million if losses are not covered by the owners, which might be more relevant here, given that the clubs are owned by their members.

In any case, they can exclude certain expenses, including depreciation on tangible fixed assets and expenditure on youth development and community activities, which would be worth at least €20 million. On top of that, they could argue that losses made by other sports should also be ignored, though the FFP guidelines suggest that “other sports teams” might be included.

Perhaps the biggest threat to the financial ascendancy of Madrid and Barcelona is the desperate situation of Spanish football in general. Even though results on the pitch have never been better for the Spanish national team and their clubs in Europe (five of the eight semi-finalists in Europe last season came from La Liga), most clubs are struggling off the pitch with a quarter of the clubs in the top division in bankruptcy protection. As Professor Gay said, “Many clubs are living dangerously.”

"So why so sad?"

The start of last season was delayed by a players’ strike over unpaid wages and there were threats of similar this season, this time over TV rights and schedules. This is exacerbated by the desperate state of the Spanish economy, which is firmly in recession with unemployment running at a record 23%.

With their new found focus on sustainability, Madrid and Barcelona will be fine from a financial perspective, but it is conceivable that fans may lose interest in La Liga, due to the lack of competition. The financial disparity with the rest of the league was always large, but it has become colossal, leading to doubts about some clubs’ ability to survive. Professor Gay warned, “If things go on like this, Spanish football will kill itself.”

At the moment, Madrid and Barcelona give the impression of fiddling while the rest of the country burns, but they would do well to remember the wise words uttered in Spider-Man (or, if you prefer, the works of Voltaire), “with great power comes great responsibility.”

Arsenal - The Song Remains The Same

2012-10-02T16:36:00.002+02:00

It has been a mixed start to the season for Arsenal, as promising away performances at champions Manchester City and a rejuvenated Liverpool have been balanced against a disappointing home defeat to Chelsea. However, there is an air of quiet optimism among the fans that Arsène Wenger’s new-look side will be able to mount a challenge once the new players have fully gelled. It certainly feels better than last year when the Gunners were on the wrong end of an 8-2 thrashing by Manchester United.

In fact, Arsenal recovered well after that disastrous start to finish in a creditable third position, securing qualification for the Champions League for a hugely impressive 15 seasons in a row. Even Wenger was moved to describe this feat as a “miracle”, citing the thrilling 5-2 victory over Spurs in the North London derby as the turning point. Nevertheless, it was a close run thing, as Arsenal only made sure of qualifying with a last day victory at West Brom.

The team’s inconsistent performances can be partly attributed to the significant amount of turnover in the playing squad, exacerbated by losing some of the club’s best performers each summer. Last year Cesc Fàbregas returned to his spiritual home at Barcelona, while Samir Nasri moved north to join Manchester City’s project. In the recent transfer window, it was the turn of leading scorer Robin Van Persie to head towards Manchester, though he opted for Old Trafford, while Alex Song joined the long list of Arsenal players transferred to Barcelona.

"Mertesacker - the power of Per-suasion"

Good arguments can be put forward that each of these sales may have made sense individually, e.g. RVP was in the last year of his contract, while the offer for Song was too good to refuse given his tactical indiscipline, but taken together they do give the impression that Arsenal have become a selling club, not overly bothered if their best players leave.

At least Arsenal appeared to have more of a plan this summer, recruiting international replacements before the departures, including the highly talented creative midfielder Santi Cazorla from Malaga, the experienced German forward Lukas Podolski from FC Köln and last season’s top scorer in Ligue 1 Olivier Giroud from Montpellier. Furthermore, the return of Jack Wilshere and Abou Diaby after lengthy absences through injury enabled the club to wheel out the tried-and-tested “like a new signing” line.

However, many fans remain baffled that a club of Arsenal’s immense financial resources did not aim higher in the transfer market, such as buying a striker of the calibre of Napoli’s Edinson Cavani or Atlético Madrid’s Radamel Falcao. Of course, either of these would have broken Arsenal’s transfer record by some distance, but the money is clearly available to fund a purchase of this magnitude.

"Cazorla - Spanish eyes"

To the outside world, it appears that Arsenal have paid rather more attention to strengthening their balance sheet, as opposed to the squad, an impression that was reinforced by last week’s announcement of a hefty profit for the 2011/12 season, described by Peter Hill-Wood as “another healthy set of full year results.”

As is the chairman’s style, that was a beautifully understated description of a thumping great profit before tax of £36.6 million, which was up from £14.8 million the previous year. This was split between £34.1 million from the football business (up from £2.2 million in 2010/11) and £2.5 million from property development (down from £12.6 million).

The massive £32 million increase in football profit was mainly due to profit on player sales rising £59 million to an enormous £65 million, largely from Fàbregas and Nasri, though recurring revenue also rose £10 million to £235 million with more than half of the growth coming from commercial operations.

However, this was offset by substantial increases in staff costs of £40 million: wages climbed 15% (£19 million) from £124 million to £143 million; player amortisation surged 70% (£15 million) to £37 million after last summer’s acquisitions; and a £6 million impairment charge was booked to reduce the value of players “deemed to be excluded from the Arsenal squad.”

Net interest charges continued to fall, down to £13.5 million from £14.2 million (£18.2 million in 2009/10).

As anticipated, there was a further slow-down in the property business with turnover falling from £30.3 million to £7.7 million, as the Highbury Square development is now almost entirely sold.

Chief executive Ivan Gazidis was at pains to emphasise the club’s self-sustaining model, claiming that the club “can and will forge its own path to success”, though he must be concerned about the continuing decline in operating profits, which have fallen from a £31 million peak in 2008/09 for the football business. In fact, excluding property development, the club actually reported an operating loss of £18 million last season, compared to the previous year’s £9 million operating profit. This £28 million turnaround was due to operating expenses (£38 million) rising much faster than revenue (£10 million).

Nevertheless, the bottom line is that Arsenal once again made another sizeable profit, even if it was largely on the back of player sales. There is no doubt that the club’s record off the pitch has been superb, especially in the unforgiving world of football, where large losses are frequently the order of the day. In fact, the last time that Arsenal reported a loss was a decade ago in 2002, amply demonstrating its self-financing ethos. The last five years have been particularly impressive, at least financially, with Arsenal accumulating staggering profits of £190 million, an average of £38 million a year.

Arsenal have consistently been one of the most profitable clubs in the world, though they are not quite the only leading club to make money. Both the Spanish giants have recently reported large profits for 2011/12: Barcelona £41 million (€49 million) and Real Madrid £27 million (€32 million). In addition, Bayern Munich have been profitable for 19 consecutive years. Manchester United slipped to a £5 million loss (before tax) last season, dragged down by £50 million of interest charges, though they made a £30 million profit the previous year.

At the other end of the spectrum, clubs operating with a benefactor model reported enormous losses. Manchester City’s £197 million loss in 2010/11 was the largest ever recorded in England, while Juventus, Inter, Chelsea and Milan all registered losses of around £70 million. As Gazidis put it, “we see clubs struggling to keep pace with the financial demands of the modern game.”

That said, the arrival of UEFA’s Financial Fair Play (FFP) regulations, not to mention the economic difficulties of many of the clubs’ owners, has produced a clear change in behaviour. Milan and Inter have been selling their experienced, more expensive players, while City were relatively restrained in the transfer market (by their own exalted standards) this summer. Even Chelsea’s spending has been on younger players with a future resale value.

So far, so good, but Arsenal’s profits have been very reliant on player sales and (to a lesser extent) property development. In 2011/12, if we exclude the £2.5 million profit from property development and the £65.5 million profit from player sales, the football club would actually have made a sizeable loss of £31.3 million.

No other leading club has been so dependent on player sales as part of its business model. In fact, over the last six years, selling the club’s stars has been responsible for £178 million (or over 90%) of the £195 million total profit. That’s great business, but it makes it very difficult to build a winning team, as Arsenal seem to be perpetually two pieces short of the complete jigsaw.

There’s little sign of this slowing down either, as the sales of Van Persie and Song were made after the 31 May accounting close, so will be included in next year’s accounts, contributing another £37 million of profit.

These “once-off” sales are all well and good, but they have been disguising Arsenal’s increasing operational inefficiency. This can be seen by the decline in cash profits, known as EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which has virtually halved from a peak of £66 million in 2008/09 to £35 million last season. That’s still pretty good for a football club, but, to place it into context, it is less than 40% of the £92 million generated by Manchester United, who also forecast growth to £107-110 million this season.

This may be a tiresome accounting term, but it is important, as it represents the cash available for a club to spend – unless it sells players or increases debt. Assuming no change in overall strategy, this means that Arsenal will continue to sell players unless/until they grow revenue or cut their wage bill.

As Gazidis explained, “The reason we talk about the financial results at all is that it provides the platform for us to be successful on the field.” Given this truism, let’s look at some of the challenges facing Arsenal.

1. How will the club grow revenue?

Looking at the club’s revenue of £235 million, which is the fifth highest in Europe, it is difficult to imagine that this could be an issue, especially as it is only surpassed by Manchester United in England (£331 million in 2010/11, £320 million in 2011/12), while it is way ahead of clubs like Liverpool £184 million, Tottenham £164 million and Manchester City £153 million.

However, there are three problems here: (a) the gap to the top four clubs is vast; (b) Arsenal’s revenue has hardly grown at all in the last few years; (c) other clubs have continued to grow their revenue.

Real Madrid and Barcelona generate around £200 million more revenue than Arsenal. Even though this shortfall would come down if the current exchange rate of 1.25 Euros to the Pound were used instead of the 1.11 prevailing when Deloitte produced their survey, the disparity would still be around £150 million, which makes it difficult to compete.

Although revenue rose £10 million last season to £235 million, this is effectively the only revenue growth since 2009, when revenue was £225 million. The largest increase in this three-year period came from broadcasting, which rose £11 million from £73 million to £85 million in 2012, as a result of centrally negotiated deals for the Premier League and UEFA (for the Champions League), so Arsenal’s board cannot take a great deal of credit for that.

Much was made of commercial revenue rising £5.6 million to £52.5 million, but this is only £4.4 million higher than the £48.1 million received in 2009. In other words, this crucial revenue stream has only grown by a miserable 9% in three years. Even though Gazidis stated in an interview with the club website that commercial partnerships were “well ahead of our five-year plan”, I would suggest that to date there has is not exactly been a scintillating return on investment in the expensive new commercial team.

"Giroud - handsome devil"

The most important revenue stream for Arsenal, match day income, has actually fallen from £100 million to £95 million, despite ticket prices being raised last season.

It is imperative that Arsenal manage to find ways to profitably grow their revenue, as Gazidis acknowledged during the results presentation, “Our activities to increase revenue are important. Increased revenues allow us to be more competitive and to keep pace with the ever present cost pressures in the game.” The club’s Chief Commercial Officer, Tom Fox, re-iterated this, when he described his role as “to build and grow the multiple revenue streams at the club in order to maximise the money available for the board and the manager to spend on the squad.”

Arsenal’s real revenue problem is that while they have struggled to increase their revenue, other leading clubs have continued to grow their business. In the three years since 2009, Real Madrid and Barcelona both grew revenue by around £90 million. Madrid have just announced record-breaking £411 million (€514 million) revenue for 2011/12, while Barcelona are not far behind with £381 million (€476 million).

For English clubs, United’s revenue fell back to £320 million in 2011/12 after their earlier Champions League exit, but still represented growth of £42 million since 2009, while the 2012/13 revenue outlook they provided to analysts was a mighty £350-360 million. The only leading club whose growth was anywhere near as low as Arsenal’s was Chelsea, but their 2011/12 figures will be much higher, due to the Champions League victory and new commercial deals.

Arsenal’s Achilles’ heel from a revenue perspective has been commercial income, which is extremely low for a club of Arsenal’s stature. Even after the 13% increase to £53 million in 2011/12, this still pales into insignificance compared to the likes of Bayern Munich £161 million, Real Madrid £156 million and Barcelona £141 million.

The story is no better in England, as Arsenal’s £53 million is less than half of Manchester United’s £118 million. While Arsenal have barely registered any commercial growth since 2009 (just £4 million), others have steamed ahead, including Manchester City (£41 million growth) and Liverpool (£17 million growth). The discrepancy will be even worse when those two clubs publish their latest accounts, as the 2010/11 figures do not include the increases for new sponsorship deals with Etihad and Warrior respectively.

Arsenal’s problems in this area can be highlighted by a comparison with Manchester United, who admittedly are the commercial benchmark for English clubs. Back in 2007, Arsenal’s commercial income of £42 million was just £14 million lower than United’s £56 million, but since then Arsenal’s revenue has only risen 26% to £53 million, while United’s has rocketed 110% to £118 million, leading to an annual difference of £65 million. Mind the gap, indeed.

Arsenal’s weakness in this area arises from the fact they had to tie themselves into long-term deals to provide security for the stadium financing, which arguably made sense at the time, but recent deals by other clubs have highlighted how much money Arsenal leave on the table every season.

The Emirates deal was worth £90 million, covering 15 years of stadium naming rights (£42 million) running until 2020/21 and 8 years of shirt sponsorship (£48 million) until 2013/14. Following step-ups the shirt sponsorship deal is worth £5.5 million a season, which compares very unfavourably to the amounts earned by the other leading clubs, who have all improved their deals in recent seasons, so Liverpool, Manchester United and (reportedly) Manchester City earn £20 million from Standard Chartered, Aon and Etihad respectively.

In fact, no fewer than eight Premier League clubs now have a more lucrative shirt sponsorship than Arsenal. As well as the usual suspects, Arsenal’s deal is behind Sunderland’s barely credible £20 million deal with Invest in Africa, Tottenham £12.5 million (Aurasma £10 million plus Investec £2.5 million), Newcastle £10 million (Virgin Money) and Aston Villa £8 million deal (Genting).

The news is no better with Arsenal’s kit supplier, where the club signed a 7-year deal with Nike until 2011, which was then extended by three years until 2013/14. This now delivers £8 million a season, compared to the £25 million deal recently announced by Liverpool with Warrior Sports and the £25.4 million paid to Manchester United by Nike.

Gazidis talks a good match, “we continue to be successful in attracting top brands to sign on as commercial partners”, but the reality is that Arsenal have been outpaced in this area. Yes, they have indeed signed some new sponsors, such as Carlsberg, Indesit, Betsson, Bharti Airtel and Malta Guinness, while other like Citroen and Thomas Cook renewed for a higher sum, but there has been little tangible revenue improvement. Furthermore, Manchester United continue to attract more secondary sponsors than Arsenal, including seven since 1 July 2012 alone.

Indeed, much of the commercial revenue growth was down to the overseas tour to Malaysia and China, which is something of a double-edged sword, as it may well have had a detrimental effect on the players’ pre-season preparation.

"Jenkinson - corporal punishment"

More positively, Arsenal will have a fantastic opportunity for what Gazidis calls “a significant uplift in revenue” when the main sponsorship deals are up for renewal at the end of the 2013/14 season. If they could match the £45 million currently received by United and Liverpool for main shirt sponsor and kit supplier, that would imply a £32 million increase in revenue.

Great stuff, but the trouble is that the bar is being continually raised in sponsorship deals, so United have recently announced a truly spectacular deal with Chevrolet. Not only will this rise to an astonishing £45 million ($70 million) in 2014/15, but the sponsor will even pay them £11 million in each of the previous two seasons – while Aon are still the sponsors. Not only that, but United have also persuaded DHL to pay £10 million a season to sponsor their training kit.

In other words, there is no guarantee that Arsenal’s new sponsorship deals will ride over the hill like the seventh cavalry to save them, especially if the brand is damaged by a failure to qualify for the Champions League (though that has not prevented Liverpool from securing superb deals). Gazidis has said that “in terms of the financial impact, it will be as significant a step forward as the stadium was in 2005”, but his commercial team will have to significantly up its game – or Tom Fox will be considered about as effective “in the box” as Franny Jeffers.

Match day income of £95 million is the fourth highest in Europe, only behind Real Madrid, Manchester United and Barcelona, but that makes the club very reliant on the revenue generated in the stadium – “more so than any other club”, as Gazidis stated. Wenger confirmed its importance, “We are very lucky because we have good support and the income of our gates is very high.” Indeed, the £3.3 million that Arsenal generate per match is more than twice the amounts earned by Tottenham and Liverpool.

However, this revenue stream seems to have reached saturation point, as Arsenal continue to register capacity crowds of 60,000 and their ticket prices are among the highest in the world. In fact, match day income was actually higher in 2008/09 at £100 million, largely due to the high number of home games played (or old-fashioned success on the pitch). Furthermore, revenue per match has also fallen from the peak of £3.5 million in 2009/10.

Indeed, after the deeply unpopular 6.5% ticket price rise in 2011/12, most prices were frozen for this season, though 7,000 Club Level members were asked to pay an additional 2%. The media made great play of the cheapest tickets for the match against Chelsea (an A category game) being an obscene £62, though they have been less voluble about the 28% reduction in prices for C category games from £35 to £25.50. In addition, Arsenal have introduced a number of pricing initiatives, e.g. discounting lower-tier tickets to £10 for the Capital One Cup game against Coventry City.

The other issue here is what would happen if Arsenal failed to qualify for the Champions League, even if the inferior Europa League was on offer, as the season ticket includes the first seven cup games from European competition and the FA Cup. The club would surely have to issue credits, potentially leading to a 10-20% reduction in revenue.

The majority of Arsenal’s television revenue comes from the Premier League central distribution with the club receiving £56 million in 2011/12, unchanged from the previous season. Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£18.8 million) with the only differences down to merit payments (25% of domestic rights) and facility fees (25% of domestic rights), based on how many times each club is broadcast live. This methodology is very equitable with Arsenal only receiving £4.4 million less than champions Manchester City.

However, the signing of the £3 billion Premier League deal for domestic rights for the 2014-16 three-year cycle, representing an increase of 64%, will “provide clubs with a significant boost to their revenue” per Gazidis. If we assume (conservatively) that overseas rights rise by 40%, that would increase Arsenal’s share by around £30 million (using the same allocation system).

Of course, other English clubs’ revenue would also rise, though lower placed clubs would not receive as much in absolute terms, but this would certainly help Arsenal’s ability to compete with overseas clubs, especially Madrid and Barcelona, who benefit from massive individual deals.

The other major element included in TV revenue is the distribution from the Champions League, which was worth around £24 million (€28 million) to Arsenal in 2011/12. The amount earned depends on a number of factors: (a) performance – a club receives more prize money the further it progresses; (b) the TV (market) pool allocation – half depends on the progress in the competition, half depends on the finishing position in the previous season’s Premier League; (c) exchange rates – the 2011/12 figure was adversely affected by the Euro’s weakness.

In this way, Chelsea earned more than twice as much last season as Arsenal with €60 million after their triumph in Munich. Interestingly, Manchester United (€35 million) also earned more than Arsenal, despite being eliminated at the group stage, as their share of the market pool was higher after winning the previous season’s Premier League, while Arsenal finished fourth. Potentially, Arsenal could increase their revenue by €30 million if they managed to emulate Chelsea’s success, but, by the same token, they could lose €30 million if they missed out on qualification to Europe’s flagship tournament.

However large the differences are between the English clubs that qualify for the Champions League, it is still much better than the Europa League, where the highest amount earned by an English representative was the €3.5 million that went to Stoke City. Financially, the Champions league is the only game in town, especially now that the prize money for the 2012 to 2015 three-year cycle has increased by 22%.

2. Are expenses out of control?

Last season saw the first operating loss in many years after expenses rose at a much faster rate than revenue. In particular, the wage bill shot up 15% from £124 million to £143 million, despite the sale of Fàbregas and Nasri, two of the highest earners. Part of the increase was presumably due to rushing in the likes of Per Mertesacker, André Santos and Park-Chu Young last summer without enough time for meaningful salary negotiations.

In addition, a once-off charge of £2.2 million was included to top-up the pension provision, while Arsenal’s lack of trophies and commercial growth did not prevent Gazidis’ package rising 24% to £2.15 million (salary £1.366 million, bonus £675,000, pension £100,000).

The explosive wage growth is nothing new. In fact, since 2009 wages have gone up £39 million (38%), while revenue has only grown by £10 million (5%), leading to a significant worsening in the wages to turnover ratio from 46% to 61%. This is by no means terrible (most Premier League teams have a ratio above 70%, while Manchester City notched up 114% in 2010/11), but is of concern, especially as Manchester United have managed to maintain their ratio around 50%. Though not the only reason, this helps to explain why so little has been spent in the transfer market.

The problem is that wages in football resemble a sporting arms race, as other clubs continue to set the agenda, notably Manchester City, who have increased their wage bill from £36 million to £174 million in just four years. Arsenal’s wage bill of £143 million is now the fourth highest in England, behind City, Chelsea £168 million (2011) and Manchester United £162 million (2012).

Arsenal’s performance in regularly finishing third or fourth in the Premier League means they have slightly outperformed expectations based on the wage bill, though Tottenham fans would note that they ran them very close last season with £30 million less wages.

"Wenger - train of thought"

One issue at Arsenal is the equitable wage structure, which means that the top salaries are not enough to attract the world’s best, while fringe players like Sébastien Squillaci and Marouane Chamakh are handsomely rewarded for sitting in the stands. Arsenal’s wage bill is sufficient to sign world-class players, but that would mean reducing the salaries of lesser lights. This has been tacitly admitted by Gazidis: “Can we compete at top salary levels? Yes we can, but we have an ethos at the club - the way Arsène expresses it is that it is not about individual players, it is what happens between them.”

The difficulty is in getting the unwanted players off the payroll at their high wages, hence loans for Nicklas Bendtner, Denilson and Park when the club would have preferred to sell them. However, there are signs that the club is now acting on this with numerous departures this summer and the hard line over contract discussions with Theo Walcott. This is a tricky balancing act for the board: if they extend contracts too early, they risk paying over the odds in wages; if they wait until the last minute, they risk losing the player for nothing on a Bosman.

The other expense impacted by investment in the squad, player amortisation, has also risen significantly from £22 million to £37 million. For those unfamiliar with this concept, amortisation is simply the annual cost of writing-down a player’s purchase price, e.g. Mikel Arteta was signed for £10 million on a 4-year contract with the transfer reflected in the accounts via amortisation, which is booked evenly over the life of his contract, so £2.5 million a year.

Many of the players that have been sold were fully amortised, so amortisation was reduced much by the departures, but it has increased following investment in new players. To give this some perspective, it’s still a lot less than Manchester City (£84 million), but significantly more than previous years.

3. Where has all the money gone?

After so many years of large profits, it is difficult for most supporters to understand where all the money has gone. Gazidis is adamant that it has been spent on football, “We generate revenue and we reinvest all of that revenue in football. We don't pay dividends, the money doesn't come out of the club. All of the money we make is made available to our manager and he has done an unbelievable job in managing that spend.”

That’s sort of true, but the reality is that very little has been spent on bringing in new players with net player registrations of just £4 million in the last six years. Instead, the vast majority has been gone on the new stadium, property and other infrastructure (e.g. enhancements to Club Level, “Arsenalisation” projects, new medical centre) with more planned for development at the Hale End youth academy.

Since 2007 Arsenal have generated a very healthy £376 million operating cash flow, but have spent £71 million on capital expenditure, £110 million on loan interest and £64 million on net debt repayments, while the cash balances have risen by £118 million. Astonishingly, only 1% (one per cent) of the available cash flow has been spent in the transfer market.

Although Arsenal have laid out a fair bit of cash on buying players in the last two seasons (nearly £90 million), this has been more than compensated by big money sales, so their net spend has still been negative. In fact, since they moved to the Emirates stadium, they have made £49 million in the transfer market, where they are the only leading English club to be a net seller.

Of course, Manchester City and Chelsea have been the big spenders in recent years, splashing out £444 million and £235 million respectively since 2006/07. Little wonder that Peter Hill-Wood complained, “At a certain level, we can’t compete.” That said, in the same period, Liverpool, Manchester United and Tottenham have also all spent considerably more than Arsenal.

Following the elimination of the property debt, the club has managed to reduce its gross debt to £253 million (down £5 million from last year), leaving just the long-term bonds that represent the “mortgage” on the Emirates Stadium (£225 million) and the debentures held by supporters (£27 million). Once cash balances of £154 million are deducted, net debt is now only £99 million, which is a significant reduction from the £318 million peak in 2008.

Despite the high interest charges, it is unlikely that Arsenal will pay off the outstanding debt early. The bonds mature between 2029 and 2031, but if the club were to repay them early, then they would have to pay off the present value of all the future cash flows, which is greater than the outstanding debt. In any case, the 2010 accounts clearly stated, “Further significant falls in debt are unlikely in the foreseeable future. The stadium finance bonds have a fixed repayment profile over the next 21 years and we currently expect to make repayments of debt in accordance with that profile.”

4. How much is available to spend?

This question is provoked by Arsenal’s incredibly high cash balances of £154 million, which are significantly higher than any of their competitors with Manchester United the closest with £71 million (down from £151 million in 2011). Of course, not all of this is available to spend for a couple of reasons: (a) the seasonal nature of cash flows during the year, e.g. the May balance will always be high following the influx of money from season ticket renewals, but this money is used to pay annual expenses, including wages; (b) as part of the bond agreements, Arsenal have to maintain a debt servicing reserve, which was £34 million in 2012.

Nevertheless, there is clearly still a large amount of cash available to spend, especially as the cash balance does not include £26 million to come from the Queensland Road property development (though this is only payable in instalments over the next two years) and more (£10 million?) from the two remaining “smaller projects” on Hornsey Road and Holloway Road. It also excludes any money from this summer’s transfer activity with the accounts giving a positive net impact of £11 million.

Although this is probably the figure most fans want to know, it is actually almost impossible to calculate what could be spent in the transfer market for many reasons. For example, most transfers are funded by stage payments, so all the money is not needed upfront. In addition, Arsenal could easily take on some additional debt, given the strength of the balance sheet. Nevertheless, I estimate that Arsenal could safely spend £50-60 million from cash resources.

"Diaby - king of pain"

The other point that people often raise when discussing the transfer fund is that it would also have to fund a new signing’s wages, so if the club bought a player for £25 million on a five-year contract at £100,000 a week, that would represent a commitment of £50 million. That is undoubtedly true, but it is a little disingenuous, as it ignores the fact that this would be at least partially offset by the departure of an existing player, not least because of the limitations imposed by the 25-man squad rule, as highlighted by Wenger himself.

5. Will FFP come to Arsenal’s rescue?

It is no secret that Arsenal hope that UEFA’s FFP regulations will reward their prudent approach, as these aim to force clubs to live within their means, thus restricting the ability of benefactor-funded clubs to spend big on players. Indeed, Gazidis stated that the advent of FFP meant that “football is moving powerfully in our direction”, while the results press release was actually entitled, “Results confirm Arsenal strongly placed to meet UEFA’s new financial rules.”

On top of that, there are discussions at the Premier League to introduce similar rules domestically. However, although there are some signs of clubs modifying their behaviour, Arsenal’s faith in the new system may not work out as planned.

First, there is much leeway in the FFP rules, e.g. clubs are allowed to absorb aggregate losses of €45 million (around £36 million), initially over two years for the first monitoring period in 2013/14 and then over three years, as long as they are willing to cover the deficit by making equity contributions. In addition, certain costs such as depreciation on fixed assets, stadium investment and youth development can be excluded from the break-even calculation.

Furthermore, there is a sliding scale of sanctions for offenders, so it is far from certain that clubs will be excluded from UEFA competitions. This is without considering the threat of a legal challenge from a leading club.

Second, it is evident that FFP will benefit those clubs that have the highest revenue, as they will be able to spend more on their squad, but, as we have seen, other clubs continue to power ahead, so Arsenal are likely to always have a shortfall against some clubs.

"I am Vito Mannone!"

With the new commercial deals in 2014 plus more money from better central TV deals for the Premier League and Champions League, Arsenal should surpass £300 million revenue in two years, but Real Madrid and Barcelona are already around £400 million, while Manchester United are projecting £350-360 million next year.

That said, Arsenal’s revenue will place them in the revenue elite (“the top five clubs in the world with separation from the rest”, said Gazidis), so they will be very handily placed to benefit from FFP, though it is unlikely to act as some kind of magic potion to solve all of their financial issues.

In many ways, Arsenal’s self-sustaining approach has been admirable, though it has often felt like the club has been overly cautious. Gazidis speaks of avoiding “the many examples of clubs across Europe struggling for their very survival after chasing the dream and spending beyond their means”, but Arsenal are a long way from such an awful predicament. As we have seen, Arsenal do face issues around lack of revenue growth and an ever increasing wage bill, but they still have much more room to manoeuvre than most.

"Vermaelen - Tommy, can you hear me?"

The price of Arsenal’s self-sustaining model has been to regularly sell the club’s best players, while charging the highest ticket prices in the country, so this is not quite the financial Utopia that has often been portrayed in the media. For the fans, it must be particularly galling that the club’s two majority shareholders, Stan Kroenke and Alisher Usmanov, are both billionaires, but there is little sign of either making any investment into the squad.

Arsenal’s financial results are undoubtedly impressive and they have done well to consistently finish in the top four, but whether the current strategy is enough to bridge the gap to the leaders and actually win an important trophy is debatable.

The board wastes no opportunity in telling supporters how ambitious the club is, e.g. last month Peter Hill-Wood argued, “We have a pretty good chance of challenging for the Premiership. I don’t see why we cannot win it this year”, but whether the fans believe that this is credible is another matter, especially when the club does not use all the resources at its disposal.