Thursday, April 29, 2010

How Big Is Arsenal's Transfer Budget?

Come with me, if you will, back to the beginning of this season, a time when most pundits graced us with their opinion that Arsenal were the club most likely to drop out of the top four positions in the Premier League, having spent very little and sold two of their established stars. With the team now virtually assured of third place, you would therefore think that this was cause for celebration, but most fans still feel a sense of disappointment. The humbling by Barcelona in the Champions League quarter-final was followed by defeat in the North London derby (the first time that Spurs had beaten Arsenal in the Premiership for over a decade) and the desperate collapse against a feeble Wigan side.

If it wasn’t evident before, it has become abundantly clear that Arsenal need to strengthen the side during this summer’s transfer window. We are not talking about a major rebuilding programme, but most supporters know where the priorities lie. First, no team is ever going to win the title with goalkeepers of the calibre of Manuel Almunia and Lukasz Fabianksi. There could also be significant changes to the central defence. The hapless Mikael Silvestre should be allowed to leave, while William Gallas’ contract is due to expire and at the age of 35 Sol Campbell cannot be a long-term solution, despite his sterling efforts since he returned. The squad would also benefit from another powerful defensive midfielder to cover for the much-improved Alex Song. After crashing out of the Champions League, even the loyal Arsene Wenger admitted that his side needed reinforcements, “We have to add something, for sure.”

"Good arguments for strengthening the squad"

The club has always maintained that it has the funds to compete in the transfer market and this was confirmed by chief executive Ivan Gazidis when commenting on the most recent accounts, “We have money available to invest in the transfer market when we can identify the right players to add into the mix that add something to the squad.” A couple of weeks ago, chairman Peter Hill-Wood gave an explicit green light for a spending spree this summer, “We have got more money than we’ve had for a long, long time and we would like to spend it. But we want to spend it sensibly. There is plenty of cash, although not in comparison to Manchester City.” His normally circumspect manager was just as bullish, “We can match Chelsea and Manchester United in any bid. They can’t buy all the top players.”

But exactly how big is the transfer budget? For obvious commercial reasons, the club has not divulged how much money it has, but you would expect a considerable surplus to be available from playing in a 60,000 sold-out stadium with some of the highest ticket prices in the world, especially when the club’s wages to turnover ratio is among the lowest around. The newspapers certainly appear to be completely confused. The Daily Telegraph announced this week that “Wenger gets £18m war chest”, though did not bother to explain how they arrived at this figure in the accompanying article. The Daily Star typically went big with “Arsene Wenger’s £60m spree”, while the Sunday Times was more oblique, “If Wenger wants to sign two £20m players on £80,000 per week this summer, he has the means to do so”. Even John Cross at the Mirror, normally so authoritative on all Arsenal matters, seems unsure, saying that “the club has £50m plus to spend” last October, only to reduce this to a “£30m plus budget” this month.

"Time to open the cheque book"

So, let’s take a look at the accounts to see if we can work it out, as the Beatles once said. The starting point is an impressive cash balance of £101m, but that includes £22m which must be maintained on deposit as security that future payments of interest and principal can be made to bond lenders, leaving £79m. Much of this will have come from season ticket money paid in advance, which will be needed to cover operating costs in the second half of the accounting year. As we do not know when expenses are incurred (or other income is received), we cannot say for sure how much cash is required for this. Your guess is as good as mine, so let’s just take the estimate of £35m from the esteemed Arsenal Supporters’ Trust, which would leave the club with net cash of £44m - still pretty good by most standards.

Half of this came from last summer’s profitable player trading. The annual report boasts “all proceeds from player sale transactions are made available to Arsene Wenger for re-investment back into the development of the team”. This is reinforced by the terms of the stadium financing deal, which states that 70% of all net sale proceeds must be used on buying players or placed into a ring-fenced Transfer Proceeds Account (TPA). This protects lenders by ensuring that the club continues to invest in its core asset, i.e. the playing squad. The sales of Emmanuel Adebayor (£25m) and Kolo Toure (£16m) to Manchester City less the purchase of Thomas Vermaelen (£10m) from Ajax produced a net surplus of £31m, so £22m went into the TPA.

"Pointing the way forward"

Importantly, this fund can also be used to improve players’ contracts and this has become key to Wenger’s approach to investing in the squad. Most fans probably do not appreciate that the manager controls a budget covering both transfers and wages, so just because money is available to him does not necessarily mean that he will use it to purchase new players. Instead, he can allocate cash to increase the wages of the existing squad, which is a route he has clearly followed. The interim accounts highlighted an £8.6m rise in player wages, despite the departure of Adebayor and Toure, who were on very high salaries. This reflected the re-signing of 17 first-team players on long-term contracts, which the chairman described as an “investment in a very talented group of players” and as the “best means of protecting the value of one of our most important assets”.

That may well be true, but it implies an annual wage bill of £120m, which is admittedly £30m less than Chelsea, but is now over 50% of turnover. Although that’s lower than most other clubs, you would not really want to push it any higher, even though there will be pressure to do so for a number of reasons. This month’s increase in the top income tax bracket from 40% to 50% has compounded the currency effect of Sterling’s weakness against the Euro, making England a less attractive proposition for foreign players, which can only be compensated by increasing gross salaries. At the very highest echelons, the market might also continue to be artificially inflated by the presence of extremely wealthy benefactors like Roman Abramovich and Sheikh Mansour, not to mention the Spanish giants Real Madrid and Barcelona.

"Money talks"

Hence, the so-called “golden handcuffs” deal to keep Cesc Fabregas away from the Catalans’ clutches, which not only increased his salary from £80,000 to £110,000 a week, but actually back-dated it for two years, resulting in a “signing-on” fee of £3m. It is strongly rumoured that Wenger’s first addition to the squad this summer will be Moroccan forward Marouane Chamakh from Bordeaux. This is presented as a free transfer, but he will reportedly be on a five-year deal worth £50,000 a week, which is a £12.5m commitment. See how important wages are to the overall cost of buying a player? A straightforward point, but one that Harry Redknapp did not seem to grasp at “pay up” Pompey.

What might be worth considering is whether the allocation of the wage bill is the right one, as much of it is currently given to younger players, who earn more at Arsenal than other clubs. In one sense, this is a shrewd policy, as it protects the players’ value in terms of future transfer fees, but it does mean that there is less money available to improve the first team squad. If the balance were fine-tuned, this could facilitate the purchase of the players who would make the difference between challenging for and winning trophies.

From a purely financial perspective, it is difficult to criticise Arsenal’s transfer strategy, as player trading has proved to be a very profitable activity in recent years. In the four seasons since the club moved to the Emirates, their net transfer spend has been a negative £35m. As a comparison, the net spend at their North London rivals Tottenham was £78m, even after the big money sales of Dimitar Berbatov and Robbie Keane, which is an incredible £113m more. Of course, any sales this summer would increase Wenger’s transfer pot and there has been media speculation about some departures, such as Eduardo to Lyon for £8m and Tomas Rosicky back to the Bundesliga for a similar sum. However, one potential barrier to clearing out some of the dead wood is the relatively high wages paid to the likes of Almunia, Eboue, Diaby and Denilson. Which other clubs would be willing to match their salaries?

"All in the past?"

On the other side of the coin, the club has provided £9m for “probable” additional transfer fees payable to other clubs after existing players make a certain number of appearances. It is not clear exactly when these payments will be made, but the prudent approach would be to deduct this from the available cash. On top of that, there are another £11m contingent liabilities for similar performance-related clauses, though these payments are considered less likely.

The really good news in the last set of accounts came from the property side. Although there had been considerable uncertainty arising from the market downturn, Peter Hill-Wood confidently announced, “It is clear that the next couple of years will see our property activities deliver excess cash”, while Ivan Gazidis confirmed, “We will soon be delivering a profit back into the football side of the Group”.

At the time the interims were published, 524 of the 655 private apartments at Highbury Square had been sold and recent reports indicate that there is only a limited number still available. We do not know how much money they sold for, but we can estimate the value of the 131 remaining apartments as between a conservative £33m (using the on-line starting price of £250k) and £54m (based on the average price of sales to date of £414k), which would produce net proceeds of £20m to £41m after clearing the outstanding debt of £13m (at the time the accounts were published). It’s a bit rough and ready, but if we take the mid-point for our calculations, that would produce £30m, though we do not know when the money will be given to Wenger. As Hill-Wood said, “This is very good news, although I would not want to speculate on the exact quantum or timing of this.”

"Welcome to Highbury"

Furthermore, the club’s other three property assets (Queensland Road market housing, Hornsey Road and Holloway Road) are now free of debt following the sale of Queensland Road social housing, so any future sales here represent pure profit. I have no idea what that could be worth, but let’s say £15-20m. The reason that I have guessed those figures is that it would result in total once-off property gains of £45-50m, which is in line with the £45m estimate from the Arsenal Supporters’ Trust and the £50m “surplus from sales” expected by the Times. Everyone seems to think that this money will be produced “over the next two years”, so it is far from certain that it will be on tap in the next transfer window. While we are being cavalier, let’s assume that half of the Highbury Square money is available now, leaving Queensland Road as future music, which would give Arsene another £15m now.

Given that Arsenal made a £5m profit from the core football business in the last six months, having stripped out player trading and amortisation, we could potentially add this to the transfer budget, but let’s be conservative and leave that untouched, so it can be used to cover other costs.

After all that, how big is Arsenal’s transfer budget? Well, we start with £44m cash, having allocated £22m to the security deposit for lenders and deducted £35m for second-half running costs, and then should reserve £9m for probable additional transfer fees, leaving us with £35m net cash. To that, we could add the estimated £15m from property development, giving us a grand total (drum roll) of a nice, round £50m.

"If we build it, they will come"

Even if that figure is not completely accurate, there is definitely a lot of cash available. It is equally clear that Wenger will have additional funds next year as well from a combination of solid football profits plus the remaining property development. However, if the club wishes to maintain a similar level of transfer funding beyond that, it will have to go down the old-fashioned route of increasing revenue (or cutting costs). Is that feasible?

The most obvious potential for revenue growth is in the commercial area, where Arsenal’s income lags way behind their peers, according to the Deloittes Football Money League 2010. Arsenal’s commercial revenue of £48m is much lower than the other teams in the so-called “Big Four” (Manchester United £70m, Liverpool £68m and Chelsea £53m). Understandably, Arsenal tied themselves into long-term deals with Emirates (stadium naming rights until 2021, shirt sponsorship until 2014) in order to provide security for the stadium financing, but recent deals by other clubs highlight the size of the opportunity, which is probably worth another £20m a year.

Gazidis is well aware of this and has recently restructured and strengthened his commercial team to explore new partners and overseas markets in order to “unlock value” (in his terms), though the thorny issue of more lucrative pre-season tours to America or Asia is on the back-burner until the club has a clear strategy for these regions. Arsenal’s transfer activities are also relevant to this area, as a new star would generate more shirt sales à la Ronaldo, Messi, Torres and Rooney.

"Gazidis unlocking value"

Other revenue streams are relatively fixed, though we know that broadcasting income will rise by £7.5m a year following the new Premier League deal for overseas rights. It is also difficult to see how match day revenue could be increased, given that Arsenal’s ticket prices are already among the highest in Europe, and there are some slightly worrying signs that demand at the higher end is not as strong as it has been. This is important, as the 9,000 premium seats generate approximately 35% of match day revenue. This may well have resulted in pressure on the manager from the board to buy some established stars, in order to improve the team’s chances of success, thus reducing the risk of a drop in crowds.

How about a spot of cost cutting? There certainly seems to be scope for some judicious efficiencies, as the annual costs of £55m for “other operating charges”, i.e. excluding salaries and amortisation, is actually higher than the total costs at seven Premier League clubs. Unfortunately, the club does not provide much detail for these costs, but they must include items like stadium operating costs, travel and training. What we can see is that these costs represent 25% of football turnover, which seems on the high side to me.

Hang on a minute, don’t Arsenal have a huge amount of debt to pay off? Yes and no. The astonishing advances on property sales have enabled the club to reduce net debt by circa £160m in the last twelve months to around £175m with the property developments now being essentially debt-free. This represents gross debt of £275m less £100m cash with the remaining debt being for the Emirates stadium, via a mixture of fixed rate and floating rate bonds that are due for final repayment in 2031. Total annual cost to service these loans is £20m (£15m interest and £5m principal reductions). It’s not clear whether it would be possible for Arsenal to pay off this debt early in order to reduce the interest charges, but my guess is that they are in no hurry to do that, as Gazidis has argued that not all debt is bad, “The debt that we’re left with is what I would call ‘healthy debt’ – it’s long term, low rates, very affordable for the club, and it’s effectively a mortgage on our stadium, which generates revenue.”

"Money spinner"

You might therefore conclude that all the funds will be invested in the team, but Peter Hill-Wood struck a slightly contrary note (not for the first time), “In addition to investing in the team, I think we will examine investment in club projects and infrastructure … into the next phase of growth.” Not sure what that might mean, but it inspires visions of adding a new tier to the Emirates like the San Siro before the 1990 World Cup – though somehow I doubt it.

Those fans that would prefer to see the club put money into the “Arsenalisation” of the team rather than the stadium, would be comforted by Gazidis’ comments after the results, “We have delivered a profit before tax of £35m for the first half of the year, but it’s important to note that this isn’t our primary objective. The reason we run a responsible, profitable and self-sustaining business is so that we can deliver success to the club and invest in the club and ultimately deliver success on the pitch.” While Arsene Wenger believes he “would not be doing his job well if the club lost money”, he is at pains to emphasise that “the sporting side is always the most important thing.”

There is no doubt that the move to a new stadium has limited Arsenal’s transfer budget over the past few years, which Wenger finally admitted this week, “The construction of the Emirates Stadium meant that for many years we could not spend a lot of money. Our financial situation has greatly improved. We are finally able to buy the players we think we need”. This is a much more transparent response than the previous obfuscation, but there is still a suspicion that Wenger would prefer to build rather than buy, so much of the low spending was out of choice.

"How much?"

Every summer, Wenger has repeated the mantra: “We are not short of money. I am not scared to spend money. We have a squad that is good enough to compete. I will spend for a player that we need.” Even though he clearly has money this year, Wenger seemed to be preparing supporters for another summer of low spending, when he told the club’s magazine, “I feel we have made huge steps forward this year compared to last year”, while also pointing out the dangerous consequences for the club’s wage policy of buying a top star on top dollar. Last summer, he also showed his hand when discussing Real Madrid’s galactico policy, “In my opinion, to recruit more than three new players in a transfer window, as Real plan, is taking a technical risk.” Wenger may feel vindicated after the lack of success for the Spaniards (and indeed Manchester City) this year, but critics would point to the improvement shown in the Champions League by Bayern Munich and Lyon, who were among the biggest spenders last summer.

There are two other factors that might influence Arsenal’s transfer targets. First, injuries have been a major dynamic this season with key players being lost at different stages (Robin Van Persie, Cesc Fabregas and Alex Song in particular) and the squad suffering a barely credible seven fractures. If they all return hale and hearty, that will be like making several “new signings”. Second, the Premier League has introduced a new home-grown player rule, which means that all clubs must register a squad with a limit of 25 players of which eight must be aged 21 or under and qualify as home-grown. The consensus seems to be that Arsenal are well placed to satisfy these quotas, but it might influence the club’s manoeuvres in the transfer market.

"Mind over matter"

Whatever signings Arsenal make, we can expect them reasonably soon, if you believe Wenger’s comments to the club magazine, “I have definite transfer targets and have been talking to people, but I will not tell you who. I believe the earlier you settle your teams the better it is and the less anxiety you have.” While some might cynically note that this announcement neatly coincides with season ticket renewals, there is a precedent for this approach, as he signed Rosicky before his goal scoring feats for the Czech Republic in Germany (and before his price was artificially inflated). It should also be noted that Wenger is going to South Africa to cover the World Cup for French television.

One final factor is that Arsene Wenger’s own contract expires next summer. The chairman has reiterated his support for the enigmatic Frenchman, “We want him to stay for as long as he wants, and we hope that will be for a considerable time yet”. Wenger’s sense of moral decency would not allow him to go on a spending spree if he felt that he was likely to leave, as a new manager will usually want to bring in his own players. From this perspective, the arrival of several new players would be doubly pleasing to the majority of Arsenal fans.

However, a few supporters are getting restless at the lack of trophies and reluctance to spend big in the transfer market, because Wenger’s reign has been like the proverbial “game of two halves”, winning three Premier League titles and four FA Cups in his first nine years, followed by nothing in the last five years. He is an outstanding manager, probably the best that Arsenal has ever had, but he might need to modify his transfer policy to ensure that he goes out with a bang.

United target Modric

According to The Sun, that man is 24-year-old Tottenham midfielder Modric.

The Red Devils are said to be lining up a £25 million bid for the diminutive Croatian midfielder who Ferguson praised in the programme notes at the recent United v Spurs game when he said: "And I give you another wee man who'll be at Old Trafford this afternoon: Luka Modric, who is playing out of his skin at the moment."

Tottenham will no doubt try and bat off the advances of their Premier League rivals, but United have managed to prise the likes of Michael Carrick and Dimitar Berbatov away from them in recent seasons and will be confident their pockets will prove deep enough once more.

- Thanks for reading!

- Posted using BlogPress from my iPhone

Sunday, April 25, 2010

"The Capitalist Tool" + "the Red Knights" = total journalistic confusion

"The Capitalist Tool" is not Joel Glazer's nickname from his time at college, but the motto of US business magazine Forbes.  Last week Forbes, enthusiastic cheerleaders for the unfettered free market, published its annual list of the world's most valuable football clubs (they do a similar exercise for NFL franchises).  No doubt you will have seen that United top the list with an estimated valuation of $1.84bn (£1.19bn).  This estimate caused much confusion among journalists, many of whom saw the numbers quoted as being very bad news for the Red Knights consortium that is hoping to bid for United.  This article from the Telegraph was typical:

The Red Knights, a group of wealthy businessmen, are attempting to raise funds to launch a takeover bid at Old Trafford, but the Forbes figures suggest they must raise well in excess of £1 billion if they are to make a viable offer for the club.

Unlike some football money surveys (yes I'm talking to you Deloittes), the Forbes one has some financial logic to it.  This is how it is constructed.....

They take EBITDA before profits and losses on player trading - this is what they call "Operating Income".  For United they have a figure of $150m which is roughly consistent with Red Football's pre-exceptional EBITDA for the year to 30 June 2009 of £92.1m (the average exchange rate for that period was $1.603 which actually gives a dollar number of $147.6m but its pretty close).

EBITDA is a very common measure of profits used for valuing companies, perhaps the most common.  It has some disadvantageous when applied to football clubs because it takes no account of transfer spending (something no club can avoid in the long-term if they don't want a team of pensioners and a cost that can sink a club - see Pompey and Leeds for example), but as I say, its a commonly used number.

When you value a business using a multiple of EBITDA (which is profits before interest), the number you end up with is a measure of the "enterprise value" (or "EV") of the company.  Enterprise value is "capital structure neutral", it measures the value of the debt and the equity of the company (see Wikipedia's perfectly sensible article on enterprise value for more details).  Forbes confirm this is their approach in the footnotes to their survey:

Value of team based on past transactions and current stadium deals (unless new stadium is pending) without deduction for debt (other than stadium debt).

Other than this footnote, Forbes give no further information on how they arrive at their chosen "multiple" of EBITDA which drives their club valuations.  United's multiple is 12.2x, whilst Real Madrid's is only 10.2x which is odd.  Forbes say they use "past transactions", but the Glazers' paid almost 17x for United in 2005, and Real Madrid is of course structurally unbuyable which means its "value" is something of an oxymoron, can something you can never buy or sell have a value?

The JP Morgan research report on United helpfully included the EBITDA multiples paid (or offered) for stakes in ten European clubs (including the Glazers buying United).  The multiples ranged from a low of 12.2x implied by the Rhone offer to buy 40% of Liverpool to the 18.9x paid by Roman Abramovich when he bought Chelsea.  His presence on the list, as well as football finance geniuses like Hicks and Gillett shows the problems with valuing big clubs.  There are so few precedents and all too often the price is crazy and irrational.  There is no efficient market for assets like Manchester United, the number of individuals who could afford the club is tiny. Anyway, Forbes' 12.2x used to value United looks perfectly sensible as United's profits are hardly depressed, indeed JP Morgan show last year being the peak for a few years to come.

So Forbes value United at £1.19bn.  Where journalists such as Mark Ogden at the Telegraph get confused is that they forget that this includes United's debt.  Forbes says there is $844m (£518m) of debt which I assume is the bank debt on the balance sheet last June.  This obviously excludes the PIKs, but that really doesn't matter.  The £1.19bn is their estimate of the value of the whole business.  The debt figure you use just drives the equity value (the value of the Glazers' shares in United).

Which brings us to the Red Knights.  Articles such as this one by the ever sensible BBC Sports Editor David Bond (ex-Daily Telegraph himself) suggest the Red Knights will offer around £1.2bn.  Let's be totally clear here, this number is the enterprise value of United, it is completely comparable with the Forbes valuation.  David Bond goes on to suggest that the Red Knights intend to keep United's bonds in place in the short-term (something I wrote about recently).  So if the offer was c. £1.2bn and they kept £534m of bonds, the Red Knights would need to raise around £700m to fund their offer.

Hopefully you can see how the confusion has arisen between the £700m described in the paragraph above and the £1.2bn Forbes valuation.  If the Glazers sold Manchester United to the Red Knights at Forbes' valuation, the Red Knights would pay them around £700m in cash, the Glazers would have to pay off the PIKs, leaving them with around £500m for their (and our trouble).  And the rest of us would go back to worrying about Rafael Da Silva's immaturity vs. his undoubted natural talent.


Thursday, April 22, 2010

The gilded stable doors of the Premier League – the new rules that won’t stop the next Portsmouth

The Administrator’s “Report to Creditors” of Portsmouth City Football Club Ltd which was published yesterday is at its heart an idiots’ guide on how to bust a football club in a very short space of time.

Lesson 1:
“Live the dream” and increase your wage bill by 163% in three seasons whilst your turnover only rises 66% (thanks Harry).

Lesson 2:
Spend money on planning for a new ground, fail to finance it and fail to build it (the so-called “scouse gambit”).

Lesson 3:
Let every other cost go through the roof, doubling in only two years.

Lesson 4:
Open and then close a pointless chain of shops, invest in a radio station and start a ticket financing business in order to “diversify your income”.

Lesson 4:
Borrow, borrow and borrow to fund lessons 1, 2, 3 and 4…..

I’m not going to dwell on the detail of Portsmouth’s situation, thankfully there has been a sea-change in the amount and quality of investigative journalism about the financial crisis in football in recent months, but instead I want to show how inadequate the Premier League’s (self) vaunted new rules which aim at avoiding repeats of the Pompey debacle really are.  The Premier League of course accept no responsibility for Portsmouth's problems (or anything else that goes wrong to be honest).  But just to be safe, the league introduced tough new financial rules last September.  Richard "under wraps during the election" Scudamore said at the time: “It's absolutely crucial that these clubs are run as ongoing viable concerns. These financial rules apply immediately.”

The new rules
Rather than reprint all of rules 71 to 82 of the Premier League rule book, here is a very good summary published by the BBC on 18th February (with my emphasis and explanations):

-   Clubs must submit independently audited accounts to the Premier League by 1 March each year, with requirements to note any material qualifications or issues raised by auditors.
-   Requirement for clubs to submit future financial information [i.e. financial projections] to the Premier League by 31 March each year. This will act as an improved early warning system should any club take undue financial risks which may have consequences for future financial stability.
-   An annual requirement to demonstrate to the Premier League board that a club does not have outstanding [i.e. overdue amounts] debts to other clubs.
-   An annual requirement to demonstrate to the Premier League board that a club is not in debt with regard to income tax or National Insurance and payroll taxes [i.e. overdue amounts].
-   These rules are to ensure that Premier League football clubs can meet their obligations throughout a season including being able to fulfil all fixtures, fulfil contractual obligations to the Premier League and demonstrate that they can meet all payments due during a season.
-   Any qualification raised in accounts or risk seen by the Premier League board could result in action to help prevent a club from exposing itself to financial difficulties that may be deemed unsustainable or put at risk the future financial sustainability of a club.
-   Clubs that fall into such financial difficulty could be subject to financial controls relating to transfer activity and/or player salaries.

There are some sensible things in here, especially the requirement to demonstrate that clubs aren't using Her Majesty’s Customs and Revenue as a piggy bank by not paying PAYE and national insurance on time.  Nor of course should clubs be able to avoid paying transfer fees or debts due to other clubs.  And the introduction of these rules is the first time the hands off, laissez-faire Premier League has ever contemplated imposing financial controls on a member club, even if it has taken seventeen years to put the powers in place.

But beyond these small positive steps, the rules are totally inadequate and crucially would have not have stopped Portsmouth FC from collapsing in the way it did.

Don’t rely on qualified accounts and future financial information
The fundamental problem with the new Premier League rules is that the things that can trigger Premier League intervention (other than breaking the two new rules about taxes and overdue transfer fees) are so, so weak.  Intervention can take place if:

Rule 81.1 the club fails to deliver annual accounts to the league by 1st March; or
Rule 81.2 the club fails to deliver interim accounts to the league by 1st March (which set of accounts are required depends on the club’s year end); or
Rule 81.3 the club fails to deliver “Future Financial Information” by 31st March; or
Rule 81.4 the club fails to deliver additional information requested by the Premier League relating to the auditor’s qualifications of its accounts; or
Rule 81.5 the club has failed prove its doesn’t owe HRMC or other clubs money it should have paid; or
Rule 81.6 the accounts supplied are qualified or part qualified by the auditors; or
Rule 81.7 the Premier League Board, having looked at the information supplied by the club doesn’t believe the club will be able in the next season:
Rule 81.7.1 to pay its “football creditors” or employees; or
Rule 81.7.2 be able to play its 38 league matches the following season; or
Rule 81.7.3 be able to fulfil its league obligations to broadcasters

Putting aside the rules about delivering information on time (something tells me even the most rotten club will manage to comply with those), the other main triggers are whether the club’s accounts are qualified or part qualified and whether the PL board thinks the club might not be able to play its matches or pay its football creditors the next season.  This is totally inadequate and no form of “early warning system”. To see why, just look at the Portsmouth situation.

March 2009 – all well in Pompey world?
Under the new rules, to play in the Premier League in the current season, Portsmouth would have had to file accounts with the league last March.  They actually had their 2008/09 accounts signed off on 27 February 2009 and crucially, there was no qualified auditor’s opinion in the accounts.  Grant Thornton did not issue a qualified opinion about the accounts because they were convinced by the club’s board that although the club had massive liabilities, loans would not fall due before the opening of the next transfer window when player sales could be made.  No doubt the club had a business plan at the time the accounts were signed off which it shared with its auditors and helped satisfy them that the business would continue as a going concern.  Under the Premier League’s new rules, this plan would have to be submitted to the league board of course.  But would the Premier League board have disagreed with the club’s own auditors about the viability of the business?  It would be an extraordinary, effectively inconceivable thing to do.  So the whole new system now relies on the auditors identifying a problem.  If they don’t, whether through their own fault or because they are misled by the management, the whole new system falls over.  No red lights flash.

You may be wondering if the collapse of Portsmouth was a sudden event, unpredictable by anyone in March 2009.  Since the Administrator published the details of the club’s financial position, journalists have expressed shock and dismay at the £122m of liabilities on the balance sheet.  If they looked a bit closer, they’d actually see that the last published accounts showed even greater liabilities.  You can see this in the following table (I have kept the classifications of assets and liabilities as they are described in the Administrator’s Report to Creditors and the Report and Accounts respectively, but the total numbers are completely comparable):

May 2008
Liabilities from administrator

Owed to Portpin

Owed to finance co.s

Owed to financial instituions

Staff holiday pay arrears

Unsecured creditors

Liabilities from 2008 accounts

Short term creditors

Long term creditors


Total liabilities


Freehold property
Other fixed assets



Financed Assets

Player transfers

Cash at bank

Total assets

Net liabilities

Now the net position has indeed worsened (unsurprisingly the club lost money between May 2008 and today), but the key point is that when these accounts were signed off by the auditors in 2009 (when no doubt the Premier League also would have nodded them through if its new rules had been in place), the situation was already hopeless without huge injections of new capital.  None of the Portsmouth’s recent owners had or were willing to inject the money required of course, but none of this is even considered in the Premier League rules and most importantly there is absolutely nothing in the rules to prevent a club getting into such a state in the first place.  As long as the accounts aren't qualified, all is well....

The answer of course is to take a far more fundamental approach to regulating football.  Specifically, English football needs binding rules limiting wages and salaries as a percentage of turnover, and limiting debt as a multiple of profits (with due allowance for borrowing for proper football investment like Arsenal building the Emirates stadium).  Such rules would have gone a long way in stopping Portsmouth or Leeds or Cardiff or Chester (or dozens of the other 50 professional clubs that have gone into administration or CVA in the last twenty five years) ever getting into severe trouble in the first place.

Preventing clubs running up debts at the expense of the taxpayer or other football clubs is a very welcome step, but it doesn’t go nearly far enough.  So next time Richard “over £900k a year but I’m not bailing out the St John Ambulance” Scudamore or Premier League spokesman Dan Johnson wax lyrical about the new “early warning system” and “a set of regulations designed to protect the viability and sustainability of the clubs” remember that these rules wouldn’t have saved Portsmouth and will do little or nothing to save the next football club which falls victim to greed, stupidity and mismanagement.