Thursday, September 23, 2010

Has The Old Lady Been Rejuvenated?

Although Juventus only finished 7th in Serie A last season, there is no doubt that they have come a long way since the dark days of Calciopoli just four years ago. Having been heavily punished for their role in that scandal, when they were relegated to Serie B and forced to start the following season with a nine-point deduction, the bianconeri have manfully fought their way back to the upper echelons of the top tier.

Until this year’s blip, they improved every year on the result of the previous season, starting by winning Serie B by a comfortable six points in 2007, then surprising most pundits by finishing third in their first season back, followed by an impressive second place in 2009.

Relegation was an unprecedented indignity for the Old Lady of Turin, as the club is affectionately known, as it had had never before been out of Italy’s top division in its 109-year history. Very far from it in fact, as Juventus have a roll of honour as long as both your arms, having won the Champions League twice, 29 Italian championships (though one of these was revoked and another one not assigned), three UEFA Cups and one Cup Winners’ Cup. On top of that lot, the club’s website claims that they are the most popular team in Italy with 12 million supporters, while they boast of a barely credible 170 million fans worldwide.

"In safe hands"

Their fall from grace arose from the match-fixing scandal that emerged in 2006, after police uncovered a series of telephone interceptions that showed some major teams attempting to rig results by selecting referees that would be favourable to them. The basic facts are that Milan, Fiorentina, Lazio and Reggina were all given points deductions, but only Juventus were condemned to relegation, as they were most deeply implicated in the murky machinations.

This is clearly a profoundly emotional subject for all Italian football fans and is one that even now refuses to die down with the recent discovery of more tape recordings suggesting that Inter were also heavily involved in this outrage. The role of this blog is not to apportion degrees of blame, but to look at the Juventus response to the body blow that they received.

One immediate result was that the team that “won” the scudetto in 2006 had to be broken up, partly through players wanting to leave for greener pastures, partly out of financial necessity, so stars such as Zlatan Ibrahimovic, Patrick Vieira, Lilian Thuram, Gianluca Zambrotta and Fabio Cannavaro all left Turin. On the other hand, some players remained loyal to the club’s colours, forever cementing themselves into the hearts of the Juve faithful, including Gigi Buffon, Pavel Nedved and the incomparable Alessandro Del Piero.

"Nedved says goodbye"

As they say, “when the going gets tough, the tough get going”, so it was all change at Juventus. The club’s majority shareholders, the Agnelli family, brought in John Elkann, the grandson of the legendary avvocato Gianni Agnelli, to sort out the horrible mess and he wasted little time in instigating a radical clear-out, sacking the former management and recruiting a new chief executive in the shape of Jean-Claude Blanc, whose sporting experience included the Winter Olympics, Tour de France and the French Tennis Federation. The “French Connection” was further strengthened when Blanc hired World Cup winner Didier Deschamps as the new manager, replacing England’s very own Fabio Capello.

Although Blanc has attracted criticism for not being a football man, it has to be remembered that he took control of Juventus during the most turbulent period in the club’s history. The meltdown on the pitch could easily have been accompanied by financial disaster off it, but Blanc and his team managed to steady the ship and restore confidence.

"Jean-Claude Blanc: Allez les bleus!"

In 2007 the new board of directors formulated a medium-term plan that would permit the relaunch of “Newventus”, if you will, as a leading football club in Europe, while strengthening its financial position. Their mission was to be the very benchmark of a modern football company: excellent in sport, close to the fans, but managed with great professionalism and a focus on commercial opportunities.

To that end, the club has demonstrated a ruthless streak whenever it has looked like their objectives were not being fully met with Deschamps leaving by “mutual agreement” after winning promotion and Claudio Ranieri being sacked after losing out to Inter in the championship, including a fatal two-month run without a victory. Ciro Ferrara, who had been responsible for the youth sector, replaced him, but he lasted less than a season before being sacked after the club failed to qualify for the knockout stages of the Champions League. His replacement, Alberto Zaccheroni, was only given a four-month contract, which unfortunately for him included the ignominious exit to Fulham in the Europe League semi-final.

The swings and roundabouts continued this summer with Elkann effectively demoting Blanc, though he retained some duties, by appointing his cousin Andrea Agnelli as chairman. Something of a figlio d’arte, Andrea’s late father, Umberto, was the club’s president between 2003 and 2005, while his uncle was the highly successful Gianni, so fans hoped that his arrival heralded the return of former glories.

"Andrea Agnelli - a chip off the old block?"

Agnelli moved quickly, raiding Sampdoria to hire Beppe Marotta as Sporting Director and Gigi Del Neri as coach. Marotta may well prove to be the more important acquisition, as he is a highly skilled, proven operator in the Italian transfer market, helping to guide Sampdoria from Serie B to the Champions League with a series of astute, cut price purchases, notably Antonio Cassano and Giampaolo Pazzini, who formed a lethal strike force for the Genoa club.

All this time, Juventus have strived to build a business model based on self-sufficiency, so that “the future is not an uncertain one” in Corso Galileo Ferraris. The 2009 annual report spoke proudly of respecting “an idea of sustainable football that blends competition in sport with economic balance.”

So the obvious question is how close are Juventus to achieving this noble objective?

The short answer is that they’re doing pretty well, all things considered. The club has only just announced its 2009/10 results (to 30 June 2010), which admittedly revealed a small post-tax loss of €5 million, but it should be noted that before tax Juventus actually posted a profit of €8 million, prior to booking hefty tax charges of €13 million (€6 million in current taxes and €7 million in deferred taxes, largely due to profits on player sales).

In fact, tax has played a fairly big role in the club’s financials with pre-tax profits being made in four of the last six years, only for three of those to end up as losses after the tax bill was taken into account.

The odd one out was came in 2008/09, when the results were spectacularly good, producing a €7 million post-tax profit. This is the most recent year where we can compare Juventus’ financial performance with those of other Italian clubs, as they have not been so quick to publish their 2010 accounts. So, in that period, Inter reported a gigantic loss of €154 million, which was €161 million worse than the profit that Juventus made, despite a year of unparalleled success. On the pitch, Inter finished ten points ahead of Juventus, so you could argue that each additional point cost the nerazzuri €16 million. Obviously, that’s not the only reason for the gap, but it’s definitely an important factor. Money talks.

"How much?"

The other major Italian club, Milan, also recorded a small loss of €10 million in 2008/09, but this was boosted to a great extent by the €66 million profit made on the sale of Kaka to Real Madrid. A more realistic comparison would be the €67 million loss that Milan made the previous year.

In fairness to the others, last year was exceptional for Juventus from the financial perspective, featuring revenue back up to levels not seen since before the demotion to Serie B. Despite the high revenue in 2006, the club still made a huge loss of €46 million, “thanks” to the exceedingly high costs. All that high spending must have felt a little bit like the last days of the Roman Empire, albeit taking place 400 kilometers north of the capital in Turin.

Then came the annus horribilis of 2007, when relegation necessitated drastic action with the club having to desperately downsize, as revenue plummeted by over a third from €214 million to €142 million. As well as losing out on the Champions League (worth €29 million in 2006), several key broadcast and commercial contracts were renegotiated as a result of the club competing in the inferior division. There was a €14 million reduction in the value of the main broadcasting contract with Sky Italia, while shirt sponsor Tamoil and kit supplier Nike lowered their payments by €8 million and €4.5 million respectively. Furthermore, gate receipts fell by €9 million.

In line with the revenue decline, Juventus were forced to cut costs, which effectively meant offloading players in order to trim the wage bill and reduce amortisation. Obviously, this produced another financial benefit in the form of a significant profit on player sales of €42 million, including a €15 million gain on Ibrahimovic when he was transferred to rivals Inter.

"We're back for good"

These strenuous efforts meant that Juventus just about broke-even in Serie B, which was a notable achievement, though the following year they did report a large loss of €21 million, as they ramped up their spending in order to be competitive on their return to Serie A. Given that they finished third that season, you have to say that this gamble worked out very well, as it produced significant revenue growth in 2009 derived from the Champions League qualification.

As with all major clubs, the Champions League has become a vitally important element of Juve’s finances, worth around €22 million in each of the last two seasons from the central UEFA distribution. This is highlighted by the warning in the 2010 accounts that “the 2010/11 financial year is expected to be negative, due to the club failing to qualify for the UEFA Champions League … as well as the effects stemming from the new rules governing broadcast rights.” In fact, the impact of these two factors is of such a magnitude that “the 2010/11 financial year is expected to close reporting a significant loss.”

Before further commenting on the revenue, I should explain that the revenue figures in my analysis are different from those quoted by Juventus. In order to be consistent with other clubs, I have followed the definition used in the Deloittes Money League. For example, their latest report, which was based on 2008/09 results, excluded the following items: (a) gate receipts given to visiting clubs €1.7 million; (b) TV income given to visiting clubs €18.2 million; (c) profit from player sales €17.3 million. Adding the total adjustments of €37.2 million to the Money League revenue of €203.2 million gives the €240.4 million revenue reported by Juventus. Similar adjustments were made in other years, though I have had to pro-rate the 2009/10 figures, as the Deloittes report for this year has not yet been issued.

Looking at the comparison with other top clubs, the initial impression is reasonably positive, as Juventus are placed 8th in the Money League with the highest revenue of any Italian club, though Inter and Milan are only just behind with €197 million apiece. However, on closer inspection, it becomes clear that not everything is rosy in Juve’s garden.

First, the other clubs have grown their revenue at a much faster rate than Juventus. In fact, before relegation Juve were as high as 3rd in the Money League. Second, their income is a long way short of their competitors abroad, especially the Spanish giants, Real Madrid and Barcelona, who generate around €400 million, which is around twice as much revenue as Juventus. At the risk of stating the obvious, this makes it difficult to compete, especially when that shortfall in turnover is suffered every single year.

Two other observations really smack you in the face. Juve’s match day revenue of just €17 million is extremely low, so much so that it’s actually the lowest of any team in the top twenty clubs listed in the Money League, representing only 8% of the club’s total revenue. On the other hand, their television revenue of €132 million is substantial – the third highest in the list, accounting for a meaty 65% of total revenue.

Like other Italian clubs, Juve’s revenue profile has become increasingly unbalanced and is heavily dependent on broadcasting income, but in their case it is particularly exaggerated. As a matter of fact, this is the highest level of reliance on a single revenue stream for any Money League club.

Up to now Juventus have benefited from selling their TV rights individually to Sky/Mediaset, with a deal worth €112 million a season, though this was netted off to €100 million once the mutuality agreement was considered. As from the 2010/11 season, this has been replaced by a return to a centralised collective deal, which Juventus have estimated will lead to a €7 million reduction in revenue (to €93 million) in the first season, but only €2 million (to €98 million) the following year.

This is maybe not quite as bad as some had feared for a couple of reasons. First, the total money guaranteed by the new media rights partner Infront Sports will be approximately 20% higher than before at over €1 billion a year. Second, the complicated distribution formula tends to favour the big clubs: 40% equal share; 30% based on past results (5% last season, 10% last 5 years, 15% historical results up to 5 years ago); and 30% based on fan base and city inhabitants.

However, as we have seen, the failure to qualify for the Champions League will have a major detrimental effect on Juve’s revenue – just look at the difference between the TV income in 2008 and the other years. Last season UEFA distributed €21 million to Juventus, but that was relatively low, because they did not progress further than the group stages. If we were to assume that they reached the quarter finals, they would receive approximately €28 million from a combination of participation fee, performance bonuses and TV pool. On top of that, gate receipts are worth €3-4 million, while additional sponsorship payments are linked to success in Europe.

Little wonder that Juventus finance director, Michele Bergero, advised supporters that “Champions League participation is the key to a healthy balance sheet.” Although prize money has been increased in the Europa League this season, it’s still very much the poor relation with prize money of only €6.4 million available to the eventual winners. As Bergero said, “it’s worth more from the sporting aspect than economic.” Given the financial difference, the possibility of Germany taking a Champions League place from Italy next season is of clear concern.

Although the most popular club in Italy, Juventus have struggled to convert this support into meaningful match day revenue. This is an issue for all Italian clubs, but especially Juventus, even though they have managed to grow this revenue stream from the €13 million in the first season back in Serie A to €17 million last year. This is just behind Roma’s €19 million, but is far below Milan (€33 million) and Inter (€28 million), who generate almost twice as much revenue at San Siro. The comparison is even worse abroad with Manchester United and Arsenal earning over seven times as much match day revenue with €128 million and €118 million.

Not only do Juventus have the lowest average attendance of the top European clubs in the Money League at around 23,000, but this was only the 11th highest in Serie A last season, lower than clubs like Bologna and Palermo. In comparison, Inter’s average crowd was over 49,000, while Milan and Roma averaged 43,000 and 41,000 respectively. To be fair, Juve’s attendances have been rising every season since they were promoted, but there were worrying signs during this summer’s sales campaign. As of 31 July, only 13,551 season tickets had been sold, compared to 17,329 in the same number of days the previous year.

Of course, Juventus have been limited by the capacity of their ground, which is very low at 28,000, only underlining the importance of moving away from the Stadio Olimpico. To that end, they have begun construction of a new 41,000 capacity stadium on the site where the hated Stadio Delle Alpi once stood. Juventus will be the only Italian football club to own its own stadium, which is scheduled for completion in July 2011, though many others are keen to emulate them. This development will give them a better chance of competing financially with Europe’s other great clubs.

The stadium was originally estimated to cost €105 million, but this has recently been increased to €120 million to cover some design improvements. However, this should not diminish the club’s ability to buy new players, as they have put into place three pillars to finance the construction: (a) Sportfive has acquired the naming rights for €75 million (€6.25 million for 12 years, though a significant proportion will be paid in advance during the building phase), which it will assign to a multinational; (b) the €20 million sale of commercial land adjacent to the stadium to Nordiconad, who will also pay the Turin council €9 million for infrastructure improvements; (c) a 12-year loan from Istituto per il Credito Sportivo for €60 million (originally €50 million, but an additional €10 million added in May).

"Grounds for optimism?"

Juventus have estimated that this move will more than double match day income to €40 million per annum, driven by four distinct sources of revenue: naming rights, premium seats, standard seats and facilities and events. The premium seats are particularly important, if you consider that Arsenal make 35% of their match day revenue from just 9,000 premium seats at the Emirates. Significantly, all of this income will go directly to the club, as they will no longer have to share it with Torino or the local council.

Nevertheless, it’s far from certain that Juventus will be able to fill their new stadium, given their current low attendances, though the club point out that they did average around 36,000 the last time they played in a larger stadium. Getting the pricing and package offered to supporters will be critical to the club optimising match day revenue, but there are some encouraging signs with 1,100 premium seats already sold (about 35% of the total available for sale).

Another key part of the Juventus business plan is a modified commercial strategy, known as “Less is more”, which aims to increase the average value of contracts by creating more stable, longer-lasting relationships with a select group of companies. This is in marked contrast to the approach adopted by Inter and Milan, who have considerably more marketing partners. The recent increase in commercial revenue to €56 million has been used to justify this policy, but it’s still lower than the income they used to receive before being tainted by Calciopoli.

"Milos Krasic - the new Nedved?"

In 2005 Tamoil signed a five-year €110 million shirt sponsorship deal that was believed to be the highest in football history at €22 million a season with a possible five-year extension worth even more. This was more than twice the size of any other deal with an Italian club, but was cancelled in the light of the scandal. It was quickly replaced with a three-year deal with the New Holland Group (part of Fiat), but this was only half the value at €11 million a year.

The new sponsorship deal signed with Betclic this summer is fairly innovative, as it only covers the famous black and white home shirt, but it is another decrease from the previous deal at €16 million for two years. The payments were going to be split €7.5 million in 2010/11 and €8.5 million in 2011/12, but the first year has been reduced to €6.5 million following the club’s failure to qualify for the Champions League. So far the club has not managed to secure a sponsor for the second shirt, so it might have to market this for a limited period (or even single matches).

In contrast to the numerous changes in shirt sponsors, their kit supplier Nike has remained loyal with their 12-year deal running until 2015/16 for a minimum of €12 million a season. As Giorgio Brambilla of sports marketing consultancy Sport+Markt explained, “Juventus have had moments of great difficulty off the field and now they are having them on it, but they are still one of soccer’s most important brands.” The club is aiming to consolidate that brand around the world and has undertaken tours of USA, China and Australia in the past few years in pursuit of that objective.

What Juventus have done very well is to control their costs in line with the rise and fall of their revenue, especially the wage bill, which is by far the largest item in expenses. In fact, as far back as 2006 John Elkann spoke about introducing a salary cap as part of their new way of doing business. Total salaries last year were more or less the same as the prior year at €138 million, split between players €127 million and other staff €11 million. These have been increasing ever since promotion, but they are still only just higher than the 2006 wage bill, which is a rare event in a football world that has been subject to huge salary inflation.

Even so, Juventus still have the third highest wage bill in Italy, according to a survey published by La Gazzetta dello Sport, but they are miles behind Inter, whose €205 million is nearly 50% more. This has produced a respectable wages to turnover ratio for Juve of 67%, just below the 70% upper limit recommended by UEFA. The same Gazzetta report listed the highest paid players as Gigi Buffon, Amauri, Del Piero and Giorgio Chiellini, but taken as a the whole the salaries seem on the low side for this day and age.

It should also be noted that Beppe Marotta’s activity during this summer’s transfer window will cut the wage bill by around €25 million (20%), which will help compensate for the lack of Champions League money in the coming season. Furthermore, many players’ contracts expire next summer, including high earners like Del Piero, Hasan Salihamidzic and Nicola Legrottaglie, so that could be another €10-15 million reduction. Obviously these players will need replacing, but these are likely to be with cheaper alternatives.

"Marchisio - one of the young guns"

Cheap is not the adjective that comes to mind when looking at the remuneration of chief executive Jean-Claude Blanc. We don’t yet have the details for 2010, but the 2009 annual report lists this as an amazing €2.7 million, comprising salary €0.6 million, bonus €1.6 million and other payments €0.5 million. Even though the club’s previous annual report took great pains to praise the “passion, competency and professionalism” of the management, this still seems pretty steep to me.

Player amortisation has also been on an upward trend, rising €6 million to €34 million in 2010, though this is a lot less than the €66 million peak in 2006. This follows on from the fairly wasteful transfer campaign in 2009, but is likely to come down after this summer’s shrewd moves. In any case, it’s nowhere near as high as other top clubs, which have spent considerably more in the transfer market: Barcelona €71 million, Real Madrid €64 million and Inter €50 million. The cost was also inflated in 2008 by a €7 million write-off following Andrade’s retirement due to a serious knee injury.

Actually, write-downs have had quite a big impact on Juve’s accounts, amounting to €26 million over the last four years, including €15 million on the company’s video archive (€7 million in 2007, €5 million in 2008 and €3 million in 2009) and €2 million in 2007 for stadium design costs, when those plans were cancelled after the 2012 European Championships were not awarded to Italy.

Bearing in mind Juve’s focus on the bottom line, it’s not surprising to see that they have not spent an enormous amount on new players. Although it is difficult to find accurate figures for transfer fees, especially for Italian clubs with their mixture of permanent moves, loans and player sharing agreements, those used on Transfermarkt suggest that Juve’s net spend over the last decade was €194 million, which would mean less than €20 million a season. The club has also made good profits on player sales, averaging €16 million a season over the past three years.

What we can say with more confidence is that Beppe Marotta has performed better than his unloved predecessor, Alessio Secco. Indeed, much of this transfer campaign would appear to be about correcting previous mistakes. The 2010 management statement spoke of a net investment of €26.6 million, but this simple fact disguises a great deal of activity.

Marotta got rid of Poulsen, Almiron and Molinaro for good money, while allowing Cannavaro, Camoranesi, Zebina and Trezeguet to leave on free transfers, thus removing them from the payroll. OK, Diego was sold at a large loss, but, as we saw with the Ibrahimovic transfer, things ain’t what they used to be in the transfer market.

"Diego - time to cut your losses"

Acquisitions have been targeted at obvious areas of weakness, so Leo Bonucci and Marco Motta have been brought in to improve a suspect defence, while the flanks have been strengthened with Milos Krasic and Jorge Martinez to suit Del Neri’s playing style. Marotta has also made good use of the loan system, picking up Alberto Aquilani and Simone Pepe “on the cheap”. Importantly, most of the purchases have been made with payments split over the next three years, so the impact on this year’s cash flow is not overly damaging.

This prudence is also reflected in the club’s vision of “successfully developing young players” with the goal of progressing them from the youth squad to the first team. This objective is supported by an annual budget of €6 million plus a €5 million investment to improve the Vinovo training centre. It is early days to see whether this approach will bear fruit, but the Juventus Primavera team has won the prestigious Viareggio tournament five times in the last eight years.

Given the focus on financials, you would not expect the club to carry much debt and you would be right. In fact, the “net financial position” (as Juventus describe it) is a positive €6 million, as cash balances of €39 million more than cover bank loans (primarily for the new stadium) of €33 million. In fact, the last time the club had net debt was in 2006 and that was only €13 million. Since then, the club has been net cash positive every year: 2007 €22 million, 2008 €11 million and 2009 €26 million.

Some analysts mention debts of €178 million (£147 million), but that is the figure for total liabilities, thus including amounts owed to trade creditors and employees, and is clearly over-stated. However, UEFA’s definition of net debt also includes amounts owed to and from other football clubs and this would bring the net debt to €19 million, though this is still exceptionally low. The staggered payment of transfer fees is a recurring element of Juve’s strategy with the amounts owed to other football clubs ranging between €46 million and €55 million in the last three years.

In order to avoid going into potentially ruinous debt in 2007, Juventus increased its capital by €105 million by issuing 81 million new shares (two for every three owned). The largest shareholding is now the 60% owned by Exor Spa, the Agnellis’ holding company, followed by 7.5% with the Libyan Arab Foreign Investment Company. However, Juventus are not bankrolled by the Agnelli family in the same way that Inter are by Massimo Moratti and Milan by Silvio Berlusconi.

"Will Del Neri get it right?"

This leaves them in pole position among Italian clubs to meet the new challenge of UEFA’s Financial Fair Play Regulations, which will ultimately exclude from European competitions those clubs that fail to live within their means, i.e. break-even. These will be implemented in the 2013/14 season, though the monitoring period will cover the preceding two reporting periods, 2011/12 and 2012/13, so other major clubs like Inter and Milan are under pressure to rapidly eradicate their losses.

Juventus have done remarkably well to recover from the Calciopoli scandal, but the reality is that their fans have been starved of success for four years, which is a lifetime for those raised on a seemingly never-ending diet of trophies. They might have to be patient for a little longer, as it will surely take time for the team to gel after all the buying and selling this summer. Indeed, Beppe Marotta has tried to lower expectations, “The objective is Champions League qualification. We don’t have champions, but good players.”

"Marotta - the future's so bright, I gotta wear shades"

That will indeed be crucial to the club’s future success, as will the new stadium. While the club’s “business project with a long-term vision” has undeniably left them in the strongest financial position of the major Italian clubs, they now need to match those heights on the pitch.

It’s too early to say that the Old Lady is singing again, but if you listen carefully, you might just hear her warming up in the wings.