Sunday, September 5, 2010

The Zlatan Ibrahimovic Transfer Analysed

Last week Barcelona sold their enigmatic Swedish striker Zlatan Ibrahimovic to Milan in a transfer that was astonishing not only because it came just 12 months after “Ibra” had moved to the Camp Nou, but also because the price was considerably lower than the amount the Catalans had paid to Inter for the mercurial forward. Although his performances in the blaugrana shirt had been a bit hit-and-miss, Ibrahimovic was by no means a complete failure, having scored 21 goals in all competitions, averaging a goal every other game in La Liga, where he helped Barcelona retain their title.

When rumours first started circulating that Ibrahimovic might be for sale, a deal appeared highly unlikely, especially as Barcelona had apparently inserted an extraordinary €200 million buy-out clause in his contract. Ibrahimovic’s agent, the colourful Mino Raiola, hardly encouraged the transfer initially with a series of negative quotes: “It’s 99.99% certain that Zlatan is staying”; “I have spoken with the club and Guardiola doesn’t want to sell him”; and “Guardiola will leave the Camp Nou before Zlatan does”.

But if a week is a long time in politics, it’s an eternity during the transfer window and a few days later Raiola was congratulating Milan’s vice-president Adriano Galliani on his ability to negotiate Barcelona’s price down from €70 million to €24 million. Making Harry Redknapp look like a rank amateur in the dark arts of wheeler dealing, it was little wonder that Raiola described this as “the greatest deal he ever made.”

"Galliani reaching for his wallet"

So the Rossoneri get to take Ibrahimovic on loan for one year with an option to purchase him for just €24 million at the end of the 2010/11 season. Furthermore, this is a so-called free loan, which means that Milan do not pay Barcelona anything for the loan itself, only having to find the cash to pay Ibrahimovic’s (lower) salary during the year of the loan.

During this saga, all sorts of figures have been thrown around, but much of what has been reported is misleading or incorrect, so it’s worth examining this transfer in some detail, in order to understand the different motivations of the interested parties. Put another way, what are the advantages of this deal for Barcelona, Milan and Ibrahimovic himself?

This transaction also highlights many financial issues surrounding transfers that fans do not generally understand that well, such as the profit (or, in this case, loss) made from a transfer, a player’s value in a club’s accounts and amortisation. Not exactly thrill a minute stuff, but unfortunately very important in these times when football has become big business.

"Heads above the rest"

OK, as our old friend Rafa Benitez would no doubt say, let’s try to establish some facts.

First, the price that Barcelona paid Inter for Ibrahimovic last year has been listed as anything between €46-50 million plus the value of Cameroon striker Samuel Eto’o who moved in the opposite direction. Barcelona’s official website listed the price as €46 million plus Eto’o plus the loan of Alex Hleb, but the Belarus midfielder refused to go to Inter, instead opting to return to Stuttgart, which resulted in the Catalans increasing the cash element as compensation. The figure that we will use for our calculations is the one quoted in Inter’s accounts, namely €69.5 million, which comprises €49.5 million cash plus a €20 million valuation for Eto’o, which we shall round up to €70 million to make life simpler.

At this point we need to understand that when the purchase of a player involves a non-cash consideration, such as a player in part-exchange, then the transaction is accounted for using an estimate of the player’s market value. This is obviously open to some manipulation, but not too much, otherwise the value would be questioned by the club’s auditors.

In years gone by, football clubs used to book the entire purchase price as an expense in the year of acquisition, which had the advantage of simplicity, but meant that a club’s profits over a number of years could be “lumpy”. However, since the introduction of IFRS (International Financial Reporting Standards), in particular FRS10 on Goodwill and Intangible Assets, clubs have used the capitalisation and amortisation method to account for player transfers.

"I'm no makeweight"

Unfortunately we now need to get a little technical in order to understand the concept of amortisation, which is how accountants reduce the value of assets over time. In this case, we mean footballers. At the end of a player’s contract, the number crunchers consider that a player has no value, as he is allowed to leave the club on a free transfer, so they write down (or amortise) his value over the length of his contract. In the case of Ibrahimovic. Barcelona bought him for €70 million on a five-year contract, so the annual amortisation was €14 million (€70 million divided by 5).

After one year his net book value in the accounts was €56 million (the original cost of €70 million less €14 million amortisation). After two years, his value would reduce by another €14 million to stand at €42 million. Simples.

There have also been conflicting reports on Ibrahimovic’s salary at Barcelona, but the figure that makes sense to me is €12 million after tax. As he benefited from the Beckham Law, where foreigners were taxed at 24% (instead of a 24-43% range), the club’s gross salary costs would have been around €15 million per annum. This is also consistent with the statement on Barcelona’s website, which referred to savings from the deal of “approximately €60 million”. Given that Ibrahimovic had four years remaining on his contract, that equates to annual salary savings of €15 million.

Actually, that raises an interesting question: if Ibrahimovic had stayed at Barcelona, how much would this have cost the club in total?

Before I give you the answer to that question, I advise you to take a seat. Sitting comfortably? The figure is a jaw dropping €163 million, which is made up of three elements: €70 million to buy the big fella; €75 million in wages (€15 million times five years); and an estimated €19 million in bonus payments. Looking at Barcelona’s accounts, we can see that a very high proportion of their salary costs actually comes from variable compensation, i.e. bonuses paid out for success on the pitch, so I have assumed that this would be 25% of salary (which is possibly on the low side, given the last two seasons).

This perfectly demonstrates the importance of wages in any transfer. Last summer, football pundit Jamie Redknapp said, “You can’t get cheaper than a free transfer”, when discussing Michael Owen’s move to Manchester United, but this is obviously nonsense, as it can get pretty expensive if you’re paying the player involved £100,000 a week. Even when the transfer fee is enormous, as was the case with Ibrahimovic, the salaries (and bonus) still represent more than half the total cost to the club.

"Right sort of dive"

Some might say that part of this cost will be offset by shirt sales, but you need to sell an awful lot of shirts (average profit €12) to make a dent in this. In any case, I would argue that the club would probably have sold a similar amount of shirts if they had bought another world-class forward, but for less money.

In reality, Ibrahimovic has of course been sold after only a year, which has so far cost Barcelona €88 million (purchase price €70 million plus a year’s salary €15 million and bonus €4 million).

To be fair, Ibrahimovic was bought as a direct replacement for Eto’o, so we should probably bring him into the equation and reduce the cost by the €8 million (or so) wages that Barcelona would have paid to the Cameroon striker, meaning that the net cost should be reduced to €80 million.

On the other hand, Barcelona bought David Villa for €40 million this summer, effectively replacing Eto’o after a year’s hiatus with Ibrahimovic, so this should be added, bringing the total cost for the last year to an incredible €120 million.

"Raiola - football agent extraordinaire"

Arguably, the cost is even higher, as the money paid to Inter last year enabled them to buy a whole raft of top quality players, who were pivotal in their Champions League triumph, not least when they eliminated Barcelona in the semi finals. In exchange for Ibrahimovic, Inter got Eto’o and €50 million, which they used to buy Wesley Sneijder (€13.5 million), Diego Milito (€22.5 million), Thiago Motta (€9 million) and Lucio (€6 million).

You can’t really put a price on a victory like that, but Inter received €49 million from UEFA’s central distribution, compared to Barcelona’s €39 million. That’s €10 million more, so our estimate of Barcelona’s total cost for a year of Ibrahimovic’s services has arrived at a whopping great €130 million.

Of course, when Barcelona receive the €24 million from Milan for Ibrahimovic’s sale, this will come down to “only €106 million”, but to lose that much on one deal in one year shows a distinct lack of financial judgment at the very least. To put it more bluntly, it’s staggering incompetence, especially when you consider that the loss is equivalent to more than 25% of Barcelona’s annual turnover.

Let’s focus on the sale for a moment. In real terms, the loss on sale is easy to see: Barcelona bought Ibrahimovic for €70 million and will sell him for €24 million, producing a horrible loss of €46 million. Last year many wise football men said the price paid was ridiculous and it looks even more absurd now.

However, in the wonderful world of accounting, the loss is a moving target, depending on exactly when you sell the player. It is important to realise that in the accounts, the profit from a sale is not the same as the transfer fee, but is actually equal to the sales proceeds less the carrying value in the books.

As we saw earlier, Ibrahimovic’s value in the books falls as time passes with each year’s additional amortisation. So, his value now is €56 million, but in a year’s time it is only €42 million. This means that if Ibrahimovic had been sold now, the loss on sale would have been €32 million (€24 million sales proceeds less €56 million net book value), but next year the loss would be “only” €18 million (€24 million less €42 million).

Aha, you cry, so that’s why Barcelona structured the deal as a loan with the sale delayed until next year - a smaller loss. Lovely jubbly. Creative accounting at its finest.

Not so fast, big boy.

Yes, the pure loss on sale would indeed be €14 million lower, but that ignores the fact that Barcelona still have to book that €14 million as amortisation in the coming year, as the asset remains on their books during the loan. In other words, over two years the accounting loss is exactly the same for Barcelona whether they sell Ibrahimovic now or loan the player and then sell him.

If they transfer him now, they make a straight loss of €32 million on the sale. If they go for a year’s loan and then sale, they will lose €18 million on the sale, but also have to book €14 million amortisation, giving a total loss of, guess what, €32 million.

So why on earth would Barcelona want to structure the deal in this way? I can think of three reasons:

(i) Part of the loss is postponed until the following year, so the year-on-year growth will look better in the 2010/11 accounts, which, let’s not forget, are the first ones published under the new Barcelona president, Sandro Rosell. If Ibrahimovic had been sold now, the loss in the accounts would have been €32 million, compared to €33 million expenses in 2009/10 (amortisation €14 million, salary €15 million, bonus €4 million), leading to “growth” of €1 million.

However, with the sale slipped by 12 months, the only expense this year is €14 million amortisation, giving a “growth” of €19 million (compared to the €33 million expenses). That will do very nicely with Rosell looking for as large profit as possible in order to demonstrate his financial acumen, which was a key part of his election campaign.

(ii) A straight loan would have been too risky. If Ibrahimovic had flopped in Milan, Barcelona would have had to take him back and his value would have further diminished. On top of that, the Beckham Law has now been revoked, so the cost to the club of his salary would need to be increased to cover the higher tax, as his contract has been agreed “netto”. Equally, Ibrahimovic could be a great success, increasing his value, but that would have been too much of a gamble.

(iii) Ibrahimovic remains as an asset on Barcelona’s balance sheet. Probably not that significant a factor in all honesty, but it helps improve the club’s net assets figure (assets less liabilities), which has been under a great deal of scrutiny with all the talk about Barcelona’s indebtedness.

"Shut the door on your way out"

Of course, the argument that Barcelona’s loss would be lower this year might be invalid if a brave auditor decided to ask the club to book an impairment provision against the obvious reduction in the value of the asset. It’s difficult for the club to argue that he’s still worth €42 million in June 2011, when the club has set the price at €24 million the very next month. In that case, they would have to book the full €32 million loss in the 2010/11 accounts.

Enough accounting already. However much you dress it up, it’s still a poor deal. In fact, there’s a case for saying that Barcelona will not even get €24 million, as Milan will not pay the whole fee next year, but over the following three years. Given the time value of money, even in these times of low interest rates, that means it is probably only worth around €23 million, once the payments have been discounted. Furthermore, Barcelona will also continue to pay Raiola his annual 10% commission on Ibrahimovic’s salary (€1.2 million a year for four years), as the player did not unilaterally break his contract.

The reality is that Barcelona backed themselves into a corner. As Milan appeared to be the only game in town, Barcelona had absolutely no leverage during the negotiations. They really should have tried harder to interest other clubs in the player, so that they could encourage a bidding war, especially Manchester City, the one club that has the riches to pay a much higher price, as we saw with Yaya Toure. City’s absence from the negotiating table seems even stranger when you consider Ibra’s connection to their manager, Roberto Mancini, who had bought him when he was at Inter.

"What does Rosell think of the deal?"

In fairness to Barcelona and their new president Rosell, the situation is in some ways reminiscent of the old joke, when an Englishman asks for directions and an Irishman replies, “If I were you, I wouldn’t start from here.” Rosell can also say that it is indeed an expensive mistake, but it’s really Joan Laporta’s expensive mistake, as it was the former president who over-paid.

And there are actually some redeeming aspects to this deal from Barcelona’s viewpoint. From a football perspective, they have offloaded a player who did not neatly fit into the team’s fast, flexible passing game and was not really part of Pep Guardiola’s plans for the future. The relationship with the manager had obviously broken down, so if Ibrahimovic had remained, he might have been an unhappy, disruptive influence in the dressing room. In short, Ibrahimovic had become surplus to requirements.

As Sporting Director Andoni Zubizarreta explained, “Even with the financial loss, this was the best option.” While it might be good to see the football take priority over money, Zubizarreta also pointed that “the total salaries of the squad have gone down by 5%”, so the financial issues have also been taken into consideration, which is hardly surprising given the hits that Barcelona’s accounts have taken in the last few months.

"David Villa - new kid in town"

This was backed-up by vice-president Josep Maria Bartomeu, who claimed, “We’re very pleased with the way things worked out. We’ve saved €60 million and taken in €24 million.” This might well be the truth, but, as we have seen, in no way is it the whole truth. Even if the savings over the next four years are probably higher at €75 million, if you include an estimate for bonuses, the central point remains the same.

Incidentally, a few people were under the impression that the €60 million savings mentioned on Barcelona’s website arose from a combination of the €24 million sale plus three years of salary at €12 million, but Bartomeu’s statement gives the lie to that, as it explicitly mentions the €24 million on top of the savings. In addition, as Ibrahimovic was on a five-year contract, four years of salary costs have been saved, not three (Milan pay his wages from this year).

Barcelona’s savings in the accounts over the next four years will be even higher, as amortisation is also a factor. With the loan arrangement, Barcelona book amortisation next year, meaning three years will be saved. That would produce another €42 million (3 x €14 million) to add to the €75 million cash savings, resulting in a grand total of €117 million coming off the accounts between 2010 and 2014 (though this will obviously be offset by David Villa’s cost).

"The other side of the tracks"

In essence, Barcelona have decided to cut their losses here, observing the economic principle of “sunk costs”, which are costs that have already been incurred in the past and cannot be recovered, so you should move on. No use crying over spilt milk (even if it’s bloody expensive milk).

The other point worth making is that Barcelona have produced the majority of their first-team squad from La Masia, their renowned youth academy, so they can afford to make a few costly blunders in the transfer market. This deal in isolation is dreadful, but the club should probably be judged on its overall recruitment policy, including those players developed in-house.

For Milan, this looks like a fantastic deal. It’s not just that they have negotiated a cut-price €24 million, but they only have to start making payments next year, when their cash flow will be significantly better, since 11 players’ contracts come to an end, reducing the wage bill by around €70 million a year (though they will obviously have to replace some of these players). Much of the transfer fee will be funded by Milan selling Klaas-Jan Huntelaar to Schalke 04 for €14 million and loaning Marco Borriello to Roma for €2 million (with an option to buy for a further €13 million).

"Meet El Presidente"

Milan have bought “un campione”, as Ibrahimovic has brought success wherever he’s been (seven successive league titles for four different clubs in three different leagues). Along with the purchase of Brazilian striker Robinho, he will bring some much-needed flair to a Milan team that has been toiling in Inter’s shadow the past few years. This will help boost president Silvio Berlusconi’s popularity after he had been severely criticised by fans for his lack of spending.

As for Zlatan, he has come out of this affair rather well. He took a 33% pay cut (from €12 million to €8 million) and without this sacrifice, it’s not entirely clear whether the transaction would have gone ahead, as he has effectively subsidised the deal by reducing Milan’s overall costs. OK, the lower wages are still a huge amount of money, but I’m not sure that every player would have done the same.

In addition, Barcelona did not pay Ibrahimovic a “golden goodbye”. There had been talk of a huge leaving bonus, presumably to compensate for the salary reduction, but in the end Raiola confirmed that nothing was paid. Cynics may argue that this was possibly influenced by Eto’o losing his court claim for a pay-off equivalent to 15% of his transfer value, but other players might have dug their heels in and refused to budge without a sweetener.

"Where did it all go wrong?"

Maybe the boy just wants to play. In a remark reminiscent of Eric Cantona, he is reported to have said, “You don’t buy a Ferrari and just leave it in the garage.” He also promised not to leave Milan “until we’ve won everything”, which is a bold statement of intent, albeit one that could prove expensive to his new employers.

Hopefully, the magic will return to his game and San Siro will once again witness “Ibracadabra”, for at his best Ibrahimovic is one of the most exciting talents in world football.