Tuesday, July 27, 2010

Be sure to be prudent: FC Barcelona’s amazing disappearing profits

Different country? Same economy....


Having shocked the sporting world by failing to pay their players in June (and announcing they needed to take out a €150m bank credit facility), FC Barcelona went further today with the announcement of major adjustments to their previously published (although unaudited) results for the year to June 30th 2010.

The unaudited results had been published by the previous Treasurer, Xavier Sala i Martin on 30th June 2010 and showed EBITDA of €96m and net profit of €9m on turnover of €446m. The new President (Sandro Rosell) and his executive management have agreed substantial changes to the audited accounts with the club's auditors Deloittes. The changes generally relate to judgments about what revenue and costs to recognise, with the Rosell management and Deloittes taking a far more prudent approach than the previous board.

The accounting changes can be seen below:









The biggest adjustments come from two connected disputes over TV rights in Spain. FCB are now recognising a potential €37.8m liability to TV company Sogecable and are no longer recognising €18.5m owed by as yet unpaid by current rights holder Mediapro. Mediapro has sought court protection from its creditors due to a dispute with (small world) Sogecable. Although FCB have not yet published a cash flow statement, it seems likely that Mediapro's travails were the main cause of the June cash flow crisis.


Whilst the Mediapro/Sogecable adjustments are just tighter accounting practice, the need to make further adjustments relating to land sales and valuations and player sales (including that of Thierry Henry) hint at darker goings on to massage the shape of the balance sheet during the Laporta presidency.

The impact of the above changes can be seen below:





















The official FCB statement talks of a higher revised debt number of €442m (and €552m "gross debt"), compared to the originally published figure of €326m. From a normal IAS (or UK GAAP) accounting perspective, this is misleadingly high, as Rosell and his team like to include all sorts of short term liabilities in their numbers (such as prepayments). We will have to wait for the full accounts to see the true debt position.

With numbers so limited (and a considerable dose of Catalan politics to take into account), proper analysis of the situation is difficult at the moment. Having said this, FCB's financial difficulties should be a salutary reminder of not relying too much on an endless bonanza of TV money.....

LUHG

Wednesday, July 21, 2010

Philadelphia Union 0 - 1 United

Gabriel Obertan give The Red Devils another victory on USA Tour.


Sir Alex Ferguson had said the MLS has made immense strides since Manchester United last visited the United States in 2004 and, as a hard-fought and slightly fortunate win over Philadelphia Union confirmed tonight, his tribute was not merely an attempt to pay lip-service to an American audience. A 76th-minute goal from Gabriel Obertan was all that separated United from a Union side that has only been in existence since 2008.
Federico Macheda and Danny Welbeck, two of Ferguson's principal reasons for confidence in his young players, were paired in attack and demonstrated flashes of the pace and touch required to stake a greater claim next season. Welbeck's movement was also impressive, although his finishing and the Italian's decision-making betrayed their inexperience against a well-organised and athletic Philadelphia Union side.
Welbeck went close from 25 yards in the first half and with an audacious shot on the turn at the start of the second. His simplest chance was also one to regret when, having collected Fabio's cross from the left and stepped inside his marker, the United striker shot straight at Brad Knighton in the Union goal from eight yards.
Manchester United: Kuszczak; O'Shea (De Laet, 77), Brown (Smalling, 61), J. Evans, Fabio (Rafael, 61); Obertan, Cleverley (Fletcher, 61), Scholes (C. Evans, 61), Giggs; Welbeck, Macheda (Berbatov, 61).
Attendance: 44,213

How Do Blackburn Rovers Stay Afloat?


Rumours are rife that an Indian entrepreneur is close to completing a takeover of Blackburn Rovers football club in a deal worth between £35 and £45 million. Saurin Shah apparently hopes to establish strong marketing links with cricket’s Indian Premier League (IPL), where his uncle Niranjan Shah holds the post of vice-chairman. He considers Blackburn a perfect fit because of the town’s large Asian population, while India is regarded by many Premier League clubs as an area of huge potential growth, so such a partnership could bring a much-needed boost to Rovers’ commercial revenue.

It is far from certain that the deal will go through, first because Shah’s team is still conducting due diligence, and second because it is unclear how wealthy the little-known businessman really is. He may well have the funds, but up till now nobody seems to have heard of him in business circles. The only thing that Blackburn’s chairman, John Williams, would admit to is: “The situation is fluid, there is real interest and discussions continue.”

Long-suffering Blackburn fans have been down this road many times before. The club put up the “For Sale” sign three years ago, when they appointed Rothschilds as corporate advisors to find potential buyers, but so far the search for new investors has drawn a blank. The chairman has said that the owners are “in no hurry to sell”. You can say that again. Several parties have now looked at the books, but they have all ended up walking away.

"Chairman of the Board"

Back in 2007, there was some talk of South African billionaire Johann Rupert and NFL Miami Dolphins owner Wayne Huizenga joining forces for a bid, but nothing materialised. In January 2008, a US-based consortium lead by Lancashire-born Dan Williams was involved in several rounds of talks before withdrawing from the process. Later that year, JJB Sports owner Chris Ronnie was reported to be close to a takeover before pulling out of a bid and there was also the inevitable property tycoon, Nabeel Chowdery, who declared an interest before baulking at the valuation.

Obviously, anyone buying the club would need enough money for more than just the purchase price, whatever that is, as they would also need to repay any outstanding loans (currently £20 million), provide a transfer budget of at least £10 million for new players “to move to the next level” and fund ongoing losses. The club’s trustees would also “like to see a takeover funded with equity and not debt”, as they believe that any increase in external debt could “threaten the financial status of the club.” However, the owners would not need to finance a new stadium and they would be acquiring a club with modern facilities that is well established in the most lucrative league in the world.

Unsurprisingly, chairman John Williams agreed with this assessment, “the acquisition of Rovers as a Premier League club with relatively small debts presents a tremendous opportunity for the right person.” However, he sent out some slightly mixed messages, when he admitted, “I don’t really think anyone is going to buy into Blackburn Rovers looking for a return on their investment.” Nevertheless, the quest for investment continues, as “everyone knows suitable new ownership with new money coming into the club would be the answer.”

"Jack Walker and some TV pundit"

So what would an investor get for his money? A traditional family club very much in touch with its East Lancashire roots, Blackburn Rovers has a lot of history, having won the league three times and the FA Cup six times. The problem is that most of this is ancient history with two of the league wins coming before the First World War and all but one of the FA Cup triumphs coming in the 19th century. In fairness, they are also the only team to have won the Premier League since its inception in 1992 outside of Manchester United, Arsenal and Chelsea.

The Premiership victory in 1995 was the pinnacle of Blackburn’s rise during the Jack Walker era. “Uncle Jack” was a local businessman made good, who bought his hometown club in 1991 when they were languishing at the wrong end of the old Second Division, and spent big money (for the time) in order to improve their prospects. He broke the British transfer record twice on forwards Alan Shearer and Chris Sutton, who formed the so-called SAS (after the elite British special forces), which is ironic considering the club is now sending out an SOS for new money. It would not be too harsh to say that Jack Walker’s money bought Blackburn success, but expectations have had to be lowered since those halcyon days.

Since Jack Walker’s death in 2000, the club has been owned by the Jack Walker Settlement Trust, which is based in Jersey, where Walker was a tax exile. The Trust has invested well over £100 million, most notably converting £14 million of loans into share capital in 2006, followed by the conversion of £80 million preference shares into equity in 2007. They also provided annual funding of £3 million for six years, but the money has now all but dried up. In fact, in 2007/08 the trustees discontinued this support, arguing that there was no requirement to invest further, given the new TV deal, though they were persuaded to provide a £3 million loan for the 2008/09 campaign.

This limited financial support has impacted upon the club’s financial status, though it was always Walker’s wish that the club would become self-sufficient. To be fair, if we look at the club’s recent profit trend, they are more or less there, even though Walker could never have foreseen the explosion in transfer fees and wages (despite having to some extent lit the touch paper himself). At the level of operating profits, the total over the last five years is a small net loss of £1.6 million. The pre-tax losses (after player trading and interest) are higher, but the club should be praised for making profits in the last two years (£3 million in 2008 and £3.6 million in 2009), even though last season was boosted by high player sales, notably Roque Santa Cruz to Manchester City. They don’t have the financial backing of many other Premier League clubs, but it is evident that they are being run on sound business lines.

Like so many English clubs, their strategy is a simple one: to stay in the Premier League, so that they can continue to enjoy the financial benefits of the world’s richest league, in particular the vast television money. As Williams put it, “So long as we can preserve our PL status, the club is stable.” This is presumably why manager Sam Allardyce is always so keen to announce when Blackburn are mathematically safe from relegation.

"Happy days are here again"

This has resulted in a high-wire balancing act for the past ten years with any profits made being re-invested in the team, either as capital expenditure (transfer fees) or wages, leading to an apparently suicidal wages to turnover ratio of 91%. However, there is some method behind this madness, as they need this level of salaries to remain competitive. Williams argued, “I would term the wage bill as not reckless, but a calculated gamble, a true expression of our ambition.”

If they need to balance the books, they cover the shortfall by selling players, a policy that can be understood by examining the transfer activity last summer. In 2008/09, there was a hole in the P&L, because a lower league position than budgeted lead to less television income. The club (more than) compensated for this with the proceeds from the sale of Roque Santa Cruz with the balance being used to fund the purchases of Nikola Kalinic from Hajduk Split and Gael Givet from Marseille.

As the club then prepared budgets for the 2009/10 season, they were faced with the choice of reducing wages by 10% or gaining £4 million from player sales, which they achieved by selling Stephen Warnock to Aston Villa for £7 million, replacing the full-back with Pascal Chimbonda from Spurs for £3 million. Selling players to maintain operating expenses may not be everyone’s business model of choice, but it seems to just about work for Blackburn Rovers, where player trading has become the name of the game.

This policy has been born out of necessity, as Blackburn’s revenue is very low compared to other leading clubs in the Premier League. If we look at the revenue of the clubs who finished in the top ten positions in the 2008/09 season, Blackburn’s revenue of £51 million is easily the smallest of those clubs. OK, you would expect them to be significantly behind the so-called Big Four (Manchester United £279 million, Arsenal £224 million, Chelsea £206 million and Liverpool £185 million), but they are also earn a lot less than clubs like Aston Villa (£84 million) and Everton (£80 million), while even Birmingham City generate more income (£67 million).

The most startling difference comes from the match day revenue, where Blackburn receive less than £7 million a year. All the other clubs in the top ten earn a minimum of three times that amount with their near neighbours, Manchester United, pocketing over £100 million more. As John Williams explained with some justification, “attendance is the one area where we find it difficult to compete.” This is not overly surprising, if you consider that Blackburn is a “small, relatively impoverished town with a small fan base” (not my words, but the chairman’s), which has greatly suffered in the recession. The problem is not just that it’s a relatively small town, but it’s the fact that Blackburn is located very close to many other football clubs in the North West of England, so there is a limit on how successful the club can be in terms of attracting spectators.

Attendances of 23,500 in the 2008/09 season were among the smallest in the Premier League, only ahead of Bolton and Portsmouth, and were actually lower than four clubs in the Championship and one in League One (Leeds). This represented a 2% decline over the previous season’s crowd, though it is a fair bit higher than the nadir of 22,000 in 2004/05. This means that only 75% of the ground’s 31,400 capacity is being filled on average.

"David Dunn - local boy made good"

This provoked a campaign to “take back Ewood” with ticket prices being reduced by 25%, which means that Blackburn Rovers now have the cheapest season tickets in the Premier League at £224. Although some might argue that this is still too high a price to pay to watch any team coached by Big Sam, it has worked to the extent that attendances have increased and season ticket sales increased from 14,000 to 18,500, though overall gate receipts are still down. Blackburn’s pricing structure is now very similar to that of a Championship team, but the problem is that the club has Premier League expenses.

Similarly, commercial revenue of £9 million is also on the low side and has been declining over the last few years, though this is a bit misleading, as it has included some strange items in the past. Up until 2007/08, this was where Blackburn booked the annual £3 million funding from the Jack Walker Trust. The 2008 accounts contained a once-off settlement from Sports World International after the club took back responsibility for the retail operation, while the high commercial revenue in 2005 was boosted by £1.5 million compensation from Manchester City for securing the services of Mark Hughes and his management team. The current sponsor is Crown Paints, who replaced Bet24 in 2008, but they only pay £4-5 million for a three-year deal, while the shirt supplier is Umbro.

What really drive Blackburn’s turnover is television. Almost 70% of their total income comes from TV, which is only behind Wigan and Portsmouth in terms of Premier League clubs, even though their £35 million is nowhere near as much as the leading clubs earn, mainly due to the money those teams earn in the Champions League. Williams noted the “obvious effect on our business”, but was honest enough to admit that the club was “too heavily dependent on TV revenue.”

Blackburn’s record turnover of £56 million in 2008 was heavily influenced by the new broadcasting deal, which increased TV revenue from £24 million to £41 million (an rise of over 70%). Similarly, nearly all of the £5 million decrease in revenue in 2009 to £51 million was almost entirely due to the fall in TV revenue from £41 million to £35 million, because of the lower merit payment arising from a lower league position.

Most of the 2009 TV revenue (£34 million) came from the Premier League’s central distribution and we already know that the 2010 payment will be £7 million higher, largely because of Blackburn’s higher league position (10th compared to 15th) and more live TV appearances. This highlights the importance of final league place, each of which is worth £800,000, to a club like Blackburn, especially as this is budgeted “aggressively”.

"Paul Ince - no longer the guv'nor"

A key part of Blackburn’s strategic planning is to anticipate higher revenue from the new broadcasting deals. Happily for Blackburn (and others), the central payments from the next three-year deal, which kicks off in the 2010/11 season, will climb by about a third, largely thanks to the increase in overseas rights, so they can anticipate another £10 million in revenue. However, woe betide them if this gravy train stops or even slows down.

This is why the club is so nervous of relegation, which would have severe repercussions for their financial well-being. Williams acknowledged that “the model would come under threat”, if they lost their Premier League status. This was the key factor behind the decision to sack Paul Ince in December 2008 after just six months in charge, as they considered that this was the club’s best chance to avoid the nightmare scenario.

The parachute payments paid to clubs dropping out of the Premier league have been increased to £48 million (£16 million in each of the first two years, £8 million in each of years three and four), but this would still represent a drastic reduction for Blackburn. They can expect around £50 million revenue from the Premier League next season, so they would have to confront a £34 million reduction in their total revenue. This would effectively mean that they could not meet their payroll, so would have to offload players, making it more difficult to be promoted back into the top division – a vicious circle. Inevitably, some clubs gamble on getting back after one season, keeping most of their players and taking a financial hit that season, but they are taking a big risk.

Of course, if a football club wishes to cut back on costs, there is realistically only one place they can go – the playing squad. But Blackburn are on the horns of a dilemma: either they cut wages and increase the chances of relegation (with all the revenue implications); or they keep wages high and run the risk of financial ruin. In fact, their wages have been on an upward trend, rising from £31 million in 2005 to £46 million in 2009 (an increase of nearly 50%). Indeed, salaries grew by a worrying 16% in the last season alone, “reflecting the cost of attracting and retaining players and the market within the Premier League generally.” Effectively, Blackburn and other clubs have channeled the increases in TV revenue directly into the players’ bank accounts.

The increase in wages is not primarily due to transfer activity, but improving contracts for existing players. Again, this is a conscious decision, where the club has accepted the additional cost in order to secure their players, so that they may be profitably sold at a later date, which is an important element of Blackburn’s business model.

"Roque Santa Cruz - a model professional"

However, this has produced what the club itself describes as an “uncomfortable ratio of wages to turnover” of 91%, which is, needless to say, one of the worst in the Premier League. The problem is not so much the absolute level of the wage bill – it’s only the 12th highest in the Premier League – but the disproportionately low turnover, which is very difficult to address. There is a clear correlation between a club’s wage bill and its success on the pitch, so Blackburn are unwilling to reduce their wages, which means that they have to invest a greater proportion of their income than their competitors.

If they wanted to lower their wages to turnover ratio to a more reasonable 60%, they would have to cut their wage bill by a third from £46 million to £31 million. Alternatively, they would have to grow revenue by a half from £51 million to £77 million, which would be ambitious to say the least. There is some light at the end of the tunnel with the improved TV deals, but the other avenues have limited growth prospects – unless someone like Saurin Shah really can greatly expand their marketing reach.

Obviously, player trading can be another source of revenue, but up until last season Blackburn Rovers have essentially been a trading club, balancing sales and purchases. Last year was exceptional with the sales of Roque Santa Cruz and David Bentley contributing towards a large surplus on transfer movements and a £19 million profit on player sales. This approach was summarised by Williams, “We can’t go out and spend £5 million on a player who is not good enough. That would kill us, because our finances are so finely balanced.” However, he was at pains to emphasise the difference between a selling club, which is one that has to sell, and a trading club (like Blackburn), which is one that cannot afford to buy, but does not have to sell. Having said that, he accepted that without external funding, Blackburn could easily become a selling club in the truest sense of the word.

Television revenue again plays a part in their thinking, as they try to buy players the year before a new TV deal kicks in on the assumption that they will be more expensive 12 months later. This helps to justify last year’s high wages to turnover ratio as a rational decision to buy players at the right price, making sure the club survived in the Premier League, in order to benefit from the extra income. They have also looked at recruiting young, cheaper players, not just into the academy, but ones who can rapidly progress into the first team.

As you would expect from this cautious approach to the transfer market, player amortisation, which is such a big expense for many clubs, is relatively low for Blackburn at just £8 million. To place that into context, Chelsea booked £49 million for this expense last year, while even the famously parsimonious Everton recorded £13 million.

"A snarling, fat-headed beast and Roar the Lion"

The club’s debt also seems relatively low with bank loans constant at around £14 million, though these will increase to £20 million by the end of 2009/10, a level that is described as “manageable, but cannot be allowed to increase further.” In fact, the total debt is already £20 million after including the £6 million owed to the parent undertaking, i.e. the Jack Walker Trust. These loans are interest-free, unlike the bank loans, which carry interest at LIBOR plus 3.25%.

The real issue with the debt is the repayment schedule. The bank loans need to be repaid by May 2012 – in equal installments according to the accounts, implying £4.8 million a year. The shareholder loans required £1 million to be repaid in both November 2009 and November 2010 with the timing for the remaining £4 million not agreed, but expected to follow a similar schedule. This all means that within the next two years the club must definitely find £20 million for the bank loans and potentially another £6 million for the Trust, though the owners may be more flexible on the phasing of their repayments.

The club believes that the debt level is acceptable, given the value of its assets, so what do they have to support the balances they owe? First off, they own their stadium and 50 acres of freehold land, which are included in the accounts at £39 million, but may well be worth more in the real world. Ewood Park was in some ways the prototype for today’s modern, all-seater stadiums. The directors have valued the playing squad at £47 million – much higher than the net book value of £13 million in the books. This provides solid under-pinning of the debt, but does not help to release cash to make repayments, unless players are sold, hence the club’s desire to secure new money from investors.

"El Hadji Diouf - spitting mad"

In the meantime, Blackburn Rovers will have to soldier on, struggling with their limited turnover. With some justification, their fans may feel that they are not operating on a level playing field, but others would be quick to remind them that not so long ago they were the beneficiaries of Jack Walker’s generosity. Despite the financial constraints, they have performed creditably, finishing tenth and reaching the Carling Cup semi-final last season, even though their uncompromising brand of football is not everyone’s cup of tea.

On the one hand, Blackburn have to be admired for their efforts to survive in the Premier League, while balancing the books, but on the other hand, the club has admitted that it is “punching above its weight”, and you do wonder what would happen to them (and others of the same ilk) if the TV funds were to dry up.

Tuesday, July 20, 2010

Warning, debt can seriously damage your core support

Yesterday, on the same day they announced the signing of Joe Cole (a “good day to bury bad news”?), Liverpool FC slipped out a juicy little press release about ticket prices for members (of which I understand there are around 15,000 available per game). The gist of the statement is that prices for 2010/11 are rising by a blended 10.6% for the Kop and 10.1% for the other three stands and that’s prior to the impact of the “progressive” VAT rise in January.

Having previously operated on a “Category A” and “Category B” system, LFC have now added “Category C” on the following basis:

Category A games for the 2010-11 season include: Arsenal, Chelsea, Everton, Manchester City, Manchester United and Tottenham Hotspur
Category B games for the 2010-11 season include: Aston Villa, Blackburn, Bolton Wanderers, Newcastle United and West Ham United
Category C games for the 2010-11 season include: Birmingham City, Blackpool, Fulham, Stoke City, Sunderland, West Bromwich Albion, Wigan Athletic and Wolverhampton Wanderers


Although the price rises vary by category, the message is clear, Liverpool are joining United in the debt driven game of pricing out their core working class support. The Kop now has the dubious privilege of being more expensive than the Stretford End which, when you consider the relative quality of football, is a true injustice.

LFC are in real financial trouble, something it actually gives me no pleasure in writing. In the last accounts (2008/09), the club reported EBITDA of £35m and interest of £40m. The dream of a new stadium was screwed the moment the credit crunch hit, leaving the business enormously overleveraged. Despite a valuable new shirt deal with Standard Chartered, the loss of Champions League income will inevitably impact the top line this season. That leaves Chelsea supporting Chairman Martin Broughton scrabbling around for other ways to boost revenues.

In 2008/09 LFC generated £42.5m of matchday revenue from 27 home games at an average attendance of 42,728. That’s £28.74 per occupied seat. The equivalent figure for Old Trafford is £39.58 per seat and for Chelsea £52.72. With the club up for sale and in dire need of new equity investment, yesterday’s announcement (plus the previously announced 4.6% increases in season ticket prices) look like being just the start....

So now we have the spectacle of both of England’s most famous and successful clubs screwing their core support to pay the debts of unwanted speculators. All the while the Premier League and Football Association stand around being “ownership neutral”. Is this truly the “Best League in the World”?

LUHG

Book review: “On the Road: A journey through a season” by Daniel Harris

With nothing of note going on in the world of football finance, here’s a first for this blog; a book review...



A quick trawl through books about Manchester United on Amazon shows that two genres dominate, history and biography. Whilst that comes as no surprise, it’s a shame that there isn’t more decent writing from the people who actually are Manchester United, the fans. Dan Harris’ new book “On the Road: A journey through a season” is a welcome step in filling that gap.

On the Road brings together ex-lawyer Harris’ successful blogs for ESPN Soccernet following United away from home during the 2009/10 season. Harris blends match reports with observations on modern football and the existential angst of being a football supporter. Written over the course of a whole season rather than after its conclusion, it perfectly captures the mental gymnastics all football supporters go through; from hope, through fear, a bit of anger, more hope and eventually (in a sport where most teams win nothing) the resignation of failure. If that all sounds a little serious it really isn’t. Harris is a very funny writer (could he really have been a lawyer?) with a fantastic ability to be very rude about deserving people and places in new and amusing ways (although to be fair Garry Cook is the gift that keeps on giving).

Being 2009/10, green and gold, bonds, PIKs and the Glazers make their share of appearances of course. Harris stopped going to OT in 2005 on principle and now relies on favours, mates and swaps to get his precious United fix at aways. It won’t come as a surprise to hear I share his views on the subject of our owners, but I do recommend his calmly angry take on the financial alchemy that threatens the long-term future of our football club.

Re-reading On the Road as one work rather than individual blog posts through the season, the book works really well. Football seasons are long journeys with numerous diversions on them and Harris does a great job of taking the reader down these little paths (Fergie’s “unfit” referees comments, Bellamy bravely hitting a supporter who was being held by stewards, the great Oakwell half-time pie robbery....) before returning to the main subject. All this is done with the authentic voice of the proper, critical, clued up supporter Harris clearly is. Recommended.

“On the Road: A journey through a season” will be in good bookshops in Manchester and London later this week and can also be bought direct from Waterstones using this link.

LUHG

Thursday, July 15, 2010

Is Manchester City's Strategy Fair Play?


Another summer, another spending spree by Manchester City. Having already splashed out over £60 million on David Silva, Yaya Toure and Jerome Boateng, it is almost certain that they will complete more big money deals before the new season kicks-off. The press has linked them with virtually all the major transfer targets, most notably the Bosnian striker Edin Dzeko, the exciting but wayward Italian teenager Mario Balotelli, Aston Villa’s willing but limited midfielder James Milner and Lazio’s Serbian left-back Aleksandar Kolarov. Many other names have been mentioned in dispatches, so it is quite possible that the final bill will be even higher than the £118 million shelled out this time last year, with some estimates as high as £175 million.

This would be crazy money for almost any football club, but that’s the point: Manchester City is not just any old football club. Ever since Sheikh Mansour’s Abu Dhabi United Group completed a takeover in September 2008, after buying out former Thailand Prime Minister Thaksin Shinawatra for £210 million, City has been described with much justification as the world’s richest football club. The owners clearly have plans to transform City into a major global force with substantial funds being poured into the playing squad.

A further demonstration of financial strength and commitment to the club came last December, when the owner converted his support, which had previously been in the form or shareholder loans, into £305 million of equity. At the same time, he purchased another £90 million of shares, taking his total investment in the club to around £400 million.

In spite of all this ostentatious flashing of the cash, City are keen to emphasise that this is part of a carefully considered project. Garry Cook, Manchester City’s chief executive, is the man with a plan, which is apparently “to build a successful, sustainable football club for the future.” After an initial period of admittedly significant investment, the intention is that City will become financially self-sufficient.

That’s obviously future music, but how close are City to achieving this ambition right now? Miles away, according to their last set of accounts (up to 31 May 2009), which covered the first season with the Abu Dhabi United Group at the helm. The enormous loss before tax of £93 million was incorrectly reported in some quarters as the largest ever loss made by an English football club, but it has only been surpassed by Chelsea’s world record loss of £140 million in 2004/05, when Roman Abramovich was really pushing the boat out.

To be fair to the new owners, Manchester City have rarely been profitable and have consistently reported losses. In fact, if we look at the financials for the last five years, the only season they made a profit was 2005/06, which was almost entirely due to player sales, ironically largely because of Shaun Wright-Phillips’ transfer to Chelsea. Although revenue has grown by £26 million in this period to £87 million, expenses have ballooned by £92 million to a staggering £161 million. Moreover, nearly the entire rise in revenue is attributable to improvements in the Premier League television deal, while the other revenue streams have hardly grown at all.

The main reason for the cost growth is very clear. As the accounts drily noted, the increase is “primarily driven by increased playing staff remuneration.” Over the last five years, wages have increased by almost 120% from £38 million to £83 million. In the same period, revenue has only grown by 43%, leading to a huge rise in the important wages to turnover ratio to a perilous 95%, way above UEFA’s recommended maximum level of 70%. Only Birmingham have a worse wages to turnover ratio in the Premier League (99%), while Manchester United and Arsenal lead the way with 44% and 46% respectively.

The increase in salaries arises from a combination of City paying top dollar to their stars plus a large increase in headcount. City had six players in the latest list of the top 50 highest football salaries published by Portuguese agency Futebol Finance, which is the same number as Real Madrid and only behind Barcelona and Chelsea. Robinho’s contract is apparently worth £160,000 a week, but that pales into relative insignificance compared to the £221,000 reportedly agreed with Yaya Toure (if you can believe that). The club has also been on a recruitment drive, as staff numbers have grown by nearly 50% from 204 (100 football, 104 admin) in 2005 to 302 (156 football, 146 admin) last year.

So, the wage bill has been growing exponentially (49% in 2008, 52% in 2009), but there’s no end in sight, as the latest figures did not include the eight star signings made last summer (Carlos Tevez, Emmanuel Adebayor, Gareth Barry, Kolo Toure, Joleon Lescott, Roque Santa Cruz, Patrick Vieira and Sylvinho). Some of those players have been given contracts of £160,000 a week, but it’s unlikely that they are all earning that much, so let’s assume an average of £100,000, which is huge money by most standards, but probably not unreasonable for City. That would mean annual wages of £5.2 million, which would imply an increase of around £40 million in the wage bill.

"Get your Yaya's out"

Similarly, the 2008/09 accounts do not include a full year’s salary for those players bought that season, especially those that arrived in the January transfer window (Wayne Bridge, Craig Bellamy, Nigel De Jong and Shay Given). Assuming that these players are on lower salaries with an average of, say, £70,000 a week, that would mean an additional £8 million (seven months of annual salary of £3.6 million for 4 players).

Furthermore, this year’s salaries will almost certainly include a severance payment to former manager Mark Hughes plus the cost of hiring Roberto Mancini as his replacement. Let’s call that another £3 million.

Clearly, some players have also left the club’s payroll in this time (Elano, Gelson Fernandes, Richard Dunne, Daniel Sturridge), but their wages would have been nowhere near as high as the new recruits, so will not have had that dramatic an impact.

So, we can anticipate a wage bill next year of over £130 million, which would take the club above Manchester United and Arsenal, only just behind Chelsea. And that figure does not include any of the players bought in 2010. As the annual report said, “the financial impact of these latest acquisitions will be seen in next year’s financial statements.” You can say that again.

In the last four years, Manchester City’s net transfer expenditure has been well over £300 million, which represents a tremendous change from the previous three years, when they were clearly a selling club (net receipts of £28 million). After last summer’s heavy buying, City let is be known that they would not spend so freely next time, but it now looks as if they have returned to the transfer market for a third bite of the cherry.

In fact, the accounts suggest that the cost last year was even higher than the reported transfer figures, as they said that the net expenditure on last summer’s transactions was £117 million, while the analysis above is only £99.5 million (and that includes £7 million for Adam Johnson’s purchase in January). The figures also exclude very large contingent liabilities of £23m, which is “payable upon the achievement of certain conditions contained within player and transfer contracts”, e.g. number of appearances, international caps, etc.

On the other hand, City would expect to recoup a good portion of their transfer expenditure this summer. Valeri Bojinov’s sale to Parma has already secured £5 million, but the club would hope to raise at least £50 million from other sales. Possible departures include Robinho, Craig Bellamy, Jo, Stephen Ireland, Nedum Onuoha, Javier Garrido and Felipe Caicedo. This would be a double whammy, as it would also restrain the burgeoning payroll. However, during all this wheeler dealing, they will have to bear in mind the new regulations on squad sizes (limited to 25 players) and home-grown players (minimum of eight in the first-team squad).

"Adebayor - say no more"

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, accountants consider that a player has no value, as he is allowed to leave the club on a free transfer. It’s probably easier to comprehend with an example. City signed Yaya Toure for £30 million on a five-year deal, so the annual amortisation is £6 million.

In Manchester City’s accounts, amortisation expenses have significantly increased over the last three years from £6 million in 2007 to £39 million in 2009, reflecting the continued investment in the club’s playing squad. It is difficult to know how much this will be going forward, as we do not know which players will leave, but my guess is that it will be at least £20 million higher, which would take it up to £59 million next year. To place that into context, that would be the highest amortisation figure in the Premier League, way above Chelsea at £49 million.

"Robinho - time to go?"

And guess what’s happened to the administrative expenses? Got it in one: they’ve also massively increased, doubling over the last five years from £20 million to £39 million. This reflects the significant investment made to improve the club’s training facilities (new gymnasium and improved pitches), offices and other infrastructure, which were in need of a major overhaul.

Manchester City’s financials provoke a sense of déjà vu, as they almost exactly mirror what happened at Chelsea, which will inevitably mean several years of large losses. Actually, you don’t have to be a genius to work that out, as the club kindly spells it out in the annual report, “It is therefore to be expected that there will be further significant operating losses reported in future financial periods as we accelerate the timeframe for generating success.” Chelsea kept telling us that they were on course to break-even, but they are still nowhere near self-sufficiency. Although they have been reducing their losses year after year, in 2009 they still came in at a loss well over £40 million. In fact, as we have seen, Manchester City’s losses are still on an upward trend and next year they could well establish a new record loss of around £150 million, as huge increases in wages (£50 million) and player amortisation (£20 million) are offset by improved TV revenue (£10 million) and commercial revenue (£10 million). We shall see.

Longer-term, there is no doubt that Manchester City have a lot of potential. Despite their years in the doldrums, they are already the sixth highest English club in terms of revenue and are rich in tradition, having won the old Football League twice, the FA Cup four times and the European Cup Winners’ Cup once. As the marketing men would say, they have a great brand (the “people’s club” in Manchester) with a solid fan base, which even stayed loyal when the club was relegated to the third tier of English football in 1998, and now they’re playing in a spanking new stadium in the most lucrative league in the world.

Of course, the main driver for revenue growth at English football clubs these days is television and City are no exception with broadcasting income of £48 million representing 55% of their turnover. It increased by 11% in 2009, largely due to the money earned from reaching the UEFA Cup quarter-final, but by far the largest component was the central distribution of £40 million from the Premier League. This was the reason for the substantial £19 million increase in 2008, as a new three-year Premier League deal commenced. We already know that City will receive £50 million from the Premier League this year, the £10 million improvement derived from higher merit payments (after finishing fifth) and more matches shown live on television. Next season, they should receive a further £10 million increase, as the new Premier League 2010-13 deal kicks in, following the much higher sale of overseas rights.

However, City’s broadcasting revenue is still a long way behind the so-called Big Four, as they also benefit from the riches of the Champions League. In 2008/09, this was worth between £20 million and £33 million, but last season’s pot increased by almost 30%, so qualification is now worth at least £25 million, assuming a team gets out of the group stage. In fact, reaching the Champions League would increase revenue across all three streams, including higher gate receipts and better deals with sponsors.

"The Bank of Abu Dhabi"

Commercial revenue actually fell £2 million in 2009 to £23 million, because City decided to stop hosting other events like summer music concerts and the Ricky Hatton fight. The better news is that City have signed new marketing deals with Etihad and Umbro, replacing Thomas Cook and Le Coq Sportif as shirt sponsor and supplier. These contracts are reportedly for much more money, so Etihad’s deal is worth £25 million over the next three seasons, compared to Thomas Cook’s £2.3 million annual payment, while Umbro have entered into a ten-year strategic partnership for more than £50 million.

The owners plan to maximise the commercial potential for the City brand, so you would expect them to boost this revenue, especially in the Middle East. There is certainly room for improvement, when you look at how much Manchester United’s marketing machine earns – over £50 million more than City. Their continental counterparts like Bayern Munich and Barcelona earn even more from their commercial operations, so there is definitely a great opportunity here.

Despite a small increase in 2009, match day revenue is also relatively low. The Deloittes Money League gives a figure of £21 million, having re-classified some revenue from commercial, which is around half that achieved by Spurs, even though City’s average attendance is nearly 8,000 higher. In fact, crowds have been on the rise at Eastlands over the last three seasons, increasing from 40,000 to 43,700, though this is still only utilising 92% of the stadium’s 47,700 capacity, which does not look great when you see that Manchester United fill 99% of the far larger Old Trafford (76,200 capacity). At the moment, City’s gate receipts barely cover Yaya Toure’s salary, something that City fans might like to consider when shouting “we pay your wages” to the team. The club has increased its ticket prices by an average 5% for next season, but they are still a lot lower than many other clubs.

"Don't look back in anger"

However, the club is restricted in its ability to greatly increase its match day revenue by the fact that it does not own the City of Manchester Stadium, which is rented from the council on a 250-year lease. On the plus side, City only had to pay £30 million to convert the stadium into a football ground after the 2002 Commonwealth Games, but this arrangement is a double-edged sword. First, City had to hand over Maine Road to the council; second, the rental payments are based on a formula that allows the club to retain receipts up to the 34,000 capacity of their old ground. This effectively means that City do not get the benefit of higher attendances, as it just means more rent paid to the council. The club plans to expand the capacity to 60,000, including more corporate hospitality facilities, but they would probably prefer to buy the stadium, so they could remove the rent expenses, increase revenue and sell naming rights.

That would help contribute towards a brighter future for City, but there is a cloud on the horizon, namely UEFA’s Financial Fair Play initiative, which will ultimately exclude from European competitions those clubs that fail to live within their means. Although City claim that they are “engaging fully with the FA, the Premier League and UEFA” on this matter, it is highly unlikely that they will break-even in the near future. Indeed, UEFA President, Michel Platini, specifically mentioned them, when he announced the new measures, “Manchester City can spend £300 million if they want to, but if they are not breaking-even in three years, they cannot play in European competition.”

But does it really matter if City spend so much? Defenders of the beautiful game have bemoaned the reduced emphasis on traditional methods such as good coaching, intelligent tactics, developing players, hard work and team spirit; all of which can apparently be replaced by whipping out the cheque book and buying your way to success. The argument goes that this policy inflates the market for everyone else, both in terms of transfer fees and wages. It is obvious that clubs apply a premium when City call, no doubt whistling “Santa Claus is coming to town”, as they hear Garry Cook approaching.

"Father Christmas"

This could be particularly tough on the youth players at Manchester City. The club is rightly proud of their performance in developing young players. Indeed, the annual report notes, “Vladimir Weiss became the 27th player since 1998 to graduate from the academy to first team football – an almost unprecedented record of success.” However, does anyone seriously believe that this will continue, now that the club can go out and buy a ready-made international? Although Mancini has spoken of the club’s commitment to the academy, it would be no surprise if the focus lessened with few, if any, players progressing to the first team. As a meaningful comparison, Chelsea’s youngsters have hardly set the world on fire since Abramovich started pumping money into the club (though, in fairness, they did win the FA Youth Cup last season).

After the spectacular collapses at the likes of Portsmouth and Crystal Palace, there is also some concern about the benefactor model, which works just fine until the money runs out. Even when the owner appears to be incredibly well funded, there is always the possibility that his financial status might change (e.g. market crash in Dubai), he loses interest or gets arrested. Indeed, City should be well aware of these dangers after their experience with Thaksin Shinawatra, who faced corruption charges in Thailand, which lead to his money being blocked. This meant that the club could not pay the players and had to ask the former chairman for a loan.

On the face of it, the men from Abu Dhabi are cut from a very different cloth with a long-term strategy, based on diversifying their economic operations and presenting an appealing image to the world. In a message to fans, the new chairman, Khaldoon Al Mubarak, said, “We are genuine people and we want to develop this club in a sustainable manner.” All very reassuring until you realise that in the same conversation, he also stated, “Mark (Hughes) is as good as they get and we are backing him all the way”. That’s the same Mark Hughes, who was unceremoniously sacked a few months later.

"Time's up"

There is also a worry that they’re not really City fans. When they bought the club, Sulaiman Al Fahim claimed that there was nothing special about City, acknowledging that his backers were simply “attracted to the Premier League itself.” To be fair to Sheikh Mansour, he soon cut short Al Fahim’s “loadsamoney” impression, when he realised that this was upsetting a lot of people, e.g. when the club launched its “name your price” offer for Milan’s Kaka.

Maybe this is why some City fans feel uncomfortable with their new wealth, as it looks like they’re trying to emulate the business model followed for so long by their dreaded neighbours: spend big, build a global franchise and attract worldwide support (from Surrey to South Korea).

On the other hand, although this might not be the club they knew and loved, most City fans surely think that if anyone deserved this good fortune, it has to be them, following all their years of being the underdog. After all, they would not be the first club to benefit from a sugar daddy or buy their way to success. Is what they’re doing really that different from Manchester United when they paid huge money for the likes of Rio Ferdinand, Juan Sebastian Veron, Wayne Rooney and Dimitar Berbatov?

In any other business (and football is now surely a business), there would be no problem with investors using vast amounts of their personal wealth to fund ventures. Would anyone have said anything if the owners had spent £1 billion+ to acquire United? The investment in City, which has largely been spent on buying new players, may actually end up costing less than purchasing a ready made club.

"Not provocative in the slightest"

It’s also difficult to see how else they could realistically break the monopoly of the big four without investing substantial sums. It might be unfair to the likes of Everton and Aston Villa, but this could be what it takes in England to break into the Champions League. This is the thrust of Khaldoon’s argument against the UEFA Fair Play rules, “This suggests that the big clubs, which make the most money, must remain the big clubs and that the status quo must remain.”

In fairness, UEFA have given clubs every opportunity to meet the new guidelines. First, there will be a phased implementation with the first monitoring period being season 2013/14, though this does cover the preceding two reporting periods, 2011/12 and 2012/13. For each successive monitoring period, three reporting periods will be taken into consideration.

UEFA have also stretched the definition of break-even to include an “acceptable deviation”. Billionaire owners will be allowed to absorb aggregate losses of €45 million over three years for the first two monitoring periods, so long as they are willing to cover the club’s losses by making equity contributions. The maximum permitted loss then falls to €30 million from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount). This means that in the transition (weaning-off) period, owners can pump in an average per season of €15 million up to 2015 and then €10 million up to 2018.

"I'm coming for you"

In addition, clubs will still be permitted to borrow for “good” projects like improving the stadium, training facilities, youth and community development. Any costs associated with this investment, like interest on loans to fund the construction or depreciation on the resultant fixed assets, are excluded from the break-even calculation. In other words, an excess of expenses over income may still be allowed if it is solely related to costs that are for the long-term benefit of the club.

At this stage, we should probably clear up a few misconceptions about the Fair Play regulations. Many seem to believe that if a club has no debt, it should be OK, but that is not the issue for UEFA. They are less concerned about clubs taking on debt, but more their ability to service that debt, i.e. pay the interest charges. Some thought that this was the reason that Sheikh Mansour converted his loans into equity, but in reality this makes no difference to UEFA. Obviously, it’s beneficial to the club, as it would be able to start with a clean slate financially if the owner walked away – though it would still have to finance a massive wage bill – and it will also reduce City’s annual interest payment, which is currently £17 million.

It should also be noted that City are not quite debt-free yet, as they still have £49 million of loan notes and bank loans, including £30 million repayable over 25 years at 7.27% and £14 million over 15 years at 7.57%. The debt also includes £43 million provided for future stadium rent, giving gross debt of £92 million. If cash balances of £19 million are taken into consideration, net debt is £73 million. On top of that, the accounts also reveal that City owe other football clubs an amazing £77 million.

"Sheikh - your money maker"

Others are under the assumption that if the owners were to inject £1 billion into the club, that would somehow enable the club to meet the UEFA regulations. Obviously, this would strengthen the balance sheet, but it would not help the profit and loss account. Assuming the funds were used to strengthen the squad, all that would happen is that expenses would increase following a rise in salaries and player amortisation, which would make it more difficult to meet the break-even target.

Another potential loophole often mentioned is for a wealthy owner to pay a ridiculous sum, say £200 million, for sponsorship or use of an executive box. Here, UEFA have said they will test such deals for “fair value”, and if an owner has over-paid for services, the income will be adjusted down to market value. Of course, this is open to interpretation and there are plenty of high-paying deals that could be used as a comparative. It would also be difficult to argue against a club securing many deals at, say £5 million, which could add up to a tidy sum.

However, here’s the thing: Manchester City do not have to worry about any of that, as there is a section in the new guidelines that may well allow them to pass UEFA’s break-even test with flying colours.

As a rule, revenue from non-football operations is excluded from the break-even calculation, but clause B. (k) in Annex X allows you to included revenue from “Operations based at, or in close proximity to, a club’s stadium and training facilities such as a hotel, restaurant, conference centre, business premises (for rental), health-care centre, other sports teams.”

"Cooking up a story"

That sounds almost exactly like the £1 billion development that City are planning for the area around Eastlands stadium. Described as a world class sports and leisure complex, it will include a training facility, luxury hotel and restaurant and should provide a very healthy revenue stream. Bingo! Job done.

Of course, I may be a touch over-cynical here. An alternative scenario would have Manchester City cutting back on their investment after they reach the Champions League, replacing expensive imports with cheaper players developed by their academy, and reaching break-even that way.

This all makes sense if you believe Khaldoon, when he explained that the owners had two reasons for investing in Manchester City, “There is a pure football, emotional side to it and a big business side too. Sheikh Mansour is a huge football fan, but we can also create a franchise, a business which will create value over the years and reap a long term return.”

At the moment, the normal rules of business do not apply to City, but strange as it seems, they just might pass UEFA’s Financial Fair Play rules.