How Can Barcelona Afford Cesc Fabregas?

For the past few days there has been intense speculation about whether the Arsenal captain Cesc Fabregas will make his long-anticipated return to Barcelona, the team who brought him through their famed academy system. Trying to discern fact from fiction is extremely difficult, but the question that concerns me is exactly how Barcelona can afford to buy him, especially now that one of the Catalan club’s own presidential candidates has described the club’s level of debt as “stratospheric”.

Barcelona has already spent £34m this week to secure prolific striker David Villa from Valencia, while they splashed out around €90m last summer on bringing new players to the Camp Nou, including the mercurial forward Zlatan Ibrahimovic, the unpronounceable defender Dmytro Chygrynskiy and two Brazilians: the veteran full-back Maxwell and the promising striker Keirrison. Estimates of a transfer fee for Fabregas have ranged from a ridiculously low £30m to an optimistic £80m, but whatever the price, I think it’s worth looking at whether Barcelona are “mes que un club” from the financial viewpoint.

"Future team mates at Barca?"

So, do they have enough money to buy Fabregas? To be honest, it’s almost an impossible question to answer, given the willingness of Spanish banks to hand over loans to Barcelona (and Real Madrid) to fund their acquisition plans, but if we analyse Barcelona’s financials we might just be able to see whether they generate sufficient cash themselves. It might also be interesting to compare their accounts with Arsenal’s to get a sense of perspective, but before we get stuck in, I should give a few health warnings:

(a) We will look at the last set of annual accounts, not the more recent interims, as they do not contain the wealth of detail of the full-year figures. These cover the 2008/09 season, though Arsenal’s accounts are for the twelve months until 31 May 2009, while Barcelona closed their books a month later on 30 June 2009.

(b) Unsurprisingly, Barcelona’s financial statements are as per the Spanish National Chart of Accounts, which is very similar to the British format, but not exactly the same, so I have slightly amended their presentation to enable like-for-like comparisons.

(c) I have excluded Arsenal’s property development business, as this is a temporary activity for Arsenal, which should come to a (happy) end in the near future.

(d) However, I have included Barcelona’s non-football sporting activities (basketball, handball and hockey), as this is normal business for the club. In any case, it is not significant to their revenue (only £1.3m in total), though the costs are more of a drain, reducing last year’s profit by £24.3m.

(e) Currency movements can play a big part in the comparison with the Pound around 25% lower against the Euro than two years ago, even after the recent collapse of the Eurozone currency. This means that Barcelona’s revenue in Sterling terms is now much higher than it was. For convenience, I have used the same exchange rate as Deloittes in their 2010 Money League, namely €1.1741.

The first point to note is that both clubs make money, which is a rarity in the world of football. Barcelona’s profit before tax was a highly respectable £7.5m (€8.8m), but Arsenal’s was even more impressive at £39.9m, even after excluding £5.6m from property development. This difference may be down to a divergence in strategy, as Barcelona’s approach appears to be to remain profitable, but only just, as they spend available money on strengthening their squad. However, when Barcelona vice-president Joan Boix describes the club’s economic model as “solid and sustainable, independent of any sporting success”, it sounds uncannily similar to the Arsenal ethos. Having said that, you would expect their figures to be good after an incredibly successful season, during which the Catalans won the Champions League and the domestic double of La Liga and Copa del Rey. In comparison, Arsenal did not win any trophies, but their report card was not too shabby either: reaching the Champions League semi-finals, finishing fourth in the Premier League and reaching the semi-finals and quarter-finals of the FA Cup and Carling Cup respectively.

However, there is an enormous difference in revenue with Barcelona generating an incredible £311.7m (€365.9m), which is £86.6m (or nearly 40%) more than Arsenal’s £225.1m. To put that into context, Arsenal’s turnover is the second highest in England and the fifth highest in Europe. I should mention that Barcelona report their turnover as €384.8m, as they include profit on player sales, but this is shown separately in British accounts, which is the approach I have taken. Deloittes used the same assumption in compiling their Money League.

Even though the Camp Nou has a far larger capacity (98,800) than the Emirates (60,400), Arsenal’s match day revenue of £100.1m is actually £18.7m higher than Barcelona’s £81.3m. This is due to a couple of factors. First, Arsenal fill their stadium (or at least sell all the tickets), while Barcelona’s average attendance is 76,000, which is only 77% of capacity. More importantly, Arsenal’s ticket prices are among the highest in Europe, including 9,000 premium seats that generate approximately 35% of match day revenue, though any continued lack of success in terms of winning trophies might adversely affect demand at this level.

"Grounds for optimism"

Of course, the Emirates is a brand new stadium with state-of-the-art facilities, while the Camp Nou is a venerable old ground in need of a facelift. Barcelona had planned a €250m redevelopment, adding 10,000 seats and improving corporate facilities, which would have increased revenue, but this has been postponed after complaints from local residents.

In contrast to Arsenal, Barcelona do collect good revenue from pre-season tours and lucrative friendlies. For example, their tour to America plus a friendly match in Kuwait produced over £6m. They also receive money from over 170,000 members, though this is not a significant factor, only delivering £15.1m.

However, in broadcasting revenue there really is no comparison. Although Arsenal’s TV revenue of £73.2m is nothing to be sniffed at, Barcelona’s £134.9m is virtually double the size, thanks to the unique ability of Spanish clubs to negotiate individual deals in contrast to the Premier League’s collective bargaining system. This means that Barcelona earn around €120m in television rights from their deal with Mediapro, which runs until season 2012/13, but the other, smaller teams earn considerably less. For example, Valencia and Sevilla only earn €30m and €20m respectively. Apart from the obvious financial benefits, this has another advantage to Barcelona (and Real Madrid), as it makes it almost impossible for the other teams in Spain to compete with them, allowing the big two to prioritise the Champions League. Even though Arsenal, like other Premier League clubs, will receive an additional £7.5m a year from next season following the recent overseas rights deal, they are still greatly disadvantaged relative to the Spanish giants.

With Italy returning to collective rights next season, Spain is the only leading European championship in which clubs sign their TV rights individually. Not surprisingly, the other clubs in La Liga have denounced this process as “completely unbalancing the league’s sporting potential”, but time will tell whether their pressure for change bears fruit. Equally predictably, Barcelona would resist any change, being “radically and absolutely against the collective sale of TV rights.” President Joan Laporta explained the club’s position, “I don’t want to damage the interests of Barcelona Football Club, because we have to compete against teams in other countries.”

"Business is business"

Joan Boix has said that Barcelona “only budget for the team to reach the quarter-finals of the Champions League”, so their revenue got a boost when they won it in 2009, though their share of the revenue distributed by UEFA (€31m) was not much higher than the €26.8m received by Arsenal. Although they were given €7m more for winning the competition, Arsenal’s share of the TV pool was €3.1m higher, as the English TV market is larger.

Similar to TV revenue, Barcelona’s commercial revenue of £95.4m is very nearly twice Arsenal’s £48.1m. We know that this is an area of weakness for Arsenal with their revenue lagging way behind the club’s English peers (Manchester United £70m, Liverpool £68m and Chelsea £53m), but we also understand why, as the club tied themselves into long-term deals with Emirates (stadium naming rights until 2021, shirt sponsorship until 2014) in order to provide security for the stadium financing.

"Absolutely Fabregas"

Although Barcelona are famous for not having a shirt sponsorship deal, instead having an innovative partnership with UNICEF whereby they fund some of the charity’s projects, Laporta’s regime is determinedly commercial with the club’s website listing 26 sponsors, providers and partners, including Nike who pay a guaranteed minimum of €30m a year (“the best deal in our history”, according to Laporta). Unlike English clubs, when Barcelona sign a player, they also retain a significant portion of his image rights, which allow them to make millions in advertising deals. The club also receive an incredible £18.7m a year from its museum.

Arsenal chief executive Ivan Gazidis is well aware of the opportunities here and has recently restructured and strengthened his commercial team to explore new partners and overseas markets. Recent deals by other clubs highlight the size of the prize, which are conservatively worth another £20m a year. Indeed, Barcelona are a good example here, having increased commercial revenue under Laporta’s leadership from a paltry €39m in 2002/03 to €112m today.

In fact, it’s worth looking at how revenues have grown at the two clubs since Joan Laporta’s election as Barcelona president in June 2003. At that time, Arsenal and Barcelona had almost identical revenues with the North London club’s turnover of £103.8m only just lower than Barcelona’s £105.1m. Since then, Arsenal have managed to more than double their revenue to £225.1m, which is an impressive performance, but pales into insignificance compared to Barcelona, who have all but tripled their revenue to £311.6m. One of Laporta’s first acts was to replace practically the entire management team with top-class professionals, many of them recruited from outside the football industry, which shows what can be achieved with the right people. Nevertheless, Joan Boix admitted that “the growth in income in the past six years has exceeded all expectations.”

Since the annual accounts, revenue has grown still further at Barcelona with the club reporting a substantial 19.7% (€36.8m) increase from €186m to €222.8m for the six months up to 31 December 2009, though this gain was more than wiped out by a 27.1% (€45m) rise in costs from €166m to €211m, due to an increase in salaries following the signings of Ibrahimovic et al plus higher bonuses for winning the Club World Cup and the European and Spanish Super Cups. Despite “the success on the filed having a short-term economic cost”, the club still believes that “the figures highlight that Barcelona is consolidating year after year a self-financing and sustainable business model.”

"The joy of Cesc"

Arsenal’s interims told a similar story, though revenue from the football segment only grew by £1.8m (less than 2%) with property development being responsible for almost all of the club’s £40m reported increase in turnover. Again, this was more than off-set by the £10.1m cost growth to £101.4m, largely due to the £8.6m rise in player wages, despite the departure of Emmanuel Adebayor and Kolo Toure, who were on pretty high salaries, which reflected the re-signing of 17 first-team players on improved long-term contracts.

Although Barcelona’s revenue is significantly higher than Arsenal’s, so is their cost base. Their annual expenses of £307.7m are a full £113.4m more than Arsenal’s £194.3m. As always, the wage bill takes up the largest slice of the pie at both clubs: £104m at Arsenal and a jaw-dropping £171.5m (over €200m) at Barcelona. This still gives a respectable wages to turnover ratio of 55%, although not as low as Arsenal’s 46%, which admittedly is exceptionally good for a football club. Much of Barcelona’s huge staff costs is due to high variable costs of nearly £50m for bonuses payable for winning the treble, which was £28m more than the previous season when they did not win anything (third, in La Liga, semi-finalists in the Champions League and Copa del Rey).

Even so, Barcelona has eight players in the list of the top 50 footballers’ salaries with Ibrahimovic £10.4m and Lionel Messi £9.1m being the best paid. Next in the list is Thierry Henry, so if he departs for the MLS, as expected, some £6.5m will be cut from the payroll. Arsenal only has one player on this list, Andrei Arshavin in 47th position with £4.1m, though Fabregas’ reported increase to £110,000 a week would result in an annual salary of £5.7m, taking him into the top 20.

"Pep talk"

Clubs in La Liga have been helped by the so-called “Beckham law”, which allows foreigners in the top tax bracket to only pay 23% tax for their first five years in the country. In comparison, players in England now pay 50%. This means that clubs in Spain can either pay lower gross salaries to produce the same net salary as in England or pay the same salaries, leaving the players with a higher net package. It has been reported that this law is under review, but I don’t think that it has been revoked yet.

The other meaningful operating expense is player amortisation, which reflects how much money has been spent on buying new players. The accounting treatment here is to write-off the costs associated with buying players over the length of their contracts, based on the (prudent) assumption that a player has no value after his contract expires, since he can then leave on a “free”. Barcelona’s amortisation of £46.4m is considerably higher than Arsenal’s £23.9m, but this is more due to Arsenal’s very low transfer spend than any profligacy on Barcelona’s part. As a comparison, Barcelona’s amortisation is quite similar to the other “Big Four” English clubs: Chelsea £49m, Liverpool £45.9m and Manchester United £37.6m. However, given last summer’s spending spree, I would expect it to be a fair bit higher next year.

It would be a bit harsh to overly criticise Barcelona’s big money transfers, as the majority of their first team have emerged from the club’s youth system, including great players like Xavi, Andres Iniesta, Victor Valdes, Gerard Pique and Carlos Puyol. Indeed, many have described Arsenal’s own “youth project” as an attempt to emulate the Catalan system. Barcelona’s strategy is in marked contrast to Real Madrid with Laporta memorably boasting, “We create Ballon d’Or winners, while others have to buy them. One is the model of a youth system and the other one, that of Madrid, is of a wallet.”

"Project Youth at its best"

Barcelona are not afraid to splash the cash, but they also recoup some of that outlay via player sales, which earned them £15.1m in 2009 (after £20.4m the year before). Of course, Arsene Wenger is also renowned for his ability to generate revenue from the transfers of players that he has developed. In particular, last year’s accounts include a profit of £23m from the sale of player registrations and that did not include the £42m received last summer for Adebayor and Toure from the City slickers.

This is all very well, but what about all this debt that Barcelona is supposed to have? Strange – the accounts show that Barcelona’s net interest payable of £11.6m is actually lower than Arsenal’s £14.4m. Both of these are considerably lower than the annual interest payments at clubs with a genuine debt mountain like Liverpool’s £40m and Manchester United’s eye-watering £68m. We know that the solid progress on property sales has enabled Arsenal to reduce net debt by circa £160m in the last twelve months to around £175m with the property developments now being essentially debt-free, but what about Barcelona?

The precise figure for their debt is actually quite confusing with the amounts reported ranging from €30m to €489m (see table above), but the explanation is quite straightforward. The only genuine bank debt that Barcelona has is a €29m loan from La Caixa that was taken out in February 2009 (repayable February 2010) and that is the debt the club mentioned at the AGM. At the same time a club spokesman referred to net debt of €202m, which is also the figure quoted in the annual accounts, which represents the bank loan plus provisions and accruals. The Guardian quoted a net debt of €350m, which appears to be calculated from the total current liabilities of €360m, i.e. including €247m of trade creditors, less the cash at bank of €10m. Finally, one of the Barcelona presidential candidates, Sandro Rosell, argued yesterday that the debt was €489m, which is simply the sum of all the club’s liabilities (current and non-current). As Mark Twain almost said, “the reports of my debt have been greatly exaggerated.”

So which figure is correct? In their own way, all of them. The definition of debt is “amounts owed to people or organisations for funds borrowed”, but this can be broadly interpreted. At the narrowest extreme, we have just the bank debt; at the broadest extreme, we can take total liabilities (“all financial obligations, debts, claims and potential losses”). It all depends on your purpose. The club clearly wishes to under-play their debt level, while a presidential candidate would obviously want to use the highest possible figure – which is exactly what they have done. Barcelona’s view is, “We have kept the level of debt stable and we hope to carry on lowering it”. Even after the costly purchases last July, they claimed that “the ultimate proof that Barca has a solid economic base is that we didn’t have to make any new debts when signing new players this summer.” As we have seen earlier, they are not unwilling to sell players, which would reduce any debt, though I’m not sure that they would want to make money on Messi (for example).

"Sandro Rosell - he would say that, wouldn't he?"

But do the provisions include anything that might be a sting in the tail? Yes, they do – a couple of nasty surprises, in fact. First, the club has provided €36m for a payment to the Spanish tax authorities following irregularities in the late 1990s, having already paid out €25m over the same issue for earlier years. Second, they have provided €16m against a claim made by TV company Sogecable. Trade creditors are normally just the cost of doing business, so personally I would not include them within debt, but even these include some “funnies”. For example, Barcelona owe nearly €50m to other football clubs on transfer purchases, ironically including €16m to Arsenal (€12m for Thierry Henry and €4m for Alex Hleb). These “disputes” don’t quite tie in with the club’s “holier than thou” image.

There are many things to admire about Barcelona. Not just the way the team plays the beautiful game, but also the way that the club is structured, so that the executive is accountable to the club’s members with the president being elected every four years. Alfons Godall, another presidential candidate, said, “I believe ours is the best model, an example to England. We are free. We do not depend on a Mr. Abramovich. We want to be successful, but also to have meaning, social values.” It all sounds a little too good to be true and indeed there are some who consider Barcelona to be the football equivalent of Coldplay: a bit self-righteous, adored by the masses and just a little too free with their opinions. Their image would be rather more convincing if they didn’t spend so much time unsettling other clubs’ players, or if there weren’t so many empty seats at the Camp Nou.

"On your bike"

In fact, Spanish domestic football is far from healthy. Only this week, the Guardian revealed that La Liga’s debt of £3 bln was even higher than the Premier League’s £2.9 bln. The individual TV rights may be wonderful for Barcelona and Real Madrid, but every other club in Spain suffers, highlighted by Real Mallorca announcing that they would file for voluntary administration, even though they narrowly missed out on qualifying for the Champions League. In a thinly veiled message to Fabregas, Arsene Wenger said, “I can't see anyone who has a competitive edge going to Spain. They have two good teams, but the third team is 21 points behind and this week the players threatened to go on strike because they are not paid. It's a league that is in complete disarray. If you are competitive you stay in England, that's where the competition is and that's where the best players want to be.”

We don’t know what is happening behind the scenes with Arsenal’s captain, but if Fabregas does not end up at Barcelona, I don’t think it will be for financial reasons. The Catalans generate a huge amount of revenue, which they clearly budget to spend on improving their squad. Thanks to their productive youth scheme, they only need to make a few “marquee” signings every season, so they can afford to allocate a lot of money to one or two individual transfers. I don’t think that their debt levels would prevent them from making a bid, as the majority is derived from normal operations (trade creditors, provisions and accruals) and their bank debt is tiny. In any case, we have seen that Spanish banks are more than willing to lend to Barcelona and Real Madrid. Whether Barcelona would be willing to spend as much as £80m is another question, as every buyer has his limit, beyond which he will not go. Let’s hope that this is a case of an irresistible force meeting an immovable object.