Tuesday, October 5, 2010

How Manchester City Could Break Even


Just a week after Arsenal reported record profits of £56 million, the other side of the football finance spectrum was seen when Manchester City announced a massive loss of £121 million for the year ending 31 May 2010. This is not quite the worst loss ever reported in Premier League history - that dubious honour belongs to Chelsea, who lost £141 million in 2004/05, the first full year after the acquisition by their Russian benefactor Roman Abramovich. However, to put this into context, City’s deficit is more than the combined loss for every other team in the Premier League if you exclude Chelsea (or Liverpool).

This is also the first full financial year since Sheikh Mansour’s Abu Dhabi United Group bought Manchester City and it is no coincidence that the club has made huge losses ever since the takeover, as it is striving for rapid sporting success. Last year’s loss of £93 million was the largest by far in the Premier League and it will surely be no different for this year’s loss.

As chief executive Garry Cook explained, once again dipping into his tried-and-trusted book of corporate clichés, “Manchester City football Club is undergoing a significant transformation and our financial results for 2009/10 reflect the pace of that process through rapid and ongoing investment in our infrastructure, facilities and professional capabilities.” English translation: we’re spending loads of money, so we’re making big losses.

Hidden among all the financials is Manchester City’s fifth position, which is their best ever finish in the Premier League, and represents some justification for this heavy expenditure. There is no doubt that the club’s prospects look brighter than they have done for some time, but it’s certainly cost them a lot to get here. When looking at the accounts, two areas in particular stand out: the huge transfer spend and the growing wage bill.

Since Sheikh Mansour’s arrival, the club has splashed out over £350 million in transfer fees, averaging more than £100 million each season. This marks a sea change for City, which had been a bit of a selling club in the preceding years, but there have been few signs of this outlay slowing down. In fact, this summer City spent around £128 million on new players, though they did recoup £28 million from the sale of Robinho, Stephen Ireland and others.

As surely as night follows day, transfer expenditure of this magnitude will also result in a significant increase in the wage bill and this has certainly been the case at City. Wages grew by 61% last season from £83 million to an incredible £133 million. This is still lower than Chelsea’s £149 million, though that should now be reduced after high earners like Joe Cole, Michael Ballack and Ricardo Carvalho all came off the payroll this summer. However, City’s wage bill has now overtaken three clubs: Manchester United £123 million, Arsenal £111 million and Liverpool £90 million. Incidentally, it’s also more than twice as much as Spurs (£59 million), the team that edged City out for the final Champions League qualifying place last season.

Actually, wages have been growing apace for the last few years (49% in 2008, 52% in 2009), but there’s still no end in sight, as the £133 million does not include the impact of this summer’s incoming players (Yaya Toure, Mario Balotelli, David Silva, James Milner, Jerome Boateng and Aleksandar Kolarov).

In fact, the wage bill alone is now higher than the club’s revenue of £125 million, leading to a wages to turnover ratio of 107%, which is considerably higher than UEFA’s recommended maximum limit of 70%. Just two years ago, the club had managed to stay below this guideline with a more reasonable ratio of 66%. Needless to say, the current ratio is the highest (worst) in the Premier League and far higher than Manchester United 44%, Arsenal 50% and even Chelsea 68%.

Off the pitch, the situation looks no better with the number of staff working in commercial or administrative activities also increasing by more than 50% from 146 to 223. The highest paid director, presumably Garry Cook, received a whopping £1.8 million, up from £1.4 million a year ago. This is exactly the same amount that Arsenal paid their chief executive, Ivan Gazidis, but the former MLS deputy commissioner managed to bring in a very healthy profit, while the Gunners once again qualified for the Champions League.

Of course, there was some good news in the accounts, notably City reporting revenue over £100 million for the first time in the club’s history with a 44% rise in turnover from £87 million to £125 million. Although chairman Khaldoon Al Mubarak said, “We are encouraged by the growth in the club’s capacity to generate revenue from various sources”, it is clear that the vast majority of the £38 million increase has come from commercial revenue, which rose £30 million from £23 million to £53 million. Much of this has come from “corporate partnerships” after new agreements were signed with a number of what could be reasonably described as “friendly” partners, including Etihad Airways, Etisalat, the Abu Dhabi Tourism Authority and Aabar.

This growth might be fairly impressive, but it still leaves City’s revenue way behind the traditional Big Four. Manchester United’s £279 million is more than twice as much, while Arsenal’s £223 million and Chelsea’s £206 million are £100 million and £80 million higher respectively. Even Liverpool’s recent disappointments have not prevented them generating £60 million more revenue than City.

Of course, none of this financial weakness matters too much while the owners are supporting the club and covering the losses by pouring in substantial funds. Their generosity went a stage further last year, as explained by Graham Wallace, the chief financial officer, “The financial foundations upon which the club operates have been strengthened with the conversion into equity of £305 million in shareholder loans.” A further demonstration of commitment from the owners came when they purchased an additional £189 million of shares, taking their total investment in the club to nearly half a billion.

It should be noted that City are not quite debt-free yet, as they still have £36 million of outstanding loan notes and bank loans plus £39 million provided for future stadium rent, giving gross debt of £75 million. If cash balances of £35 million are taken into consideration, the net debt is only £41 million, which is still very low, though the accounts also reveal that City owe other football clubs an amazing £81 million, most of which falls due within one year.

"What have I let myself in for?"

Manchester City’s strategy is eerily reminiscent of the one adopted by Chelsea, namely to invest heavily in new players with the objective of gaining success on the football pitch, thus generating significantly higher revenue that will ultimately be enough to cover the growth in costs. As celebrity City supporters Oasis would no doubt say, “it’s all part of the master plan.”

The CFO confirmed this, “the club’s overall financial performance for 2009/10 is in line with the Board and management team’s long-term financial and operating strategies and consistent with expectations at this stage of the financial process.” That’s all very well, but keen observers of football finances will have noted that Chelsea are still nowhere near self-sufficiency, even though they have been telling us for years that they are on course to break-even. Although they have in fairness been reducing their losses year after year, they still made a large loss last year of £47 million.

To be honest, this probably would not have mattered much without the advent of the UEFA Financial Fair Play Regulations, which aim to “introduce more discipline and rationality in club finances and to decrease pressure on players’ salaries and transfer fees.” Under this regime, clubs will have to balance their books and operate within their financial means. In other words, they will be required to break-even by spending no more than they earn.

"The only way is up"

UEFA have explicitly stated that clubs like Manchester City cannot continue making huge losses, even if they are supported by a wealthy benefactor. Although this initiative has no impact on domestic leagues like the Premiership, clubs that fail to make profits will ultimately be excluded from European competitions. Given the magnitude of City’s losses, it will be a major challenge (at the very least) for them to reach break-even, though Garry Cook said, “The plan is to grow the revenues further, control costs and have young players coming through to replace some senior players. We want to be sustainable and intend to comply with financial fair play.”

The first season that UEFA will start monitoring clubs is 2013/14, but this will take into account the losses made in the two preceding years, namely 2011/12 and 2012/13, so the accounts need to be in far better shape in just two short years.

However, they don’t need to be absolutely perfect by then, as billionaire owners will be allowed to absorb aggregate losses (so-called “acceptable deviations”) of €45 million (£39 million) over the three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million (£26 million) from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount). Of course, this is still a much smaller loss than City are currently reporting, so it’s hardly going to be a walk in the park to get down to the initial, softer definition of “break-even”.

UEFA have provided some assistance, as their break-even calculation excludes any costs incurred for what they term sensible, long-term investment like improving the stadium, training facilities, youth and community development. In this way, City’s starting point in UEFA’s template is £6.7 million better than their published loss, as it excludes £4.5m depreciation on fixed assets and £2.2m stadium finance lease charges, giving a revised loss of £115 million. OK, a little better, but still a long way to go.

Nevertheless, Manchester City appear confident of meeting the new requirements. As Cook said, “The last thing we want is not getting a licence to appear in the greatest league.” However, many appear sceptical, especially as City have not provided any details of exactly how they are going to achieve this minor miracle. Indeed, many believe that this will prove impossible, unless the club somehow discovers some loopholes in UEFA’s regulations.

I’m not so sure.

Having taken a close look at the financials, I believe that City could legitimately be in line with the guidelines over the next few years and have prepared a 10-point plan to show how they could make it.

At this point, I should emphasise that the actions I suggest are by no means the only way of reaching break-even, but they should demonstrate that this objective is not as unfeasible as some believe. This plan assumes that the club’s owners would not be overly concerned about investing even more capital, nor about making lower profits in some parts of their organisation. In other words, this would not necessarily be the best use of their resources, but this would not be an issue, as the primary objective would be to get down to the elusive break-even target.

1. Wages

The first thing to say is that the financials will get worse before they get better, as the impact of the new players arriving this summer is reflected in the accounts, though this is partially offset by players leaving. We do not know exactly how much each player is paid, but we can make some reasonable estimates.

My assumed weekly salaries for those coming in are as follows: Yaya Toure £200k, Mario Baolotelli £150k, James Milner £130k, David Silva £120k, Jerome Boateng £100k, Aleksandar Kolarov £100k. That would increase the wage bill by £42 million a year.

"Yaya Toure - does my bum look big in this?"

Against that, City sold Robinho, Stephen Ireland, Valeri Bojinov and Javier Garrido, while they also released Benjani, Sylvinho and Martin Petrov. We know that Robinho was a high earner (reportedly £160k a week), while I would expect Ireland to be on around £70k. The others were recruited during a less spendthrift era, so let’s assume an average £40k here. All of this would mean £22 million coming off the payroll.

The net impact of these movements is an increase of £20 million in wages to around £153 million. This year’s accounts also include a severance payment to former manager Mark Hughes and his team, which may or may not be repeated next year, depending on Roberto Mancini’s ability to survive, but it’s immaterial in any case.

Of course, City might bring in even more players in January, though not to the same extent, if you believe Garry Cook, “It is safe to say that player acquisitions on the scale we have seen in recent transfer windows will no longer be required in the years ahead now that we have such a deep and competitive squad.”

Another possibility that would help reduce the wage bill is offloading players who are no longer wanted, either via loans (like Craig Bellamy to Cardiff City and Nedum Onuoha to Sunderland) or selling them at a loss. We can anticipate the club selling the likes of Roque Santa Cruz and Jo at generous prices in order to get them off the books.

"Robinho flying off to Milan"

Such sales have a triple whammy effect, as they also reduce amortisation and potentially bring in a profit on sale (if the price is higher than the remaining value in the accounts). If we take Robinho as an example: he was bought for £32.5 million in September 2008 on a four-year contract, so annual amortisation was £8.1 million. He was sold after two years, so cumulative amortisation was £16.2 million, leaving a value of £16.3m in the books. Sale price to Milan is reported as £18 million, so City will report a profit on sale of £1.7 million in the 2010/11 accounts. Therefore, City will show an annual profit improvement of £18.1 million after this deal: £8.3 million lower wages + £8.1 million lower amortisation + £1.7 million profit on sale.

In my plan, I have assumed that there will be negligible profit on sales, effectively maintaining the £10 million that was booked in 2010, which is a relatively low figure for a top club, but seems a reasonable estimate in the specific case of Manchester City.

In the long-term, City would hope to progress their youth players into the first team, replacing some of the expensive imports. This was explained by Brian Marwood, the exotically titled chief football administration officer, “For both financial and strategic reasons, it makes sense for Manchester City to develop and draw upon as much talent as we can from within our own academy and development squads in the future.”

Finally, once the club establishes itself as a regular presence in the Champions League, they should no longer have to pay players over the odds in order to attract them to the blue half of Manchester.

"Super Mario"

2. Amortisation

As we have seen in the Robinho example above, when a player is purchased, his cost is capitalised on the balance sheet and is written-down (amortised) over the length of his contract. Importantly for Manchester City, this means that the cost of their recent purchases will have an impact on their accounts over the next few years via the amortisation charge.

We can see this effect over the last four seasons, as amortisation has grown significantly from £6 million in 2007 to £71 million in 2010. To place that into context, the next highest in the Premier League is Chelsea at £49 million, though they did get as high as £83 million in 2005 after their own version of supermarket sweep. Even big spending Barcelona and Real Madrid have lower player amortisation than City at £61 million and £55 million respectively.

Like salaries, any calculation here involves a degree of guesswork and is influenced not just by the players coming in, but also those leaving the club. The Guardian estimated £75 million for the 2011/12 season, but I’m going to be more conservative and assume that it increases by £10 million to £81 million.

"In good Kompany"

3. Premier League

Although City’s television revenue has been partially influenced by cup runs, notably £6m in 2009 for reaching the quarter-finals of the UEFA Cup, the vast majority of their money comes from the Premier League central distribution. City received £50 million this season, which was a £10 million improvement on the previous year, thanks to a higher merit payment (after finishing fifth compared to tenth) and more matches broadcast live on television. Next season, like other clubs, they should receive a further £10 million increase, as the new Premier League 2010-13 deal kicks, following the much higher sale of overseas rights.

4. Champions League

A key element of City’s business plan is to qualify for the Champions League, which has been so beneficial from the financial perspective to the Big Four. Last season, Chelsea earned £28 million for reaching the last 16, i.e. qualifying from the group stage, which would be a reasonable aspiration for City. Prize money will slightly increase, so this should be worth at least £30 million in the future. Of course, reaching the Champions League would also bring in higher gate receipts (assume £3 million) and trigger higher payments from sponsorship agreements (assume £5 million).

"Hart of gold"

5. Commercial Revenue

The real success story in the accounts was the 125% increase in commercial revenue. City 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, which helped retail sales and merchandise revenue rise 60% to £8 million.

This is the area where those fans who have not bothered to plough through UEFA’s regulations (and who can blame them?) see an easy way to reach the target. Why doesn’t the Sheikh sign a £200 million sponsorship deal? Or pay £50 million a season for a super-VIP executive box?

Unfortunately, that simply will not fly, as UEFA have introduced the concept of “fair value” so beloved of tax authorities when reviewing inter-company transactions. In short, if an owner over-pays for services, this will be adjusted down to market value, i.e. what the club would have received if the transactions were conducted on an “arm’s length” basis. Obviously, there is still some scope for manipulation, but the most blatant excesses should be prevented.

"Garry Cook - a lot to think about"

Having said that, even within these limitations, there is still scope for improvement, as City could point to much higher shirt sponsorship deals with other Premier League clubs. For example, the Etihad deal is worth £7.5 million this season, compared to the £20 million received by Liverpool and Manchester United from Standard Chartered and Aon respectively, so there’s a potential £12.5 million increase right there.

My plan assumes that City could easily justify an increase in their commercial revenue to the same level as Manchester United, which should be around £80 million this season. City’s current revenue here is £53 million, but I have already added £5 million for Champions League qualification, so that implies further growth of £22 million.

Of course, this is still a long way short of the astonishing £136 million commercial revenue earned by Bayern Munich, which is made up of numerous commercial deals, so there is possibly even more capacity for revenue growth here. It might be difficult for UEFA to argue against a club securing many £5 million deals, which could add up to a tidy sum.

"Would you Adam and Eve it?"

6. Loans

Interest charges have already fallen considerably from £17 million to £4 million following the conversion of shareholder debt to equity, but the club could presumably also pay off the remaining bank loans early to completely remove interest payments. This might not be the best move financially, as it would almost certainly involve penalty payments, but remember that our objective is to reach break-even.

7. Cash

Similarly, the club could generate interest income if the owners are willing to tie up capital in the club’s bank account. As we all know, interest rates are very low at the moment, so that means a lot of capital would be needed to produce relatively small amounts of interest. I assume that UEFA’s fair value review would also more than raise an eyebrow if the cash balances were ridiculously high for the club’s operational requirements. However, Manchester United’s last accounts included £151 million of cash (albeit boosted by the £80 million received for Ronaldo), while Arsenal’s cash balance stands at £128 million. Therefore, I think City could get away with, say, £167 million which would generate annual interest of £5 million at a rate of 3%, which should be achievable.

"Room for growth"

8. Stadium

Although ticketing revenues increased by £3 million to £18 million in 2009/10, thanks to extended runs in the FA and Carling Cups, City’s gate receipts are still extremely low compared to other Premier League clubs. As a shocking comparison, their neighbours Manchester United trouser £109 million from match day revenue.

Unfortunately 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. The rental payments are based on a formula whereby the club retains receipts up to the 34,000 capacity of Maine Road, their old ground, but has to pay 50% of any revenue above that to the council This means that City do not fully receive the benefit of higher attendances, as it just means more rent paid to the council.

There has been some talk that the club would seek to buy the stadium from the council, but recent reports indicate that it is more likely that they would try to renegotiate the terms of the lease to a flat fee. This would be higher than the current payments, but would allow the club to get more benefit if they expand the capacity. This has certainly been discussed as part of England’s bid to host the 2018 World Cup - possibly to 75,000, but more realistically to 60,000, including more corporate hospitality facilities.

"Born offside"

City’s average attendances have been continually rising over the past few seasons from 40,000 to 45,500, which is now the third highest in the Premier League, though worryingly this is still short of the 48,000 capacity. Clearly, there must be some doubt about City’s ability to fill a new stadium, but if the team is successful on the pitch, you would have to assume that this would draw higher crowds.

In any case, given that Liverpool earn £43 million of match day revenue from the 45,000 capacity Anfield, it does not seem unreasonable to assume that City could at least match that, which would imply an increase of £25 million from the current £18 million.

9. Naming Rights

I would be surprised if any discussions with the council about the stadium did not include the possibility of renaming the stadium. It’s not quite the same as Arsenal naming their ground The Emirates, as this was a brand new ground, but it’s not as if there’s an enormous amount of football tradition associated with Eastlands, so I would not anticipate much (if any) resistance from the supporters. It’s difficult to put a price on naming rights, as there are very few comparatives available, but I don’t think £15 million a season is totally unrealistic.

10. Sportcity Development

Manchester City are planning a £1 billion development for the area around Eastlands stadium. Described as a world class sports and leisure complex, Sportcity will include training facilities for a number of sports, conference halls, a luxury hotel and restaurant. Although there will obviously also be high costs associated with this project, it should still provide very healthy profits.

As a rule, revenue from non-football operations is excluded from the break-even calculation, but clause B. (k) in Annex X allows clubs to included revenue (and associated expenses) 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”, so long as these are closely associated with the club. Sound familiar?

Candidly, I have no idea what this could be worth to City, so I have included a notional £150 million turnover, which might produce £30 million profit (at a 20% margin). As Bruce Forsyth would have said in “Play Your Cards Right”, it could be higher or lower, but I don’t think City would invest so much time and money in such a development if the returns did not justify it.

So there we have it – how to turn a £121 million loss into a £4 million profit in ten easy steps. Of course, this plan includes lots of ifs, buts and maybes, but it should at least prove that City’s task is not completely out of the question.

"Roque fights on"

Some of the actions, like developing the stadium and Sportcity, are longer-term in nature, but my guess is that UEFA might make an exception for these, so long as City could demonstrate that the plans were very advanced, especially as they would bring a lot of benefit to the surrounding community with the continuing regeneration of East Manchester.

If this argument is not approved by UEFA, then at least this exercise highlights how much City would have to improve by growing revenue and reducing wages and player amortisation, if they want to meet the target.

The cynics among you would no doubt suggest that all of this is unnecessary, as City will just employ an army of lawyers and accountant to locate the loopholes. Call me naïve, but I would like to think that clubs would not resort to such subterfuge. In any case, UEFA are clearly no mugs, as they have addressed some of the more obvious ways of getting around the new regulations.

For example, many clubs these days have an intricate inter-company structure and there were fears that a club might argue that the football club itself was profitable, while large expenses such as interest payments were paid out of a different company. Clearly, that does not make sense to any reasonable man and UEFA have caught that one, “If the licence applicant is controlled by a parent or has control of any subsidiary, then consolidated financial statements must be prepared and submitted to the licensor as if the entities were a single company.”

"The flying Dutchman"

Others, including the venerable David Conn and the bearded Martin Samuel have suggested some accounting trickery, whereby City would choose to book all the huge transfer spend now as a cost, so that it would not impact future accounts. It is true that UEFA's regulations do allow football clubs to choose "an accounting policy to expense the costs of acquiring a player’s registration rather than capitalise them", but this must be "permitted under their national accounting practice."

This is highly technical, but in my view this is where their argument falls down. Ever since the introduction of IFRS (International Financial Reporting Standards), in particular FRS10 on Goodwill and Intangible Assets, major clubs have used the capitalisation and amortisation method to account for player transfers, so it would be difficult for City to argue that the "income and expense" method had suddenly become appropriate.

In fact, this discussion may now actually be redundant, given that City did not change their accounting policy this season, unless they decide to book a massive impairment provision in 2010/11 (the last year where the accounts are excluded from UEFA’s calculations), dramatically reducing the value of their players in the accounts and reducing future expenses.

In my opinion, this would be blatant earnings manipulation and would not be accepted by UEFA. Ultimately, they will look at the intention of such operations. People often say that the devil is in the detail, but sometimes it's worth stepping back a little and applying some good, old-fashioned common sense. I know that doesn't always work, especially in the legal world, but that's surely the intention.

"That's the spirit"

But will the regulators have the bite to go with their bark? Expelling teams from European competitions works fine on paper, but it might never happen in reality, especially when you consider that Europe’s most indebted teams are among those that attract the largest television audiences. Would UEFA really bite the hand that feeds?

Yes, if you believe Gianni Infantino, UEFA's general secretary, who said, “There may be intermediate measures. We would have to ask why, maybe there would be a warning, but we would bar clubs in breach of the rules from playing in the Champions League or the Europa League. Otherwise, we lose all credibility.”

We shall see, but it need not come to that for Manchester City. As we have demonstrated, it is perfectly possible for them to reach break-even. Of course, this is in no way a fait accompli, but it can be done. Frankly, it would beggar belief if City’s management did not already have a plan in place, but if by some chance they haven’t, mine is available for the usual fee. I’m sure they can afford it.

107 comments:

  1. great article again, also i didn’t the conclusion :)

    this whole mancity thing seems still very dubious to me. we are talking about a sheik investing up to 2bil for a champions league playing football team.

    if we look at it individually, i agree with you (even so i hate it) that, mansour could lift the income via commercial deals into similar regions as man uniteds or arsenals. also gate receipts could be increased to the level of liverpools. i guess amortisation will go down as well, as the biggest transfers are completed i think. as i understand it they could reduce amortisation even further by extending contracts long term next season (i think this was discussed here at your last man city piece).

    but i dont believe that player salaries will reduce significantly, quiet the contrary. even so they could reduce the squads size (which often goes hand in hand with compensation payments) they might have to adjust the salaries of lower profile players. In germany we call this "Gehaltsgefüge". its just unhealthy if your top players earn 10mil/year, while lets say a youth player in the first team earns 100k. even more importantly new top stars often want to earn more or at least not less then the highest paid player, the same goes for contract extensions of high profile players. I believe chelsea had this problem with lampard, balack, terry and drogba.

    in conclusion they need a turnover similar to that of barca or real madrid (the resolution of your now/ future overview is very low, could only guess 400 mil there) while receiving less “easy” or “cheap” money from tv rights. so it really comes down to the question whether uefa will accept that the first income and therefore first profits from this sportscity complex as well as a new or modernized stadium is due in a few years.

    hopefully not

    cheers robert

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  2. A Brilliant and fascinating piece.

    I have no doubt that City have a plan in place to ensure they will be able to compete in Europe. It would be negligent of them not to.

    From the perspective someone from the red half of Manchester the implications of financial fair play rules is something of a comfort. City will probably be able to break even but such massive expenditure on players will be impossible.

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  3. First time visitor to this blog having just seen a link posted on a Man City forum.

    This is by far and away the best article I've seen about City and their finances and, for this "old blue", I would like to thank you for that. Great work sir.

    I now look forward to going back to your other blog posts.

    Peter Orange

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  4. I believe one consequence of the new UEFA rules is that relatively less money will come into football. So, clubs will have to control their wages budget more than now, probably meaning less wages for the average and second-best players.

    Especially clubs with strong youth departments (like Manchester City), will be in a position to renegotiate players contracts in terms of "more years, longer security, less annual income". Already this summer, we have seen the problems players could face in finding new employees willing to pay the wages they demand.

    Add to that, the players who will suffer most from the rule about "homegrown players", are second-best/average players in the age of (say) 23+. Surely, many of those would agree longer terms for less money than today, for the sake of job security and top football.

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  5. Oh, great article, by the way! :)

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  6. very interesting article but as you said there are a couple of big ifs.

    For instance this sport city business sounds suspiciously like Chelsea village, which was so unprofitable it nearly bankrupted Chelsea, even though it was situated in the heart of london. How is an equivalent facility going to generate profits in the wastelands of east manchester?

    Similarly, I'm not sure that man city are going to find it so easy to get players off the wagebill. You highlighted robinho, and the virtuous triple effect on wages, amortisation and trading profit. However, given that nearly every major club in europe is going to be trying to desperately reduce their wage bill, who is going to spend a fortune on man city's rejects?

    While some players will gradually have their contracts expire, like bojinov and petrov, it's going to take a couple of years for the players signed under the current regime to start leaving the club, and they're the real deadweight.

    I mean who is going to be remotely interested in signing disabled centre-forward roque Santa cruz, who has nearly 3 years of his 80,000 a week salary left.

    The only way that they're going to be able to shift players is by using them as makeweights like stephen Ireland, but it's not really saving money, if that player is being replaced by a much more highly paid, amortization heavy player like james milner.

    Also Stephen ireland must be laughing his backside off at the idea that city are going to fill the squad with academy players. City are in the process of squandering the best crop of young players they've had in decades, and replacing them with incredibly expensive players.

    Are we seriously supposed to believe that in four or five years time, when man city are expecting to be challenging for league titles, and trying to win the champions league that they're going to start introducing 17 year old centre halves?

    Chelsea have been spinning this yarn for nearly a decade now, and they've spent 30-40 million on young players who have never made it anywhere near the first team. Young players are only making it onto the chelsea bench now, because they're trying to cut costs by getting rid of squad players, leaving them with a team of 30 something year olds, and a bunch of 17 year olds on the bench.

    If city look across manchester to Old trafford, where there are a relatively large number of home grown players in the squad, and an academy that keeps churning out players that wind up with careers in the premiership, united produce a squad player like wes brown, or john o'shea, or darren fletcher, roughly every two years or so, and even then, the manager has to keep picking them against the wishes of most fans.

    There's no evidence that man city are ever going to do anything like this. They're just going to keep spending money on players until they eventually start winning stuff, and won't really care about the consequences.

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  7. @Greener,

    I tend to agree that that the wage bill will not come down in the short-term. That is why this plan assumes that it increases by £20 million.

    Having said that, it is clear that part of City's longer-term strategy will be to reduce salaries. Even Chelsea have now started to produce players from their academy, while reining back on big money transfers and offloading some high-earners from their payroll. As you rightly say, this has not been enough to break-even yet, though I would think they will be very close in the next set of accounts but one.

    Clearly, it is not going to be easy to sell some of the "forgotten men" like Santa Cruz and Jo, but it is conceivable that they could be sold at a bargain price (or even free). Yes, the wages would be an issue, but that does not seem to have prevented a few players being offloaded in this way this summer. Again, this potential reduction has not been built into my calculations.

    Sportcity is indeed a difficult one to quantify. I have seen estimates of huge money coming from this, but I don't consider that likely for the same reasons you gave. However, a relatively small profit is not out of the question.

    Let me be clear on this: I don't think that it will be easy for City to reach break-even by any stretch of the imagination. On the other hand, it's not completely impossible - as some commentators imagine.

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  8. Regarding Sportcity, could City not just build and rent this out, say £30-40m per annum, to a "friendly" company who operates the site.
    Any losses this "friendly" company incurs is "helped" out.
    Or is this covered by the "fair value" rule.

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  9. If any of this happens, I'll streak through the Eastlands naked.

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  10. it's a bit early to say that chelsea's academy is producing players isn't it? I mean those players are 17 years old, have about an hour of league football between them, and are very far from being ready to step into the first team. however the squad has already been pared back. Compared to previous seasons Chelsea are now just a drogba/terry knee-knack away from total disaster.

    Similarly man city already have a really good academy, operating at the top of it's game, but those players aren't considered to be good enough to play for man city. It is unclear how those players are ever going to be good enough, unless city start producing 18 year old superstars that are already good enough to slot into any team. Is it going to be any easier for these players to get in the team in three or four years time?

    I still think that a £20 million rise in wages is very optimistic in the extreme. City have filled their squad with B-list star players, like the toure brothers, james milner and Emmanuel adebayor. They're going to want to buy better players than these. However they're already paying these players A++ list star player wages, so any incremental improvement is going to be vastly more expensive.

    You could particularly see city going all out to sign a couple of big name centre halves because kolo toure and joleon lescott don't necessarily inspire that much confidence.

    You also have to bear in mind that a lot of the players that they've signed would test the patience and man management skills of much better managers than mancini. Adebayor is a professional disgrace, and No manager needs to have mario balotelli doing his weird thing in the corner.

    Carlos Tevez seems to have lost the run of himself as well. and in a situation like that, it's likely that the manager leaves, and the player follows. While it is easy to see a club being prepared to sign tevez, you could easily see adebayor and balotelli becoming Robinho mark II and III.

    I think there's another factor that you have to bear in mind as well. Garry cook is a bona fide, grade A 100% bombastic moron, who seems to have no function other than upsetting people and driving up the already inflated prices that City are paying for everyone. He's like a hyped up version of peter kenyon in his early days at chelsea.

    It will be interesting to see how long man city are prepared to give roberto mancini. Any new manager is going to be a step further up the management chain, and is going to have his own ideas about his own type of players, and this means further turnover of players with the concommitent increase in wages and amortization.

    I mean yes it is possible that with the help of god and two policemen, and with the fall of ground behind them and a strong following wing, man city could conceivably break even at some point in the future. But smart footballing and commercial decisions just really aren't the man city way are they? This is man city we're talking about after all. They exist to punish their fans and amuse everyone else. It's a near certainty that they're going to win the premiership and be excluded from the champions league.

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  11. @Greener

    What a sad rag you are !

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  12. Perhaps what will happen will be two Champions Leagues: UEFA's for the spendthrift while the profligate will be in a league of their own.

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  13. @Greener,

    Lots of good points (and I'm smiling at your description of Cook). Your scenario is obviously at the other extreme to City reaching break-even. Time will tell.

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  14. Boyata, Cunningham, Ibrahim, Vidal, Nimely, Mee - just a bunch of youngsters given their debuts in this or last season.

    Time will tell on City's financials, indeed, but as Dave said it, @Greener, what a sad rag you are!

    Excellent article, btw!

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  15. I don't know if i'd characterize it as that. Surely there's a whole continuum of possible outcomes, and city breaking before 2014 is at one improbable extreme, and I'm somewhere in the middle.

    Come on Blue Dave, you know what your club is like more than I do. They've broken your heart a thousand times.

    I mean they sold four time player of the year richie Dunne for 6 million, replaced him with the hapless lescott and the declining toure, and saw him make it straight into the PFA team of the season while lescott spent the season running into toure. They sold him all because his name "Didn't roll off the tongue in Beijing."

    I have a memory that stephen Ireland won the player of the year award in 2008-9, and was widely hailed as the best city homegrown player in living memory. A hardworking, goalscoring, creative box to box midfielder. He was cast to one side by mancini and used as a makeweight to sign the ploddingly mediocre milner.

    your best player over the entirety of last season now plays for cardiff and you're paying him over £50,000 a week for the privilege, and now your best player by miles is fighting tooth and nail with your manager.

    It's not the greatest recipe for success is it?

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  16. @Greener Dunne won PoY because we had a crap squad. Lescott is the superior player. Check out Villatalk for some current opinion of Dunne. City have conceded 3 PL goals so far this season with Kompany & Toure at CB. How many goals have United conceded ?
    Ireland had one good season playing with Robinho & Elano - talented player in the right system but it is doubtful he will reproduce. I am happy with the trade, again there are many Villa fans who think they have been had - I tend to agree with them.
    Bellamy was not our best player over the course of the season, that would be Tevez.
    As for Tevez I wouldn't believe everything you read in the press and of course SAF never fell out with any of his players (lol)
    As a general point I would say to you to concentrate your posts on things you know something about - United maybe - it saves looking stupid and bitter !

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  17. Greener, have a look at any Villa forum lately and you'll see what they think of Dunne and Ireland - City are a better team without them. For Ireland to shine, one has to build the team around him, otherwise he cannot function effectively in different formations - versatility is not a word I'd use to describe the player. Dunnie was a good servant for City, but he's not a top 4 player, otherwise he'd be playing for a top 4 club.

    As for Bellamy, everyone and his dog knew full well that he was on borrowed time after Hughes left - his record of working well with other managers is not exactly stellar. His injury issues were also becoming a problem, so it made sense for all parties concerned to go their separate ways.

    No doubt there will be more drama at City in the future, but ADUG are not fly-by-night types like the Glazers or Gillette/Hicks - one way or another, City will succeed. Whether you like the way that success is achieved is irrelevant.

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  18. Another great article (no idea how you have time to write this stuff). I do however strongly disagree with your conclusions. You set out such an unlikely scenario to produce a tiny profit that your article serves only to confirm that City CAN'T break even anytime soon. Even with a SportsCity business producing £150m turnover and £30m EBITDA, the club only just makes it. What does this £150m turnover, high margin, East Manchester business actually do? As others have said even similar football club related businesses in the richest area of the richest British city have failed to generate significant profits. And that is before we even dissect the other enormous revenue generation and cost savings envisaged. Ex the SportsCity business you are suggesting the club can quickly generate Man United type revenue. Really?

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  19. @greener
    I think you may be right about Agreedybayor. He seems more comfortable flouncing around on a stage as a member of some shite boyband rather than knuckling down as a serious footballer.
    As for Tevez, where do you start?
    Has he spent more than two years at any club in the last 7 or 8 years without causing mayhem, falling out with managers, owners etc.?

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  20. @stefanborson,

    As I said in the article, the Sportcity figures are a "finger in the air" estimate, though it would be surprising if the club were to invest so much into this development for an insignificant return.

    The other revenue growth is quite possible, I believe:

    - Premier League TV increase is virtually guaranteed, if City finish in the top four.
    - Champions League revenue is a reliable estimate, especially the UEFA central distribution, though clearly this depends on CL qualification.
    - The increase in match day revenue only assumes an increase to the £43m currently earned by Liverpool in a 45,000 capacity stadium. This is far short of Man United's match day revenue of over £100m.
    - The only revenue stream where I have assumed growth to Man United levels is commercial, which is much more within City's control, due to the availability of "friendly" partners, not to mention this is Garry Cook's speciality. I would also include naming rights under this description.

    Granted, for the plan to work, all of these factors need to happen, which is far from a done deal, but none of the assumptions is wildly outlandish.

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  21. @Ole Gunner,

    "If any of this happens, I'll streak through the Eastlands naked."

    Well, there is an extremely good chance of the Premier League revenue increasing, given that the central deal for the period 2010-13 has already been signed, so maybe you should invest in a willy warmer ;-)

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  22. @swissrambler

    I realise its an estimate but SportsCity is such a key part of your hypothesis - without that £30m the club loses £25m even taking all your assumptions. This may be harsh but using SportsCity is a bit like hard coding a balance sheet to make it balance.

    But lets put SportsCity to one side.

    I'm with you on Premier League. I'm happy on Champions League (although it assumes a fairly rapid emergence from nowhere to contender). But I don't see how City can go from £18m to £43m even if Liverpool achieve that.

    Matching Liverpool assumes City can sustain huge increases in average seat prices AND sell out a number of Cup/Euro games - in the short term, £43m is pie in the sky. How quickly can a club raise prices? Remember that this essentially means taking an AVERAGE of another £600 per fan per year (£400 per fan now to £1000 per fan). So for a large proportion (excluding the kids and the OAPs) this will mean over £1000 extra spent at MCFC a year. And thats just the home games! Can City fans really afford this in these economic climes?

    Commercial revenues are currently not arms length (the growth tells you that immediately) so whilst I can accept that there is a myriad of ways Abu Dhabi COULD fund commercial deals, only a primitive UEFA regime would accept these as genuine. Any more than the current commercial revenue puts the club above Milan, Inter and Juve. Surely no brand expert would accept that.

    One thing I am sure you would accept is everything here is maxed out. This is best case not base case.

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  23. ah now lads, I'm not arguing that richie dunne is the best player in the world. I'm from Ireland, and I have a very good appreciations of the strengths and weaknesses of both dunne and Ireland.

    The problem is with the decision processes involved in their departure from the club.

    Richard dunne was club captain, and a fine centre half, if a little slow on the turn, but he's about as good as john terry is, (Terry has fallen a long way since 2006) he was a strong player and a good personality to help with the transition between the new man city and the old one, and a player who would be prepared to help others bed in.

    However garry cook and the city board decided that he was *old man city* and needed to be replaced by someone new and shiny, whose "name would roll off the tongue in beijing", so they bid over £50 million for john terry, a player no better than dunne, and the sort of man who bangs his best friend's girlfriend.

    he didn't want to leave so they settled for joleon lescott, a player that would be paid twice as much, and would cost five times what they got for dunne, and would be about a third as good.

    My point isn't that dunne is the best player in the world, My point is that selling him to aston villa was incredibly stupid. and indicated that the people at the top of the club aren't really running things on primarily football grounds.

    Stephen Ireland is a bit of a nutter truth be told, but he's a fantastic footballer who works his balls off if you get him interested. But the thing that killed him is that while he may have been good enough, he just wasn't famous enough.

    mancini probably had never heard of him before he saw him in training. instead he prefered to pick the 76 year old patrick vieira, a player who didn't have the legs to play premiership football in 2005.

    The problem here is that the chronic instability brought about by the massively raised expectations means that good players that need an arm around their shoulders just won't get it. also you are only as good as your last training session.

    This is a problem for manchester city. They've just spent £25 million on mario balotelli, the craziest man in Italian football. A man who makes stephen Ireland look like ken barlow. Also what message does selling stephen Ireland, a youth academy product, who won player of the season send to the young players at the club?

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  24. @ bloovic

    Craig bellamy is indeed a total headcase, however he was your best player over the entirety of last season. (Tevez only scored in 2 of his first 15 league games, hughes must hate him for only turning into goal monster after he left)

    Now he plays for cardiff, and you've spent over fifty million pounds, on talented frail midget Silva, and beefy, plodding James, and are paying them over £300,000 a week between them. Neither of them is a winger, and neither of them is ever going to turn in the performances that bellamy did against man utd or chelsea away last season when he was like a rocket fuelled by anger, malice and spite.

    Neither can either of them do what martin petrov could do the odd time he wasn't on crutches.

    What this seems to highlight is that man city aren't really thinking all that much about who they should sign. That and a theme that is becoming a recurrent problem. Your best players are crazy and need careful managing.

    Because for all of his brilliance carlos tevez seems to be rather mad. If he was looking to sign a permanent contract at old trafford, his campaign of public pronouncements, on pitch gesturing, and chronic inability to score goals in his second season really was just about the worst way to go about it.

    At man utd this had one outcome. The manager stayed, the player left. At man city, while you can't believe everthing you hear, there is obviously something really bad going on between tevez and mancini. And since tevez is the goalscoring superstar It looks like there will be another change of manager.

    This will lead to another bunch of new players signed, more expense incurred, the club derailed again for another period. But how long before we hear the inevitable "I don't like the weather, It's always been my dream to play for Real madrid blah blah blah, because while city are paying him twice what united were, Real madrid can pay him even more, and he'd get to live in madrid, where the weather is better, and the people speak spanish.

    For all of the clubs proud tradition, and the loyalty of the fans, City have never been a stable club, or a particularly well run club. This hasn't changed, and the addition of enormous amounts of money, while bringing a better quality of player, has only made this side of things worse.

    This instability, and odd decision making will make it impossible to hit these break even targets, whatever increases in income they manage to sneak past the uefa accountants.

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  25. @stefanborson,

    Have to disagree, I'm afraid.

    As I pointed out, City do not have to reach break-even from day one of the UEFA regulations, because of the acceptable deviations, so Sportcity is not necessarily a key part of the hypothisis.

    Nor am I assuming that City become a contender in the Champions League. If they manage to qualify, then all I am assuming is that they get out of the group stage, reaching the last 16.

    The assumed increase in match day revenue is not just about increasing ticket prices, but is more linked to increasing capacity, installing more corporate hospitality and renegotiating the agreement with the local council. I purposely took Liverpool as a comparison, as: (a) they have a small stadium; (b) it's a similar locale. If I had taken Arsenal as the benchmark, that would have been absurd, but I don't consider Liverpool to be unrealistic.

    I agree with you that the growth in commercial revenue has largely come from related partners, but think that it's an easy argument to make to, say, increase short sponsorship to the same level as Liverpool, especially if they fail to qualify for the Champions League again.

    In short, this is an optimistic case, but it's by no means the best case.

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  26. @ greener
    "For instance this sport city business sounds suspiciously like Chelsea village, which was so unprofitable it nearly bankrupted Chelsea, even though it was situated in the heart of london. How is an equivalent facility going to generate profits in the wastelands of east manchester?"

    No comparison. Manchester City FC is the flagship for develoment around Eastlands and SportCity on a scale and concept more comparable with the Olympics site. Ambitions are way beyond a Chelsea Village. MCFC has a long tradition of working with Manchester City Council and in the community. That will continue in what will be regeneration of the whole area which is close to the City Centre. Manchester City, the Council and partners have already secured vast tracts of land which is being cleared for joint development. Trafford Park and the docks around United's Old Trafford ground in the 1960's was on a par with the Isle of Dogs in London at its worst. Both are now landmark sites.

    ADUG have bought into brands like Ferrari. Manchester City had the potential to rival football brands such as Man Utd, at a lower cost and with more kudos. History shows that teams who spend most on players and salaries win most and generate most income. The first step is to create a winning team. With the EUFA rules investments in players have had to be brought forward.

    Investing in greater stadium capacity is already on the cards with the recent renegotiation of the terms of the 250 year lease on CoMs to a fixed rate. City Square has just been opened as a meeting place which will also generate additional revenue over existing F&B outlets.

    Already, foundations are going down to trade on City's successful player development through a global network of football academies. In time they will generate revenue.

    It is planned to locate City's main training facility next to the ground. Incorporated will be the kind of office, hotel, leisure and restaurant facility that EUFA deem can be associated with football revenue. No accident that Gary Cook is CEO with his sports marketing background with Nike.

    Overall I think Swiss Rambler has been conservative in his assessment of the sustainability of City's finances. Chelsea understood as did certain top European clubs and as do ManU now.

    The core expertise of ADUG is development and this is where they stand to make a real return on their investment. Not many inner city sites available in the world in stable, established regenerating economies as in Manchester with all the investment in infrastructure in place, tramlink, international airport rail link main rail and planned Eurostar terminal within walking distance.

    ADUG chose carefully and well. No doubt that timescales and impact has been planned to revolve around MCFC requirements who incidentally met with EUFA last week.

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  27. spiny, do you by any chance work for ADUG, manchester city, or their PR Firm?

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  28. A cunning plan with many risks, not all under Man City's control to reduce or avoid.

    If I were being asked to invest in a company with the prospectus set out here for it's success I would be very wary.

    All those gears having to mesh to gain the CL entry that provides the oil for the same gears to keep on rolling. Risky.

    All it takes is one season without CL and the system creaks, 2 and it grinds to a halt.

    Man Utd for example look a tired outfit compared to a couple of seasons ago because they have not/could not refresh to previous player levels. If they make top 4 it will be because of failings at Arsenal, Spurs and City, not how good they are. Chelsea look a given.

    This CL dependency for survival is not a good thing for football, it makes clubs desperate and undermines the integrity of the game. I digress.

    Smashing article and not outside the realms of possibility but if a sheik can buy Man City anything can happen.

    I suppose the sheik knew at the time he was deciding to buy Man City that UEFA FFP rules would actually become law and that was part of the plan? Or have other big clubs just outmanoeuvred him?

    Nothing against Man City, seemed a decent club but for the sake of the game I hope they fail to make the cut.

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  29. City is a giant marketing tool, to advertise the westernised Abu Dhabi. The owners, will make sure City will be successful on and off the pitch.

    City Square is starting example of things to come at Manchester City. It's an incredibly effective way or making revenue, some thing replicated across Europe but not in England. Over the next few years, the developments will be impressive. Yes, the land opposite the ASDA site will be new training complex/academy, like Milans. Shops, Hotels, and the like will be built around the complex, along with large investment in the surrounding area, for re-development.

    City have already created links with company's such as ferostaal, which is a Abu Dhabi linked company, these links wil continue to flourish and prove fruitful.

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  30. @swissramble

    Its easy to feel like the boy who spotted the Emperor was naked when reading the incredible growth stories I have been reading here and elsewhere.

    On Champions League - its all about definitions- reaching the last 16 would be a remarkable development for a club that hasn't ever played in the Champions League and is a pre-requisite every season. We agree on that much.

    On matchday revenue, I didn't realise this factored a redevelopment of the ground. Adding 20k-30k seats and somehow selling them out at substantially higher prices than today (as a City fan I have to say I dont believe we have that level of latent support or United/Arsenal/Liverpool tourist support or Chelsea style business following) would of course produce huge increases in revenue. But that is a 5 year game and you haven't increased costs accordingly. More corporate boxes is also fine but where is the business coming from? The Manchester economy is not big enough to support 2 major Champions League corporate hospitality opportunities. As for the deal with the council, the current deal doesn't restrict revenue but costs rise with crowds over 34,000 (although the deal appears to have changed (http://tinyurl.com/3af4taa))

    Optimistic?! You are suggesting that in relatively short period (although I am not sure how long) that City could generate the 4th largest football income in the world and even then it needs a major non football subsidy to trade profitably. I'd say this was asking a lot.

    As for those claiming the patch of scrubland opposite Asda (exactly) can become some kind of mini-Las Vegas are smoking something.

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  31. greener said...

    spiny, do you by any chance work for ADUG, manchester city, or their PR Firm?

    Nope. None of those. Wish I was. Just a City supporter who regularly followed since the late 1950's at Maine Road and has since been around the world enough to be shown chests of pearls in the middle east as origins of wealth before oil and have been given indication of their aspirations many years ago.

    My conviction is from experience. Facts I have given to are in the public domain. I do not represent anyone nor have any interest other than as a lifelong supporter of Manchester City.

    I do confess to an interest in buying shares in City with money I could ill afford when we were down with the dead men in lower divisions. Like Wardle and Makin and many other smaller investers we lost money on keeping City afloat before being taken over and bought out at a loss by Thaksin Shinawatra. ADUG followed.

    You really don't have a clue do you greener? Never experienced the roller coaster in different divisions; the highs and lows between failure and success? Do you understand anything about football apart from the glory hunters? Are you Alan Green in disguise? Or that NornIron rag presenter, portrayed in the media as a roly poly?

    And you? Your comments are typical comment of British lazy journos. Your credentials and sources are ...?

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  32. Really enjoyed the blog. I can't see all 10 financial changes occurring but I do think the lawyers will be utilised to defend our right to avoid "restrictions to trade" in Strazburg.
    UEFA seem to be P&L focussed in their mission which would seem to let the debt-ridden clubs (cant just think of an example) off the hook.
    Could player purchases be financed via a lease... over a longer period than the amortisation period to reduce the P&L effect?
    I am sure the FRS's will be stretched to the limit by clubs' accountants or more likely consultant financial experts.

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  33. @JamiePhilp,

    Don't think that the lease suggestion would make any difference, as the depreciation policy has to be consistent with that used if it were an owned asset. In the football world, this is defined as the length of the contract.

    What could reduce amortisation charges is if City were to extend the length of player contracts, but they would almost certainly have to increase wages in return for the longer commitment. It's also debatable whether players would be happy to tie themselves down to longer contracts.

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  34. This comment has been removed by a blog administrator.

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  35. Maybe I am reading it wrong but there cannot be a breakeven in the scenario above...
    This is the way I see it..from an accounting point of view

    1) £32m from cash and £32m "asset" in balance sheet (BS). 2) £16m amortised from BS (the asset) to the Proft and Loss (P&L) over 2 years, so £16m still a balance in the BS 3) Sell player and bank £16m and put the other side of the entry against the amortised £16m in the P&L. So profit wise the club has broke even but there is still a shortfall of £16m cash plus £16 in the BS for someone who has been sold. 4) The £16m not amortised yet needs to be transferred (as a loss) of £16m to the P&L.

    The balance of the as yet unamortised value of the player (£32m minus £16m) has to be taken into the P&L when the player is sold so it automatically negates the "profit" from the sale.

    You cannot get £16m less cash than you paid for a player and breakeven.
    In my notes above the player cost £8m (ie contributed a loss of £8m) in Year 1 and in Year 2 there was also a loss of £8m (£8m amort, add £16m cash for selling and then £16m write off of the remainin un-amortised value of the player).

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  36. @jertzee,

    Yes, you are reading it wrong.

    Let's take the Robinho example I used in the article.

    What I wrote was, "City will show an annual profit IMPROVEMENT OF £18.1 million". The key word is in capitals.

    Overall, if you sell a player for less than you paid for him, then you will clearly make a loss. In this case, sales proceeds £18m less purchase price £32.5m gives a loss of £14.5m.

    However, we are looking at what impact the above actions would have on the latest loss. In this case, the costs would be reduced by £8.3m by removing the wages from the payroll and similarly £8.1m for the amortisation. The profit on sale this financial year is derived from sales proceeds £18m less remaining net book value of £16.3m, which gives £1.7m.

    To reconcile the overall loss on the sale of £14.5m, the books would show the following:

    Year 1 - annual amortisation £8.1m
    Year 2 - annual amortisation £8.1m
    Year 3 - profit on sale £1.7m
    Total = £14.5m

    Hope that clarifies.

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  37. Good stuff as ever,

    I think you're blue sky matchday numbers are over ambitious at current ticket prices.

    The £18.2m reported in these accounts is purely gate receipts. They also disclose in the text £6.1m of matchday hospitality (p 30 of the pdf), accounted for under "Commercial". Add those together and you get a "Matchday" number more comparable with MUFC or AFC of £24.3m.

    City played 24 home games in 2009/10 with average attendance of 43,572. That's revenue per occupied seat of £23.26 (ex-VAT) on capacity utilisation of 92%.

    That is obviously incredibly low income per seat (Arsenal 2009/10 was £58.21). The reason is the policy of having low prices. Average season card prices fell 7% last season vs. 2008/09. The average season card price was £340 (inc VAT) with a limited first come first served offer at £250.

    Your thesis of Matchday rising to Liverpool levels (£42m in 2008/09) would require a complete reversal of this pricing policy.

    In a 30 home game season (19 league, 6 CL, 5 domestic cup games say) at 95% capacity utilisation, City would only hit £32m of matchday income at current prices

    To hit that £42m in a 30 game season, you'd have to see yields per seat (i.e. prices) rise by exactly one third from where they are now...

    Would City's "best fans in the world" pay those prices? Well attendance for the recent glamour tie vs. Juventus was only 35,212 (74% of capacity). Looks a bit bullish.

    Could you drop me a line (andersred@btinternet.com)? Cheers,

    anders

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  38. @andersred,

    I agree that the assumption could be considered ambitious, but I don't think that it's completely unrealistic.

    Yes, the policy has been to keep prices low. In fact, according to the Manchester Evening News, the season ticket prices are between a third and a quarter of those paid at the "top four" clubs, while the Valuecard is the second cheapest in the Premier League.

    I guess you can take this one of two ways: either the policy will continue or that there is plenty of scope for increases. Even if they rose by a third, the prices would would still be considerably lower than other leading clubs.

    Obviously not easy to do in the current economic climate, but there are also other possibilities here, including more premium seats, increased corporate hospitality, expanding capacity, etc.

    I'll send you an email.

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  39. Great article as usual. By the way if I'm not mistaken 'Stuart' is City correspondent for the Manchester Evening News so probably worth taking him up on that romantic night out.

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  40. @Inside Manchester City,

    Thanks. Yes, I've already been in contact (removed his comment to delete the email address). Nice chap, but no candlelight dinner, I'm afraid.

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  41. hi fella,nice read..think we have been following city roughly the same time..born Longsight 1952..

    Anyway just wondering if with the new squad system..PL squad Euro L Squad.. would the club not be able to have a seperate squad = values for the CL at the time of Mr Twåttines new policy.. + if its going to be the same for ALL clubs in the CL what have we to fear?



    d

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  42. A question. For entry to 2013-14 club competitions, UEFA will use the figures in the reports that appear in 2011-12 and 2012-13. These are 'reporting periods'. But don't they cover the accounting periods 2010-11 and 2011-12?

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  43. This is off topic, but I wonder if you will write a piece looking at John Henry and Red Sox Ventures(assuming they are successful in buying Liverpool FC)
    I believe that Henry and his partners are significantly different than the other US sports owners who have bought Premier League football clubs.
    I love the blog. Keep up the good work.
    Michael Fahey

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  44. I simply cannot understand why one of the Major British Dailies is not publishing you.

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  45. @STAN,

    Sorry to disappoint you, but I am actually an Arsenal fan. Have been since the 70s. However, I do try to write balanced reviews of other football clubs.

    Re your question, clubs will not be able to have separate squads in separate companies, as UEFA will simply consolidate those entities to give the true picture.

    Your other point is a very good one, namely that the rules will also impact other clubs. For example, Inter and Chelsea have been making large losses for years, which have been covered by their owners, but have clearly slowed down their spend and will look to reduce their wages.

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  46. @Anonymous (2:39),

    My understanding is that the reporting period is the same as the accounting period.

    UEFA's regulations state:

    "As an example, the monitoring period assessed in the licence season 2015/16 covers the reporting periods ending in 2015 (reporting period T), 2014 (reporting period T-1) and 2013 (reporting period T-2).

    By exception to this rule, the first monitoring period assessed in the licence season 2013/14 covers only two reporting periods, i.e. reporting periods ending in 2013 (reporting period T) and 2012 (reporting period T-1)."

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  47. @Michael Fahey,

    This is a subject that is being covered very well by Liverpool bloggers, so I'm not sure that I could add anything at this stage. May return to it in the future though.

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  48. @Anonymous (8:49),

    Thanks for that.

    In fairness, although more people are interested in the business of football than before, it's still a niche market. Also, I do write very long articles, which would test the patience of most readers. That's why I'm always happy when people take the time to visit this blog and read them.

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  49. @Swiss Ramble

    Don't reports refer to the previous financial year? Hence Man City's recent figures (reported in 2010-11) refer to the accounts of 2009-10. This means that UEFA will have plenty of time to scrutinise the reports before competitions begin. If the reporting period was the same as the accounting period then Man City, for example, would be reporting while in the competition for which that report needs to be ready.

    Most clubs report towards the end of the calendar year or at the beginning of the next calendar year, i.e. during the season following the season to which the report refers.

    I'm not an accountant hence my question. If this is right then for Man City the clock is already ticking: we are already in the financial year (2010-11) to which the first reporting period (2011-12) will refer.

    If right, I think this materially affects your analysis. I could be wrong, of course.

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  50. @Anonymous (12:02),

    This is how UEFA define the reporting periods:

    "Current financial information - Information in respect of the financial performance and position of the club in the reporting period ending in the year that the UEFA club competitions commence (reporting period T).

    Historic financial information - Information in respect of the financial performance and position of the club in the reporting periods ending in the years prior to commencement of the UEFA club competitions (reporting periods T-1 and earlier).

    Reporting period - A financial reporting period ending on a statutory closing date, whether this is a year or not."

    So, if we take the first definition, for the season 2013/14, the year that the UEFA club competition commences is 2013, so the reporting period ending in that year would be 2012/13, which they call T. Therefore, T-1 is 2011/12.

    I understand your thinking, given that most clubs only report after the following season has commenced, but they will have their figures available internally much earlier to send to UEFA in their break-even template.

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  51. Interested what you think of the article in the independent this morning?
    http://www.independent.co.uk/sport/football/premier-league/the-163250m-millstone-that-could-cost-city-their-european-future-2100900.html

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  52. @Manacle,

    Yeah, saw that. Nothing new.

    All they are saying is that the cost of City's recent transfer spend cannot be written-off in one fell swoop (as some had suggested), but would have to be amortised over the next few years.

    This is what I said in my article. In fact, I estimated that amortisation (like salaries) would actually increase in the short-term from last year's £71m to £81m.

    This is undoubtedly a major challenge for City, but remember that if they sell some of the current squad, then their amortisation will be taken off the books.

    My guess (and it's only a guess) is that Mancini will still want some different players, but that he will be told he can only have them if he lets some other players go. Obviously, there's also the restriction of the squad limits as well.

    I should also emphasise that my plan cannot happen overnight, as some of the actions are long-term. However, City do not have to get down to break-even immediately (with the "acceptable deviations") and UEFA may grant them an exception if they can show concrete plans to get there within a reasonable timescale. Big call for UEFA - nobody knows how they will handle this, but City are unlikely to be the only ones in that situation.

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  53. The usual high standard Swiss.

    I'm looking forward to your take on the latest Man Utd figures. Come to think of it, this is the only site that keeps me remotely interested in football finance - keep up the good work!

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  54. Excellent blog as usual Swiss

    Do you know this blog has been copied virtually word for word in today's (08/10/10) Manchester Evening News?

    http://menmedia.co.uk/manchestereveningnews/sport/football/manchester_city/s/1345135_citys_champions_league_plan

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  55. @Chris,

    Thanks.

    Yes, the journalist contacted me before the article to ask my permission and get some quotes.

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  56. @Swiss Ramble

    I guess I find it odd that accounts would be immediately available for inspection right at the end of the financial year, when it takes time to do the books for that year. In fact, decisions made for entry into UEFA club competitions (qualifying and play-off rounds) have to be made precisely at that moment. Thus there would be no opportunity for UEFA to ask questions, seek further information, etc., since their decisions about entry will be made just as soon as the financial year has ended.

    It would make more sense for UEFA to inspect the acounts for the previous financial year. This could begin as soon as the season has ended and the candidates for European competition put forward by the national asociations. This would begin before the current financial year had ended, but would relate to the previous financial year. Hence my separation of the 'reporting period' (why do they use this designation?) from the financial year to which it refers.

    But it is also possible that UEFA might stimulate the realignment of the financial year to permit earlier reporting.

    Against my initial view, I've also thought it peculiar that the FFP regs would be announced just before the 2010-11 year began. If I was right about the reporting period referring to the previous financial year, it would be strange to announce the regulations without any time for a club to start making changes to the way it manages its finances.

    But, above all, the text of the regulations seems to point strongly in the direction of your interpretation.

    Cheers.

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  57. Another great post, I enjoyed very much this entry into forecasting and speculation territory. I am hoping that once the flurry of financial reports has passed, perhaps you could do the same for our Arsenal. My personal forecasting is that we'll top the revenue league by 2014/15 once all our contracts bar the naming rights will have been renegotiated at market value (and I'm counting on United to slide from where they are now thanks to the trickling effects of their owners' shennnigans). I don't know which one of United or Liverpool will get your attention first, in any case your upcoming entries will be fascinating ;)

    Anyway back to your post I'm having doubts that City can make it happen as you laid it out if they don't break in the top 4 this season because until it happens they won't be able to lower their expenses if they want to clinch that spot. First, they will likely boot Mancini and pay over the odds for a new manager who will want more players for whom they will still have to play at least 50% over market value and their wage bill and player amortization will increase rather than decrease.

    Now I'm with you on the fact they should increase their commercial revenue with the help of the sheikh's friends but the increase would probably roughly match the wage bill inflation (if they want UEFA not to look into it too closely). That will still leave them 100mM+ short next season, too far from the 45M allowed UEFA threshold.

    As I see it, either they get that top 4 spot this season and a version of your plan will be rolling, otherwise I think their best bet is to forget about balancing the books for a few seasons more, spending what is needed to anchor themselves in the top 4 at the cost of not being allowed to compete in Europe. But then what's 30-50M for a few years for the sheikh?

    Thanks again for this very enjoyable read.

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  58. Swiss Rambler, I am your biggest fan and even so I find it impossible to agree with your conclusion. I have no doubt that Citeh is more than strong enough to end up in the top 4 this season, possibly even mount a title challenge, but it's extremely hard to believe that Citeh is anywhere close to breaking even within 3 seasons. The extent of Citeh's spendthrift ways is just far too much to be made up of by the boom from CL money and title successes. In particular, the assumption that Citeh can reduce their amortisation is highly flawed because a) Citeh almost certainly will be selling the players at a much lower price than what they paid; just look at Robinho. b) With the huge, exorbitant wages some of these players are getting it's going to be harder to sell these players than you think.... don't forget that Robinho had to prove himself in Santos before Milan got interested in swooping for him. Things are going to be worse when clubs have to trim their wage bills. c) For every player sold, Citeh's going to have to find a replacement or they're going to get weaker.

    Although Citeh did the right thing in getting young players in their squad, it's impossible for Citeh to be able to avoid pouring in more money if they want to remain competitive. Players get long term injured, become crap after impressing initially..... you have to be constantly on the lookout for good players and getting them into your squad. That's something most of the new premiership team owners seems to be ignorant about, especially the Americans at Utd and Liverpool. If Chelsea is unable to break even despite winning trophies I do not see how Citeh, with an even more prodigious plan than Chelsea, will be any better. FIFA's plans are very clearly set up to screw up Citeh, and it's impossible to see how they can fail to do so if they are determined enough.

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  59. @Anonymous (1:17),

    You're perfectly at liberty to disagree with the conclusion, but let me correct you on a couple of points:

    - There is no assumption that amortisation will reduce. In fact, the assumption is that it will increase.
    - I stated quite clearly that City would probably have to sell players at a loss, citing Robinho as an example. This would not necessarily be an issue from an accounting perspective, as they might still show a profit on sale in the current year's accounts, given that some of the cost has been booked in earlier years as amortisation.
    - I agree that the wages City's players earn could be a factor, but that did not prevent Robinho deciding to move.
    - You're probably also right about City having to buy replacements, though the club claims that it will progress players from the academy, but this might result in lower costs. For example, if you sold Adebayor and Toure, you might well replace them with players who cost less (lower amortisation) and were paid lower wages - with an improvement in quality.

    The point of my article is not that City will definitely get back to break-even, just that it's not as impossible as some believe.

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  60. @Anonymous (10:18),

    The presentation that Manchester United gave to accompany the release of their accounts confirms my understanding:

    "Previous 2 years accounts (2011/12, 2012/13) considered for entry in 2013/14"

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  61. Swiss Rambler.Good article but your plan is neither sound nor robust.It relies too heavily on £150M of income being generated from Sport City Development. You admit that you have 'no idea' of the amount of revenue this development will generate and admit this is a 'notional figure'.You should have qualified your plan to let the reader know that it contains a big inherent risk.

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  62. @Dave,

    I thought I'd included plenty of qualifications around the plan in the article, especially around the Sportcity development. As you say, I said that I had no real idea on this notional figure. Not sure how much clearer I could have expressed that.

    Obviously, the £150m revenue here is not that important: it's more about the resulting profit , which was "guesstimated" at £30m. This really is "finger in the air" stuff, but the question remains whether the owners would invest so much in this project without a reasonable return.

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  63. Swiss Rambler. Thanks for your reply and once again for your excellent article. The important thing is that you have identified the problems ('challenges/opportunities')facing City in the coming years.A week ago I was basking in the glow of a lucky victory against Newcastle,going second in the Premier League above United and safe in the knowledge that we could blow (and write off) as much money on transfer fees as we wanted until 2013. How things can change in a week!
    Anyway best of luck to Arsenal this year. If City don't win the league, I hope Arsenal do.I like their Manager (cultured) and the team's style of play.

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  64. It is my considered opinion that with the demise of Liverpool, past any realisitic chance of recovery back into the CL, City will indeed be the ones to ongoingly fill the gap.
    Yes Spurs are there now, but playing in the CL whilst attempting to qualify for it is alot harder than just qualifying for it.
    City will meet EUFA's targets because like most things in life, the Financial Fairplay rules are not there to protect the integrity of the game but rather ensure the status quo.
    Once they are in place, it will be virtually inpossible for any club to break into the top 4 cabal, as doing so will require financial outlay that will in itself prohibit entry.

    Platini said that Abramovic wanted these rules. Of course he did! Now nobody will be able to do to him what he did to others. Abramovic had no interest in these rules until Man City was sold and he saw what REAL money was.

    Either way, anybody who believes that Man city will not beat the rap on this one is kidding themselves. That deal is already done as surely as Liverpool's fate is sealed.
    Tickets for OleGunner's .......Great Eastland Run are available from Ticketmaster.co.uk or from your local ticket outlet. ;-)

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  65. Great Article swiss ramble.

    I was thinking that it would of been smart for city to 'forward load' the salaries of their new players. That term was crudely termed by me as I'm not certain what else to call. Anyhow, what I'm suggesting is the reverse of what many clubs do in sports where a salary cap is involved. If they want to sign a player and are close to their salary cap they include a yearly wage rise, which allows them to rearrange their salaries in years to come.

    So couldn't city pay Yaya and the likes, with a decreasing wage per year. Year 1 he makes 400k, Year 2 200k, Year 3 150k, Year 4 130k. It could be arranged to average his estimated wages of 200 odd grand. This method of payment could be justified specifically in the cases of older players. Why can't you pay them less as their ability declines but still secure their services? Admittedly Fifa would likely take issue with Silva's wages declining which would be impossible to argue they reflect his ability.

    On a side note, I struggle to believe some of the salaries quoted by the press. Surely city couldn't believe this would be smart given the impending restrictions. It also goes against all the quotes the club have made. Paraphrasing: there is money for transfer fees but not for wages.

    I also wonder whether large signing on bonuses would have been included to encourage a player to sign for a smaller wage. Although I assume the bonus would be amortised over the course of the contract so it would be not result in any change.

    Another idea for some creative accounting could be using a different method for amortisation than straight-line depreciation. I am not sure what the accounting practices are in the UK, but it surely is worth a look. I think you could make a fairly convincing argument that a player's transfer value is worth exponentially more the longer he is signed on. That is, his transfer value doesn't decrease in a straight line. This could allow for a huge amount of amortisation in the next reporting period. However, IMO I think this is largely happening already as 71million in amortisation costs for the year gone is an awful lot if their amortising over the life of the contracts, considering they haven't included their recent transfers of balotelli and co. which was close to 100m.

    might of got some of the amortisation and depreciation mixed up. I'm only a student so I'm sure alot of what I've said is slightly off, but I've learned alot and reinforced alot from your article. I read it for the football side, but I wish they could make University this interesting.

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  66. This comment has been removed by a blog administrator.

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  67. swiss-the big issues for me in city hitting break even within 4 years are
    1. gate money-united and arsenal are at 100m, on your figs city will be only at what 40-50m with such a huge disadvantage how can they compete unless they get closer to the figures those two and barca and madrid generate (i know, united blow there's on interest..but arsenal don't)
    2. you have to allow for what arsenal, chelsea and united are doing in the league and Cl and what the cream of europe are doing as those top tier clubs compete for sponsorship euro's and prize monies and only one/two teams can win meaningful prizes each year. Those other teams won't stand still in terms of revenue growth, youth development etc and united, arsenal, chelsea,are all positioning themselves well (hell even spurs are if they can get the ground funded).
    I do wonder like you about sportcity-it seems the only possible source of competitive advantage for them versus the likes of united, arsenal, madrid, barca in bridging that revenue gap long term but it is a big bridge and its a hellishly competitive landscape with 6 epl teams investing heavily against each other and unless united falter and become the second team of the city and citeh can get 50-60,000 crowds paying top whack, i'm not sure it can work. Still its certainly livened things up and certainly given us financial saddo's plenty to chew on.

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  68. I think that it would be possible for Man City to write off all unamortised transfer expenditure in one fell swoop at the end of this financial year.
    Who is going to stop them?

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  69. Further to my preceding post, is it possible for UEFA to stop a club re-structuring financially to put itself on a sound financial footing if this is done before 2011/12? The Sheik's recent share capital injection suggests that the groundwork might be being laid.

    The company's auditors and could hardly disapprove such a prudent move so long as the company remains solvent. Seemples!

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  70. @Marek,

    Mansour's recent capital injection will make little difference to how City do under the Fair Play regulations. Obviously, this strengthens the balance sheet, but it does not help the profit and loss account, which is the driver for the calculation.

    In fact, assuming that 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.

    A club could always attempt to write-off all unamortised transfer costs before the new regulations bite, but I guess that the auditors would consider that as a blatant attempt to manipulate profits. In the unlikely event that this were allowed, then UEFA would almost certainly make an adjustment for this in their break-even calculation or risk losing their credibility at the first hurdle.

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  71. Found this blog after a bit of research. Man, just can't stop reading your articles; they are mesmeric. Keep on the good work!!

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  72. If we consider the purpose of depreciation being to provide an accurate assessment of the value of an asset by writing off a relevant expense against it on an annual basis is there not an argument for City to recognise an impairment on the same basis? For example if we can conclude that City overpaid for players like Lescott, Santa Cruz etc etc. is there not an argument for City to impair the value of these players contracts in the current financial year there by realising a significant loss on these contracts now with the benefit being a decrease in the player amortization figure for the remaining years of there contracts thereby by increasing the possibility of them recognising a profit in years to come.

    An additional benefit of this would be the recognition of increased profit on sale of players figure if these players were to be sold before the end of their contracts but also in line with the years under consideration by UEFA for disclosing a profitable income statement?

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  73. @Richard,

    Yes, I raised the possibility of an impairment provision in the article. It would not surprise me at all if City did this in this accounting year with some players, unless they manage to sell them.

    There is indeed a legitimate accounting argument to do this with "older" assets, such as Santa Cruz and Lescott, though UEFA would probably consider it fairly blatant manipulation if they were to try this with more recent purchases.

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  74. But surely if financial reporting is based on fair presentation whether or not you impair the older or recent purchases it still relates to a more accurate picture. James Milner is one player who we should all consider worthy of impairment!

    Out of interest what is the basis that these assets are capitalised on? IFRS makes specific reference against capitalisation of humans on the basis that it does not meet the "control over the asset" requirement. Surely even if it's the contract being capitalised it is still the effective recognition of a human as an asset?

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  75. @Richard,

    Sometimes you have to step away from the pure accounting aspects to understand the intention of the legislation. I am not saying that the accounting treatment would be incorrect, but if a club were to purchase a player for, say, £20m, only to impair the value 3 months later to, say, £10m, that would clearly be an attempt to game the system and UEFA would disallow the adjustment for their break-even calculation. This is analogous to the fair-value adjustments that they would make if a club attempted to boost their revenue with a £200m annual sponsorship deal.

    The way to look at this is to consider UEFA a bit like a tax authority, who would review a company's accounts and say, "OK, the accounting is fine, but you have artificially inflated revenue in this low-tax authority."

    On your second point, there's been a fair bit of academic discussion about whether FRS10 is applicable to football players, but the reality is that this treatment has been accepted by virtually all market participants, namely football clubs, and indeed the auditors.

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  76. But surely that's the very reality of this situation - in the same way that UEFA would make consideration of a "fair value" of certain transactions they would surely need to consider the fair value of certain players? Surely we need to distinguish between the fair value of a player and the value City are willing to pay for certain individuals?

    If UEFA are going to take the stance that they will make certain common-sense considerations in interpreting financial results then this makes perfect sense. The idea of over-paying for a player to get the signature ahead of other bidders and then impairing that value to represent a fair value of that contract is not (in my opinion) an intentional manipulation of the financial performance. The intention of over-bidding is to secure the service and certainly falls within the broad term of "production of income"? I'd be surprised if City weren't tempted to argue that this is an increased fee that they are forced to pay in order to compete and therefore should be able to recognise it upfront - it would almost be anti-competitive if they couldn't!

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  77. @Richard,

    Having personally set up a number of "tax-efficient" holding company structures and dealt with many tax authorities, I have a reasonably good idea of how they would approach the intent behind such transactions.

    Of course, UEFA is not a tax authority, but the guidelines have been written by accountants and lawyers in language that is very similar to how bodies like the IRS operate. I would therefore be very surprised if UEFA interpreted such a transaction as anything other than being against "financial fair play".

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  78. While I don't doubt your experience with this kind of tax structure I believe that the merits of the transaction are not being correctly dealt with.

    By not allowing an impairment of that sort upfront would almost be suggesting that City are over-paying with the intention to get the write off - I'm fairly certain City's motives for overpaying for players has little to do with the upfront tax benefit!

    At the very least this point could be argued with UEFA authorities and not simply thrown out in the same manner as the (not so analagous) comparison of a significant sponsorship revenue from a related party.

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  79. @Richard,

    If City simply impair player values shortly after purchase, it suggests that they can pay inflated prices for players without any fear of the ongoing financial impact on their accounts (via player amortisation). If this were to be attempted on a large scale in the accounting period just before the UEFA regulations come into force, I don't see how that could be considered anything other than the most egregious attempt at creative accounting.

    Yes, many clubs do impair player values in their accounts, but it's infrequent and it's immaterial.

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  80. Firstly, how can a side attempt to compete for the signature of top players without over-paying? This should have a benefit attached in the spirit of promoting a competitive market, which I'm sure is part of the intention of UEFA's new regulations?

    Secondly, the point of impairment has been lost here. By impairing to a fair value (possibly indicated by the forced disclosure by the selling club of the next highest bid behind the selling price) the proper valuation of a signing can be obtained. This would only serve to provide an accurate expense in each subsequent year of a club's financial performance in the year under review. The impact that this has in the preceding year is effectively irrelevant as it is not under consideration. Therefore, no matter how large the impairment it essentially has minimal impact as all that is being obtained is fair presentation of years under review.

    The only way City would benefit from your suggestion is signing players en masse at huge transfer fees and recognising this impairment immediately. However, how would this differ from signing a player on a year contract for the same transfer fee and then renewing the contract shortly after for 5 years?

    For what it's worth I'm not a City fan I just find this a worthwhile topic as it will become extremely relevant over the next couple years!

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  81. @Richard,

    1. "How can a side attempt to compete for the signature of top players without over-paying?" Are you serious?

    2. A I explained in an earlier response, the issue here is not one of accounting accuracy, but whether such adjustments would be allowed in UEFA's break-even calculation.

    3. That's exactly my point. City would clearly benefit vis à vis the Fair Play Rules by effectively bringing forward expenses into a period not covered by the rules.

    Your last point - if that lower price is effectively the market price, then it becomes obvious that City have effectively-over paid to secure the player's services, hence the impairment, which it could be argued is in itself anti-competitive.

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  82. 1. Your repsonse is out of context but I appreciate how you feel the need to save face by responding in a condascending fashion.

    2. You're arguing against your own point. Firstly you are trying to suggest that UEFA will work against accounting manipulation then you argue that there is no manipulation at all? Serious?

    3. So what is wrong with this - it seems more relevant to reflect the substance of the transaction in this manner - what are you arguing here?

    4. You really believe this is anti-competitive??? Last time I checked City weren't the only club allowed to be purchased by fat-cat owners. Where exactly is the anti-competitive element?

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  83. @Richard,

    I feel like I'm bashing my head against the wall here, but I'll have one last go.

    1. I simply don't understand how anyone can believe that no club can secure a player "without over-paying". That just doesn't make sense.

    2. You're missing the point. What I am saying is that a club's accounts can be perfectly in order, but that still does not mean that they will be acceptable to UEFA, as the underlying transaction could be interpreted as being designed to manipulate their break-even test. The obvious example is the inflated sponsorship agreement, where £200m received could be booked as revenue, but would be marked down to fair value by UEFA. I am arguing that large-scale impairment would be handled the same way. No guarantee, of course, just my opinion.

    3. I believe that bringing forward expenses via impairment in this accounting period would be deemed as manipulation in terms of the UEFA template. Nothing to do with IFRS accounting.

    4. Of course other clubs can do the same and my views would equally apply to them. I am referencing City, because that club is the subject of this blog.

    While I am happy to enter into a decent debate with anyone (time permitting), I really don't want to get into a lengthy discussion, especially when the debate is just going round in circles, so this will be my last word on this subject.

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  84. The feeling is mutual!, but for the sake of completeness:

    1. The over-paying argument was in reference to securing world-class players by a club who have little other than financial means to attract them.

    2. I do not feel that that the recognition of impairments is circumventing break-even tests. It is merely using a tool that was not as necessary before as what is the case now. Not having applied it previously because of the lack of necessity is not tantamount to circumventing? The 200m comparison (while I understand it is designed to illustrate a point) is not really an adequate comparison.

    3. Refer to the explanation in 1.

    4. This point is in reference to an anti-competitive example I used which is not really the underlying subject of this so not really worth harping on about.

    I appreciate the time taken to engage and hopefully some of the accounting masterminds that City's owners will no doubt make use of will raise similar debates. I look forward to reading your future entries!

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  85. I read this blog a while ago and have been reading this for a good few months now, and just saw this article linked to a BBC article!
    Well done dude, keep up the amazing work!!

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  86. Link to the BBC article on UEFA Fair Play:
    http://news.bbc.co.uk/sport2/hi/football/9358589.stm

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  87. Well researched and a great article!

    The devil are not just in the details but it could also be in the ifs-and-buts. Don't you think?

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  88. Just a super article.

    So well written and thought out, loved it.

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  89. You have already set the bar high in terms of football blogging, but this article amazes me with the level of painstaking detail.

    Good, no, great article, keep it up

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  90. I discover this via the BBC link. If there is a broadsheet editor* out there reading this, please pay this guy to do a similar article for each premiership club. Launch it on your website and let the comments flow.

    Thank you.

    * not the Times obviously as we'd have to pay for that...

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  91. I have ben involved with colleagues in producing a paper on the new UEFA regulations (for distribution throughout Europe to football clubs and other interested parties) and, with that background, I must say this is an excellent article - very well informed and intelligent insight.

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  92. Discovered this blog through the BBC article about UEFA fair play (as have many it seems from the comments above!). An excellent blog, and am very glad that I have found such a blog after searching for a while. I am now going to spend the remaining few hours of the day, in which I should be revising, to read on some of your other blogs. Please keep up the good work! :D

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  93. Lol i am not one bit surprised not to see the rags and arsenal fans suggesting that what if Man City do not finish in the top four this season now.
    On another note, good article. As an accounting student and a new city fan (never supported anyone else before in football but only support city since everyone hates them, specially the football hirearchy of europe and english media which i hate) this article is optimistic but not beyond possible. A firm investing almost £2 billion in a project must have plans into place and proper planners as well. I dont beleive they would have considered the financial fair play into their plans however its not impossible to get around these rules.
    All in all, not worried about financial progress of the club. Pretty pleased about the football progess as well. Every player signed by mancini is young and therefore will not need replacing for at least 5 years.

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  94. Could an alternative tactic to lengthening player contracts be to shorten them (at least in the near term) ?
    Say you buy a player today on an 18 mth contract. Using current depreciation policy (for consistency and to comply with FRS etc) the book value is quickly returned to zero, as is the ongoing amortisation charge. Crucially this is achieved before the full impact of the FIFA regs hit.
    At the end of the contract the player is retained by paying higher than average wages (already the case at City). Or possibly sold for a profit over book value.
    If this tactic could work, the logic would be to invest heavily in top players right now, but only on short deals ? Short term P&L pain for long term gain.....

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  95. The Deloitte Rich List 2011 showed Manchester City jump from 20th to 11th with a big jump in revenue. Critics have lined up to say City is buying success with a scattergun approach that is not sustainable and doomed. They fail to recognise the scope of the business model. To detractors and doubters of the scale of ambition for MCFC on and off the field, it has just been announced on the Official Site that:

    “New East Manchester Limited (NEM), Manchester City Council (MCC) and Manchester City Football Club are to step up consultation and engagement with the East Manchester community, as the working relationship between Club and Council was solidified yesterday.

    The previous partnership arrangement, which began with the signing of a Memorandum of Understanding in March of 2010, is to be formalised with the creation of a legally binding Joint Venture. The Eastlands Development Partnership, as the Joint Venture will be known, is the vehicle through which activity and development opportunities for land in and around the City of Manchester Stadium and its neighbouring communities, is delivered.

    Further to this, the Eastlands Regeneration Framework document has been set out, which outlines the overarching vision for the development of land held by the parties, which when combined, totals approximately 200 acres.”

    As I replied to an earlier post, more London 2012 Olympic Park in scale than Chelsea Village. The size of investment is staggering. ADUG’s investment in MCFC was central to a considered, long term commercial strategy underpinned by core social values. It another reason why City fans have such a high regard for Sheikh Mansour and what he has done for the Club and will do for the area and the City of Manchester.

    This adds a whole new dimension to football club activities. The question is what is the potential impact for Manchester City related to the EUFA Fair Play Rules? Any views?

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  96. Hmmm - progress to date fairly good I'd say - FA Cup winners, champions league group qualified, city developments on course, stevie ireland and richard dunne not terribly missed, and an admin team who at least seem to know their arses from their elbows - so couldn't be doing any better - isn't hindsight a wonderful thing though - Greener? OleGunnar? Care to respond?

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  97. Pedantic point but FRS 10 is the UK accounting standard (i.e. UK GAAP not IFRS), the IFRS equivalent accounting standard is IAS 38. However, most football clubs in England still use UK GAAP not IFRS.

    Interesting academic research on whether it makes sense to capitalize/amortize player registrations here: http://pastie.org/paste/asset/283954/Accounting__Valuation_and_Duration_of_Football_Player_Contracts.pdf

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  98. £400m over 10 years... Your £15m were on the low side

    http://news.bbc.co.uk/sport1/hi/football/14080388.stm

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  99. @GreekGunner,

    Actually, the new Etihad deal includes several items: higher shirt sponsorship, stadium naming rights and a "campus". City have not yet provided a break-down of all the elements, but it seems likely that the naming rights is around £10-15m.

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  100. ok that makes more sense.

    Man U and Liverpool get £20m per year for their shirt sponsorship. Less than Barcelona or Bayern but still the highest deal in the UK. The campus can't be worth more than £1-2m for a project that is years away from actual revenues. So that leaves £18m for naming rights. Considering Arsenal's own naming deal and the difficulties Chelsea and Tottenham had in selling theirs to advertisers, surely City off limit in relation to UEFA's rules no?

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  101. @GreekGunner,

    The truth is that nobody knows, as the terms of the deal have not been announced. For example, I saw one reputable paper say that it was a 10-year deal for £300m, possibly rising to £400m, so it could be £20m for shirt sponsorship (which is in line with Liverpool, who have a fantastic tradition, but are not in the Champions League) and £10m for stadium naming rights (which is not completely unreasonable, given that Arsenal's deal was a very poor one).

    It will be very difficult for UEFA to assess the value of naming rights, as there are so few comparatives in the market, but unless the figure is totally absurd, I doubt whether they would take action, especially as all they could do is to remove the difference between perceived fair value and actual value. City could introduce all sorts of arguments, e.g. value of deals on the continent, value in other sports, etc.

    With regard to the campus, I agree that that is a longer-term project, but I would not have thought that the club's owners would invest so much, unless the net revenue is worthwhile and that would certainly be more than £1-2m.

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  102. See your point but they are still testing the limits of the FFP spirit.

    What's interesting with your projections is the fact that, even excluding Sportcity's profits - to me the most disputable source of profits in your analysis - Man City would only by £30m in the red. Such a loss, coupled with the fact that the trend would show a reduction in losses, would be enough for City to pass the FFP rules.

    What really worries me is the impact such a strategy will have on Arsenal (cf comment on your Real's article). Already, Man City has many players above the £100k/week mark vs one for Arsenal (Cesc). The Narsi contract extension fiasco shows Arsenal is already struggling to keep top club status with strong revenue growth or an improved cost mix. I am always amazed that Gazidis doesn't get more heat from Arsenal fans on the high proportion of non-salary costs in Arsenal P&L.

    Anyway, again thanks for your posts. By far, the most interesting economic analysis on European Football out there

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  103. http://www.guardian.co.uk/football/2011/jul/12/arsenal-manchester-city-premier-league

    Arsene is not happy about the naming rights' deal either.

    UEFA will have to comment now

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  104. how have recent sponser and sales and less spending this summer afffected city could we perhaps have an article on that perhpas with comparisons to other clubs good article better than all on city or most at least how did EUFA the figures for the monitoring period alloud devation it seems random or is it to help some clubs and no others another thought is with regards to the fair value of the sponsrship deal how do we no what EUFA SAY IS FAIR VALUE IS FAIR VALUE

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  105. New financials released today, hope you can do another City review and hopefully comment on how in line we are we your FFP break even strategy.

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  106. Like you, I await the Swiss Rambler's update on Man City's finances. However, I can make an amateurish attempt to comment upon them and on City's chances of complying with UEFA's FFP rules which kick in from this season.

    The starting point is that City lost £197.5 million last season. Subtracting the 'additional exceptional' sum of £34 million leaves a loss of £163m.

    However, since May, City have spent a lot of money on new signings, somewhere in the region of £70m, most of them on five year contracts.

    As an expense, this is an extra £14m a year. In addition, the wages of these new signings are likely to total £0.5m a week or some £26m a year.

    Therefore, additional costs from transfers alone will add some £40m a year to the expenses.

    Leaving aside any more 'exceptional losses' this financial year 2011/12, such as Tevez, this means the loss is set to rise to over £200 (£163 + £40m).

    However, revenues will also rise this season by at least £60m, a combination of much more revenues from Champions League football rather than Europa League football and, also, the enhanced Etihad deal of some additional £27 a year as this deal replaces a less lucrative earlier Etihad deal.

    The result is that losses for this season 2011/12 are likely to be some £143m, excluding Tevez and excluding any new arrivals in January or enhanced contracts for existing players.

    Because of existing player contracts, it is likely that losses for the next two years will also be in the same barely sub-£150m level.

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