Friday, January 2, 2015

Manchester City - Roll With It

Manchester City's 2013/14 season was described, with some justification, as “another memorable year” by its chairman, Khaldoon Al Mubarak, as City won their second Premier League title in three years. They also added the Capital One Cup, which meant that the club has now won every major domestic competition at least once in the last four seasons.

The strategy off the pitch is also delivering, as City’s revenue surged through the £300 million barrier, rising 28% from £271 million to £347 million, while it further reduced losses for the third consecutive year. All three revenue streams contributed to this strong performance with broadcast revenue up 51%, match day revenue up by 20% and commercial revenue up by 16%.

The 2013/14 loss was more than halved from £52 million to £23 million. In fact, the club would have been very close to break-even without including the £16 million settlement with UEFA over disputed breaches of its Financial Fair Play (FFP) regulations and it expects to be profitable in 2014/15.

The £29 million decrease in the 2014 reported loss was mainly driven by a £39 million increase in TV money from the new Premier League deal, further growth in commercial partnerships of £23 million, a reduction in the wage bill of £23 million, which was partially offset by once-off movements such as the £16 million FFP settlement and £46 million of intellectual property sales in 2013.

Two encouraging items are worth noting: (a) the growth in EBITDA (Earnings Before Interest, Depreciation and Amortisation), which more than doubled from £36 million to £75 million; (b) the fact that City’s 2014 figures include virtually nothing from player sale profits, so there is likely to be future upside from this activity.

City’s 2012/13 numbers were boosted by £48 million of Other Operating Income, which was derived from the sale of intellectual property (£22.5 million to subsidiaries and £24.5 million to third parties). These have not been repeated in 2013/14; in fact, there have been £10 million of “recharges for costs incurred providing services for the benefit of the company”.

The last time that City made a profit was back in 2006 (£10 million). Since then they have reported a total of £628 million of losses, but, as technical analysts are prone to say, “the trend is your friend”, and City’s losses have been steadily reducing since the £197 million registered in 2011. Effectively, the losses have been halving each year.

After years of heavy spending in order to build a squad and the facilities required to compete at the highest level, City can now look forward to future profits with some confidence. The owners’ “Masterplan” appears to be firmly on track, as confirmed by Al Mubarak, “Today our club is where we hoped it would be when we began this transformation six years ago.”

Since 2009, City’s revenue has increased by around 300% (£260 million) from £87 million to £347 million, mainly driven by more commercial partnerships, up by an astonishing 821% (£148 million) from £18 million to £166 million. Broadcasting is also substantially higher, rising from £48 million to £133 million, including £31 million from the Champions League, while match day income has more than doubled from £21 million to £47 million.

Revenue grew £76 million in the last season alone, rising from £271 million to £347 million. All three revenue streams contributed: broadcasting up £45 million (51%) from £88 million to £133 million, commercial up £23 million (16%) from £143 million to £166 million and match day up £8 million (20%) from £40 million to £48 million.

This growth represents the best performance of the top four English clubs (in revenue terms) in 2013/14, both in absolute terms (£76 million) and percentage (28%). United’s absolute growth was almost as much (£70 million), while Chelsea and Arsenal both increased by 23%.

City now have 48% of their revenue coming from commercial activities, which is a higher proportion than any other leading English club, e.g. it’s 44% at United and 26% at Arsenal. Their remaining revenue is split 38% broadcasting and just 14% match day.

City’s 2013/14 revenue of £347 million is the second highest in England, behind United’s £433 million, but ahead of Chelsea £320 million and Arsenal £299 million.

Last year City were 6th in the European Money League with £271 million, which is a notable achievement, but still a long way behind the Spanish giants, Real Madrid £445 million (gap £174 million) and Barcelona £414 million.

Depending on PSG’s revenue, City will be either 5th or 6th in the new edition of the Deloitte Money League, though the gap is closing, partly due to the underlying growth and partly due to exchange rate movements. For example, Real Madrid’s 2014 revenue of €550 million equates to £440 million, so the gap to City has reduced from £174 million to £93 million.

Winning the title in the first year of the new Premier League three-year television deal helped City increase their distribution by £39 million (66%) from £58 million to £97 million. Interestingly, this was £1 million less than second-placed Liverpool received, as the Reds were shown live more often than City, leading to a higher facility fee. Nonetheless, the increased revenue arising from each Premier League deal is clear to see, rising from £21 million back in 2007.

City also received £31 million (€35.4 million) from the Champions League, which was £7 million higher than the previous season’s £24 million (€28.8 million), as they progressed further (to the last 16) and performed better in the group. City’s share of the UK market pool is dependent on how far they progress (compared to other English clubs) and their finishing place in the previous season’s Premier League. This means that 2014/15 Champions league revenue should be higher, as City won the Premier League in 2013/14.

Incidentally, some teams from other countries benefit from a high market (TV) pool, divided by fewer clubs, a good example being Juventus who received €32 million from the Italian market pool in 2013/14.

City’s commercial revenue rose 16% to £166 million in 2013/14. As Al Mubarak drolly commented, “commercial success has never been an afterthought for Manchester City.” Much of this is linked to Abu Dhabi, where the club’s ownership is based, but it is also true that the number of commercial partners has greatly increased to 35 (UK and global 25, regional 10), 133% more than the previous season.

Chief Executive, Ferran Soriano added, “The establishment of the City Football Group, with clubs in the United Kingdom, United States, Australia and Japan, has expanded the commercial potential of the organisation and has already facilitated global partnerships with companies such as Nissan, Etihad and Hays.”

Nevertheless, the club is still a long way behind Bayern Munich, whose commercial revenue increased to a barely credible £233 million last season, under-pinned by lucrative contracts with their own “triple A” investors, Adidas, Audi and Allianz. PSG lead the way in 2012/13, as their commercial revenue of £218 million was inflated by a €200 million partnership with the Qatar Tourism Authority.

Despite City’s commercial progress, they have slipped further behind Manchester United, whose £189 million is £23 million above City’s £166 million – and that’s before United’s hefty new deals (Chevrolet from the 2014/15 season and Adidas from the 2015/16 season). However, City are a long way ahead of Liverpool £98 million (admittedly the 2012/13 season) and Arsenal £77 million (before the PUMA kit deal, starting in 2014/15 season).

City’s largest commercial deal is with Etihad, which is understood to be worth £400 million over 10 years, covering shirt, stadium naming rights and campus. Of that, it is estimated that the shirt sponsorship accounts for £20 million a season, which would put City’s deal behind United’s Chevrolet agreement £47 million ($70 million) and Arsenal’s Emirates deal £30 million.

There has been press speculation that the Etihad sponsorship deal will be extended for a further five years, bringing in an additional £320 million. Given that three years of the deal have already elapsed, that would imply an annual payment of £50 million going forward.

In addition, it is understood that City will sign a further five-year deal with three partners for a total of £80 million to sponsor their new training complex, including the splendid new 7,000 capacity stadium for reserve and academy matches.

There is room for improvement with City’s kit supplier deal with Nike, which is worth £12 million a season. Although this six-year deal, signed in 2013, doubled City’s revenue compared to the previous Umbro agreement, it is now well behind other clubs’ latest deals: United £75 million (Adidas), Arsenal £30 million (PUMA) and Liverpool £25 million (Warrior).

Even though City’s match day revenue rose by 20% to £48 million, this is still less than half the money generated by United and Arsenal (both over £100 million), despite the average attendance at the Etihad Stadium of 47,091 being the highest in the club’s history and all 36,400 season tickets being sold out. The other side of the coin here is that City have the cheapest season tickets in the Premier League at £299.

City are extending the stadium to take the capacity up to 55,000 in advance of the 2015/16 season and they also have received planning permission for potential further expansion up to 61,000.

City reduced their wage bill by 12% (£28 million) from £233 million to £205 million. Allied with the steep increase in revenue, this reduced the wages to turnover ratio from 86% to a healthy 59%.

The magnitude of the reduction has raised a few eyebrows, especially as the number of football staff has been slashed from 222 to 112. This is essentially due to a group restructure, where some staff are now paid by group companies, which then charge the club for services provided.

This is undoubtedly an example of fancy footwork with some people accusing City of finding a device to get round FFP restrictions. There is likely to be a net reduction, as some of these costs will be shared among group companies, but it is difficult to believe that UEFA will not have access to the full details, so could make a judgment whether this treatment is reasonable. In any case, many of these costs will simply be booked elsewhere in City’s accounts, i.e. external charges have risen £17 million from £42 million to £59 million in 2013/14. Furthermore, it is likely that the majority of that headcount reduction refers to lower-paid staff.

In addition, there are a couple of other underlying reasons to explain the year-on-year reduction: (a) the 2012/13 figures included compensation paid to Roberto Mancini and his coaching staff – which other clubs usually report under exceptional items; (b) Soriano has renegotiated a number of contracts with a lower basic salary, but higher bonus payments.

Whatever the rights and wrongs of City’s reported wages, they have been overtaken by United, whose wage bill rose to £215 million in 2013/14. However, they are still around £40 million higher than Arsenal £166 million, while Chelsea are still to report wages for 2013/14 (£173 million in 2012/13). It should be noted that one of the clauses in UEFA’s FFP settlement states that City cannot increase their wage bill during the next two financial periods (2015 and 2016) – though performance bonuses are not included.

Interestingly, despite last season’s reduction, City now have the second highest wage bill in Europe with €256 million, ahead of both Real Madrid €250 million and Barcelona €248 million. Much of this is due to the exchange rate used (this calculation is based on the 1.25 rate that Deloitte are likely to use in their 2014 Money League) and it also depends on how clubs account for things like image rights, but it does make you think.

City have spent (net) over half a billion in the transfer market since 2007/08, but there has been a noticeable slowdown in player investment in the last few seasons. Up until 2011/12, the club spent £415 million, averaging £83 million a season, but this has reduced to £128 million in the last three seasons, halving the average annual spend to £43 million.

In fact, they have been outspent in the last three seasons by both United £231 million (around £100 million more) and Chelsea £137 million. It’s a whole new ball game at City, as their desire to curb their expenditure has also been impacted by FFP restrictions. They agreed with UEFA that they would “significantly limit spending in the transfer market for seasons 2014/15 and 2015/16”, including a €60 million limit (net) for the 2014 summer transfer window.

On top of that, their squad size for UEFA competitions has also been limited to 21 players (23 were registered in 2013/14), which, according to manager Manuel Pellegrini, was the key factor behind the departure of striker Alvaro Negredo to Valencia.

Either way, the reduced transfer activity resulted in player amortisation (the annual cost of writing-off transfer fees) falling from £81 million to £76 million.

Unsurprisingly, City have zero financial debt, though official gross debt figures include £67 million of finance leases, i.e. future obligations under the Etihad Stadium lease. However, there are £101 million of contingent liabilities (up from £54 million in 2013) for additional transfer fees, signing-on fees and loyalty bonuses that will become payable upon the achievement of certain contractual conditions.

Since his arrival in 2008, Sheikh Mansour has invested £1.1 billion into Manchester City in six years, either through new loans or issuing new share capital. Any outstanding owner loans were converted into equity in December 2009.

One of the most important issues for Manchester City has been FFP. Although the club believed that it had complied with these regulations, there was “a fundamental disagreement between the club’s and UEFA’s respective interpretations of the FFP regulations on players purchased before 2010.” Basically, the club thought that it would have been able to exclude £80 million of such costs from its break-even calculation, but this was not allowed, as the break-even deficit in 2011/12 was not entirely due to pre-June 2010 player contracts. The difference was negligible, but this meant that the entire £80 million could not be utilized.

Although City felt that the goalposts had been moved after the game had started, notably due to a 2013 change in UEFA’s guidance notes, they decided to draw a line under the matter and not contest the ruling in the courts. They were fined €60m (£49 million) of which €40m (£33 million) was suspended, assuming that the club follows the other measures, leaving €20m (£16 million) booked in the 2013/14 accounts.

This must have been particularly galling, given that PSG were fined the same amount, despite a lot more substance to City’s activities. Interestingly, UEFA did not rule against City’s Etihad deal, on the grounds that it was not a “related party transaction” and was therefore permitted.

City have also specific allowances for FFP losses of €20 million in 2013/14 and €10 million in 2014/15, as opposed to the cumulative allowance of €30 million over those two seasons for all other clubs. In practical terms, this is unlikely to have much effect on City, as their 2013/14 loss can exclude infrastructure costs and the £16 million FFP settlement, while they plan to be profitable from 2014/15 onwards. Indeed, Soriano said that the club expected to enter the 2015/16 season with “no outstanding sanctions or restrictions.”

That said, the measures restricting the net transfer spend and the wage bill must be influencing City’s approach to some extent when bidding for the top players.

Soriano concluded that City had reached “a new level of financial sustainability” in 2013/14. Given the extensive discussions that City had with UEFA when reaching their “compromise” settlement, it has to be considered likely that the club's FFP problems should now be behind them – always assuming that the team continues to perform on the pitch, especially qualification for the Champions League.


  1. Excellent analysis produced and presented in a concise and intelligent way. Its just a great pity that the myth makers and truly ignorant are incapable of accessing and absorbing the progress the club has been making. Swiss Ramble deserves enormous respect and admiration for producing what others seem incapable of.

  2. Wait until thy need to spend to replace existing squad who are all growing old together.

    1. It's alright, we can just sell them on to New York for whatever figure we choose :P

  3. I think you will find that the club are now in a position to replace the players on a gradual basis.The spending when the takeover first took place was to accelerate the team to be challenging for honours which it has.
    All the key players have several years at the top level yet.
    Some like Hart,Mangala,Silva,Jovetic and Aguero have still not reached their true potential yet even though they are world class.
    You'll find that other clubs eg Manchester united have and will be spending a fortune to try and keep up.

  4. City will be at #1 within 5 more years. Messi will take care of shirt sales for us.

  5. The owners seem committed, but the reality is that their connections provide those lucrative commercial deals. The Abu Dhabi royal family own Etihad, and City are owned by a member of the royal family. Not sure how UEFA decided it wasn't a related transaction, but anyway that's what they decided.

    I also wonder about the new training facilities, and how that benefits them in terms of FFP, as I know such expenditure is excluded, not sure it offsets anything else, if expenditure on it is overstated.

    Anyway, the club is progressing, but not convinced of it's permanence without oil money, but the oil money may last a long time anyway like Moratti at Inter.

  6. Anon,

    I'm quite sure that UEFA follow International Accounting Standard 24 (IAS24) when determining who is or isn't a related party and IAS24 guidance shows that Etihad isn't a related party. There are other smaller second tier sponsorship deals that City have that are with related parties. I'll also concede that we have been quite heavily reliant on Abu Dhabi-based sponsorship but that reliance is getting less by the day due to the club signing more and more deals with companies based in other countries across the globe. It's been clear to a lot of City fans for a long while (but not so clear in other quarters) that this was the plan all along - initial heavy investment which in turn creates a sustainable business model for the club to keep challenging the elite teams. Where City now currently stand shows to me that we ought not to have to rely on "oil money" going forward, but I accept Swiss Ramble's point that we need to continue to be relatively successful on the pitch in order to be self-funding.

  7. How much is the premier league TV-deal comparing it with the spanish, italian and german leagues? Can you put i in numbers? thx!


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