The Truth About Debt At Barcelona And Real Madrid

Despite their failure to reach next month’s Champions League final, Barcelona and Real Madrid are by common consent the best two club sides in world football. Featuring superstars such as Lionel Messi and Cristiano Ronaldo, their talented players entertain and delight us in equal measure, as they dominate La Liga season after season.

However, admiration of their exploits is tempered by the financial advantages that they enjoy compared to other less fortunate clubs. Not only do they generate far more revenue than anybody else (around €100 million higher than the nearest challenger, Manchester United), but one of the main reasons for this substantial competitive advantage is an unbalanced domestic TV deal that awards the two Spanish giants almost half of the money available.

Their reputation off the pitch also suffered a hit recently in the media when it was “revealed” that these great teams were built on a mountain of debt (€590 million at Real Madrid and €578 million at Barcelona), raising questions as to whether this was, to coin a phrase, “financial fair play.”

Quite why this came as a surprise to some analysts is a little perplexing, given that the clubs’ accounts have been available to the public for many months. Whatever.

"Pep Guardiola - Goodbye cruel world"

The fundamental issue is whether this debt is too high, as many commentators suggest, with the implication that these grand old clubs might even be in some financial difficulty.

That might seem like an easy question to answer, but, as is so often the case in the murky world of accounting, it’s not quite so simple. To give a comprehensive response, we have to do three things:

1. Importantly, understand what this debt figure actually represents, as there are numerous definitions, all of which can be equally valid in different circumstances.

2. Look at the overall strength (or weakness) of each club’s balance sheet, i.e. also at assets, not just liabilities.

3. Explore how well the debts are covered by items such as income and cash flow.

To avoid looking at Madrid and Barcelona in isolation, we should also compare their debt position with that at other leading clubs. For the purpose of this exercise, I have opted to look at two English teams, Manchester United and Arsenal, as they are useful comparatives, who are viewed as being at different ends of the spectrum. The former are known for the large amount of debt they have been carrying since the Glazers bought the club via a leveraged buy-out, while the latter are often portrayed as the poster boy of sustainable football clubs.

"Jose Mourinho - I couldn't bear to be special"

1. What is debt?

For people without a financial background, the different definitions of debt can be a bit confusing, as acknowledged by UEFA’s snappily titled Club Licensing Benchmark report, which stated, “In practice, the term ‘football club debts’ has been used in many different ways with a great deal of flexibility, references ranging from the very broad, totalling all liabilities that a club has, to the narrow definition of debt financing either including or excluding interest-free owner loans.”

At the narrowest extreme, we have just bank debt: at the broadest extreme, we can use total liabilities, which covers all financial obligations, including tax liabilities, trade creditors, provisions for future losses, accrued expenses and even deferred income. Often, when the media refer to debt, they actually mean total liabilities.

This includes what might be described as operational debt, such as: (a) trade creditors (payables) for amounts outstanding on bills for products or services received, e.g. rent, electricity; (b) money owed to staff, e.g. wages earned by staff paid at the end of the month, bonus payments; (c) other accrued expenses (accruals), which are the same as payables except no invoice has yet been received; (d) provisions, which are an estimate of probable future losses, e.g. legal claims; (e) and, most bizarrely, deferred income for payments received for services not yet provided, e.g. season ticket revenue for matches to be played in the future.

That last one highlights one danger of using liabilities as a definition for debt, as season ticket money received in advance is clearly not a bad thing, as UEFA explain: “It is recorded as a liability, as accountants consider the cash received as not yet being fully earned until the matches take place. This is a liability, but not a debt that will have to be paid back.”

So, much of Madrid’s €590 million and Barcelona’s €578 million debt includes liability for what might be termed normal operations. If we apply the same definition to Manchester United, they have debt (total liabilities) of just under €1 billion (£824 million converted at a rate of 1.20). Even Arsenal’s debt on the same basis is €524 million, which the journalists would no doubt describe as “eye-watering” if they were talking about others and not their template for a well-run club. To use an old adage, you have to make sure that you are comparing apples with apples.

Of course, if you wanted to make a club’s debt look as bad as possible, then you would absolutely use the total liabilities definition. However, it is very conservative to say the least. Indeed, in response to their critics, Madrid and Barcelona might feel like misquoting Mark Twain: “The reports of my debt have been greatly exaggerated.”

The net debt reported in an English club’s financial statement will be in line with IFRS (International Financial Reporting Standards) and essentially covers purely financial obligations, such as overdrafts, bank loans, bonds, shareholder loans and finance leases less cash. On this basis, the gross debt of Madrid and Barcelona at €146 million and €150 million respectively is not only considerably smaller than the figure highlighted in the press, but is also much lower than Arsenal €310 million and Manchester United €551 million.

The difference is not quite so large for net debt, as both United and Arsenal have substantial cash balances, but the Spanish clubs are still lower: Madrid €48 million and Barcelona €89 million. Arsenal are much of a muchness with €117 million, while United are the outlier with a hefty €370 million.

In their Financial Fair Play (FFP) guidelines, UEFA introduce a third definition of debt which lies somewhere between the narrow calculation employed in annual accounts and the widest possible measure of total liabilities: “A club’s net player transfers balance (i.e. net of accounts receivable from players’ transfers and accounts payable from players’ transfers) and net borrowings (i.e. bank overdrafts and loans, owner and/or related party loans and finance leases less cash and cash equivalents).”

They go on to explicitly state, “Net debt does not include trade or other payables.” However, it does include the net balance owed on player transfers, which is a reasonable approach to take, as this can be an important element in the business model adopted by some football clubs, e.g. this amounts to €76 million at Madrid (actually down from €111 million the previous year and an astonishing €211 million in 2009), though it is only €12 million at Arsenal, which probably comes as no surprise to those fans that have been exhorting the club to spend some money.

This has clearly been an important factor in allowing Madrid to finance big money acquisitions. Although all clubs make stage payments for transfers, very few do so to the same extent as Madrid (and indeed Barcelona).

Of course, this does not make the practice inherently wrong. Indeed, UEFA commented, “It is worth noting that the size of transfer payables reported in financial statements can be influenced by the timing of the financial year-ends relative to the timing of transfers, and that transfer payables are, in most cases, not overdue but in line with the payment schedule agreed between the respective clubs.”

Under this UEFA definition, it is remarkable how similar the net debt is between Madrid, Barcelona and Arsenal, with all three clubs reporting a balance in a narrow range of €124-131 million. The exception to the rule is United with, deep breath, €442 million.

2. Strength of the balance sheet

To state the blindingly obvious, liabilities are only one side of the story (or balance sheet). To get a full picture of a football club’s health, we also have to look at its assets. This is where the English clubs start to look better, as they tend to have higher assets, especially as they usually own their own stadiums.

United’s net assets (assets less liabilities) are a mighty €973 million, though €618 million of this is due to inter-company receivables from the parent undertaking, while Arsenal have a highly respectable €322 million. Madrid are far from shabby with net assets of €251 million, but Barcelona fall down on this measure with net liabilities (also described as negative equity) of €69 million. In other words, their reported liabilities are larger than their reported assets. Barcelona are far from alone in this, as UEFA’s benchmarking report noted that 36% of clubs reported negative equity in 2010, but it is still nothing to be proud of.

If this ratio is refined to only cover current assets and liabilities (payable within 12 months), then it is even worse for the Spanish clubs, as they both have net current liabilities: Madrid €141 million and Barcelona €226 million.

Once again, the accounting values are a little misleading when looking at the balance sheet, because of the way that certain assets are treated in the accounts. As UEFA say, “Some of the principal assets of a club, such as a loyal supporter base, reputation/brand, membership/access rights to lucrative competitions, and home-grown players, are not included within balance sheet assets since they are extremely difficult to value, despite them unquestionably having a value. These unvalued assets tend to be greater for larger clubs.”

"The Glazers - Money (that's what I want)"

This is highlighted when a football club is sold. Invariably, the purchaser pays a higher price than the fair value in the accounts and the difference is booked as an asset called goodwill. In this way, Manchester United’s balance sheet includes £421 million of goodwill.

This can also be seen very clearly with player valuations. In the accounting world, when a player is bought, football clubs do not expense the cost immediately, but instead book it onto the balance sheet as an intangible asset and write it off evenly over the length of the contract. Following the Bosman ruling, the assumption is that the player will have no value after his contract expires, since he could then leave on a “free”.

However, the value in the real world is almost always higher. As Javier Faus, Barcelona’s Vice President of Finance once explained, his club has over €250 million of assets that are not reflected in the balance sheet. This is particularly the case for the Catalans, as their team is full of players developed in-house by the legendary La Masia, and these effectively have zero value in the accounts. I don’t know exactly how much the likes of Messi, Xavi and Iniesta would be worth if sold, but I do know that it’s more than zero.

The respected Transfermarkt website does actually list values for each major team’s squad, so we can get an idea of how much stronger each club’s balance sheet would look if you applied real values instead of accounting values. As expected, this is most striking in the case of Barcelona, where the real value is estimated as €591 million, so €470 million higher than the books, leading to adjusted net assets of €401 million.

Of course, it would kind of defeat the object if a club were to realise that value by selling all its players, but a few judicious sales can make a big difference to the reported strength of a club’s balance sheet.

3. Debt coverage

As we said earlier, Real Madrid (€480 million) and Barcelona (€451 million) have the highest revenues in world football, covering around 80% of their debt, which is significantly higher than their English counterparts, Arsenal 57% and Manchester United 40%. In Arsenal’s case, this is obviously a function of much lower revenue (€307 million), even though I have included property income, as liabilities are not split by business segment.

However, as the old saying goes, “revenue is for vanity, profit is for sanity”, so a more useful ratio might be cash flow to debt, which provides an indication of a club’s ability to cover total debt with its annual cash flow from operations. There are many ways of defining cash flow, but I have used EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) for simplicity’s sake. Others might adjust for (irregular) profit on player sales, while you could also use free cash flow, (operating cash flow minus capital expenditure).

Contrary to popular belief, Real Madrid and Barcelona are relatively profitable: Madrid have made total profits of around €200 million in the last five years, including €47 million last season; while Barcelona’s loss was only €12 million. Adjusting for non-cash flow expenses like depreciation and amortisation plus interest produces very impressive EBITDA of €151 million for Madrid and pretty good €66 million for Barcelona. In the same way, Manchester United’s notable ability to generate cash results in excellent EBITDA of €138 million.

So, Madrid’s cash flow over debt ratio comes in at 26%, much better than the others: Manchester United 14%, Arsenal 13% and Barcelona 11%. Simply put, the higher the percentage, the better the club’s ability to pay its debt.

While it is clearly important to be able to ultimately pay off debt, a club’s ability to service its interest expenses is absolutely crucial. This can be explored with the interest coverage ratio (cash flow/interest payable), which tells a similar story to debt coverage, i.e. Madrid’s ratio of 11.7 is by far the best, though the others are not too bad: Barcelona 4.5, Arsenal 3.9 and Manchester United 2.5 (anything below 1.5 is a bit questionable).

What is striking here is just how much higher the interest payable is at United €56 million (£46 million) compared to the other clubs: Arsenal €18 million, Barcelona €15 million and Madrid €13 million. In fact, both “heavily indebted” Spanish clubs actually pay less interest than the two English clubs.

Let’s look at the debt in a bit more detail for the clubs we are reviewing, as this might throw up some other anomalies.

Real Madrid’s accounts use yet another definition for debt, which is essentially the same as UEFA’s definition (bank debt plus net transfer fees payable) plus selected creditors (essentially stadium debt). This gives a net debt of €170 million, a reduction of €75 million from the €245 million in 2010. That’s pretty impressive, especially when we consider that the net debt peaked at €327 million the year before.

That said, for many years before 2009 they had no bank debt at all. The loans are split evenly between Caja Madrid and Banco Santander and were mainly used to finance the major signings that summer. The interest rate is relatively low, but the loans do have to be repaid by 2015, though even here Madrid were given some leeway with lower payments in the first three years.

Stop me, if you’ve heard this before, but Barcelona also use a different definition for debt, providing their Annual General Meeting with a figure of €364 million, which is not fully explained, but the main distinguishing factor is that some debtors are deducted to arrive at the net balance.

This represents a 15% reduction from the €430 million reported the previous season, but is still higher than the preceding years. Indeed, Javier Faus, Barcelona’s Vice President of Finance, admitted, “We’ve reduced the debt, but we’re still in a delicate situation. The debt is still too high for us to be able to dictate our future. We can’t afford to owe so much money to the bank, and we need to generate more income.”

He emphasised the board’s concern when he added, “It’s not the debt that we want, and we have to reduce it further, to sustainable levels, with regard to the cash flow generated by the club. We’ll continue to work on it.” Ideally for Faus, the net debt would be “just over €200 million.”

Indeed, Barcelona were forced to take out syndicated loans of €155 million in 2010 from a group of banks led by La Caixa and Banco Santander, though club president Sandro Rosell has defended Barca’s debt level, arguing that it is eminently serviceable via its huge revenues, “The club is not bankrupt, because it generates income. The banks know that we have a business plan that will allow them to recover the money.”

Indeed, the willingness of Spanish banks to help Barcelona is a factor, as it is difficult to imagine a scenario where a local financial institution would be responsible for damaging the emblem of Catalonia, given that its customer base is largely made up of the club’s supporters – even with the struggles in the Spanish economy. This is evidenced by the banks ignoring Barcelona’s breach of commitments in terms of total liabilities made when securing the 2010 loan.

Manchester United have also succeeded in reducing their net debt, which was cut from £377 million to £308 million (£459 million gross debt less £151 million cash), after the club bought back £64 million of its bonds. This is down from a peak of £474 million in 2008.

Last year the club raised around £500 million of funds via a bond issue, so that they could repay the previous bank loans, in order to fix the club’s annual interest payments for a longer period (up to 2017), thus ensuring more financial stability. However, there was a price to be paid, which can be seen with a comparison to Arsenal’s bonds, as the debt has to be repaid quicker (7 years vs. 21 years) and the interest rate is higher (8.5% vs. 5.75%).

The really annoying thing for United fans is that this is still unproductive debt. While clubs like Chelsea and Manchester City have used their debt to fund the purchase of better players and Arsenal used theirs to build a new stadium, United’s debt was only used to enable the Glazers to buy the company.

At least the owners managed to find £249 million last November to pay off the prohibitively expensive Payment In Kind notes (PIKs), which carried a stratospheric interest rate of 14.25% (rising to 16.25%), though it is unclear how they funded this repayment. Including the PIKs, United’s gross debt was at one point as high as £773 million with annual interest payments of around £70 million. To paraphrase Winston Churchill, “never has so much been owed by so many to so few.”

"Emirates Stadium - good debt"

Included within the net debt as at 30 June 2011 are astounding cash balances of £151 million, though this was boosted by cashing the £80 million Ronaldo cheque and the £36 million upfront payment from the shirt sponsor. United’s board has argued that it likes to retain so much cash to provide “flexibility”, but this seems a strange decision when they have to pay 8.5% interest on the bonds, while cash balances are unlikely to attract more than 2% interest.

The latest financial engineering from the Glazers is the decision to float a minority stake of the club via an IPO (Initial Public Offering) on the Singapore Stock Exchange with whispers suggesting that the board is seeking to raise £600 million for a 30% stake. The IPO was postponed last year due to volatile market conditions, but is now reportedly back on the agenda.

If some of the proceeds were used to repay part of United’s debt, as the club has apparently briefed journalists, then they would benefit from lower interest payments, though this would not improve cash flow if they were then replaced by dividends to the new shareholders.

Arsenal have now eliminated the debt they built up as part of the property development in Highbury Square, reducing gross debt to £258 million as at end-May 2011. That comprises the long-term bonds that represent the “mortgage” on the Emirates Stadium (£231 million) and the debentures held by supporters (£27 million). Once cash balances of £160 million are deducted, net debt was down to only £98 million, which is a significant reduction from the £136 million last year and the £318 million peak in 2008.

Many fans ask whether it would be possible for Arsenal to pay off the outstanding debt early in order to reduce the interest charges, but chief executive Ivan Gazidis has implied that this is unlikely, arguing that not all debt is bad, “The debt that we’re left with is what I would call ‘healthy debt’ – it’s long term, low rates and very affordable for the club.” In any case, the 2010 accounts clearly stated, “Further significant falls in debt are unlikely in the foreseeable future. The stadium finance bonds have a fixed repayment profile over the next 21 years and we currently expect to make repayments of debt in accordance with that profile.”

So, Real Madrid and Barcelona might not exactly be sitting pretty in terms of debt, but their situation is not quite as bad has been made out. However, it is true to say that debt is a major issue for many other Spanish clubs.

A recent study by Professor José Maria Gay de Liébana of the University of Barcelona revealed that total debt of La Liga clubs was €3.5 billion with half of them having negative equity (though it should be noted that the accounts from seven clubs were only from the 2009/10 season and two from as far back as 2008/09).

As Professor Gay said, “Everyone is concentrated on Madrid and Barca, who are the kings of the banquet, while the rest live a real uncertain future. Many clubs are living dangerously.”

While Madrid and Barcelona unsurprisingly top the list with debt (total liabilities) of €590 million and €578 million, seven other clubs have debt over €100 million, most notably Atletico Madrid €514 million, Valencia €382 million (even after selling stars like David Villa, David Silva and Juan Mata) and Villarreal €267 million. In contrast to the big two’s debt cover (by revenue) of around 80%, theirs is much lower, e.g. Atletico Madrid just 19%.

Spanish football’s struggles are highlighted by the fact that no fewer than six clubs in the top division are currently in bankruptcy protection: Racing Santander, Real Mallorca, Real Zaragoza and all three promoted clubs (Real Betis, Rayo Vallecano and Granada). Furthermore, the beginning of this season was delayed by a players’ strike over unpaid wages. The figures are frightening with 200 players owed a total of €50 million, up from €12 million owed to 100 players the previous year.

"Athletic Bilbao: good football, low debt - what's not to like?"

This is due to two factors: (a) Spanish football’s inability to govern itself properly; (b) the awful state of the economy.

Up until recently, the Spanish Football League (LFP was unable to impose any meaningful sanctions on financial miscreants, but a new law came into force in January 2012 that now authorises the authorities to relegate a club in administration – though whether they have the stomach for a confrontation with a club’s supporters is debatable.

In fairness to the LFP, they have also been impacted by the troubled economy, as Spain is entering recession with a record unemployment rate of 24% (a horrific 40% for young people) and Standard & Poor’s cutting the country’s credit rating. As LFP president José Luis Astiazaran noted, “We are not immune to the wider economy.” Professor Gay agreed, “Football is largely a reflection of what has been happening in our economy, with people spending way beyond their income, relying on fanciful growth forecasts and ending up with unsustainable debt and an asset pricing bubble.”

It could be argued that the dominant position of the two Spanish powerhouses is slowly killing Spanish football. This financial pre-eminence is boosted by the “every man for himself” approach taken with the individually negotiated TV deals. Madrid and Barcelona both trouser €140 million a season with the nearest club to them, Valencia, receiving about a third at €48 million. Thirteen of La Liga’s clubs receive between €13-18 million, including Athletic Bilbao with just €17 million. What price them holding on to all of the scintillating young talents that have enthralled us during their Europa League campaign?

Spain is unique among the leading European leagues in not having a collective TV deal, which explains why accusations of selfishness have been aimed at Madrid and Barcelona. The Sevilla president, José Maria del Nido, complained, “We cannot allow a situation where, because two clubs are very powerful, they bring about the demise of the Spanish league.”

That said, football is an amazingly resilient industry and it has not yet collapsed under the weight of debt in Spain, even though the issue is not a new one. In fact, La Liga debt has been about the same level of €3.5 billion for the last four years. Although it rose €50 million last season, the 2001 debt of €3.53 billion is actually lower than the €3.561 billion peak in 2008.

Nevertheless, there is no room for complacency, when a comparison is made with the other major European leagues. At €3.5 billion, Spanish liabilities are by far the highest, almost a billion Euros more than Serie A €2.7 billion (up €327 million in 2010/11) and the Premier League €2.6 billion (2009/10 figure). The debt levels in the financially disciplined leagues are unexpectedly much smaller: the Bundesliga €0.9 billion and Ligue 1 €0.7 billion.

In addition, the Spanish league also has the worst debt coverage (in terms of revenue) at 47% compared to the others: Serie A 63%, Premier League 95%, Ligue 1 140% and the Bundesliga 193%.

This sad state of affairs was underlined when it emerged that Spanish clubs owed the taxman €752 million, including €426 million from clubs in the top division. In fact, that came from just 14 of the 20 clubs, as the remaining six had no outstanding tax debt. According to the AS newspaper, that included Real Madrid, which seems a little strange, as both the club’s accounts and the study by Professor Gay do list tax liabilities.

Once again, Atletico Madrid have the dubious honour of leading the pack with the largest tax debt of €155 million, even after paying the €50 million from the sale of Sergio Aguero to Manchester City directly to the tax authorities. The next highest was Barcelona with €48 million.

This high level of tax debt is galling to many, particularly given the fragile Spanish economy, not to mention the fact that Spain has five clubs in the semi-finals of the Champions League and the Europa League – including the aforementioned Atletico Madrid.

As always, Uli Hoeness, the forthright president of Bayern Munich, got straight to the point, “This is unthinkable. We pay them hundreds of millions to get them out the shit and then the clubs don’t pay their debts.” In fairness, some clubs have negotiated payment plans with the authorities, such as Atletico Madrid (€15 million a year), Levante (5 years) and Mallorca (10 years).

On top of that, the Spanish government and the football league recently announced new rules that would pave the way for the clubs to repay the outstanding tax debts, as the threat of intervention from European Union anti-trust officials loomed large. The LFP said, “Economic control will be strict, as well as the sanctions regime.” These measures will include clubs being obliged to set aside 35% of TV rights revenue for tax payments from the 2014/15 season; clubs possibly being forced to sell players to raise cash; and clubs maybe even booted out of the league.

"Holidays in the sun"

Of course, Spain is hardly unique in having clubs facing severe tax issues, as fans of Rangers and Portsmouth would no doubt attest, but it is the magnitude of the debt in Spain that is concerning, especially given the relatively low revenue of some of the clubs involved.

Given the understandable focus on tax liabilities recently, it might also be a good idea for UEFA to include these in their definition of debt in order that clubs take this issue more seriously than they appear to have done in the past. It is actually a little strange that UEFA do not, as Article 50 of the FFP regulations specifically states that there should be no overdue payables to social/tax authorities (as well as employees) in the same way that Article 49 prohibits overdue payables towards football clubs. While the latter is included in their definition of net debt, the former is not.

In conclusion, while there are some very real debt problems in Spanish football, the situation is not quite so dramatic at Barcelona and Real Madrid as some would have people believe. It would obviously be better for their balance sheets if the debt was lower, but their ability to generate revenue is unsurpassed, admittedly partly due to the current unfair TV deal, but also their high gate receipts and awesome commercial strength. These operations continue to grow, as seen by Barcelona’s record-breaking shirt sponsorship deal with the Qatar Foundation and Real Madrid’s plans to build a $1 billion holiday resort in the United Arab Emirates.

"Put your shirt on it"

Of course, the two Spanish giants may still come under pressure from their creditors at some stage, especially if they embark on a summer spending spree following the disappointing Champions League semi-final exits. Nor should the impact of Spain’s faltering economy be trivialised, but the fact is that right here, right now, the important debt (bank loans, transfers and tax liabilities) is relatively low, at least for clubs of this size.

When reading reports on how much Barcelona and Real Madrid owe, it’s not quite a case of “don’t believe what you read”, but you do need to understand what any analysis is actually referring to, because, as we have seen, debt has many different definitions.

Caveat emptor – or something like that.

The Zlatan Ibrahimovic Transfer Analysed

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

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

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

"Galliani reaching for his wallet"

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

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

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

"Heads above the rest"

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

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

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

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

"I'm no makeweight"

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

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

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

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

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

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

"Right sort of dive"

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

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

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

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

"Raiola - football agent extraordinaire"

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

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

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

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

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

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

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

Not so fast, big boy.

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

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

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

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

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

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

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

"Shut the door on your way out"

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

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

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

"What does Rosell think of the deal?"

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

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

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

"David Villa - new kid in town"

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

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

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

"The other side of the tracks"

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

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

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

"Meet El Presidente"

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

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

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

"Where did it all go wrong?"

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

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