Where Does Stoke City's Money Come From?

At last the 2010 summer transfer window is over and we can concentrate on watching some football instead of the frenetic efforts of Sky Sports presenters desperately trying to discover some exciting news on deadline day. In reality, it was all a bit of a let down with transfer spend over 25% lower than last year. A variety of reasons have been put forward to explain this drop: the effect of the economic downturn; clubs trying to sort themselves out before UEFA’s Financial Fair Play Regulations begin to bite; and the introduction of restrictions on squad size.

Despite all these factors, clubs have obviously still spent some money on transfers, ably led by the usual suspects, namely Manchester City (a long way ahead of the rest with net spend of around £100 million) and Chelsea (mainly due to the purchase of Brazilian midfielder Ramires). Harry Redknapp took time out from his football management to do a bit of last minute wheeler dealing to ensure that Spurs remained high in the spending charts, while Birmingham continued to run through Carson Yeung’s millions, but who’s next on the list?

You would probably be surprised if I told you that it was unfashionable Stoke City, but it’s true. Although their net spend of £15 million is not particularly high, it’s still more than the likes of Manchester United, Arsenal and Liverpool. This is no flash in the pan either, as Stoke have consistently been among the top spenders since their return to the Premier League a couple of years ago (£30 million in 2008 and another £18 million in 2009).

OK, it’s perfectly understandable that a team newly promoted from the Championship need to splash the cash in order to be competitive, but where on earth do they get their money?

Although Stoke is a club with a lot of history, having been one of the 12 founding members of the Football League way back in 1888, they had fallen on hard times a few years ago. Before their recent promotion, the last time they participated in the top flight was in 1985, when they were relegated with the embarrassingly low total of 17 points. This was a far cry from the glory days of “The Wizard of the Dribble”, Sir Stanley Matthews, a true legend of the game.

Recent vintages have not been so fine, but Stoke did enjoy some success under long-serving manager Tony Waddington in the early 70s, winning the League Cup in 1972 and finishing just four points behind First Division champions Derby County in 1975. And let’s not forget that Stoke also provided England with two of its greatest goalkeepers in the form of World Cup winner Gordon Banks and most capped player Peter Shilton.

However, for most fans, those days are in the distant past, so it makes you wonder how they have managed to claw their way back to the upper echelons and specifically who has provided the funds enabling Stoke’s rise.

"Coates points the way forward to Pulis"

Step forward, Peter Coates. A miner’s son, Coates is the sort of English hometown man made good that was supposed to be a dying breed among owners of Premier League football clubs. Actually, Stoke’s chairman has made not just one, but two fortunes, first from stadium catering in the north of England, then from the online gambling giant bet365. The success of his internet betting firm has propelled Coates up to 128th place in the Sunday Times Rich List and is the source of the major investment in Stoke City.

In fact, this is Coates’ second bite of the cherry, as he was also chairman of Stoke until 1997, when he stepped down from the position due to fan protests following some poor performances by the team. He remained the club’s majority shareholder before selling his stake to an Icelandic consortium two years later, though he controversially retained a “golden share” with special voting rights. However, Stoke’s fans were reminded of the old dictum, “Be careful what you wish for”, as the Icelandic reign was an unmitigated disaster, and they were relieved to see Coates taking back control in 2006.

The old/new chairman wasted no time in bringing back former manager Tony Pulis to drive the team forward and make sure that his cash was well spent. The talismanic Welshman did such a good job that the team was promoted to the giddy heights of the Premier League just two years later.

"We are going up, say we are going up"

As the club’s latest accounts admit, Stoke City “could not have achieved our recent success without huge investment.” Although Coates only paid £1.7 million to buy a majority stake, this allowed him to invest another £8.3 million directly into the club, giving a total of £10 million spent. Around £3.3 million was used to repay Icelandic loans with the former owners writing-off their other debts. That left the remaining £5 million to fund future working capital requirements or, in plain English, cover losses. Since then, Coates has also had to pay an additional £2 million that was contingent on Stoke reaching the Premier League within three years, so the total “purchase” price effectively amounted to £12 million.

Without this investment, the stark alternative for Stoke would have been “to raise money through significant player sales and dramatically cut the player wage bill in order to bring expenses into line with income.” Nothing’s impossible, but let’s just agree that this option would have made promotion to the Premier League extremely difficult.

Instead, money has been poured into both the club’s playing side and many infrastructure improvements. Not only have Stoke City bought their Britannia Stadium outright and spent considerable sums on refurbishing it, but they have also committed £7 million to a new training complex at Clayton Wood.

The club has clearly come a long way since the dark days before Coates’ return when the “debt had risen to approximately £9 million and the company was technically insolvent.” The auditors at that time even felt compelled to emphasise that the club’s ability to continue as a going concern was reliant on the financial support of its holding company, which was described as a “significant uncertainty”.

These days, Stoke City are essentially debt-free (with the exception of Matthew Etherington’s gambling debts), being in the enviable position of having virtually no bank loans and £10 million of cash in the bank. As Tony Pulis said, “This is a great testament to the Coates family, who have put so much into the club.”

That’s absolutely right, as the club’s progress has been funded via interest-free loans from the chairman’s pocket. As at the last year-end (31 May 2009), Stoke City owed £17 million to its parent company. Stoke City Holdings Limited, which is to all intents and purposes the Coates family. However, the accounts then noted that this debt had “risen considerably” to £24 million, following the summer 2009 and January 2010 transfer windows.

Not to worry, as the Coates family have since converted these loans into capital in order to “put the club in a strong financial position, leaving the club unencumbered by debt.” This is not their first act of kindness, as the £8.3 million loan used for the 2006 investment was also converted into shares in the same way.

There’s no doubt that Stoke fans owe Peter Coates and his family a great deal. Since his return, they have invested nearly £40 million into the club: £3.7 million to complete the purchase followed by £32.3 million of loans, which they subsequently wiped clear by converting them into equity. Without this investment, the club would not just have struggled, but would have been in serious trouble.

And the good news does not stop there, as Stoke City actually made a small profit in 2009 after many years of losses. Coates said that the financial performance in 2006, when the club reported a record loss of £6.7 million under the Icelandic owners, could not be described “as anything but dire”. Although there was some improvement in the next two years, the club still did not break-even, though this was actually part of a considered strategy, whereby the club budgeted “to continue to make a loss of this order so that a player wage bill can be created to produce a competitive team on the field.”

This approach was taken to a new level in 2008 with a substantial increase in operating expenses from £10.8 million to £19.0 million “to help give Tony a competitive team in order to give us a chance of promotion.” Following a significant increase in the parachute payments made to clubs relegated from the Premier League, it had become even more difficult for clubs like Stoke to secure promotion, so Coates felt that he had to really push the boat out to ensure a level playing field. The loss was contained by some astute player sales, but the willingness to gamble on success was epitomised by the £575,000 fee paid to Newcastle for the loan of striker Shola Ameobi for just a few weeks in order “not to miss out.”

"One of Kitson's rare goals"

This policy of deliberately over-spending could have ended in tears, as it has done with so many clubs, especially as the 2008 loss would have been even higher without £2.3m profit from exceptional items (release of impairment provision and income from group undertakings). In fact, if the profit on player sales had been at the usual levels of around £1 million and these exceptionals had been excluded, the 2008 loss would have been nearly £10 million.

Of course, this is all hypothetical and in reality the strategy did achieve its objective, as Stoke City secured their promotion to the Premier League (and all its riches) on 4 May 2008 after a goalless draw at home to Leicester City. This lead to the club’s revenue and expenses growing in dramatic fashion the following year, which reflected the reality of playing in the big boys’ league.

In particular, staff costs virtually tripled from £14.4 million to £40.1 million. As Peter Coates drily explained, “The club has invested heavily to put together a team capable of being competitive in the Premier League, but this has come at a heavy cost in respect of the high initial player cost and the consequential ongoing wage bill.” That has translated into wages rising from £11.9 million to £29.7 million and player amortisation surging from £2.5 million to £10.4 million.

Funnily enough, the wages to turnover ratio has actually fallen to a respectable 56%, thanks to the much higher revenue in the Premier League. This was much better than the last Championship season, when this important ratio had soared to an unsustainable 106% as part of the push for promotion. All I can say is that it is just as well that Stoke managed to escape from the Championship.

In fairness, even though Stoke’s wage bill massively increased, they are still one of the lowest spenders in the Premier League. Only three teams had a smaller payroll in 2009, which means that Stoke significantly outperformed their expected league position based on wages when they finished 12th. To place their wage bill of £30 million into context, teams like Blackburn and Fulham pay 50% more, while Aston Villa and West Ham pay twice as much. The most extreme comparison takes place when Stoke play Chelsea, as their opponents receive five times as much in salaries.

Similarly, the major increase in player amortisation to £10 million has still left Stoke far behind most of their Premier League rivals, who are still “paying” for the transfer excesses of previous years. As you no doubt recall, when a player is bought, the cost is capitalised as an intangible fixed asset and amortised over the length of his contract. This means that the costs of buying a player are not fully reflected in the books in the year of purchase, but over time the amortisation costs can have a real impact on the profit and loss account, e.g. Chelsea’s annual amortisation is nearly £50 million.

The significant increase in costs begs the question of whether promotion was actually worth all that effort and investment? Leaving aside the obvious delights of playing in the “best league in the world”, from a financial perspective, the answer has to be resoundingly in the affirmative, as Stoke’s revenue has rocketed five-fold to £54 million within the space of a year. When you see the size of the prize, it becomes easier to understand why clubs speculate to accumulate.

When Coates returned to Stoke in 2006, he said that “the club needs to significantly improve its revenue streams”. Although there was some growth in 2008, Stoke’s revenue basically remained flat for many years and only took off after promotion, when they benefited from the Premier League’s enormous TV money.

Stoke do not break-down the revenue figure in their accounts, but analysis of the Premier League central distribution payments reveal that they received £36.3 million TV money in 2008/09 and this is clearly what has driven their gargantuan revenue growth. Good stuff, but it does mean that an extremely high proportion (over two-thirds) of the club’s revenue comes from television, which was only behind Wigan, Portsmouth and Blackburn in terms of Premier League clubs. Even though Stoke’s TV income is nowhere near as much as the leading clubs earn, mainly due to the money those teams receive from the Champions League, it is clear that they are inordinately dependent on this revenue stream.

Nevertheless, Stoke’s payment from the Premier League for 2010 will be £3 million higher at £39 million, partly because of the higher league position, and they can anticipate £10 million on top of that for the following season, as the new three-year collective deal for 2010-13 is worth about a third more than the previous one, due to the hefty rise in overseas rights. This is great news for Stoke (and others), but it’s a dangerous game to rely on a business model that puts all its eggs in one basket, especially if any future growth in TV money merely ends up in the players’ bank accounts.

Up until last year, the largest element of Stoke’s revenue almost certainly came from gate receipts, as with most teams outside the Premier League. Again, match day income is not separated in the accounts, though the chairman’s report in 2004 and 2005 gave a figure of £3.1 million. Local press reports suggested that each home game in the first season in the Premier League generated around £500,000, which would imply annual revenue of just over £10 million (adding in a couple of Cup games). Although that’s quite high growth, it does seem reasonable over four years, especially when we consider that after promotion there was a substantial increase in average attendance from just under 17,000 to nearly 27,000, the second highest in 45 years.

As the capacity of the Britannia Stadium is just over 28,000, a high proportion of games are sold-out, contributing to the intimidating atmosphere at the ground. Importantly for the club’s cash flow, an impressive 20,500 season tickets were sold for the 2009/10 campaign, helped by the club freezing ticket prices for two years in succession.

After over 100 years at the Victoria Ground, Stoke moved to the Britannia Stadium in 1997, but only completed the buy-out of the local council’s stake last December for £5 million. Coates argued, “Buying the Britannia made sense to us, as it’s better to own your own stadium.”

"Tuncay flying high"

That is undoubtedly true, as it gives the club security and facilitates any expansion plans. For example, the stadium currently has three open corners, which could each be filled in, adding 2,500 seats at a cost of £3 million apiece. However, they appear to be in no hurry to do this, as it is by no means guaranteed that they would be able to sell all those extra seats, which might compromise the vibrant atmosphere that undoubtedly provides an advantage to the home team. Potentially, they could also generate higher levels of turnover via more corporate hospitality, new ticket pricing strategies and improved catering and retail facilities.

So, if Stoke’s total revenue was £53.5 million and TV revenue was £37 million (Premier League distribution of £36.3 million plus a little bit more for Cup competitions) and match day revenue £10 million, by a simple process of subtraction, we can work out that commercial revenue must be of the order of £6-7 million. This looks pretty feeble to be honest, when you consider that even a club like Blackburn Rovers earns £9 million, but it makes sense when you see that Britannia’s shirt sponsorship is worth only £1 million a year.

Stoke have a long-standing relationship with Britannia with the recent four-year extension taking the partnership to 16 years, including shirt sponsorship, stadium naming rights and a deal whereby the building society pays a bonus based on the number of fans opening Stoke City Save and Support accounts. Although performance-related clauses in the agreement meant that Britannia doubled the shirt sponsorship after the team was promoted to the Premier League, it may be worth the club exploring other options when the deal expires, given that FxPro have just agreed to pay Aston Villa and Fulham £4-5 million a season for the privilege of putting their name on those clubs’ shirts.

"Sitting pretty?"

In contrast, Stoke have changed kit supplier this year, replacing Le Coq Sportif with Adidas in a new four-year contract. Although this move has not proved universally popular, as the new home shirt has done away with the traditional red and white stripes on the back, the club is still hoping to match last season’s record 40,000 replica shirt sales, which was much higher than the 15,000 sold in the Championship. As we have seen, everything’s on a different scale in the Premier League.

Having said that, when the club spoke about seeking to “maximise the commercial opportunities that come with Premier League status”, I was expecting a little more than staging The Greatest Ever Luncheon for Muhammad Ali (even though the man is a hero of mine) and hosting the start of the Tour of Britain cycle race.

So, given the colossal importance of the television money to Stoke’s finances, it is hardly surprising that the club’s “objective, above all others, is to retain our Premier League status.” As Tony Pulis added, “We’re desperately trying to stay in this league for the next three years for the benefits of the Sky TV money and everything that comes with it.” From that perspective, Pulis is the ideal manager, as he’s never suffered relegation in his 18 years of management with assorted clubs, and he’s maintained that tradition with Stoke, finishing 12th and 11th in the last two seasons.

His team have picked up a fair few critics en route for their uncompromising, no-nonsense style of play, but in a way you can understand this approach, when the priority is so obviously survival and the club’s resources are relatively limited. Their methods might not win them many friends outside the Potteries, but so long as they win points the team’s own fans will be more than happy. In fact, you get the feeling that they relish being the underdogs, which is helped by many of the players being given a second chance after failing at other clubs.

"Delap throwing down the gauntlet"

This attitude is greatly helped by possibly the loudest fans in the country, who have turned the Britannia into a fortress. Indeed, when the club was promoted, they sacrificed 500 seats by dividing the South Stand, so that the home capacity could be increased by 1,500 and yet more voices could belt out “Delilah”, the anthem adopted by Stoke fans in times of despair and now sung in celebration.

But would relegation really be so calamitous after the increase in the parachute payments paid to clubs dropping out of the Premier League? Well, it’s true that they have risen to £48 million (£16 million in each of the first two years, £8 million in each of years three and four), but this would still represent a drastic reduction for Stoke City. As we have seen, they will receive around £50 million revenue from the Premier League next season, so relegation would mean a highly damaging £34 million drop in their total revenue.

They would then be in danger of not meeting their payroll, so would have to sell their better (paid) players - unless Peter Coates once again stepped up to the plate to fund the losses. We do not have to look too far to see what could happen, as this is the procedure followed by Hull City after their relegation. Of course, this then risks becoming a vicious circle, as it is more difficult to be promoted back into the top division if you sell your best players.

"If the cap fits, wear it"

This is the reason behind Stoke’s repeated ventures into the transfer market. When they were promoted, they badly needed to get players in with Premier League experience in order to give themselves the best chance of avoiding relegation, but this was no easy task for many reasons. As Coates said, “One of the difficulties all promoted clubs have is the perception they will just come down again”, so it’s not easy to attract players, especially as “there’s a stigma attached to joining a club like Stoke”, according to Pulis. This was exacerbated by the club’s lack of expertise in the foreign market, which was amusingly the reason given by the Icelandic consortium for sacking Pulis, an accusation which the manager has since admitted is not totally inaccurate.

Despite these obstacles, Stoke have shelled out over £60m in the last three seasons as a sign of their ambition. In the first summer after promotion, Stoke bought ten new players, including the £5.5 million purchase of striker Dave Kitson from Reading, which smashed their previous transfer record of £1.2 million. Ultimately, Kitson turned out to be a non-scoring failure, but other purchases have more than proved their worth like Danny Higginbotham, Abdoulaye Faye and Matthew Etherington.

Over the 2009 summer period, Stoke attempted to enhance their squad, by signing several established Premier League players, most notably Robert Huth and Tuncay from Middlesbrough and Danny Collins and Dean Whitehead from Sunderland. This year has seen the influx of some more expansive players, hinting at a possible modification to the fairly predictable tactics in an attempt to improve their scoring record, with the likes of Kenwyne Jones, Eidur Gudjohnsen, Jon Walters and Jermaine Pennant (on loan) all arriving at the Britannia.

"Me and Mr. Jones"

In the midst of this flurry of activity, Stoke have refused to be held to ransom with chief executive Tony Scholes saying that they have walked away from a few “deals that weren’t right for this football club”, including Joe Ledley and Nikola Zigic, where the wage demands were above Stoke’s valuation. This attitude is not just prevalent in the boardroom, as Pulis also demonstrated an admirable understanding of football economics, “It’s not just about the transfer fee. It’s also the wages and the length of contract.”

Even with this prudent approach, Stoke City’s spending has been relatively high, which has only been made possible through their owner/benefactor Peter Coates. His importance to the club is clearly shown by the company’s cash flow over the last two years, which would have been negative without him issuing substantial new loans (£12.1 million in 2009 and £4.6 million in 2008). While this support is better than external funding, as Coates will not be demanding his money back any time soon (if at all), there are always some concerns around the benefactor model.

Although Coates says he has no plans to walk away from Stoke City, the fact is that he is 72 years old, so you have to look at his future intentions and those of his family. While Coates initially said that his family was not very keen on him returning to the club, he now takes great pains in thanking his daughter Denise, the “real driver behind bet365’s success”, and his son John for their contributions. Pulis concurred with this rosy view, when talking about the chairman, “I’ve got a fellow here who was born and bred in Stoke. He’s an absolute Stoke City nut. So is his son. And his grandson.” He concluded, “The Coates family will not do anything that will put the club in jeopardy.”

"Happy days for Peter Coates"

Nobody appreciates this dilemma more than Coates himself. He explained, “What we have done is put in money to get us to the Premier League and we are still doing it now to establish the club there.” So far, so good, but he added, “Going forward however it must be our aim to make Stoke City football club self-financing, so that it is not overly reliant on new funds being continually introduced by a benefactor.”

In short, the club is aiming for self-sufficiency, but still needs some help for the moment. However, if Stoke City do become a permanent fixture in the Premier League, then they should no longer have to rely on Coates to prop up transfers or the wage bill. A laudable intention, but the jury’s still out on that one, as we have seen how difficult it is for other clubs to wean themselves off their financial support.

This is where the investment in new training facilities and academy might help, as Stoke City could then start to develop its own youth policy and attract young players from other clubs. The average age of the first team is currently one of the highest in the Premier League, as grizzled old professionals battle to remain in the top tier, but that could change with a focus on in-house coaching and development.

"Matt's Entertainment"

When Coates took over the club in 2006, he pinpointed financial stability and ambition as the blueprint for future success. These are strange bedfellows in the world of football, but the plan seems to have worked. Stoke City appear to be a very well-run club, in fact they are in an astonishingly healthy financial state, compared to other clubs who have attempted to “live the dream.”

However, there are still numerous challenges ahead. As their chief executive reminded fans, “If you don’t do anything, the odds are that you don’t stand still, you go backwards.” His words sounded terribly prophetic when Stoke started the new season with three straight defeats, but a comeback win against Aston Villa proved that they’re still up for the fight.

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.

Celtic – If You Know The History

Another nail was hammered into the coffin of Scottish football last week when all three of their remaining entrants failed to qualify for the Europa League, leaving only Rangers to fly the flag. Nowhere was the disappointment more keenly felt than among Celtic supporters, who saw their beloved Hoops unceremoniously dumped out 4-0 by mid-ranking Dutch side Utrecht, after squandering a 2-0 lead from the home leg. This followed Celtic’s elimination from the qualifying stages of the Champions League by Portuguese side Braga, and meant that another European adventure was cut short almost before it had started. Manager Neil Lennon probably spoke for all fans when he complained, “I’m fed up with coming back from Europe with my backside being smacked.”

How the mighty have fallen, for these are very much the History Bhoys. Not only have Celtic won 42 Scottish league titles, including nine in a row between 1966 and 1974, but they were memorably the first British team to win the European Cup in 1967, when they beat Inter Milan 2-1. Under the leadership of the incomparable Jock Stein, the Lisbon Lions achieved this feat with a team of players all born within 30 miles of Glasgow. No wonder that Bill Shankly, who knew a thing or two about great managers, told his friend, “John, you’re immortal now.” Stein’s magnificent team almost repeated the feat in 1970, narrowly losing the final 2-1 to Feyenoord.

"A genuine legend"

More recently, Gordon Strachan recalled those glory days, when he became the first Celtic manager since Stein to guide his team to winning three league titles in a row in the 2007/08 season. While not quite attaining the same heights in Europe, at least Celtic twice reached the last 16 of the Champions League during his tenure, only falling to the giants of AC Milan and Barcelona. Despite losing every time they travelled away, they compensated by winning all their home games at fortress Parkhead, understandably nicknamed “Paradise” by Celtic fans.

That was then, but this is now. And these days it’s not just about the prestige on the pitch. No, progress in the Champions League is also critical to Celtic’s success off the pitch. For example, last year’s failure to reach the group stages was the major factor in the club’s turnover slumping by 15% to £62 million, the lowest it has been since their last absence from the tournament in 2005/06, following the disastrous elimination by Artmedia Bratislava.

Indeed, if we look at Celtic’s revenue over the last seven years, we can see just how important Champions League money is to their financials, as their revenue is virtually flat without it. The impact can be clearly shown in 2007, when total revenue increased by an astonishing 31% from £57 million to £75 million, almost entirely off the back of the solid European campaign.

The other side of the coin came in 2010, when Celtic earned just £1.6 million from the Europa League. In the same period, their great rivals Rangers earned £14.3 million from the Champions League, even though they finished bottom of their group, thus highlighting the vast gap in prize money between the two competitions. This difference was exacerbated by Rangers being Scotland’s sole representative in the Champions League, as Scotland’s share of the TV revenue is distributed equally to all clubs that qualify, meaning that Rangers received the full amount, instead of having to divide it with Celtic.

The Champions League revenue distribution depends upon a number of factors, but based on last year’s figures it is worth around £14 million – even if you lose all six group games. Each team is guaranteed £6 million for participation plus around £8 million from the TV (market) pool. There are also bonuses of £0.7 million for each win and £0.3 million for each draw in the group stage plus other performance bonuses for each further stage reached. This is serious money for a team like Celtic – and it does not include the additional gate receipts.

"Reid all about it"

Celtic chairman, John Reid, has attempted to downplay the significance of missing out on the Champions League, “It’s not as bad as some people make out. The differential is roughly equivalent to £7 million.” However, his predecessor, Brian Quinn had estimated the net contribution to profit as being “of the order of £11-12 million” after taking into consideration additional costs such as bonus payments.

Chief executive, Peter Lawwell, went one better as he managed to contradict himself when talking about the Champions League, initially claiming, “It’s a fantastic revenue stream, but we don’t have to necessarily depend on it. We’ve got a structure in place that allows us to operate comfortably without it.” Great stuff, but recently he modified his stance, “Clearly European progress remains key in enabling the club to achieve its financial objectives.”

That much is abundantly clear if you look at the profit trend over the last five years, which features profits between 2007 and 2009, but losses in 2006 and 2010. Guess which years Celtic did not qualify for the Champions League. Well done.

The reality is that from a financial perspective qualification for the Champions League is an imperative for Celtic, as it is for all teams from “smaller” leagues, i.e. those outside England, Spain, Germany, Italy and France.

Actually, the 2010 loss of £2.1 million is pretty good in the circumstances, coming in a season when Celtic competed in the Europa League rather than the Champions League, did not win a trophy and did not even reach a cup final.

In fairness, it was their first loss after three years of profits, though the club did report consistent losses for a number of years before that. The relatively small deficit was down to careful stewardship of their finances, which allowed them to largely absorb these financial blows, including a substantial payout to former manager Tony Mowbray and his coaching team. In fact, much of the blame for the poor results (both on and off the pitch) was attributed to the unfortunate Mowbray, who was sacked after only nine months.

The figures were also greatly helped by the £6 million profit from player sales, including five players snapped up by former manager Strachan at Middlesbrough. This is another key driver for Celtic’s financials, as was evidenced in 2007 when Celtic reported a record profit of £15 million, which was enormously influenced by the £9 million profit made from player trading, mainly due to the sales of Stilian Petrov and Shaun Maloney to Aston Villa.

"You are my Larsson"

One reason why Champions League revenue is so crucial is the incredibly small amount of television money received for the Scottish Premier League rights, which works out at around £2 million a year for Celtic. In fact, the entire annual payment to all SPL clubs is only £13 million. To place that into context, it is less than a third of the £40 million that the team finishing bottom of the English Premier League can expect to receive this season. An even more amazing statistic is that the total SPL payment is worth just 1% of the EPL rights. Peter Lawwell summed up the problem, “The fact of the matter is that in a Scottish nation of five million people, the media values are very low.” Actually the real problem is that this makes it almost impossible for clubs like Celtic to compete.

The situation was not helped by the collapse of Setanta last year. The upstart Irish channel was replaced by a combination of Sky and ESPN, but there was a harsh price to pay, as the new deal was worth only £65 million over five years, compared to the previous £125 million over four years. Celtic had been against the Setanta deal, and (with some justification) John Reid did not hesitate to put the boot in, “No-one should under-estimate the blow that has been inflicted on this club and Scottish football by the way in which the whole affair has been handled. Today the SPL accepted a bid that is less than half the value of that offered by Sky last year. To Celtic it means a potential loss of up to £12 million over four years.”

This is why Celtic and Rangers showed interest in securing the Scottish TV rights package themselves, as they could hardly have done worse than the SPL. The Old Firm believe that they could significantly increase their broadcasting revenue by negotiating and selling their own TV rights, but SPL head honcho, Neil Doncaster, has firmly rejected this idea.

Many top European clubs are over-reliant on TV revenue, but that cannot be said for Celtic, as broadcasting accounts for only 17% of their turnover, which is lower than any of the top 20 clubs in the Deloitte Money League – much lower in most cases. Celtic have featured on this list in the past, but have slipped out in recent years, as the TV revenue has multiplied in other countries. As an example of its significance (the power of the media, if you will), Celtic’s revenue would be well over £100 million if they received the same TV revenue as clubs in the Premier League, which would comfortably get them back into the higher echelons.

In stark contrast, Celtic’s match day revenue is a much higher proportion of total revenue than other leading clubs at 58%. The 2009 accounts stated, “These results have been achieved … in reliance upon the tremendous contribution of the Celtic support.” You can say that again. Celtic have consistently enjoyed average attendances of around 57,000, which is higher than all but two clubs in the Premier League (Manchester United and Arsenal). Welcome to the Jungle, indeed.

It is clear that Celtic have a huge supporter base, but even here there are some warning signs, as the average attendance fell by more than 10% last year with the number of season tickets sold falling from 54,000 to 48,000, though in fairness the previous year had been a record. Whether the decrease is due to the economic recession or the poor displays on the field is open to conjecture, but Celtic have already reacted by freezing prices and offering other cheap concessions. Reid cautioned that season ticket sales might fall again, which would place Celtic’s business model under even more strain.

"Another Greek tragedy?"

Just as well that Celtic’s “sponsor programme remains one of the most successful in British football”, at least according to John Reid, who knows a little about spin from his time in Tony Blair’s government. It’s not entirely straightforward to see what Celtic’s commercial revenue is worth, as only merchandising (£15.5 million) is separated with the rest bundled in with multimedia, but in total it must be around £22 million. So, in reality, Celtic’s commercial revenue is comparable to a team like Newcastle United (£19 million), but way behind the Big Four in England, e.g. Manchester United £70 million.

Merchandising is by far the largest element, but this is dependent on the timing and number of kit launches. The “bumble bee” away kit may be hideous, but apparently this is one of Celtic’s best selling strips ever. A new shirt sponsor was announced earlier this year with Tennent’s replacing Carling (notice a theme here?) in a three-year deal that Lawwell said would generate “important revenue” for the club. However, it is believed to be worth only £1.5m a season, compared to the £20 million that Liverpool get from Standard Chartered. Incidentally, Tennent’s sponsor both Celtic and Rangers, as they cannot risk alienating supporters of the other Glasgow club. A new five-year deal was also signed with kit supplier Nike, extending the partnership to ten years, with annual royalties expected to be around £5 million.

Celtic’s response to their limited revenue has been the old-fashioned idea to control their costs. Not only has there been no cost growth, but costs have actually been reduced by nearly 10% since 2004. A good example of Celtic’s ability to manage a budget came last year when operating expenses were cut by £4 million in order to mitigate the £11 million revenue reduction. Not enough to break-even, but you get the idea. Avoiding any temptation to refer to national stereotypes, there’s clearly a thrifty side to Celtic’s style. Although this is a breath of fresh air compared to the profligacy of most other clubs, it has not helped their ambitions on the football side.

The key to Celtic’s cost containment is their ability to keep wages down. Unlike most football clubs, the wage bill has essentially remained flat over the last few years. In point of fact, it’s dropped slightly from £37.4 million in 2004 to £36.5 million in 2010. The wages to turnover ratio has been held in a pretty good range between 50-60%. Although it rose from 53% to 59% last season, this was entirely due to the decline in revenue, as wages actually fell.

If we compare this trend with Premier League clubs, we see a big difference. Back in 2004, Blackburn (£31 million) and Fulham (£34 million) both had lower wage bills than Celtic (£37 million), but while the Scots have cut their salaries, both English clubs now spend much more at around £46 million. Peter Lawwell drily noted, “The affluence of other major leagues – particularly the English Premier League – is an inflationary factor, pushing up wages throughout Europe.” Given that Celtic’s wage bill has stayed at the same level, the logical conclusion is that the quality of their players must have become worse.

However, there is always an exception to the rule and directors’ pay has been steadily rising at Celtic, especially the chief executive, Peter Lawwell, whose total remuneration has increased from under £300,000 four years ago to a staggering £739,000 last year. His salary is fixed at £455,000 until 2011, but he also has a 60% bonus plus hefty pension contributions and benefits in kind. Oh, and let’s not forget the loyalty bonus payable in 2011, which is partly dependent on the company’s earnings per share. Not bad, considering the feeble on-field performances in the last couple of seasons and the declining share price (down 15% in five years). All I can say is that Mr. Lawwell must be an amazingly good negotiator, especially as he was once quoted as saying, “"I'm just doing my job. I'm only part of an all-round team effort.”

"Blame it all on Mowbray"

The 2009/10 accounts also include exceptional items of £3.1 million, but these are effectively also staff costs, as they “mainly relate to costs associated with the early termination of certain employment contracts” (Mowbray’s management team), though they also cover some impairment in player values. These costs are relatively immaterial, but Reid was keen to tell people that “if it weren’t for these costs, we would have equalled last year’s figures.” However, that’s a little misleading, as last year also included £2.8 million of exceptional items. In fact, we see such costs booked every year, so they’re arguably just a normal part of Celtic’s modus operandi.

Reid is also the man who told fans, “Tony has the right to expect our loyalty and moral support while he faces this huge challenge”, only to fire him a few weeks later, directly causing the “exceptional” item. Following the recent results, Reid warned, “the performance of our football management team and players will be placed under even more scrutiny than normal.” Given that Neil Lennon only has a one-year contract, he probably shouldn’t spend too long choosing new decorations for his office.

The club’s net debt increased in 2010 for the first time in five years, but it is still only £6 million, a level that the club believes is “sustainable” and “not out of control”. That seems fair enough, as the debt has come down a great deal from around £30 million ten years ago with a sizeable decrease in 2006 following a £15 million share issue. Current debt represents a £12 million loan from the Co-operative Bank, which bears interest at LIBOR plus 1.125% (floating rate), less £6 million of cash, though these figures exclude the £4 million debt element of the Convertible Preferred Ordinary Shares.

Reid said that the debt had gone up, because the club had “pushed the boat out last summer” with a “hefty investment” of £13.6 million in football personnel, but the big question is whether the club should further increase debt in order to strengthen the squad. Reid commented, “there has been a myth that the board are against borrowing”, but “we are prepared to spend money and get into debt if it doesn’t put the club into danger.” That sounds promising, but the bottom line for many fans is whether the board will make enough cash available to bring in some top quality players.

In years gone by, the club managed to find enough money to buy players of the calibre of Henrik Larsson, John Hartson and Chris Sutton – maybe not world-beaters (with the exception of "Henke"), but a class above the present crop. Reid boasted, “We can still invest in the team more than any club in Scotland”, noting that “Last year we signed or took on loan 13 new players. Already, under our new management in the new financial year, we have brought in seven new faces.” The problem is that very few of those acquisitions are likely to make a massive difference – Daryl Murphy from Sunderland and Gary Hooper from Scunthorpe are not exactly going to set the world alight.

The problem is that Celtic have to do their shopping in the bargain basement, which was effectively admitted by Reid, “We will continue to scour Europe for players at big clubs who cannot command a first-team place there, but who may prosper with us in Scotland.” That has lead to some opportunistic signings like Thomas Gravesen, Craig Bellamy and Robbie Keane (the latter two on loan). The Keane deal was actually a rare example of the club extending itself in a gamble to win the SPL and secure Champions League riches, as they had to pay around £1.3 million in wages during the loan period.

"It went this far wide"

As the song goes, it’s a grand old team to play for, but this summer the likes of Sol Campbell, David James, Jimmy Bullard and that man Bellamy have all rebuffed Celtic’s advances, presumably because of the low wages on offer. That explains why Lennon had to admit, “There are players out there, if you shop around, at reasonable fees and wages.”

Peter Lawwell has also explained that spreading the Celtic brand worldwide has become a major concern in the club’s transfer policy, leading to the purchase of players from countries like Japan and Poland. He said, “Obviously they must be able to play, but to find players in the markets where we think there is growth is also important.” Unbelievable. Here’s an idea: buy some good players, start winning things and the bloody brand will take care of itself.

Every cloud has a silver lining and the flip side of the other leagues’ booming TV earnings is that clubs like Celtic can make good money by selling players into those markets. Indeed, Celtic have already raised over £15 million this summer, mainly from the sales of Aiden McGeady to Spartak Moscow and Marc-Antoine Fortune to West Brom. The board has pledged to reinvest the proceeds into the squad, but this might actually be a pointer to Celtic’s future as a selling club. Although it would be unappealing to supporters, it could be a good financial strategy to make use of the new Lennoxtown football academy to develop young players that could be sold later for healthy gains.

"To Russia with Love"

Celtic’s challenge is magnified by the generic problems facing Scottish football as a whole. Indeed, PricewaterhouseCoopers’ “Financial Review of Scottish Premier League Football” said that action was required to remedy the poor financial state of the SPL or Scottish football would fall into a “downward spiral”, concluding, “In a nutshell, the SPL cannot compete financially.” John Reid went further, warning that much of Scottish football was “edging the narrow line of insolvency.” It al looked very different ten years ago, when Celtic were managed by Martin O’Neill and Rangers had Dick Advocaat, with both clubs spending big money for the times.

The Old Firm can now be considered as big fish in a small pond or an “unattractive league in comparison to Europe’s major championships” according to Lawwell. Their dominance is such that no other team has won the SPL since its formation in 1998 and there has only been one season when both clubs failed to occupy first and second positions. So, Celtic have a great chance of winning trophies and securing regular access to European competitions, but the gulf in quality in the SPL means that they are ill-prepared to compete in the Champions League.

Even the formality of Champions League qualification is now endangered, due to the recent lack of success. Scotland’s two places depend on the country’s ranking in UEFA’s table of coefficients. At the moment, they sit in 15th position, but if they drop just one more spot, they will lose a valuable Champions League place. As the coefficients are based on the previous five years, there could well be trouble ahead when the successful 2006/07 and 2007/08 seasons fall out of the calculation. Celtic reached the last 16 of the Champions League both those seasons, while Rangers were finalists in the 2008 UEFA Cup, but nothing comparable has been achieved since then.

"Against the odds"

Although Celtic and Rangers attract crowds around the 50,000 mark, the club with the next highest attendance in Scotland averages less than 15,000. It may be time for (yet) another change in the SPL structure, expanding the league to 14 teams to add more variety and adding play-offs to ensure that Sky could still show four Old Firm derbies every season. That last point might seem ridiculous, but money talks and Sky are the “only show in town” at the moment.

All of this is why Celtic (and Rangers) have cast their eyes elsewhere. They would clearly love to join the Premier League, viewing this as an escape route from their financial difficulties. In fact, they are so keen to make the move that Peter Lawwell was apparently even prepared for Celtic start at the bottom, i.e. the second tier of a revamped Premier League. However, although this idea has been discussed for many years, it looks like it won’t fly, as the English Premier League firmly rejected the proposal last November. The official statement was unambiguous: “The clubs were of the opinion that bringing Celtic and Rangers into any form of Premier League set-up was not desirable or viable.” As if that weren’t plain enough, Premier League chief executive Richard Scudamore made it crystal clear, “No means never.”

At first glance, Celtic and Rangers would bring some financial gains, but the Premier League sees its future earnings expansion mainly coming from overseas TV rights and sponsorship, to which it was felt the Scottish clubs would not greatly contribute. Some have also mentioned safety as being a cause for concern with the Glaswegians’ vast away support, but the main issue is probably the lesser English clubs worrying that they would be risking their own place in the lucrative Premier League. After all, turkeys very rarely vote for Christmas.

"Do the huddle"

However, things can change and we probably shouldn’t definitively rule this idea out. If the TV money ever shows signs of drying up, the plan might be re-visited, though not in the near future. Having said that, at that stage football might be run along franchise lines in any case (like the NFL). Glasgow Bravehearts vs. London Cockneys, anyone?

There has also been talk of an Atlantic League, comprising teams from less important countries (in financial terms) like Scotland, Portugal and Holland, but that initiative is again unlikely to get past first base. It would resemble a poor man’s Champions League and TV companies would almost certainly not pay much for such limited fare. Given that the only rationale for doing this would be financial, there would seem to be little point in going ahead, as it would be like jumping out of the frying pan into the fire.

"Hail, hail, the Celts are here"

Where does this leave Celtic? Unfortunately, they find themselves in a vicious circle. If they can’t get the money to buy better players, they will struggle to reach the group stages of the Champions League, but if they don’t qualify for the Champions League, then it’s difficult to see where they will get the money to buy those players.

The Celtic board are clearly aware of this dilemma, as they say in the latest accounts, “Revenues generated by progress in European competitions remain of major significance and provide greater flexibility when considering player investment.” More pithily, the old bruiser, John Reid, explained that “football and commercial success go hand in hand.”

So they’re going to start investing in better players then? Unlikely, if you listen to Reid, “If you start getting into a position where you are running up debts that you cannot afford, spending money you don’t have, it is the road not to success, but to ruin.” Celtic’s chairman had already taken aim at Rangers and their strategy of “borrowing endless amounts of money”, but that does beg a rather uncomfortable thought for Celtic fans: if Rangers can dominate Scottish football when their finances are so shaky, what will happen if they sort themselves out?

"Derby day"

As we have seen, there is no easy answer. Celtic are clearly not broke, but they do not have the financial resources to get to the next level. In theory, their ambition should be scaled back in line with their relatively modest income, but the fans are hungry for success. Anyone that has experienced European nights at Celtic Park will understand that this is a special club and would surely want them to be part of the Champions League experience.

It is difficult to criticise a club for adopting a “careful and business-like approach”, but the challenge for the board is to deliver success on the pitch as well as financial sustainability. Bhoys don’t cry, but they must have been just as upset as Reid, when he described last season as “simply not good enough.” You said it, big man. The question is: what can he do about it?