A Tale Of Bristol City

Few clubs can have endured such a tumultuous start to the season as Bristol City. Following a very promising finish to last season, when the Robins won five and drew three of their last nine matches, the summer had seen the arrival of experienced manager Steve Coppell and England’s World Cup goalkeeper, David James. Although “Jamo” is clearly now in the twilight phase of his career, this still represented a notable coup for the Championship team and was a clear sign of the club’s intent.

Indeed, City highlighted Coppell’s record of taking both Crystal Palace and Reading into the Premier League, so all seemed set fair for an exciting year. However, the best laid plans of mice and men often go awry and such was the case at Ashton Gate with Coppell resigning after just one league game, citing a lack of motivation. As the man himself said with considerable understatement, the timing of his departure was not exactly ideal. Chairman Steve Lansdown agreed, “It caused uncertainty and dismay and set us back a long way in our preparations for the current campaign.”

This shambolic state of affairs was exacerbated by an unprecedented injury crisis, which meant that the club lost the services of many key players, including record signing and last season’s leading scorer, the prolific Nicky Maynard. It was therefore hardly surprising in the circumstances that City’s start to the season was so shaky with the team only winning once in its first 12 games.

"Steve Coppell - now you see him, now you don't"

Although there then followed a minor recovery of sorts, partly due to summer signings Brett Pitman and Jon Stead finding their shooting boots, the club has again struggled since Christmas. Instead of challenging for promotion, as was the original objective, Bristol City currently find themselves languishing just outside the relegation zone, which was not part of the plan at all.

Some might argue that City are setting their sights too high, given that they last played in England’s top tier more than thirty years ago, but they were perilously close to securing promotion to the Premier League in 2008, only missing out at the last hurdle when they were narrowly defeated 1-0 by Hull City in the Wembley play-off final. This was the culmination of a thrilling two seasons under the guidance of manager Gary Johnson, who lead the club to promotion from League One before finishing fourth in the Championship.

However, that was as good as it got for Johnson, who resigned just a few months later after the club plummeted to 16th position in the league, the final straw being a demoralising defeat to local rivals Plymouth Argyle. Bristol City’s form subsequently improved and the club ended the season in the mid-table respectability of 10th place under caretaker manager Keith Millen, who now has the job full-time after Coppell’s untimely exit.

Amidst all this turmoil, it might seem unreasonable for the club to even consider mounting a promotion charge, but, on the other hand, expectations among the club’s supporters should be fairly high, given that Bristol City have actually been among the highest spenders in the Championship over the last couple of years. Granted, their net spend of £3.3 million is a drop in the ocean compared to the likes of Manchester City and Chelsea, but everything is relative and this total is only exceeded by five clubs in the Championship, with Burnley leading the way after their budget was boosted by the brief sojourn in the Premier League. At the very least, Bristol City have not been a selling club, which is a fate suffered by half the clubs in the Championship.

The club’s determined chairman, Steve Lansdown, whose stated objective is “for the club to play at the highest level”, has funded this expenditure. It was this drive that initially attracted a manager of Coppell’s pedigree, “I liked what the chairman said about the club and his ambition: the plans for a new stadium and desire to win promotion to the Premier League.”

Lansdown made his fortune as one of the founders of financial services firm Hargreaves Lansdown, so much so that he was ranked at an impressive 150th position in last year’s Sunday Times Rich List, and he has been the driving force behind the club’s transformation from League One also-rans. He has frequently dipped into his own pocket to keep the club afloat, and has also made a couple of significant share sales to help fund the club’s bold plans for a new stadium.

"Keith Millen - a safe pair of hands"

When he raised £47 million in this way in April 2009, he wryly commented, “Hopefully, this shows everyone that I mean business.” Indeed, last October, he raised a further £58 million with another share disposal, though this time he merely observed that this would “free up cash for other ventures.” Lansdown still holds a 20% stake in his company, which would be worth around £500 million at the current share price of 524p, even after these share sales, so there is some real substance behind his grand scheme.

A key element of Lansdown’s aspirations for Bristol City revolves around the plans for a new 30,000 capacity stadium at Ashton Vale, close to the location of the club’s present ground. Funding for the £92 million development will come from a variety of sources, including the sale of Ashton Gate, which is likely to be converted to a supermarket, debentures, corporate boxes and stadium naming rights, though the accounts make it clear that additional funds will be provided by Lansdown “where necessary.” Despite this, Lansdown said he would not follow the example of Dave Whelan, Wigan Athletic’s chairman, who named the ground after his own business.

It was initially hoped that the Southlands housing development would contribute £5.5 million towards the project’s costs, but that was removed as part of the planning revisions agreed with the local council.

That would not be so bad, as Lansdown can easily cover the financial shortfall, but potentially much more damaging is the recommendation by an independent inspector that the entire 42-acre site should be registered as a town green, which would effectively rule out any development.

"Ashton Vale - if we build it, they will come"

This has come as a real blow to the club’s ambitions, especially as Bristol City Council had granted planning permission on the land. In fact, the council is still strongly supportive of the new stadium (and the economic benefits it would bring to the region), and has urged both sides to reach a compromise before the dispute ends up in court. As Lansdown explained, only 19 acres of the site would be needed for the new stadium, while nearly eight acres would be wetlands and the rest would be fields.

Unsurprisingly, having invested so much of his personal fortune into the project, Lansdown is not best pleased, “I bought the land in good faith, but if it loses value because town green status is granted, then it is tantamount to theft.” While it might be mildly amusing to remind the chairman of the warning on his own company’s documentation, namely, “The value of your investments may go down as well as up”, the man does have a point.

Club executives recently visited the site of Brighton and Hove Albion’s wonderful new stadium, which is a tangible example of how spirited local support can ultimately win the day in the face of small pockets of local resistance, though it also acts as a reminder that this can be a long drawn-out process, which can damage a club both on and off the pitch. Indeed, the club’s latest accounts baldy state that “the delays to our stadium project have not helped our position.”

"Another goal for Nicky Maynard"

Initially, the club had hoped that Ashton Vale might be ready in time for the start of the 2012/13 season, but that date has slipped to 2013/14 and if the town green decision goes against the club, there would inevitably be further delays (if the club opted to appeal) until possibly 2015/16.

The plans for the new stadium remain on track, even though England missed out on the opportunity to stage the 2018 World Cup. Although Bristol’s bid to be a host was based on the design for a new stadium, including the possibility to expand the capacity to 42,000 (the minimum number of seats required to host World Cup matches), this was just one of the events for which the stadium was planned. As Colin Sexstone, Bristol City’s chief executive, explained, “You don’t build a stadium for four games.” Unless you’re Qatar, as the cynics might point out.

Speaking of which, Sexstone has actually suggested that Bristol should sue FIFA on the grounds that they were misled in terms of the criteria required to win the bid, thus investing £250,000 in improving infrastructure, when that appears to have meant nothing in the final deliberations, though he may have had his tongue firmly in his cheek.

"Steady as you go"

In any case, the club believes that the new stadium is crucial to its future status. Although Ashton Gate has been Bristol City’s home for over a century, it does place constraints on its ambitions. Lansdown has described the old ground as “tired”, adding, “It would be wrong of me to say the club couldn’t survive. Of course it would. But could it survive as a good Championship side or a Premiership side? In my opinion, it wouldn’t. We need the infrastructure, we need the corporate entertainment areas.” The problem is a straightforward one, namely that the club does not generate enough revenue to consistently compete at those levels. Lansdown estimated that the new stadium would generate a third more match day revenue.

It’s not just the football club that would benefit either, as the local council spoke of the development bringing in £150 million of investment with at least a thousand more jobs. Bristol City’s chief executive, Sexstone, went further, revealing that the economic benefits of the project had been assessed at £260 million over the next 20 years.

Of course, there’s no such thing as a free lunch and the impact of the proposed new stadium has been keenly felt in Bristol City’s financials, most obviously in the club’s net debt, which has increased from £3 million to £20 million in the last two years, almost entirely due to a £15 million stadium loan, which is secured on the company’s assets. There is also £559,000 of accrued interest (Barclays base rate plus 2%), which is only payable after the loan is repaid in full.

The rest of the debt comprises: £4.1 million debt element of convertible shares (classified as debt, due to the holders’ redemption rights); an interest-free loan of £335,000 from the Football League, which is repayable in two years; and a negligible bank overdraft of £85,000.

The key point here is that the majority of the club’s debt is owed to Lansdown, as the large overdraft and loan stock that the club carried in previous year’s has effectively been repaid, which means that the club will not come under pressure from creditors, as long as Lansdown is in charge. This is also what UEFA describes as “good” debt, as it has been accumulated in order to fund revenue-generating investment into a new stadium. The other benefit is that the club’s cash flow has benefited from the much lower interest charges.

"Steve Lansdown - the man with a plan"

That said, this strategy has weakened the balance sheet, resulting in net liabilities of £10 million, compared to £4 million of net assets five years ago. As Lansdown explained, “It looks a bit of a mess at the moment, because of the push we have made to make the football club more successful.” This is a fair point, and it should also be acknowledged that the club’s assets are under-valued in the accounts.

First, the players are shown as intangible assets at a net book value of £3 million, while Transfermarkt has estimated that the sales value in the real world would be more like £19 million. Second, the current stadium at Ashton Gate is shown in the books at £9 million, retaining a valuation made in 1995, while it is reported that Sainsbury’s have made an offer of around £20 million for the land.

Even so, the auditors have still included the dreaded “Emphasis of Matter” statement in the accounts, ominously warning, “These conditions indicate the existence of a material uncertainty which may cast significant doubt about the group’s ability to continue as a going concern.” This is clearly not great news, as it means that the club is dependent on securing additional finance, but it should not necessarily be taken as a sign of impending disaster, as the same statement has appeared in the accounts for the last five years.

The reason that the club can continue to operate in this way is because Steve Lansdown has funded the club’s shortfall each year - and has pledged to continue to do so for the foreseeable future. As he put it in 2009, “There should be no doubt that we have adopted an aggressive strategy, but the board is committed to ensuring the club is not put at risk because of this.”

Just as well, as Bristol City have consistently reported losses over the last few seasons. In fact, the figures are getting worse, as the losses in the last two years have been the highest ever recorded: the £6.6 million in 2008/09 was bad enough, but last year this rose by more than £5 million to £11.8 million. Small beer by Premier League standards, but a significant deficit for a club whose turnover is only £11.1 million.

In fairness, much of this reflects the investment in the stadium development and the training ground at Failand, so the hefty loss is “not surprising” according to Lansdown, but it is also due to the money spent on new players. Indeed, Lansdown admitted, “The stadium in the past year has cost us £2 million, but it’s in football where most of the losses occurred. We pushed the boat out on expenditure at the beginning of last season and that is why these accounts look as bad as they do.” This is absolutely correct when you look at the rise in wages and player amortisation, which is the principal factor behind the worsening profits in the last two years.

"Brett Pitman - rejected Blackpool for Bristol City"

Even if we exclude the exceptional new stadium development costs and the non-cash items like amortisation and depreciation, there would still be a large loss of £6.8 million, which underscores the weaknesses in the current business model. Some clubs compensate for such a shortfall by selling players and making large profits on sale, but this is not the case at Bristol City. In the last three years, the club has only made around £1 million profit via this route with the last time any meaningful sums were produced coming in 2007 (£1.7 million, mainly from the sale of Leroy Lita to Reading) and 2008 (£2.2 million, mostly due to David Cotterill’s sale to Wigan Athletic).

It is true that the £3.7 million fees incurred in the stadium development over the last two years, which have been correctly charged to the profit and loss account, should be capitalised once the stadium is definitively approved, which would mean a cost credit in a future year. As such, the losses in the last two seasons have effectively been over-stated because of these exceptional charges.

At this point, I should note that these figures are from the accounts for the club’s holding company, Bristol City Holdings Limited, which owns 100% of both Bristol City Football Club Limited and Ashton Gate Limited, so include both football and stadium revenue.

Of the total turnover of £11.1 million in 2009/10, around three-quarters (£8.6 million) came from football with a quarter (£2.6 million) from the stadium. If we consider the stadium revenue to be commercial, then there is a remarkably even split between the three revenue streams with match day contributing 37% (£4.1 million), television 35% (£3.8 million) and commercial 28% (£3.2 million).

The television money is mainly sourced from the Football League central distribution of £2.5 million that is made to all Championship clubs, which was significantly increased last season, plus a £1 million solidarity payment from the Premier League. Although it’s great that the “best league in the world” passes some of its money down through the English football pyramid, it is also true that this represents a tiny proportion of their wealth.

Much of the stadium revenue comes from hosting major rock shows, including the likes of Bon Jovi, The Who, Rod Stewart, Elton John and Ronan Keating in recent years. OK, it’s not my taste in music, but it sure does bring in the cash. This can be easily seen by the decline in stadium revenue in 2010 from £3.9 million to £2.6 million, which Lansdown said was because they did not have a concert in the year.

"David James - the people's champion"

Football income is obviously dependent on the club’s success, which is clearly demonstrated by the revenue more than doubling in 2007/08 from £4.3 million to £8.8 million following City’s promotion from League One to the Championship. The cup competitions are now treated with thinly veiled contempt by Premier League clubs, largely due to the feeble prize money, though these can still make a useful contribution to other clubs, e.g. if a Championship club reaches the sixth round of the FA Cup, it receives £338,000 compared to just £27,000 if it is eliminated in the third round, not to mention additional fees of £144,000 if a match is televised live.

However, this all pales into insignificance if the club can somehow achieve promotion to the promised land of the Premier League. As Lansdown explained, “I think most clubs in the Championship run with big losses. The dream we’re all after and what we’re spending the money to try and achieve is the television money and the commercial rights that go with being a Premier League club.”

And he’s not wrong if you compare the huge disparity between Bristol City’s £11 million revenue and the £54 million earned by Bolton Wanderers in the Premier League. The gate receipts at the two clubs are more or less the same (Bristol City £4 million, Bolton £5 million), but there is an enormous difference in TV revenue: Bristol City have £4 million, while Bolton receive around ten times as much at £38 million. Given the size of the prize, the “balls out” strategy employed by many clubs to secure promotion makes a little more sense, though clearly only a few can be elevated each season.

Hang on a minute, I hear you saying, that’s a lot of money, but didn’t I read somewhere that the Championship play-off was worth £90 million? Well, yes it is, but not all in one fell swoop. Following yet another increase in the Premier League television deal, the club that finishes bottom this season will earn around £40 million, but it will also be in line for £48 million in parachute payments over four years (£16 million in each of the first two years, and £8 million in each of years three and four). On top of that, you would expect gate receipts and commercial income to be higher, hence at least £90 million more revenue.

The parachute payments are designed to help soften the financial blow of relegation, on the assumption that the clubs cannot immediately reduce their operating expenses, which is very considerate of the Premier League, though some would argue that they actually distort competition in the Championship, as they give relegated teams an unfair advantage. It smacks a little of “once you’re in our club, we will do everything we can to keep you in (and the others out).”

"Jamie McAllister - flower of Scotland"

Given City’s proximity to the relegation places, it’s also worth taking a quick look at the TV money earned by League One clubs. I’ve taken Brighton and Hove Albion as an example, purely because they are the current league leaders (and it maintains the alliteration). Although not on the same scale as the gap to the Premier League, relegation would still make a nasty dent in the club’s financials with television money falling almost £2 million to £656,000.

Bristol City’s match day revenue also suffered last season, falling from £5.1 million to £4.1 million, as average attendances dropped by 13% from 16,816 to 14,600. This was partly down to lack of success on the field, aggravated by early exits in both cup competitions, and partly due to the poor economic climate. The club has launched a number of initiatives to counter this trend, including half-season tickets covering the final 12 Championship matches, where adults can watch a game for just £19, and many “pay on the day” schemes to encourage support.

Given that the average attendances are much lower than Ashton Gate’s capacity of 21,500 (though it can be reduced to 19,000, depending on how away fans are segregated), it raises the legitimate question of whether the club’s desire to move to a new stadium makes sense. There is a risk that Ashton Vale could be a white elephant, though, in fairness to Bristol City, their plans do not depend on taking on vast amounts of debt, assuming that Lansdown continues to provide the financing.

"Gary Johnson - where did the magic go?"

Clearly, Bristol City’s match day revenue is never going to reach the heights of clubs like Manchester United and Arsenal, who both earn more than £100 million a season, but increasing this income stream to the levels of the likes of Bolton, Birmingham, WBA and Blackburn is a realistic target, which presumably means that the Premier League vision is not completely ridiculous.

Furthermore, even if the club were to remain in the Championship, this does not necessarily mean low crowds. In fact, more people watched Championship matches last season (9.9 million) than attended Serie A games in Italy.

As Lansdown has indicated, there is also scope for growth in commercial revenue. The shirt sponsorship is provided by DAS, a legal expenses insurance company, who replaced the Bristol Trade Centre in 2008. Both fine businesses, no doubt, but you would expect the club to secure more lucrative deals if they reached the top tier. Similarly, the club has fairly recently signed a new kit supplier deal with Adidas, replacing Puma, but such agreements normally also include success clauses, based on promotion.

On the cost side, like all football clubs, the wage bill is by far the largest element, but it’s a real humdinger at Bristol City, having risen inexorably to £13.8 million, which is an incredible 124% of turnover. To place that into context, it’s even more (worse) than big-spending Manchester City’s ratio of 107%, though, in fairness, this ratio tends to be higher in the Championship, largely down to the far lower revenue.

The club is painfully aware of the “challenging financial position” that is caused by “higher wage bills”, but Lansdown pointed out that “the increase in wages is to a certain extent inevitable, if we are to compete in the Championship and have aspirations of getting into the Premier League.”

Despite the steep 35% rise in wages from £10.2 million in 2009 to £13.8 million, Lansdown has admitted that the club did not really get value for money last season. They took on a lot of loan players (Saborio, Sno, Agyemang, Iwelumo, Maierhofer and Velicka), who contributed little to the cause, while they also had to give former manager Gary Johnson a pay-off.

Even after all this expenditure, City’s wage bill is by no means the largest in the Championship, though it may well further increase this season, due to the change in management at the beginning of the season. Steve Coppell’s departure has clearly cost the club money, as some of the players he recruited during the summer were not rated so highly by Keith Millen, who has introduced his own selections.

"Marvellous Marvin Elliott"

Indeed, Millen has been informed by Lansdown that he will need to reduce the squad, which he has described as “too big and imbalanced.” It was as high as 35 before the January transfer window, which is way above the chairman’s target of 24. However, for this to have any meaningful effect on the wage bill, this would mean selling (or releasing) the higher earners, like David James, Nicky Hunt, Kalifa Cissé and Damion Stewart, which might damage the team’s promotion prospects.

The extent of the club’s financial challenge is illustrated if we analyse what it would have to do to get back in line with UEFA’s recommended maximum limit of 70% for the wages to turnover ratio. Either they would have to cut wages by £6 million (44%) or increase revenue by £8.6 million (77%). Neither choice appears very credible in the short-term, though the revenue target would be easily achieved, if the club did reach the Premier League.

How prescient Lansdown was in 2008, when he cautioned, “It is going to be increasingly difficult to keep wages under control if we wish to progress as a football club.” Then again, this did represent something of an about turn from the chairman, when you consider his words back in 2006, “The current wage structure in football is simply unsustainable. Clubs will be reducing their wage bills, because they have to if they want to survive.” To be fair to Lansdown, these two diametrically opposed points of view perfectly sum up the dilemma facing most football clubs.

The trend in player amortisation, namely the annual cost of writing down the cost of buying new players, also reflects the changing approach, as this has increased from £0.2 million in 2007 (the last season in League One) to £2.2 million. Indeed, if we look at Bristol City’s transfer activity over the last eight seasons, it is clear that this is no longer a selling club. In the four years up to 2007, the club had net proceeds of £4 million, while in the last four years the pendulum has swung and City have incurred net spend of £9.6 million. Again, this is hardly crazy money, but it does show a marked change in intent since the promotion to the Championship.

This strategy is explicitly outlined in the accounts, where the club affirms that the principal factor affecting profitability is the success of the team, which is why it commits “substantial sums of money for the acquisition and development of new players.” That said, manager Keith Millen demonstrated an admirable commercial outlook, when he accepted City’s need to sell before they can buy, even going further, “We need to be bringing in players who have a long-term future at the club and whose valuation is going to go up. You need to have saleable assets.”

However, this is not so straightforward these days, as transfer revenue for lower league sides has virtually dried up. Records may have been smashed in the upper echelons of the Premier League this month, but precious little money found its way outside the select few. This means that clubs in the Championship have needed to make judicious use of the loan system and Bristol City are no exceptions. They took Danny Rose (he of the once in a lifetime goal against Arsenal) and Steven Caulker from Tottenham Hotspur on season-long loans, while Irish international striker Andy Keogh has recently joined them on a three-month loan from Wolves.

Exorbitant transfer fees and wage demands mean that the club’s academy is another important element of its strategy. The development of home grown youth players for the first team, like Christian Ribeiro and Cole Skuse, is a possible route to financial salvation. Indeed, the club has described it as essential, which explains the continued investment into the academy training facilities.

In the meantime, the club will have to rely on the support of the board to see it through what it describes as “difficult times.” There are huge cash outflows (£22 million) in the last two years alone before financing eliminates the deficit. This effectively means Lansdown, who, as we have seen, has provided a £15 million stadium loan and also provided capital by purchasing £13 million of new shares. There is little sign of this financial support coming to an end with the latest accounts stating, “Since the year end Stephen Lansdown has agreed to subscribe for additional shares and/or loan stock in the coming year should the need arise.” In short, Bristol City literally owe Lansdown a great deal.

This business model works fine as long as Lansdown is around to pick up the tab, but there must be concerns about what would happen if he were to exit stage left. His involvement is already partially restricted, as he lives in Guernsey as a tax exile, so can only be in the UK for 90 days in a year. Although the man himself has reassured supporters with a promise that he “won’t leave this football club in the lurch”, he has also warned that he may consider walking away, if plans for new stadium at Ashton Vale are thwarted.

There’s a palpable sense of disappointment in his voice, when he considers other options if that eventuality came to pass: “Plan B will have to be to retrench to Ashton Gate and see what we can do there. We will have to cut our cloth accordingly and we won't be having the same dreams and ambitions as we do at the moment.” He continued to say that if the new stadium did not progress, he would essentially get things set up properly and then look to hand over the club to someone else, maybe an overseas investor, to finish the job.

"Christian Ribeiro - the future boy"

Hopefully, that is not the case and the club will eventually be able to move into a new stadium, where they would have a fighting chance of becoming self-sufficient. At its simplest, the club “needs to increase its turnover and control its costs”, which is an obvious point, but one that was emphasised in the chairman’s statement in the last accounts. In the absence of a new stadium, that looks very hard to do, at least without compromising the club’s ability to challenge for promotion to the Premier League, so for the foreseeable future large losses are likely to be the order of the day.

It is clear that Bristol City are following a “speculate to accumulate” strategy, or, as they put it, “setting down foundations to establish a top-class football club and stadium facilities.” With appropriate fanfare, Lansdown told a supporters’ meeting that with a new stadium the “sky is the limit”, painting a picture of Bristol becoming an international city “to rival the likes of Barcelona and New York.”

OK, that might be a bit over the top, but there’s little doubt that a city of Bristol’s size (England’s sixth largest) could one day support a Premier League team. For the moment, the club would probably do better to look over their shoulder rather than too far ahead, as the first priority must be to survive in the Championship this season. In the future, if and when Ashton Vale is built, then who knows?

Hope Springs Eternal At Roma

While football fans were purring in appreciation at the dazzling dribbling skills exhibited by French international Jérémy Menez that sealed Roma’s comprehensive 3-0 victory against Cagliari at the weekend, it may have escaped their attention that the giallorossi had stealthily moved into third place in Serie A after winning five of their last six games, which is some comeback after their indifferent start to the season. In fact, it’s beginning to look like this year could be a repeat of last year’s heroics, when Claudio Ranieri’s team staged a remarkable recovery to finish as runners-up to José Mourinho’s all-conquering Inter team, guided by their charismatic captain, Francesco Totti.

However, as important as these victories are to Roma’s campaign, this is not the greatest challenge facing the grand old club these days, as their very existence has been called into question. With depressing inevitability, their problems off the pitch came to a head last summer, when the club was officially put up for sale, after many years of financial difficulties. They reported a thumping great €22 million loss in 2009/10 and have a large hole in their balance sheet. This has resulted in them struggling to pay their wages, so much so that the players only received their money for July, August and September in November - on the very last day that they could be paid without the league imposing a points penalty.

Unsurprisingly, this has caused the supporters great consternation, as there is a clear risk that players could be sold to shore up the club’s finances with some talk of Montenegrin striker Mirko Vucinic being allowed to leave. Some players’ contracts are coming to an end, including faithful servants such as centre-half Philippe Mexès and midfielder Simone Perrotta, who could depart on free transfers if their agreements are not renewed. Even if Roma manage to retain these players, they will have to find money from somewhere to reinvigorate an ageing squad at some time.

"Roma welcomes home Ranieri"

It seems incredible that a prestigious club like Roma could be in such dire straits. After all, this is one of Italy’s most successful clubs, having won the Serie A title three times, most recently in the memorable 2000/01 season under Fabio Capello with a team featuring the attacking talents of Gabriele Batistuta, Vincenzo Montella and that man Totti. They have also seen European glory twice narrowly elude them, losing out to Liverpool in the 1984 European Cup after a penalty shoot-out and their perennial rivals Inter in the 1991 UEFA Cup.

It’s not all ancient history either, as the last decade has arguably been one of their best ever, at least on the pitch, as they captured one scudetto, finished second in the league on no fewer than six occasions and reached the Italian Cup final six times, winning twice (in 2007 and 2008). According to research by the Italian media, Roma is the fifth most supported club in Italy, only behind Juventus, Inter, Milan and Napoli.

So, the obvious question is what on earth has gone wrong?

Many commentators speak of the club’s enormous debts, but that’s not strictly accurate. The club itself has a very small net debt of €9 million and has actually had a cash surplus for the previous few years, which is a notable achievement in the highly pressurised world of football. Even the net balance owed on transfer fees, which can be very high at Italian clubs, is only €3 million.

However, the problem is that the club’s owners, the Sensi family, which owns the club via its oil storage company Italpetroli, do have huge debts with the banks. These were around €405 million at the last count with €325 million being owed to Unicredit and €80 million to Monte dei Paschi di Siena, but they are probably even higher now.

You might be forgiven for thinking that this has nothing to do with the football club, but unfortunately there is an impact, as the main creditor Unicredit, which is facing challenges of its own in the troubled banking sector, has insisted that Italpetroli clears its debts and the only way of doing that is for the company to liquidate its assets, including AS Roma, which is now very much in the shop window.

"Rosella Sensi - no smoke without fire"

Italpetroli is in a desperate situation with bankruptcy threatened and auditors questioning their accounts, so they have no other viable options remaining. Indeed, Unicredit has already taken control of the Sensi family’s other assets, leaving them with just their residential properties. The owners’ financial difficulties also obviously mean that they have no spare money to invest into the club.

The Sensi family has held a majority stake (67%) in Roma since 1993, though times have undoubtedly changed since Franco Sensi used to boast, “13% of Italians travel around using my oil.” Although initially criticised by the club’s passionate support (“Sensi senza senso”), the fans slowly warmed to Franco, especially when he opened his cheque book to buy the likes of Batistuta, Emerson and Walter Samuel, the highlight being a memorable celebration in the Circo Massimo to honour the championship win in 2001. However, after his death from illness two years ago, his daughter Rosella took charge and, since then, the future of the club has been uncertain with frequent speculation about a change in ownership.

At the same time, fans have been unhappy with the lack of investment by the owners in recent years. In the last two seasons, Roma have spent relatively little in the transfer market with the only signings of any note being Nicolás Burdisso and Marco Motta. Indeed, they have actually generated net sales proceeds of €19 million in that time, largely thanks to the sale of creative midfielder Alberto Aquilani to Liverpool. This total was only surpassed by Udinese, a club famous for doing prodigiously well at making money from transfers, and the Milan giants, whose figures were boosted by the extremely lucrative sales of Zlatan Ibrahimovic to Barcelona and Kaká to Real Madrid, while all other clubs in Serie A spent more than Roma.

Hence, the sense of relief among the majority of the club’s supporters that the Sensi family’s reign is coming to an end after 17 years in charge of La Maggica. Even Rosella now seems to realise that her time is up, “The day in which an interested party with a genuine project for the club appears, we won’t have a problem in taking a step back, albeit with a heavy heart.”

Although Rosella continues to hold the reigns, her position as president is a nominal one, merely ensuring continuity in the interim period, and in reality it is now the bank that is calling the shots. Ever since 2004, when it acquired Capitalia, another bank that helped restructure Italpetroli’s debt, Unicredit has owned 49% of Italpetroli, but it clearly has little desire to own a football club, which it effectively does now through its control of Italpetroli’s 67% stake. This helps explain its decision to sell the club, an agreement that Sensi admitted was needed in order to “safeguard” the club’s future.

"The grinta of Daniele De Rossi"

The requirement for someone else to take control has been amply evidenced since the summer with Unicredit having to advance €15 million in September to finance the transfer market acquisitions campaign, though €11 million of that was reportedly repaid in October, and a further €25 million in November to cover the wage bill, though this has been supported by a factoring arrangement, whereby some of the club’s future television receipts have been passed to the bank in exchange for the injection of cash.

Rothschild has been appointed as the advisor tasked with finding a buyer for the club, a process that has been facilitated by creating a new company, imaginatively named NewCo Roma, for Italpetroli’s 67% share. The division of ownership in NewCo remains unchanged with the Sensi family holding 51% and Unicredit 49%, but, importantly, Sensi cannot prevent a sale to a buyer deemed acceptable by the bank. At the point of sale, she will have to step aside.

However, it has not proved to be as easy to sell the club as Unicredit would have hoped. Having signed the agreement to place Roma on the market in July, they initially hoped that the process would be completed in September (“we’ll find a buyer in three months”), but that always appeared overly optimistic. That date passed, as have a number of others, with the deadline first being slipped to November, then extended to December, leaving the latest date for bids as the end of January. In fairness, the sale was somewhat comprised by the resignation of Unicredit’s CEO, Alessandro Profumo, in September, nor was it helped by Roma’s disappointing start to the season, but all these delays don’t exactly encourage the thoughts of a positive outcome.

"Philippe Mexes - the French connection"

One potential barrier to completing a sale might be the price being asked by Unicredit. It is understood that the minimum they are looking for is €100 million, though they are believed to be hoping for €130-150 million. Interestingly, the Sensi family will receive 5% of any figure above €100 million, so it is in their interest to help achieve the highest price possible. Before the economic crisis struck a couple of years ago, analysts thought that the club was worth at least €200 million, so the most opportune moment to find a new owner has almost certainly long since passed.

Indeed, a couple of years ago, it was reported that billionaire financier George Soros had made a €283 million bid for the club through his global sports investment arm, Inner Circle Sports, though this has never been confirmed. There have been many expressions of interest over the last few years from all corners of the world, but, for one reason or another, they have never come to fruition. Unicredit appears unruffled: “The sales process continues as planned” and “We are still in discussions with a number of potential purchasers to whom we have provided further details as a preparation for binding offers.” In spite of these bland words of comfort, the fans are understandably still nervous, given how long the procedure is taking.

Nothing is known for certain about any prospective owners, but the short list would appear to have come down to three reasonably credible candidates: (a) Aabar Investment, the sovereign wealth fund of Abu Dhabi, already owns 5% of Unicredit and would surely have the resources to both finance a bid and make investments into the club. (b) The Angelucci group, whose wealth is primarily derived from health clinics, though it also publishes “Libero” and “Il Reformista”, is reported to have already made an offer of €86 million. This low bid has been cited as evidence that this group would not have sufficient capital to make a success of the club. (c) A mysterious American entrepreneur, whose name has not been divulged, though some have suggested that this might well be John Fisher, the owner of the Gap clothing empire, who has approached Roma in the past, or even Steve Tisch, owner of the New York Giants.

"Marco Borriello shows the way ahead"

Many others have seemingly fallen by the wayside, including Francesco Angelini, the wealthy owner of a pharmaceutical company; Clessidra, an Italian private equity firm; and Naguib Sawiris, the Egyptian entrepreneur, who owns telecoms provider Wind, which just happens to be Roma’s main sponsor. Expressions of interest have also apparently been heard from the usual suspects in Asia, China, India and Russia, but that’s just par for the course when a football club is put on the block.

Of course, it’s not enough for the buyers to have enough money to just buy the club. No, they will also need to find a lot more cash for other investments. Right off the bat, they will need to inject around €50 million of capital to strengthen the balance sheet, and probably a similar amount to strengthen the squad. So, if we assume that the club can be bought for €150 million, that would mean a total outlay of €250 million – or a quarter of a billion. That’s without counting the cost of a new stadium and training ground, which would be needed if Roma are to compete internationally in the future. No wonder Federico Ghizzoni, Unicredit’s current chief executive, explained, “For us, it’s not only the price that’s important, but also the future of the club, in other words the quality of the investor.”

So, what sort of business would a buyer get for his money?

On the face of it, the profit and loss account does not look too bad up until last year, when the club reported a hefty €22 million loss. In the four previous years, they made two large profits (€14 million in 2007 and €20 million in 2008) and two small losses (€4 million in 2006 and €1 million in 2009). In a way, the 2010 loss was perfectly understandable, as the revenue dropped dramatically by €24 million, largely due to the failure to qualify for the Champions League. However, there are two reasons why this loss was worrying. First, even though the revenue fell, there appeared to be no attempt to compensate by cutting costs; in fact, they slightly increased. Second, the loss was incurred despite a very healthy €19 million profit on player sales, the highest recorded in the last five years.

Unfortunately, the loss next year is likely to be at least as high. The club has not provided an estimate, but has warned that, “2010/11 will close with a significant loss, which will require some form of financing.” The Italian media has spoken of a loss as high as €40 million, though this will be impacted by a number of factors. On the plus side, the return to the Champions League will make a material difference to the revenue, but this will be reduced by the new collective agreement for TV rights. Furthermore, the moribund nature of the transfer market last summer means that there will be a limited profit from player sales – unless one of Roma’s higher rated players is sold in the January window. Actually, the lack of sales activity had a double whammy impact, as Roma were unable to meaningfully reduce their wage bill.

At first glance, Roma’s revenue does not look too bad. If we look at the Deloittes Money League for 2008/09 (the most recent season available), which ranks clubs in order of their revenue, we can see that Roma are reasonably well placed in 12th position with €146 million, just ahead of Champions league regulars Lyon. However, a closer inspection reveals some weaknesses. For example, their revenue is a long way behind the Spanish powerhouses, Real Madrid and Barcelona, whose revenue is around the €400 million mark, which might be expected, but it’s also much lower than the leading English clubs, whose revenue is at least €100 million higher.

While Roma are settled in the cluster of four Italian clubs, it should be emphasised that the triumvirate of Juventus, Inter and Milan all earn around €50 million more, largely because those clubs have better TV deals, but also because they have better exploited commercial opportunities. Nevertheless, the club’s revenue still represents a solid foundation upon which a new owner could build and that gap could represent a realistic growth target.

Two other observations really hit you in the face. Roma’s match day revenue of just €19 million is extremely low, so much so that it’s actually the second lowest of any team in the top twenty clubs listed in the Money League, representing only 13% of the club’s total revenue. On the other hand, the huge reliance on television revenue of €87 million is all too evident, as this accounts for a weighty 59% of total revenue. In fairness, this fell to 54% in 2009/10, but this was more due to the absence of Champions League money than any growth in other revenue streams.

Before further commenting on the revenue, I should explain that the figures in my analysis are different from those quoted by Roma. In order to be consistent with other clubs, I have followed the definition used in the Deloittes Money League. For example, their latest report excluded the following items: (a) gate receipts given to visiting clubs €3.1 million; (b) TV income given to visiting clubs €11.4 million. Adding the total adjustments of €14.5 million to the Money League revenue of €146.4 million gives the €160.9 million revenue reported by AS Roma SpA.

Back to business and we were noting the importance of TV to Roma, which is a common factor among Italian clubs’ revenue profile. In fact, the list of top ten clubs by television revenue in the Money League includes four sides from Italy. As Rosella Sensi beautifully put it in the last annual report, “We live in an era of the virtual stadium.”

Roma generated €87 million TV revenue in 2008/09, including €60 million from the domestic broadcasting deal with Sky/Mediaset and €26 million from the Champions League. The 24% decrease (€21 million) in 2009/10 was almost entirely due to the fact that Roma only qualified for the Europa League, which brought in a paltry €2 million. If you’re wondering why the TV revenue was so high in 2007/08 at €106 million, this was again partly because of the Champions League (worth €29 million that year), but also due to a once-off payment of €15 million for domestic TV rights.

Up until now Roma have benefited from selling their TV rights individually, though their €60 million deal (net of mutuality payments) is still a long way short of the €90-100 million deals negotiated by Juventus, Inter and Milan. As from the 2010/11 season, this structure has been replaced by a return to a centralised collective deal, which Roma have advised will lower their TV income, though they have yet to quantify the magnitude of the reduction.

The decrease may not be quite as bad as some fear for a couple of reasons. First, the total money guaranteed by exclusive media rights partner Infront Sports will be approximately 20% higher than before at over €1 billion a year. Second, the complicated distribution formula still favours the bigger clubs like Roma: 40% will be divided equally among the 20 Serie A clubs; 30% is based on number of fans (25%) and the population of the club’s city (5%); and 30% is based on past results (5% last season, 15% last 5 years, 10% from 1946 to the sixth season before last). Nevertheless, there is still talk of top-flight Italian clubs breaking away to form Lega Calcio Serie A in an attempt to emulate the English Premier League and increase their share of television revenue.

As we have seen, qualification for the Champions League is imperative for Roma’s business model and unsurprisingly the club’s accounts identify this as one of the key risks influencing the club’s economic prospects. It’s not quite as straightforward as saying that the club makes a profit in years when it reaches the Champions League and makes a loss when it fails to do so, but that’s not a million miles from the truth.

The accounts actually state that the total revenue difference between the Champions League and Europa League amounted to a whopping €26 million, when additional gate receipts and increases in sponsorship payments are included. As an illustration of the “Champions” effect, in the purple patch between 2007 and 2009, during which Roma reached the quarter-finals twice and the last 16 once, the TV receipts alone averaged a very handy €20 million a season. The payments have risen since then, so if Roma were to again reach the quarter-finals this season, which is an entirely feasible target, given that they have been drawn against the inconsistent Ukrainian side Shaktar Donetsk in the last 16, they could expect to receive at least €30 million.

Another area where Roma have lagged behind their Italian counterparts is the commercial operation, which generated only €38 million last season (€41 million in 2008/09). To place that into context, Milan earned €64 million, Juventus €54 million and Inter €53 million. The deficit is explained by the differences in the main two sources of commercial revenue, where the other clubs earn more: (a) shirt sponsorship: Roma – Wind €7 million, Milan – Emirates €12 million, Juventus – Betclic €8 million, Inter – Pirelli €9 million; (b) kit supplier: Roma – Kappa €5 million, Milan – Adidas €13 million, Juventus – Nike €12 million, Inter – Nike €18 million.

Actually, the situation is even worse at Roma, as the agreement with Wind, the shirt sponsor, was extended by three years to conclude in June 2013 at a lower guaranteed amount. Previously, this had been €7 million, but is now scheduled to be: 2011 €5 million, 2012 €5.5 million and 2013 €6 million, though this will be increased by €1 million for every season in the Champions League. This does not seem to me to be a wonderful demonstration of negotiating skills, but let’s not forget that this is a club that recently went an entire season without a main sponsor. In fairness, the Kappa equipment deal does have built-in increases from €5 million to €8 million over the course of the contract running until 2017.

Even though there is plenty of room for improvement in marketing, Roma’s real revenue weakness is match day revenue, which is extremely low at €19 million. To be fair, this is a well-known issue in Italy, as we can see in the Money League, where the four Italian clubs all languish in the bottom half of that table. That said, it’s clearly more of a problem at Roma (and Juventus €17 million) than Milan €33 million and Inter €28 million. More importantly, this revenue is miserably low, compared to their European peers. At the other end of the spectrum, Manchester United and Arsenal generate €128 million and €118 million respectively, which is more than six times as much as Roma. That’s a huge competitive advantage for the English clubs, especially as it happens every single season.

The difference is largely attributable to ticket prices, but it’s also down to smaller crowds. Last season, Roma’s average attendance of 41,000 was up 4% and was the third highest in Italy, only behind Inter 56,000 and Milan 43,000, but this was still only the 28th highest in Europe. Also of concern is the fact that Roma only fill 56% of the 72,700 capacity of the Stadio Olimpico, which is the lowest percentage of all Money League clubs.

"Grounds for optimism?"

This only emphasises the need for Roma to address the issue of their stadium, which is owned by the local council, rented by the club and shared with city rivals Lazio, thus reducing its revenue generating capacity. The lack of ownership means that they miss out on profitable opportunities like premium seating, corporate boxes, restaurants, retail outlets, naming rights and non-sporting events.

That is why in September 2009 Roma unveiled plans to build a new 55,000 capacity stadium in the Aurelia zone of the city with Rosella Sensi explaining, “It’s a project to bring economic stability to the club.” Although the ground would be smaller, it would generate much more revenue. In particular, premium seats could make a big difference, if you consider that Arsenal make 35% of their match day revenue from just 9,000 premium seats at the Emirates. Significantly, all of this income would go directly to the club, as they will no longer have to share it with Lazio or the local council.

Obviously, there’s no such thing as a free lunch and a new stadium would require a huge initial outlay (estimated at around €300 million) and is not necessarily a magic bullet, given that it would be difficult to raise ticket prices in an economic recession, but it could have a dramatically beneficial impact on Roma’s revenue. You only have to look at how the gap with Arsenal’s revenue has grown from €15 million in 2005 to €139 million in 2010, with most of the growth coming since 2007 – the first year that the Emirates became operational – to appreciate that it could be worth the risk.

Indeed, this way of thinking has been embraced by other Italian clubs. Juventus’ plans to move to a new stadium are well advanced, while Inter continue to negotiate with their council to move away from San Siro. However, since the 2009 announcement, little more has been heard from Roma about a new stadium, which might be linked to their financial difficulties, though some fans suspect that it was little more than a smoke screen designed to deflect criticism away from the owners.

All in all, Roma’s revenue is not too shabby, but the problem is that it’s not enough to cover costs, leading to a €15 million loss after cash expenses and a €40 million loss after amortisation (and before profit on player sales). As with all football clubs, the largest expense is wages, which have increased by nearly 50% in the last four years from €68 million to €101 million, even though revenue has only grown by 5% in the same period. This trend is most apparent in the last two seasons, when the wage bill steadily grew, even as revenue declined, producing an unsustainable wages to turnover ratio of 82%, which is far higher than UEFA’s recommended maximum limit of 70%.

Admittedly, Roma’s wage bill of €101 million is much lower than their rivals from the north (Inter €205 million, Milan €172 million and Juventus €138 million), but it is still the fourth highest in Italy and around twice as high as the likes of Lazio, Fiorentina and Genoa. Although the payroll has been lightened with the sale of Julio Baptista to Malaga and the loan of Cicinho to Villarreal, the accounts reveal the significant cost of extending player contracts, e.g. Totti’s deal runs to 2014 at €8.6 million a year. Roma fans might also be interested to know that Rosella Sensi received compensation of a tidy €1.1 million, which begs the question of how much she would be paid if the club were actually profitable.

In contrast, player amortisation has held steady at around €24 million in the last three years, which is on the low side compared to other leading Italian clubs: Inter €50 million, Milan €41 million and Juventus €34 million. Remember that amortisation is the annual cost of writing-down a player’s purchase price. For example, Nicolás Burdisso was signed for €8 million on a four-year contract, but his transfer is only reflected in the profit and loss account via amortisation, which is booked evenly over the life of his contract, i.e. €2 million a year (€8 million divided by four years). Thus, the total cost of player purchases is not immediately reflected in the expenses, but increased transfer spend will ultimately result in higher amortisation.

Therefore, the fact that amortisation has not increased would imply that Roma have not spent big in the transfer market and that is indeed the case, at least recently. In the five years up to 2003/04, Roma clearly splashed the cash with net spend of a not inconsiderable €183 million on players of the calibre of Batistuta, Cassano, Montella and Nakata, but they have only incurred net spend of €3 million in the seven years since those heady days.

The annual report explained that the club could only afford “smaller investments, due to fewer available resources” and they have had to box clever, recruiting the Brazilians Adriano and Fabio Simplicio on free transfers (though on high wages) and taking prolific forward Marco Borriello from Milan on loan (with an agreement to buy him for €10 million next season).

This an example of Roma’s need to conserve cash, which is evidenced by the cash flow statement. Over the last two years, the cash outflow of €47 million has been even higher than the reported losses of €23 million, which rings a large alarm bell, especially as this excludes €52 million of amortisation. There have been rumours that the commercial deals were extended at such a low rate in order to get some of the money upfront, but the accounts explicitly mention a number of arrangements whereby TV revenue has been sold in order to access funds now.

"Adriano - a huge investment in both senses"

That sort of arrangement would raise a red flag to most investors, which might explain why the interest of so many possible buyers goes cold when they undertake due diligence and have the opportunity to examine the club’s books in detail. It’s as if they look at the high-level numbers and think that they could make a go of it, but there are too many skeletons in the closet for their liking.

Of course, Roma does possess hidden assets too, namely their players, who were valued at a conservative €42 million in the balance sheet, but are worth considerably more in the real world – a staggering €215 million according to Transfermarkt. Unfortunately, the only way of realising the value of these assets would be to sell players like the popular Daniele De Rossi, which would hardly endear a new owner to the fans.

In addition, any rational investor would look at the market in which a potential acquisition operated, which does not exactly provide a comforting picture. Although Serie A football remains fascinating and continues to produce more than its fair share of Champions League winners, there are numerous problems: outdated stadiums, falling attendances, outbreaks of hooliganism and the complicated “tessera del tifoso” process, which makes it more difficult to just turn up at a match.

"Mirko Vucinic - it's a celebration"

Consequently, Italian clubs have reported some of the largest losses in football. In the last three years, Inter made cumulative losses of over €500 million, while Milan’s losses of €120 million in the same period would have been even higher without the €63 million profit made from selling Kaká. Even Juventus, who have been held up as a paragon of economic virtue in Italy, lost €11 million last year. Future financial prospects have been further damaged by the loss of a Champions League place to Germany.

Of course, Italian clubs will not be able to ignore such losses in the future, even if they have a generous benefactor, as we are entering the era of UEFA’s Financial Fair Play Regulations, which will ultimately exclude from European competitions those clubs that fail to live within their means, i.e. make a profit. These will be implemented in the 2013/14 season, though the monitoring period will cover the preceding two reporting periods, 2011/12 and 2012/13, so clubs like Roma are under pressure to rapidly wipe out their losses.

"The happy couple - but for how much longer?"

Wealthy owners will be allowed to absorb aggregate losses of €45 million over three years for the first two monitoring periods, so long as they are willing to cover the club’s losses by making equity contributions, but the maximum permitted loss then falls to €30 million from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount). Funnily enough, this additional governance could potentially help Roma, as their losses are within this “acceptable deviation”, while some of their competitors will have to slash and burn to get down to this level.

There is little doubt that the right owner, i.e. one with considerable resources and a strategic vision, could make a significant difference to Roma. While it might be over-egging the cake to describe the club as a sleeping giant, it has a lot of strengths that have not been fully exploited, starting with a large, fervent fan base and a productive youth academy. If a new owner could also build a new stadium, and maybe persuade the local authorities to fund improved transport infrastructure, then this sorry saga might actually have a happy ending. Let’s hope so, as the world of football is a better place with a Bella Roma.