Real Madrid And Barcelona - Leaders Of The Pack

A couple of weeks ago Barcelona and Real Madrid produced an enthralling 2-2 draw in El Clásico with two goals apiece from their superstars Lionel Messi and Cristiano Ronaldo. It seemed appropriate that the latest match in a series of titanic struggles finished level, as there has been little to separate the two Spanish giants recently.

Their dominance in La Liga has become unquestioned, as they have shared the last eight league titles between them, Barcelona winning five times, while Madrid have been victorious on three occasions, including last season. In Europe, Barcelona have led the way, winning the Champions League twice in the last four years. Although Madrid have not been quite so prominent recently, they have reached the semi-finals of the last two tournaments, and they have won the trophy more than any other club (nine times).

"Xavi - little triggers"

Despite an uncharacteristically nervous start to the season by these two powerhouses, few would bet against La Liga once again turning into a two-horse race. Indeed, when questioned about Malaga’s potential, their exciting young star Isco’s downbeat response spoke for many, “Atlético Madrid and ourselves have begun well, but there are two teams superior to the rest and there are no others that can fight them for the title.”

They also appear to be doing fantastically well off the pitch, both reporting revenues of around half a billion Euros for the 2011/12 season. More importantly, both clubs registered hefty profits: Barcelona’s €49 million was their all-time record, while Madrid’s €32 million was also a notable achievement. Equally significantly, they have also been reducing their sizeable debts to a more manageable level.

In fact, Madrid claim that their turnover of €514 million is the highest of any sporting club in the world after 7% (€34 million) growth from the previous year’s €480 million. However, expenses shot up €48 million with wages rising 8% (€18 million) from €216 million to €234 million and other expenses surging 26% (€30 million) to €146 million, partly due to a tax law change and higher provisions.

This meant that Madrid’s cash profits, defined as EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) declined from €148 million to €134 million. This is still hugely impressive, being €20 million more than Manchester United and €90 million more than Arsenal, two of England’s most financially astute clubs.

After a €5 million increase in player amortisation and depreciation, operating profit fell €19 million to €24 million, though this was boosted by €20 million profit on player sales (and other asset disposals), which was €17 million higher than the previous season. Net interest payable rose €12 million, almost entirely due to a once-off financial gain the prior year not being repeated in 2011/12.

"Casillas - number one"

This produced a profit before tax for Madrid of €32 million, which was €15 million lower than the €47 million achieved in 2010/11. This was still more than respectable, as club president Florentino Pérez affirmed, “These results are spectacular, especially given the economic circumstances we are living in.”

Barcelona’s revenue also rose 7% from €452 million to €485 million (excluding €10 million revenue from player sales), though they also managed to cut the wage bill by 3% from €276 million to €268 million. This helped increase their EBITDA by a stunning 39% from €89 million to €123 million, just €11 million behind Madrid. In fact, their lower player amortisation, arising from their policy of developing players from the La Masia academy, means that Barcelona’s operating profit of €51 million was more than twice as much as Madrid.

However, Barcelona only made a negligible €3 million profit on player sales, as the €11 million gain made from selling the likes of Jeffrén and Maxwell was almost wiped out by the €8 million loss from removing Alex Hleb, Gabriele Milito and Henrique from the books. That still represented an improvement from the previous season, when the club made an overall loss of €22 million on player sales, as the profitable sale of Yaya Touré to Manchester City was not enough to compensate for the large losses made on selling Zlatan Ibrahimovic to Milan, Dmytro Chygrynskiy to Shakhtar Donetsk, Martin Cáceres to Sevilla and Thierry Henry to New York Red Bulls.

"You've got to fight for your right to party"

Following the debt reduction, Barcelona’s net interest payable dropped €8 million to just €5 million, leading to the record €49 million profit before tax. That’s pretty impressive for a season in which Barcelona did not win the Spanish league title or the Champions League, particularly when they did not sell any players for large amounts of money. No wonder their president Sandro Rosell described this season as “excellent in terms of numbers”, though the fans might have preferred more silverware.

In fact, without the huge losses on clearing out some of the former regime’s expensive mistakes (the loss on Ibrahimovic alone was reported to be an incredible €37 million), Barcelona said they would also have made a pre-tax profit in 2010/11 of €34 million.

Actually, the picture for the football club is even better, as these figures include large losses reported for Barcelona’s other sporting activities. These amounted to €40 million in 2011/12 (basketball €22.9 million, handball €7.7 million, 5-a-side football €5.9 million, hockey €2.4 million and other sports €1.4 million), so the pre-tax profit for the football club alone would be a mighty €89 million.

It’s a similar story for Real Madrid, though unfortunately their annual report no longer analyses the profit and loss account by activity. The last report to do so (in 2008/09) listed the basketball loss as €23 million. If this were the same level today, Madrid’s profit before tax for the football club would be €55 million.

In spite of their massive expenditure, Madrid have been consistently profitable, amassing €230 million of pre-tax profits over the last six years, including €44 million in 2007, €51 million in 2008, €25 million in 2009 and €31 million in 2010. According to their annual report, the last time they reported negative EBITDA was way back in 2001/02. The club is again budgeting for a €32 million profit in 2012/13.

Barcelona’s figures have been less impressive, though they have reported profits in four out of the last six years, albeit generally much lower. The annus horribilis of 2010 with its €83 million loss was largely due to the new board taking what Javier Faus, the vice-president of economic affairs, described as a more conservative approach and booking €89 million of audit adjustments, including provisions for TV rights disputes, player transfers and land sales/valuations.

At that point, Faus admitted that Barcelona could not “allow itself to continue losing money”, leading to a more austere approach, since when substantial progress has been made on the club’s finances, resulting in this year’s mega-profits and a budgeted pre-tax profit for 2012/13 of €36 million. Nevertheless, there is no room for complacency, as Faus acknowledged, “We’re taking this with caution. We’re not euphoric. We want to wait two to three years to see if we can stabilise the trend.”

In stark contrast to the big two, very few other Spanish clubs are doing well financially. According to a study by the University of Barcelona for the 2010/11 season, only eight of the 20 clubs in La Liga were profitable – and Real Madrid were the only one of these to report a profit higher than €5 million. While the two Spanish giants gorge themselves, the other teams are starving. As Professor Gay said, “Everyone is concentrated on Madrid and Barca, who are the kings of the banquet, while the rest live an uncertain future.”

The picture is not too different on the broader European stage, as the only leading club making similar profits are Arsenal, who reported €44 million of pre-tax profits in 2011/12, though it should be noted that they would have made a €38 million loss without the benefit of €82 million of player (and property) sales, ironically including Cesc Fàbregas to Barcelona.

Bayern Munich also reported a solid profit of €9 million, the nineteenth year in succession that they have been in the black, but Manchester United slipped to a €6 million loss (before tax), dragged down by €60 million of interest charges, though in fairness they did make a €36 million profit the previous year.

At the other extreme, those clubs operating with a benefactor/sugar daddy model reported enormous losses. Manchester City’s €237 million loss in 2010/11 was the largest ever recorded in England, while Juventus, Inter, Chelsea and Milan all registered losses at around the €80 million mark.

The source of Madrid and Barcelona’s financial supremacy is their astonishing ability to generate revenue. Domestically, they are so far ahead of the other clubs that it is questionable whether they are even competing in the same race. In the 2010/11 season, their respective revenue of €479 million and €451 million (very slightly adjusted to be in line with the Deloitte Money League) was around four times as much as the nearest challengers: Valencia €117 million, Atlético Madrid €100 million and Sevilla €83 million. The rest were absolutely nowhere with two of the clubs in Spain’s top division reporting annual revenue less than €10 million.

That’s bad enough, but the problem is that it’s getting worse, as only the big two have managed meaningful revenue growth over the last few years, while the others have been stagnating. In the three years between 2008 and 2011, Barcelona and Madrid increased their revenue by €142 million and €113 million respectively, while the closest to that was €21 million by Atlético Madrid and €16 million by Valencia. Athletic Bilbao’s revenue has been flat, and it has actually declined at Sevilla and Villarreal.

In 2012 it’s more of the same with the two giants both adding a further €34 million to their revenue. In short, the gap between the elite and the “working class” is already immense – and it’s getting wider every year. As Sevilla’s outspoken president José Maria del Nido said, “Revenues are making the big get bigger and others smaller.” The chances of Sevilla (or indeed anyone else) mounting a sustained challenge in Spain are virtually zero, unless one of the big two somehow implodes.

In fairness to the Spanish clubs, the theme is essentially the same in Europe with Madrid and Barcelona earning around €100 million more than the third placed club, Manchester United, and €150 million more than Bayern Munich. Their revenue is an incredible €200 million more than Arsenal, Chelsea and Milan. Moreover, they earn the highest television money and only one club betters them on commercial revenue (Bayern Munich) and one splits them on match day income (Manchester United).

Furthermore, the distance to the chasing pack is also growing year after year. Since 2005, the first year that Madrid topped the Money League, their revenue growth has been considerably higher than the other leading clubs. In that period, Madrid’s revenue rose by €204 million, while Barcelona’s growth of €243 million was even more impressive. The next highest increases were barely half that: Bayern Munich €131 million and Manchester United €121 million.

The distance to their peers has been steadily increasing from €39 million in 2009 to a staggering €130 million in 2012. In other words, everyone else has massively lost ground in relative terms. Given this significant competitive advantage, Real Madrid and Barcelona should at the very least reach the Champions League semi-finals every season (and this is indeed one of their budget assumptions).

It’s more of the same in 2012, as the Spanish leaders continued their growth story, while the only other clubs to publish their results for last season either only grew slightly (Arsenal) or even fell back (Manchester United – due to earlier elimination in the Champions League).

Part of the widening disparity reported in 2011 was down to currency movements, as the exchange rate that Deloitte used for their last publication was 1.11 Euros to the Pound. Since then, the Euro has weakened, but even if we apply the current exchange rate of 1.25, the picture is basically unchanged. Since 2009, the growth rate at Barcelona (€119 million) and Real Madrid (€113 million) has been at least twice as fast as their nearest rival (Manchester United €52 million). Of course, Bayern and Chelsea have yet to publish their 2012 figures, but that is unlikely to significantly distort the picture.

We should note that both clubs have provided moderate revenue projections for the 2012/13 season: flat for Madrid, as lower revenue from the summer tour (because of Euro 2012) is compensated by growth in other areas; and a 5% decrease for Barcelona, partly due to no European Super Cup or Club World Cup, with Faus admitting, “Each year it’s harder to find new revenue streams.” However, it should also be acknowledged that they have often managed to beat their revenue budget in previous years.

One other positive aspect of their revenue is how evenly balanced it is between the three revenue streams. The split is almost identical: broadcasting – Madrid 38%, Barcelona 40%; commercial – Madrid 36%, Barcelona 35%; match day – Madrid 26%, Barcelona 25%. As Madrid’s annual report puts it, this diversified structure provides economic stability, cushioning the impact of potential revenue fluctuations arising from sporting factors or the prevailing economic conditions.

Even though they have been remarkably successful in producing a balanced revenue model, broadcasting revenue still provides them with a key competitive advantage over their foreign counterparts, thanks to their lucrative domestic deal. Unlike all the other major European leagues which employ a form of collective selling, Spanish clubs uniquely market their broadcast rights on an individual basis, so Madrid and Barcelona each received €140 million in 2011/12, which was three times as much as the nearest competitors, Valencia €48 million and Atletico Madrid €46 million, followed by Sevilla €31 million and Betis €29 million.

In other words, Madrid and Barcelona on their own received around 43% of the total TV money in La Liga or 11 times as much as the €13 million given to the last club on the list (Racing Santander). This unbalanced deal produces the most uneven playing field in Europe and compares unfavourably to the 1.6 multiple in the Premier League between first and last clubs. Such a revenue disadvantage is bad enough for one season, but it makes a gigantic difference over time. As Sevilla president del Nido complained, “The two giants have earned €1,500 million more than the next club in the last ten years.”

Looked at another way, they received about twice as much from their domestic deal as Premier League champions Manchester City, though the gap should be halved from the 2013/14 season when the new English contract kicks in. In fact, their TV revenue is more than the total revenue of all but eight other clubs.

Both clubs have TV agreements in place until 2014/15, which highlights one potential problem, as the rights holder Mediapro has experienced severe difficulties leading to the company seeking bankruptcy protection over a dispute with Sogecable. Furthermore, other TV channels have spoken of not bidding for rights for matches in future, due to the high price and depressed advertising market. That probably explains why Faus admitted, “Media income has peaked and we don’t expect increases in the next five years.”

"Every little thing he does is magic"

However, the strongest threat to this revenue stream is the other clubs’ desire to move to a collective structure, as summarised by Atlético Madrid’s president Miguel Ángel Gil Marín, “We want a league that is solvent and competitive. To achieve that, it is fundamental that the gap in budgets and revenues is narrowed and there is a fairer distribution of TV rights.”

To date, this has been staunchly resisted by Madrid and Barcelona, but Spain’s sports minister José Ignacio Wert believes that they are now “receptive” to the idea of a more equitable distribution. Indeed, last year Sandro Rosell said, “The television rights are negotiated individually now, but in three, four, five years’ time, we will have to put them all in one pot and make La Liga as it is in Italy and the Premier League”, though his price is a reduction in the number of clubs from 20 to 16.

That might sound like yet another slice of “pie in the sky”, but there are reasons to believe that this might happen, not least that collective agreements tend to be worth more than the sum of their parts. La Liga’s TV rights revenue of €655 million is a long way behind the Premier League’s current €1.4 billion (rising to an estimated €2.2 billion in 2014). In fact, they have now been overtaken by the Bundesliga (€0.7 billion) and Serie A, whose return to a collective deal helped grow TV rights to just under €1 billion.

That is a huge prize to go after, especially overseas rights, which is the reason why so many in Spanish football are now actively pushing to make the “product” more attractive to viewers abroad, as articulated by former Real Madrid legend Emilio Butragueño, “We want … a brand like the Premier League. The best players in the world are here in Spain and we have to profit from it.” Of course, that is easier said than done, especially in the current harsh economic environment.

TV money has been boosted by participation in the Champions League with both Madrid and Barcelona receiving around €40 million last season from the central distribution. This again drives a wedge between them and other Spanish clubs, as the less successful Valencia (€19 million plus €3 million for parachuting into the Europa League) and Villarreal (€14 million) earned much less. It was even worse in the Europa League, as Atlético Madrid and Athletic Bilbao only earned around €10 million, even though they both reached the final.

Barcelona have consistently earned more money from Europe’s flagship tournament than Madrid, thanks to their superior results, notably the €51 million garnered when they won the trophy in 2010/11. That said, Madrid’s improved performances under José Mourinho have resulted in revenue rising €12 million to €38-39 million in each of the last two seasons. The Champions League bonanza shows little sign of slowing down, as the prize money for the 2012 to 2015 three-year cycle has increased by 22%.

Both clubs have adopted a strong commercial philosophy. Marcel Planellas of the famous Easde business school compared Barcelona’s strategy to a movie studio, “Just like Disney, you’ve got your stars, your world tours, the box office, the television rights, the t-shirts and all the other merchandising.” That description could equally apply to Real Madrid, who have recently announced plans to build a $1 billion “football island” holiday resort in the United Arab Emirates to strengthen their presence in the Middle East and Asia.

In 2010/11, their commercial revenue (Madrid €172 million, Barcelona €156 million) was only surpassed by Bayer Munich’s barely credible €178 million, but was a fair way ahead of other clubs with Manchester United being the nearest at €114 million. In Spain, it’s less of a gap to the next clubs, more of an abyss with the difference being at least €125 million to Atlético Madrid €29 million and Valencia €23 million. Note that Deloitte appear to have re-classified membership fees to commercial income in their analysis.

Perhaps unsurprisingly, the shirt sponsorship and kit supplier deals are the highest in football. Barcelona’s five year deal with Qatar Foundation, running until 2015/16, is worth €30 million a year (plus €15m for “commercial rights” in 2010/11) and is their first ever paid shirt sponsorship. Rosell argued this was due to the arrival of wealthy owners at other clubs, “If we did not have to fight against competition which has capital, I would never sell anything on the shirt.” Madrid’s agreement with Bwin, reportedly also worth €30 million, runs until 2012/13.

It’s not so rosy at other Spanish clubs with almost half of the clubs in La Liga starting last season without a shirt sponsor, including Valencia, Sevilla and Villarreal. However, the bar is continually being raised at the leading clubs with Manchester United recently announcing a spectacular deal with Chevrolet, which will be worth an astonishing €56 million from 2014/15.

For kit suppliers, Madrid have just extended their deal with Adidas to 2019/20 for €38 million, while Barcelona renewed their Nike deal in 2008 for €33 million to 2012/13 (with an option to extend to 2018). The closest to them are Manchester United (Nike) and Liverpool (Warrior), who both earn around €32 million. An indication of Madrid’s commercial strength came from the five-year secondary sponsor deal that Emirates Airlines signed for €5 million a season, purely for some “prominent” advertising space within the ground.

In terms of shirt sales, a survey by PR Marketing suggested that Madrid and Manchester United lead the way with annual sales of 1.4 million, followed by Barcelona with 1.15 million.

Commercial income has also been helped by uplifts from success like winning the Champions League and other activities, e.g. stadium tours, ticket exchanges, though there are limits with both clubs unwilling to play the Spanish Super Cup in China. Indeed, Faus cautioned, “advertising is not immune to the current economic climate.”

Stop me if you’ve heard this one before, but Madrid and Barcelona are also at the top of the league for match day income: in 2010/11 Madrid were first with €124 million and Barcelona third with €111 million. The next highest in Spain were again miles behind: Atlético Madrid €30 million, Valencia €27 million and Athletic Bilbao €25 million. This figure is impacted by the number of matches played, e.g. progress in Europe, and other events, such as Madrid hosting the Champions League final in 2010.

In recent years, the clubs have avoided raising ticket prices too much. Indeed, Barcelona’s new board promised not to increase them for two years, which they extended an additional year for the 2012/13 season. However, there are hints that this may change with Faus talking about wanting “to have a debate” on prices.

Both clubs also benefit from membership fees with Barcelona reporting revenue of nearly €20 million from their 170,000 members. Madrid do not explicitly break out their income, though they do list the fees paid by their 93,000 members, implying revenue of €10 million.

Attendances are among the highest in Europe with Barcelona overtaking Madrid three years ago, though their crowds fell last season to 76,000, around 1,000 more than  their great rivals, even though Faus said that “ticket sales have been spectacular.” One caveat here is that Spanish attendance figures are notoriously inaccurate, as explained in this interesting article from Estadios de Fútbol en España.

Last month both clubs made announcements regarding possible stadium development. Madrid unveiled four models to “turn the Bernabéu into a world class arena”, which would cost €250 million, according to El Pais, and take three years with the work starting next summer. Just two months after Rosell said that Barcelona would put planned stadium renovations on hold until the club’s debt had been further reduced, he announced a referendum whereby members could decide whether to: leave the Nou Camp unchanged; redevelop it (last year there were plans to add 10,00 seats and install new VIP boxes); or build a new stadium. Faus indicated that redevelopment would cost €300 million, while a full stadium move would be €600 million.

It is clear that both clubs have made efforts towards cost containment. In particular, Barcelona cut their wage bill from €241 million to €233 million in 2012. This gave some support to Rosell’s claim that “austerity will be a pillar of our day-to-day management”, though sporting salaries still rose by €17 million to €155 million, following the arrival of Fàbregas and Alexis Sánchez. This was off-set by a €24 million reduction in bonus payments to €44 million, as the club failed to retain La Liga and the Champions League.

In fairness, the wages to turnover ratio has improved from 59% in 2010 to a very creditable 48% in 2012, though Faus conceded that “it’s difficult to reduce the (wages) figure further and still maintain stability.”

As a technical aside, I have used the wages from Barcelona’s detailed accounts here to be consistent with the University of Barcelona analysis. The business review section of Barcelona’s annual report lists salary costs as €268 million (sports €237 million, other €31 million), as this also includes other costs, mainly image rights of €24 million.

In contrast to Barcelona, Madrid’s wage bill rose from €216 million to €234 million (almost identical to their rivals), presumably due to bonus payments for winning the league, though they managed to maintain their superb wages to turnover ratio at 46%. This may come under pressure from the abolition of the so-called “Beckham Law”, which allowed foreigners to benefit from a lower tax rate. As many players, such as the occasionally “sad” Ronaldo, are paid net, the club potentially faces a sizeable increase in its costs from 2015, when the tax rate increases from 24% to 52%.

Again, these wage bills are considerably higher than other Spanish clubs – at least €150 million higher in 2010/11 with Atlético Madrid and Valencia the closest at just €64 million and €61 million respectively. Some of the comparatives are almost laughable, e.g. Levante’s wage bill of €7 million is about 3% of Madrid’s.

As with revenue, it’s getting worse for the rest of Spain with the wages gap ever widening. Between 2008 and 2011 Barcelona’s wage bill rose €72 million, while Madrid’s increase by €49 million. In the same period, the wage bills at Atlético Madrid, Valencia and Sevilla actually fell, while Bilbao’s €14 million growth only took them to €49 million.

Their wages are also the highest in Europe, though Manchester City and Chelsea were quite close with €209 million and €202 million respectively. However, there are a couple of caveats. First, the exchange rate can play a part, so City would have been higher than Madrid in 2010/11 at today’s rates. Second, both Spanish clubs’ wage bills are inflated by other sports. In Barcelona’s case, this amounted to €31 million in 2011/12, while Madrid included around €23 million. Barca have targeted these for future savings.

Despite this factor, Madrid’s wages to turnover ratio of 45% was still better than both the financially prudent clubs (Manchester United 46%, Bayern Munich 49%, Arsenal 55%) and the more profligate ones (Manchester City 114%, Inter 90%, Milan 88%, Chelsea 75%).

The other expense impacted by investment in the squad, player amortisation, rose last year at both clubs: from €92 million to €98 million at Madrid and from €56 million to €61 million at Barcelona. For non-accountants, amortisation is simply the annual cost of writing-down a player’s purchase price, e.g. Karim Benzema was signed for €35 million on a six-year contract with the transfer reflected in the accounts via amortisation, which is booked evenly over the life of his contract, so around €6 million a year.

The only other major football club with similarly high player amortisation to Madrid is Manchester City with around €100 million. The €37 million difference with Barcelona highlights their different approaches: Madrid tend to buy in their stars, while Barcelona look to develop their youngsters in-house. As Faus said, “There’s no need to spend €80 million, as we have La Masia”, which has produced Xavi, Iniesta and Lionel Messi (among many others).

This can be seen by the net transfer spend: in the last seven years, Madrid’s €477 million was almost 80% higher than Barcelona’s €266 million. That said, there has been a sea change at Madrid with a distinct slowing-down in the last three years, with net spend of “only” €128 million compared to €349 million in the previous four years, when they launched the second version of the Galácticos project, buying Ronaldo, Kaká, Xabi Alonso and Benzema. It’s a similar story at Barcelona where they have spent just €65 million (net) in the past three years, less than a third of their €202 million outlay in the previous four years.

Faus has said that Barcelona’s average annual budget for new signings will be €40 million. He added that any over-spend would be compensated in future years, “Last year we surpassed our transfer budget with the signings of Cesc Fàbregas and Alexis Sánchez. We cannot overspend our budget by 20 or 30 million euros each year, it would put our business plan at risk. It wouldn’t be sustainable.”

Even with this more reasonable approach, the big two continue to outspend the other Spanish clubs. In the last three years, most have actually made money in the transfer market: Valencia €62 million, Athletic Bilbao €27 million, Atlético Madrid €19 million and Sevilla €5 million. The only leading club with a net spend is Malaga and that looks like a temporary blip after their ownership problems.

Transfer spending was down 70% in La Liga this summer to just €116 million with over half coming from Madrid and Barcelona (on Luka Modric, Alex Song and Jordi Alba). Some clubs didn’t spend a single Euro on player recruitment.

Given their financial weaknesses (and inability to compete), the other Spanish clubs are effectively forced to sell their stars, thus creating a vicious circle where the dominance of Madrid and Barcelona becomes more firmly entrenched. As an example, in the past few years, Valencia have lost David Villa, David Silva and Juan Mata, while Atlético Madrid have sold Sergio Aguero, Diego Forlán and David de Gea. They either move abroad or actually join Madrid or Barcelona.

Where the Spanish giants have to be careful is that they are no longer the only game in town. In fact, over the last three years they have been outspent by new money, particularly Chelsea (€272 million), Manchester City (€244 million), Paris Saint-Germain (€242 million) and Zenit Saint Petersburg (€151 million). Money talks, but oil money talks louder.

The most worrying issue for the Spanish giants, widely reported in the media, has been their large debts, though this is open to interpretation (as explained in this earlier blog). The press tend to use the broadest possible definition of debt, namely total liabilities, which includes trade creditors, accruals and even provisions. In 2012 this gives enormous headline figures for Madrid and Barcelona of €590 million and €471 million respectively. To place that into perspective, is the same measure were to be applied to English clubs, Arsenal, universally applauded for their financial prudence, would have “debt” of €585 million, about the same as Madrid and more than Barcelona, while Manchester United are much higher at €890 million.

Under the more standard definition of net debt, Madrid’s balance is only €30 million (bank loans of €143 million less cash €113 million), while Barcelona have €99 million (gross debt €136 million less cash €37 million). Both of these are lower than Arsenal (€124 million) and Manchester United (a hideous €458 million). However, Madrid also have significant net transfer liabilities owed to other football clubs (included in UEFA’s debt definition) of €55 million.

In 2010/11 Madrid (€590 million) and Barcelona (€578 million) had the highest debts in Spain, but this is cushioned by very good debt coverage (revenue/debt) of around 80%. This ratio highlights the bigger debt challenges faced by other clubs such as Atlético Madrid (debt €514 million, cover 19%) and Valencia (debt €382 million, cover 31%), though a promising sign came last month from Miguel Cardenal, Spain’s secretary of sport, who said that football club debts were declining for the first time in decades.

Madrid have succeeded in slashing debt from €327 million in 2009 to €125 million in 2012, largely because of a significant reduction in transfer liabilities. This is under their own definition, which is essentially the same as UEFA’s (bank debt plus net transfer fees payable) plus selected creditors (essentially stadium debt).

Similarly, Barcelona have cut debt by 22% in two years from €430 million to €334 million, again using an in-house definition. This is a fine achievement, considering the issues in 2009, when the club had to seek an emergency €155 million to overcome short-term cash flow problems, including paying the players. Faus has admitted that the debt is “still too high for us to be able to dictate our future” and the club’s strategic plan aims to reduce the balance to €190 million by 2015/16.

Madrid’s balance sheet is quite strong with €275 million of net assets, which is much better than Barcelona’s net liabilities of €20 million (though this has improved €49 million in 2012). However, Barcelona have “hidden” assets, as the players are only included in the accounts at book value of €143 million, while Transfermarkt estimates their real market value at a mighty €601 million.

Based on their strong financial performance in 2011/12, UEFA’s Financial Fair Play (FFP) regulations, which force clubs to live within their means if they wish to compete in Europe, should not prove overly problematic for Madrid and Barcelona. The allowable losses are an aggregate €45 million for the first two years (then three years), but this is only €5 million if losses are not covered by the owners, which might be more relevant here, given that the clubs are owned by their members.

In any case, they can exclude certain expenses, including depreciation on tangible fixed assets and expenditure on youth development and community activities, which would be worth at least €20 million. On top of that, they could argue that losses made by other sports should also be ignored, though the FFP guidelines suggest that “other sports teams” might be included.

Perhaps the biggest threat to the financial ascendancy of Madrid and Barcelona is the desperate situation of Spanish football in general. Even though results on the pitch have never been better for the Spanish national team and their clubs in Europe (five of the eight semi-finalists in Europe last season came from La Liga), most clubs are struggling off the pitch with a quarter of the clubs in the top division in bankruptcy protection. As Professor Gay said, “Many clubs are living dangerously.”

"So why so sad?"

The start of last season was delayed by a players’ strike over unpaid wages and there were threats of similar this season, this time over TV rights and schedules. This is exacerbated by the desperate state of the Spanish economy, which is firmly in recession with unemployment running at a record 23%.

With their new found focus on sustainability, Madrid and Barcelona will be fine from a financial perspective, but it is conceivable that fans may lose interest in La Liga, due to the lack of competition. The financial disparity with the rest of the league was always large, but it has become colossal, leading to doubts about some clubs’ ability to survive. Professor Gay warned, “If things go on like this, Spanish football will kill itself.”

At the moment, Madrid and Barcelona give the impression of fiddling while the rest of the country burns, but they would do well to remember the wise words uttered in Spider-Man (or, if you prefer, the works of Voltaire), “with great power comes great responsibility.”

Arsenal - The Song Remains The Same

It has been a mixed start to the season for Arsenal, as promising away performances at champions Manchester City and a rejuvenated Liverpool have been balanced against a disappointing home defeat to Chelsea. However, there is an air of quiet optimism among the fans that Arsène Wenger’s new-look side will be able to mount a challenge once the new players have fully gelled. It certainly feels better than last year when the Gunners were on the wrong end of an 8-2 thrashing by Manchester United.

In fact, Arsenal recovered well after that disastrous start to finish in a creditable third position, securing qualification for the Champions League for a hugely impressive 15 seasons in a row. Even Wenger was moved to describe this feat as a “miracle”, citing the thrilling 5-2 victory over Spurs in the North London derby as the turning point. Nevertheless, it was a close run thing, as Arsenal only made sure of qualifying with a last day victory at West Brom.

The team’s inconsistent performances can be partly attributed to the significant amount of turnover in the playing squad, exacerbated by losing some of the club’s best performers each summer. Last year Cesc Fàbregas returned to his spiritual home at Barcelona, while Samir Nasri moved north to join Manchester City’s project. In the recent transfer window, it was the turn of leading scorer Robin Van Persie to head towards Manchester, though he opted for Old Trafford, while Alex Song joined the long list of Arsenal players transferred to Barcelona.

"Mertesacker - the power of Per-suasion"

Good arguments can be put forward that each of these sales may have made sense individually, e.g. RVP was in the last year of his contract, while the offer for Song was too good to refuse given his tactical indiscipline, but taken together they do give the impression that Arsenal have become a selling club, not overly bothered if their best players leave.

At least Arsenal appeared to have more of a plan this summer, recruiting international replacements before the departures, including the highly talented creative midfielder Santi Cazorla from Malaga, the experienced German forward Lukas Podolski from FC Köln and last season’s top scorer in Ligue 1 Olivier Giroud from Montpellier. Furthermore, the return of Jack Wilshere and Abou Diaby after lengthy absences through injury enabled the club to wheel out the tried-and-tested “like a new signing” line.

However, many fans remain baffled that a club of Arsenal’s immense financial resources did not aim higher in the transfer market, such as buying a striker of the calibre of Napoli’s Edinson Cavani or Atlético Madrid’s Radamel Falcao. Of course, either of these would have broken Arsenal’s transfer record by some distance, but the money is clearly available to fund a purchase of this magnitude.

"Cazorla - Spanish eyes"

To the outside world, it appears that Arsenal have paid rather more attention to strengthening their balance sheet, as opposed to the squad, an impression that was reinforced by last week’s announcement of a hefty profit for the 2011/12 season, described by Peter Hill-Wood as “another healthy set of full year results.”

As is the chairman’s style, that was a beautifully understated description of a thumping great profit before tax of £36.6 million, which was up from £14.8 million the previous year. This was split between £34.1 million from the football business (up from £2.2 million in 2010/11) and £2.5 million from property development (down from £12.6 million).

The massive £32 million increase in football profit was mainly due to profit on player sales rising £59 million to an enormous £65 million, largely from Fàbregas and Nasri, though recurring revenue also rose £10 million to £235 million with more than half of the growth coming from commercial operations.

However, this was offset by substantial increases in staff costs of £40 million: wages climbed 15% (£19 million) from £124 million to £143 million; player amortisation surged 70% (£15 million) to £37 million after last summer’s acquisitions; and a £6 million impairment charge was booked to reduce the value of players “deemed to be excluded from the Arsenal squad.”

Net interest charges continued to fall, down to £13.5 million from £14.2 million (£18.2 million in 2009/10).

As anticipated, there was a further slow-down in the property business with turnover falling from £30.3 million to £7.7 million, as the Highbury Square development is now almost entirely sold.

Chief executive Ivan Gazidis was at pains to emphasise the club’s self-sustaining model, claiming that the club “can and will forge its own path to success”, though he must be concerned about the continuing decline in operating profits, which have fallen from a £31 million peak in 2008/09 for the football business. In fact, excluding property development, the club actually reported an operating loss of £18 million last season, compared to the previous year’s £9 million operating profit. This £28 million turnaround was due to operating expenses (£38 million) rising much faster than revenue (£10 million).

Nevertheless, the bottom line is that Arsenal once again made another sizeable profit, even if it was largely on the back of player sales. There is no doubt that the club’s record off the pitch has been superb, especially in the unforgiving world of football, where large losses are frequently the order of the day. In fact, the last time that Arsenal reported a loss was a decade ago in 2002, amply demonstrating its self-financing ethos. The last five years have been particularly impressive, at least financially, with Arsenal accumulating staggering profits of £190 million, an average of £38 million a year.

Arsenal have consistently been one of the most profitable clubs in the world, though they are not quite the only leading club to make money. Both the Spanish giants have recently reported large profits for 2011/12: Barcelona £41 million (€49 million) and Real Madrid £27 million (€32 million). In addition, Bayern Munich have been profitable for 19 consecutive years. Manchester United slipped to a £5 million loss (before tax) last season, dragged down by £50 million of interest charges, though they made a £30 million profit the previous year.

At the other end of the spectrum, clubs operating with a benefactor model reported enormous losses. Manchester City’s £197 million loss in 2010/11 was the largest ever recorded in England, while Juventus, Inter, Chelsea and Milan all registered losses of around £70 million. As Gazidis put it, “we see clubs struggling to keep pace with the financial demands of the modern game.”

That said, the arrival of UEFA’s Financial Fair Play (FFP) regulations, not to mention the economic difficulties of many of the clubs’ owners, has produced a clear change in behaviour. Milan and Inter have been selling their experienced, more expensive players, while City were relatively restrained in the transfer market (by their own exalted standards) this summer. Even Chelsea’s spending has been on younger players with a future resale value.

So far, so good, but Arsenal’s profits have been very reliant on player sales and (to a lesser extent) property development. In 2011/12, if we exclude the £2.5 million profit from property development and the £65.5 million profit from player sales, the football club would actually have made a sizeable loss of £31.3 million.

No other leading club has been so dependent on player sales as part of its business model. In fact, over the last six years, selling the club’s stars has been responsible for £178 million (or over 90%) of the £195 million total profit. That’s great business, but it makes it very difficult to build a winning team, as Arsenal seem to be perpetually two pieces short of the complete jigsaw.

There’s little sign of this slowing down either, as the sales of Van Persie and Song were made after the 31 May accounting close, so will be included in next year’s accounts, contributing another £37 million of profit.

These “once-off” sales are all well and good, but they have been disguising Arsenal’s increasing operational inefficiency. This can be seen by the decline in cash profits, known as EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which has virtually halved from a peak of £66 million in 2008/09 to £35 million last season. That’s still pretty good for a football club, but, to place it into context, it is less than 40% of the £92 million generated by Manchester United, who also forecast growth to £107-110 million this season.

This may be a tiresome accounting term, but it is important, as it represents the cash available for a club to spend – unless it sells players or increases debt. Assuming no change in overall strategy, this means that Arsenal will continue to sell players unless/until they grow revenue or cut their wage bill.

As Gazidis explained, “The reason we talk about the financial results at all is that it provides the platform for us to be successful on the field.” Given this truism, let’s look at some of the challenges facing Arsenal.

1. How will the club grow revenue?

Looking at the club’s revenue of £235 million, which is the fifth highest in Europe, it is difficult to imagine that this could be an issue, especially as it is only surpassed by Manchester United in England (£331 million in 2010/11, £320 million in 2011/12), while it is way ahead of clubs like Liverpool £184 million, Tottenham £164 million and Manchester City £153 million.

However, there are three problems here: (a) the gap to the top four clubs is vast; (b) Arsenal’s revenue has hardly grown at all in the last few years; (c) other clubs have continued to grow their revenue.

Real Madrid and Barcelona generate around £200 million more revenue than Arsenal. Even though this shortfall would come down if the current exchange rate of 1.25 Euros to the Pound were used instead of the 1.11 prevailing when Deloitte produced their survey, the disparity would still be around £150 million, which makes it difficult to compete.

Although revenue rose £10 million last season to £235 million, this is effectively the only revenue growth since 2009, when revenue was £225 million. The largest increase in this three-year period came from broadcasting, which rose £11 million from £73 million to £85 million in 2012, as a result of centrally negotiated deals for the Premier League and UEFA (for the Champions League), so Arsenal’s board cannot take a great deal of credit for that.

Much was made of commercial revenue rising £5.6 million to £52.5 million, but this is only £4.4 million higher than the £48.1 million received in 2009. In other words, this crucial revenue stream has only grown by a miserable 9% in three years. Even though Gazidis stated in an interview with the club website that commercial partnerships were “well ahead of our five-year plan”, I would suggest that to date there has is not exactly been a scintillating return on investment in the expensive new commercial team.

"Giroud - handsome devil"

The most important revenue stream for Arsenal, match day income, has actually fallen from £100 million to £95 million, despite ticket prices being raised last season.

It is imperative that Arsenal manage to find ways to profitably grow their revenue, as Gazidis acknowledged during the results presentation, “Our activities to increase revenue are important. Increased revenues allow us to be more competitive and to keep pace with the ever present cost pressures in the game.” The club’s Chief Commercial Officer, Tom Fox, re-iterated this, when he described his role as “to build and grow the multiple revenue streams at the club in order to maximise the money available for the board and the manager to spend on the squad.”

Arsenal’s real revenue problem is that while they have struggled to increase their revenue, other leading clubs have continued to grow their business. In the three years since 2009, Real Madrid and Barcelona both grew revenue by around £90 million. Madrid have just announced record-breaking £411 million (€514 million) revenue for 2011/12, while Barcelona are not far behind with £381 million (€476 million).

For English clubs, United’s revenue fell back to £320 million in 2011/12 after their earlier Champions League exit, but still represented growth of £42 million since 2009, while the 2012/13 revenue outlook they provided to analysts was a mighty £350-360 million. The only leading club whose growth was anywhere near as low as Arsenal’s was Chelsea, but their 2011/12 figures will be much higher, due to the Champions League victory and new commercial deals.

Arsenal’s Achilles’ heel from a revenue perspective has been commercial income, which is extremely low for a club of Arsenal’s stature. Even after the 13% increase to £53 million in 2011/12, this still pales into insignificance compared to the likes of Bayern Munich £161 million, Real Madrid £156 million and Barcelona £141 million.

The story is no better in England, as Arsenal’s £53 million is less than half of Manchester United’s £118 million. While Arsenal have barely registered any commercial growth since 2009 (just £4 million), others have steamed ahead, including Manchester City (£41 million growth) and Liverpool (£17 million growth). The discrepancy will be even worse when those two clubs publish their latest accounts, as the 2010/11 figures do not include the increases for new sponsorship deals with Etihad and Warrior respectively.

Arsenal’s problems in this area can be highlighted by a comparison with Manchester United, who admittedly are the commercial benchmark for English clubs. Back in 2007, Arsenal’s commercial income of £42 million was just £14 million lower than United’s £56 million, but since then Arsenal’s revenue has only risen 26% to £53 million, while United’s has rocketed 110% to £118 million, leading to an annual difference of £65 million. Mind the gap, indeed.

Arsenal’s weakness in this area arises from the fact they had to tie themselves into long-term deals to provide security for the stadium financing, which arguably made sense at the time, but recent deals by other clubs have highlighted how much money Arsenal leave on the table every season.

The Emirates deal was worth £90 million, covering 15 years of stadium naming rights (£42 million) running until 2020/21 and 8 years of shirt sponsorship (£48 million) until 2013/14. Following step-ups the shirt sponsorship deal is worth £5.5 million a season, which compares very unfavourably to the amounts earned by the other leading clubs, who have all improved their deals in recent seasons, so Liverpool, Manchester United and (reportedly) Manchester City earn £20 million from Standard Chartered, Aon and Etihad respectively.

In fact, no fewer than eight Premier League clubs now have a more lucrative shirt sponsorship than Arsenal. As well as the usual suspects, Arsenal’s deal is behind Sunderland’s barely credible £20 million deal with Invest in Africa, Tottenham £12.5 million (Aurasma £10 million plus Investec £2.5 million), Newcastle £10 million (Virgin Money) and Aston Villa £8 million deal (Genting).

The news is no better with Arsenal’s kit supplier, where the club signed a 7-year deal with Nike until 2011, which was then extended by three years until 2013/14. This now delivers £8 million a season, compared to the £25 million deal recently announced by Liverpool with Warrior Sports and the £25.4 million paid to Manchester United by Nike.

Gazidis talks a good match, “we continue to be successful in attracting top brands to sign on as commercial partners”, but the reality is that Arsenal have been outpaced in this area. Yes, they have indeed signed some new sponsors, such as Carlsberg, Indesit, Betsson, Bharti Airtel and Malta Guinness, while other like Citroen and Thomas Cook renewed for a higher sum, but there has been little tangible revenue improvement. Furthermore, Manchester United continue to attract more secondary sponsors than Arsenal, including seven since 1 July 2012 alone.

Indeed, much of the commercial revenue growth was down to the overseas tour to Malaysia and China, which is something of a double-edged sword, as it may well have had a detrimental effect on the players’ pre-season preparation.

"Jenkinson - corporal punishment"

More positively, Arsenal will have a fantastic opportunity for what Gazidis calls “a significant uplift in revenue” when the main sponsorship deals are up for renewal at the end of the 2013/14 season. If they could match the £45 million currently received by United and Liverpool for main shirt sponsor and kit supplier, that would imply a £32 million increase in revenue.

Great stuff, but the trouble is that the bar is being continually raised in sponsorship deals, so United have recently announced a truly spectacular deal with Chevrolet. Not only will this rise to an astonishing £45 million ($70 million) in 2014/15, but the sponsor will even pay them £11 million in each of the previous two seasons – while Aon are still the sponsors. Not only that, but United have also persuaded DHL to pay £10 million a season to sponsor their training kit.

In other words, there is no guarantee that Arsenal’s new sponsorship deals will ride over the hill like the seventh cavalry to save them, especially if the brand is damaged by a failure to qualify for the Champions League (though that has not prevented Liverpool from securing superb deals). Gazidis has said that “in terms of the financial impact, it will be as significant a step forward as the stadium was in 2005”, but his commercial team will have to significantly up its game – or Tom Fox will be considered about as effective “in the box” as Franny Jeffers.

Match day income of £95 million is the fourth highest in Europe, only behind Real Madrid, Manchester United and Barcelona, but that makes the club very reliant on the revenue generated in the stadium – “more so than any other club”, as Gazidis stated. Wenger confirmed its importance, “We are very lucky because we have good support and the income of our gates is very high.” Indeed, the £3.3 million that Arsenal generate per match is more than twice the amounts earned by Tottenham and Liverpool.

However, this revenue stream seems to have reached saturation point, as Arsenal continue to register capacity crowds of 60,000 and their ticket prices are among the highest in the world. In fact, match day income was actually higher in 2008/09 at £100 million, largely due to the high number of home games played (or old-fashioned success on the pitch). Furthermore, revenue per match has also fallen from the peak of £3.5 million in 2009/10.

Indeed, after the deeply unpopular 6.5% ticket price rise in 2011/12, most prices were frozen for this season, though 7,000 Club Level members were asked to pay an additional 2%. The media made great play of the cheapest tickets for the match against Chelsea (an A category game) being an obscene £62, though they have been less voluble about the 28% reduction in prices for C category games from £35 to £25.50. In addition, Arsenal have introduced a number of pricing initiatives, e.g. discounting lower-tier tickets to £10 for the Capital One Cup game against Coventry City.

The other issue here is what would happen if Arsenal failed to qualify for the Champions League, even if the inferior Europa League was on offer, as the season ticket includes the first seven cup games from European competition and the FA Cup. The club would surely have to issue credits, potentially leading to a 10-20% reduction in revenue.

The majority of Arsenal’s television revenue comes from the Premier League central distribution with the club receiving £56 million in 2011/12, unchanged from the previous season. Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£18.8 million) with the only differences down to merit payments (25% of domestic rights) and facility fees (25% of domestic rights), based on how many times each club is broadcast live. This methodology is very equitable with Arsenal only receiving £4.4 million less than champions Manchester City.

However, the signing of the £3 billion Premier League deal for domestic rights for the 2014-16 three-year cycle, representing an increase of 64%, will “provide clubs with a significant boost to their revenue” per Gazidis. If we assume (conservatively) that overseas rights rise by 40%, that would increase Arsenal’s share by around £30 million (using the same allocation system).

Of course, other English clubs’ revenue would also rise, though lower placed clubs would not receive as much in absolute terms, but this would certainly help Arsenal’s ability to compete with overseas clubs, especially Madrid and Barcelona, who benefit from massive individual deals.

The other major element included in TV revenue is the distribution from the Champions League, which was worth around £24 million (€28 million) to Arsenal in 2011/12. The amount earned depends on a number of factors: (a) performance – a club receives more prize money the further it progresses; (b) the TV (market) pool allocation – half depends on the progress in the competition, half depends on  the finishing position in the previous season’s Premier League; (c) exchange rates – the 2011/12 figure was adversely affected by the Euro’s weakness.

In this way, Chelsea earned more than twice as much last season as Arsenal with €60 million after their triumph in Munich. Interestingly, Manchester United (€35 million) also earned more than Arsenal, despite being eliminated at the group stage, as their share of the market pool was higher after winning the previous season’s Premier League, while Arsenal finished fourth. Potentially, Arsenal could increase their revenue by €30 million if they managed to emulate Chelsea’s success, but, by the same token, they could lose €30 million if they missed out on qualification to Europe’s flagship tournament.

However large the differences are between the English clubs that qualify for the Champions League, it is still much better than the Europa League, where the highest amount earned by an English representative was the €3.5 million that went to Stoke City. Financially, the Champions league is the only game in town, especially now that the prize money for the 2012 to 2015 three-year cycle has increased by 22%.

2. Are expenses out of control?

Last season saw the first operating loss in many years after expenses rose at a much faster rate than revenue. In particular, the wage bill shot up 15% from £124 million to £143 million, despite the sale of Fàbregas and Nasri, two of the highest earners. Part of the increase was presumably due to rushing in the likes of Per Mertesacker, André Santos and Park-Chu Young last summer without enough time for meaningful salary negotiations.

In addition, a once-off charge of £2.2 million was included to top-up the pension provision, while Arsenal’s lack of trophies and commercial growth did not prevent Gazidis’ package rising 24% to £2.15 million (salary £1.366 million, bonus £675,000, pension £100,000).

The explosive wage growth is nothing new. In fact, since 2009 wages have gone up £39 million (38%), while revenue has only grown by £10 million (5%), leading to a significant worsening in the wages to turnover ratio from 46% to 61%. This is by no means terrible (most Premier League teams have a ratio above 70%, while Manchester City notched up 114% in 2010/11), but is of concern, especially as Manchester United have managed to maintain their ratio around 50%. Though not the only reason, this helps to explain why so little has been spent in the transfer market.

The problem is that wages in football resemble a sporting arms race, as other clubs continue to set the agenda, notably Manchester City, who have increased their wage bill from £36 million to £174 million in just four years. Arsenal’s wage bill of £143 million is now the fourth highest in England, behind City, Chelsea £168 million (2011) and Manchester United £162 million (2012).

Arsenal’s performance in regularly finishing third or fourth in the Premier League means they have slightly outperformed expectations based on the wage bill, though Tottenham fans would note that they ran them very close last season with £30 million less wages.

"Wenger - train of thought"

One issue at Arsenal is the equitable wage structure, which means that the top salaries are not enough to attract the world’s best, while fringe players like Sébastien Squillaci and Marouane Chamakh are handsomely rewarded for sitting in the stands. Arsenal’s wage bill is sufficient to sign world-class players, but that would mean reducing the salaries of lesser lights. This has been tacitly admitted by Gazidis: “Can we compete at top salary levels? Yes we can, but we have an ethos at the club - the way Arsène expresses it is that it is not about individual players, it is what happens between them.”

The difficulty is in getting the unwanted players off the payroll at their high wages, hence loans for Nicklas Bendtner, Denilson and Park when the club would have preferred to sell them. However, there are signs that the club is now acting on this with numerous departures this summer and the hard line over contract discussions with Theo Walcott. This is a tricky balancing act for the board: if they extend contracts too early, they risk paying over the odds in wages; if they wait until the last minute, they risk losing the player for nothing on a Bosman.

The other expense impacted by investment in the squad, player amortisation, has also risen significantly from £22 million to £37 million. For those unfamiliar with this concept, amortisation is simply the annual cost of writing-down a player’s purchase price, e.g. Mikel Arteta was signed for £10 million on a 4-year contract with the transfer reflected in the accounts via amortisation, which is booked evenly over the life of his contract, so £2.5 million a year.

Many of the players that have been sold were fully amortised, so amortisation was reduced much by the departures, but it has increased following investment in new players. To give this some perspective, it’s still a lot less than Manchester City (£84 million), but significantly more than previous years.

3. Where has all the money gone?

After so many years of large profits, it is difficult for most supporters to understand where all the money has gone. Gazidis is adamant that it has been spent on football, “We generate revenue and we reinvest all of that revenue in football. We don't pay dividends, the money doesn't come out of the club. All of the money we make is made available to our manager and he has done an unbelievable job in managing that spend.”

That’s sort of true, but the reality is that very little has been spent on bringing in new players with net player registrations of just £4 million in the last six years. Instead, the vast majority has been gone on the new stadium, property and other infrastructure (e.g. enhancements to Club Level, “Arsenalisation” projects, new medical centre) with more planned for development at the Hale End youth academy.

Since 2007 Arsenal have generated a very healthy £376 million operating cash flow, but have spent £71 million on capital expenditure, £110 million on loan interest and £64 million on net debt repayments, while the cash balances have risen by £118 million. Astonishingly, only 1% (one per cent) of the available cash flow has been spent in the transfer market.

Although Arsenal have laid out a fair bit of cash on buying players in the last two seasons (nearly £90 million), this has been more than compensated by big money sales, so their net spend has still been negative. In fact, since they moved to the Emirates stadium, they have made £49 million in the transfer market, where they are the only leading English club to be a net seller.

Of course, Manchester City and Chelsea have been the big spenders in recent years, splashing out £444 million and £235 million respectively since 2006/07. Little wonder that Peter Hill-Wood complained, “At a certain level, we can’t compete.” That said, in the same period, Liverpool, Manchester United and Tottenham have also all spent considerably more than Arsenal.

Following the elimination of the property debt, the club has managed to reduce its gross debt to £253 million (down £5 million from last year), leaving just the long-term bonds that represent the “mortgage” on the Emirates Stadium (£225 million) and the debentures held by supporters (£27 million). Once cash balances of £154 million are deducted, net debt is now only £99 million, which is a significant reduction from the £318 million peak in 2008.

Despite the high interest charges, it is unlikely that Arsenal will pay off the outstanding debt early. The bonds mature between 2029 and 2031, but if the club were to repay them early, then they would have to pay off the present value of all the future cash flows, which is greater than the outstanding debt. In any case, the 2010 accounts clearly stated, “Further significant falls in debt are unlikely in the foreseeable future. The stadium finance bonds have a fixed repayment profile over the next 21 years and we currently expect to make repayments of debt in accordance with that profile.”

4. How much is available to spend?

This question is provoked by Arsenal’s incredibly high cash balances of £154 million, which are significantly higher than any of their competitors with Manchester United the closest with £71 million (down from £151 million in 2011). Of course, not all of this is available to spend for a couple of reasons: (a) the seasonal nature of cash flows during the year, e.g. the May balance will always be high following the influx of money from season ticket renewals, but this money is used to pay annual expenses, including wages; (b) as part of the bond agreements, Arsenal have to maintain a debt servicing reserve, which was £34 million in 2012.

Nevertheless, there is clearly still a large amount of cash available to spend, especially as the cash balance does not include £26 million to come from the Queensland Road property development (though this is only payable in instalments over the next two years) and more (£10 million?) from the two remaining “smaller projects” on Hornsey Road and Holloway Road. It also excludes any money from this summer’s transfer activity with the accounts giving a positive net impact of £11 million.

Although this is probably the figure most fans want to know, it is actually almost impossible to calculate what could be spent in the transfer market for many reasons. For example, most transfers are funded by stage payments, so all the money is not needed upfront. In addition, Arsenal could easily take on some additional debt, given the strength of the balance sheet. Nevertheless, I estimate that Arsenal could safely spend £50-60 million from cash resources.

"Diaby - king of pain"

The other point that people often raise when discussing the transfer fund is that it would also have to fund a new signing’s wages, so if the club bought a player for £25 million on a five-year contract at £100,000 a week, that would represent a commitment of £50 million. That is undoubtedly true, but it is a little disingenuous, as it ignores the fact that this would be at least partially offset by the departure of an existing player, not least because of the limitations imposed by the 25-man squad rule, as highlighted by Wenger himself.

5. Will FFP come to Arsenal’s rescue?

It is no secret that Arsenal hope that UEFA’s FFP regulations will reward their prudent approach, as these aim to force clubs to live within their means, thus restricting the ability of benefactor-funded clubs to spend big on players. Indeed, Gazidis stated that the advent of FFP meant that “football is moving powerfully in our direction”, while the results press release was actually entitled, “Results confirm Arsenal strongly placed to meet UEFA’s new financial rules.”

On top of that, there are discussions at the Premier League to introduce similar rules domestically. However, although there are some signs of clubs modifying their behaviour, Arsenal’s faith in the new system may not work out as planned.

First, there is much leeway in the FFP rules, e.g. clubs are allowed to absorb aggregate losses of €45 million (around £36 million), initially over two years for the first monitoring period in 2013/14 and then over three years, as long as they are willing to cover the deficit by making equity contributions. In addition, certain costs such as depreciation on fixed assets, stadium investment and youth development can be excluded from the break-even calculation.

Furthermore, there is a sliding scale of sanctions for offenders, so it is far from certain that clubs will be excluded from UEFA competitions. This is without considering the threat of a legal challenge from a leading club.

Second, it is evident that FFP will benefit those clubs that have the highest revenue, as they will be able to spend more on their squad, but, as we have seen, other clubs continue to power ahead, so Arsenal are likely to always have a shortfall against some clubs.

"I am Vito Mannone!"

With the new commercial deals in 2014 plus more money from better central TV deals for the Premier League and Champions League, Arsenal should surpass £300 million revenue in two years, but Real Madrid and Barcelona are already around £400 million, while Manchester United are projecting £350-360 million next year.

That said, Arsenal’s revenue will place them in the revenue elite (“the top five clubs in the world with separation from the rest”, said Gazidis), so they will be very handily placed to benefit from FFP, though it is unlikely to act as some kind of magic potion to solve all of their financial issues.

In many ways, Arsenal’s self-sustaining approach has been admirable, though it has often felt like the club has been overly cautious. Gazidis speaks of avoiding “the many examples of clubs across Europe struggling for their very survival after chasing the dream and spending beyond their means”, but Arsenal are a long way from such an awful predicament. As we have seen, Arsenal do face issues around lack of revenue growth and an ever increasing wage bill, but they still have much more room to manoeuvre than most.

"Vermaelen - Tommy, can you hear me?"

The price of Arsenal’s self-sustaining model has been to regularly sell the club’s best players, while charging the highest ticket prices in the country, so this is not quite the financial Utopia that has often been portrayed in the media. For the fans, it must be particularly galling that the club’s two majority shareholders, Stan Kroenke and Alisher Usmanov, are both billionaires, but there is little sign of either making any investment into the squad.

Arsenal’s financial results are undoubtedly impressive and they have done well to consistently finish in the top four, but whether the current strategy is enough to bridge the gap to the leaders and actually win an important trophy is debatable.

The board wastes no opportunity in telling supporters how ambitious the club is, e.g. last month Peter Hill-Wood argued, “We have a pretty good chance of challenging for the Premiership. I don’t see why we cannot win it this year”, but  whether the fans believe that this is credible is another matter, especially when the club does not use all the resources at its disposal.