Thursday, July 28, 2011

PSV Eindhoven - Champions League Or Bust

Another disappointing end to the season saw PSV Eindhoven come third in the Eredivisie, finishing behind champions Ajax and FC Twente. Although this was enough to secure qualification for the Europa League, things could have been so much better, as the Boeren (farmers) had led the table going into the winter break. Driven forward by the exploits of Hungarian Balázs Dzsudzsák and Swede Ola Toivenen, PSV were actually the league’s highest scorers, though this was assisted by the astonishing 10-0 demolition of old rivals Feyenoord.

They also made reasonable progress in the Europa League, only being eliminated in the quarter-finals by Benfica. However, importantly, they once again missed out on qualifying for the lucrative Champions League – the third season in a row that PSV had failed to take their expected seat at Europe’s top table.

This has had a dramatic impact on the club’s finances, as PSV had become accustomed to the regular infusion of UEFA money to boost their budget. Some might argue that this was foolish optimism, but in fairness the club did compete in the Champions League 12 years in succession between 1997 and 2008.

Up until very recently, PSV’s performance off the pitch was the envy of other Dutch clubs, but it’s a different story now, necessitating drastic action, as the club admitted, “After facing severe financial problems, due to accumulated losses, PSV have successfully implemented a financial restructuring.”

"Home, sweet home"

This involved two elements: (a) strengthening the balance sheet with €80 million of additional capital, sourced primarily from the local council, but also involving contributions from Philips, other local companies and private individuals; (b) restructuring the profit and loss account by increasing income, mainly from sponsors, and making “significant cost savings”, including a salary cap and a reduction in overheads.

The Eindhoven council bought the land under the Philips Stadium and the Herdgang training complex for €49 million, leasing it back to the club for annual payments of €2.3 million. The politicians explained that this financial assistance was provided due to the “enormous social importance of the club for the city”, but they also admitted, “if it was not necessary, we would not have done it.”

As implied by the club’s name, Philips Sport Vereniging (Philips Sports Union), the electronics giant Philips has close ties with PSV. Indeed, the club started out in 1913 as a works team for employees of the conglomerate. Therefore, it was not overly surprising that Philips also came to the club’s aid, providing them with a €20 million loan, though given that the company is struggling itself, this was by no means a fait accompli. A further €10 million came from regional companies ASML and VDL Group, who each put in €5 million in the form of interest-free, 10-year subordinated loans.

There have been some questions over whether the European Commission might rule against this deal as an effective subsidy, but surely they have bigger fish to fry at the moment. Indeed, such a deal is far from exclusive to PSV in the cash-strapped world of Dutch football. According to NOS TV, Dutch local authorities have invested over €300 million in football in the last five years through indirect subsidies, including loans to the likes of FC Utrecht, FC Groningen, FC Twente, Vitesse Arnhem and ADO Den Haag.

"Wilfred Bouma - tattooed love boy"

Furthermore, there should be no cost to the city of Eindhoven, as the annual ground rent of €2.3 million will more than cover the €2 million interest that they have to pay on the loan they took out to finance the land purchase. If PSV were to go bankrupt, then the council would own the stadium.

This just goes to show how quickly things can change in football. Although PSV have not matched their own high standards in the last three seasons, they have hardly collapsed, twice coming third and once fourth in the Eredivisie.

However, everything is relative, especially for a team that had dominated the league in the previous decade, capturing the title seven times in a magical nine-year spell, including four years in a row between 2005 and 2008. They have also flourished in Europe until comparatively recently, reaching the semi-finals of the Champions League in 2005, before being unluckily eliminated by Milan on away goals after extra time, and the quarter-finals in 2007, when they were well beaten by eventual finalists Liverpool.

Much of the blame for PSV’s fall from grace has been laid at the feet of former manager Huub Stevens, whose miserable reign ended in early 2009. His disciplinarian methods were rejected by the players, notably Mexican defender Carlos Salcido, who said that Stevens left him “dead mentally”, and he left the club as statistically the worst PSV manager since 1968. After a brief interim period, he was replaced by Fred Rutten, who had previously been Guus Hiddink’s assistant at the club between 2002 and 2006, before managing FC Twente with some success, though his subsequent experience at Schalke 04 was not so enjoyable.

"Guus Hiddink - when you're young"

Hiddink, on the other hand, had been at the helm during PSV’s glory years. In his first spell, between 1987 and 1990, he led the team to three league titles, three Dutch cups and, most memorably, the European Cup in 1988, when PSV beat Benfica on penalties after a 0-0 draw. This was PSV’s first European success since defeating Bastia for the UEFA Cup in 1978.

Curiously, the European Cup was claimed despite PSV failing to win any of their last five games in the tournament, as they eliminated Bordeaux and Real Madrid on away goals after four consecutive draws in the quarter-finals and semi-finals. Maybe that statistic is not too surprising, given that the team’s strength was its resilience, featuring tough competitors like Ronald Koeman, Eric Gerets, Søren Lerby and Wim Kieft.

Hiddink was to return to PSV in 2002, when he shrugged off the saying that you should never go back, as this time round the club won another three league titles and a Dutch cup under his guidance.

In fairness to their other coaches, PSV is the second most successful club in Dutch football history behind Ajax with 21 league titles and 8 cups, and is recognised for developing many great Dutch players over the years, such as Ruud Gullit, Gerald Vanenburg, Phillip Cocu, Jaap Stam and Ruud van Nistelrooy.

"Celebrate good times - come on!"

They also acquired a reputation for identifying bargains in under-scouted regions like South America. Under the influence of famed scout Piet de Visser, who worked for both PSV and Chelsea, the club bought two goalscoring phenomena in the Brazilians Romário and Ronaldo, but also ventured further afield to locate new talent, e.g. Jefferson Farfán (Peru), Carlos Salcido (Mexico) and Édison Méndez (Ecuador).

This ability to spend the transfer budget wisely helped produce large gains when the players were later sold at a much higher price. Although the club’s supporters may not have appreciated players using PSV as a springboard to wealthier clubs, this “buy low, sell high” business model did help them to balance the books, allowing them to compete both domestically and internationally.

However, two factors have damaged this profitable strategy: one impacted all clubs, but the other was self-inflicted. One basic economic rule is that if a company is successful, then sooner or later others will copy the approach. This has been the case in the transfer market, where other clubs now also actively scout places like South America, which has inevitably increased prices.

"Right Said Fred (Rutten)"

In particular, this has reduced the competitive gap between the traditional big three in the Netherlands (Ajax, PSV and Feyenoord) and the other clubs, so that domestic victories can no longer be taken for granted. This had led to PSV abandoning their policy of buying young players to a certain extent, which has been detrimental to their progress.

The other problem emanated from the arrival of a new general manager, Jan Reker, in 2007, whose catastrophic reign got off to the most inauspicious of starts when PSV were thrown out of the Dutch cup for fielding an ineligible player.

More specifically, Reker’s desire to “clean house” led to the removal of the technical director Stan Valckx, who reportedly earned 5% on each outgoing transfer, and the Serb super-agent Vlado Lemic. As a result of the turbulence, de Visser also left. Although this might have made sense financially (and perhaps ethically), it meant that in one fell swoop PSV’s access to Lemic’s vast network of talented players was cut off. It also ended the club’s relationship with Chelsea, who had previously loaned them foreign players that were waiting for a British work permit, such as the defensive colossus Alex.

Since the Champions League semi-final in 2005, the club has been forced to cash in on their best assets with a long list of departures, most of them to Britain: Alex to Chelsea, Heurelho Gomes to Tottenham, Park Ji-Sung to Manchester United, André Ooijer to Blackburn and Jan Vennegoor of Hesselink to Celtic. Others to leave included Mark van Bommel (Barcelona) and Johann Vogel (Milan). Hiddink was moved to comment, “It really hurts me to see how the club is sliding away in such a short amount of time.”

That viewpoint is evidenced by the club’s financials, as four years of healthy profits came to an abrupt end in 2009/10, when they reported a thumping great loss of €17.5 million. That might not sound like a lot compared to some clubs in other countries, but it’s a huge amount relative to their turnover of around €50 million. PSV’s problem is obvious: while their costs have remained largely unchanged in the last three years, their revenue has plummeted from €85 million to €50 million.

Their EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) has been very impressive, though also on a reducing trend, but they have been hit by reasonably large non-cash expenses. In both 2007/08 and 2008/09, the results were to a certain extent held up by good profits on player sales, but this also fell last season. Another striking point is that interest payable is on the high side: at around €5 million, which represents an uncomfortable 10% of turnover.

Essentially, the club had built its financial strength on money from the Champions League, most notably in 2007/08 when it made a significant profit of €29 million, though this was also boosted by the once-off sale of the parking lot for €8.5 million. However, its reserves have been rapidly depleting after a couple of years away from Europe’s flagship competition.

Of course, PSV are not the only Dutch club to be toiling financially with the total losses for the Eredivisie rising to a record €90 million in 2009/10, excluding Vitesse Arnhem, whose accounts were delayed after the sale of the club, and VVV Venlo, who are an association, so don’t have to publish accounts. This compares to two years ago when the Dutch clubs made a joint profit of €64 million.

However, the recession has taken its toll with lower TV rights and a downturn in sponsorships. In years gone by, clubs could make up shortfalls by selling players, but the Dutch transfer market is much diminished these days. In fact, only three of the 18 clubs in the Eredivisie made a profit in 2009/10: NEC Nijmegen €1.5 million, FC Twente €1.2 million and FC Groningen just €21,000. That said, PSV’s loss of €17.5 million was one of the worst, only surpassed by Ajax’s €22.8 million.

PSV’s revenue decline of €35 million (or 40%) since 2008 is almost entirely due to television (€30 million), because of the lack of Champions League football. The decreases in commercial income of €3 million and gate receipts of €2 million in the same period are largely for the same reason.

If we also consider profit on player sales as “revenue”, there has been a further fall of €7 million, while operating income has also shrunk by €11 million, due to once-off sales in 2008. So, all in all, revenue at PSV has dropped by an astonishing €53 million (or 48%) since the record year of 2008. That’s a lot of money to compensate by cutting costs, but the reality is that costs have not reduced at all. No wonder that PSV hit the financial rocks.

The major issue for the club has undoubtedly been missing out on the Champions League. In the last three years that they qualified, they received substantial funds, averaging €33 million a season (2007 €36 million, 2008 €29 million and 2009 €28 million), being a combination of TV money and gate receipts. With uplifts in sponsorships, the actual figure is even higher.

In 2009, the club took in €2.4 million additional gate receipts plus €25.6 million from UEFA in TV money. This was made up of the €5.4 million participation fee given to all clubs, €0.6 million performance bonus for one win in the group stage and €19.6 million from the TV pool. The reason that the latter element was so high is that PSV were the only Dutch club represented, so scooped the entire Dutch pool. When this money had to be shared with Ajax in 2005 and 2006, the money distributed to each club was much lower.

The difference with the money earned in the Europa League is significant, as can be seen in 2010, when PSV earned less than €4 million for their efforts, split evenly between TV and gate receipts.

"All the way from Utrecht - Mertens and Strootman"

Money from the Champions League accounted for over 40% of PSV’s total revenue – an incredible statistic. While this might be the icing on the cake for leading clubs in other countries, it represents a substantial slice for clubs like PSV. In fact, the prize money for Champions League qualifiers is even higher now, though the Dutch TV pool might well fall, as Dutch broadcasters pay less and less for TV rights, while other countries are paying more.

The other problem is that qualification has become more difficult, as investment by wealthy entrepreneurs in clubs like AZ Alkmaar and FC Twente have produced new challengers for domestic honours and indeed the coveted Champions League places.

In the past, PSV could compensate for such revenue shortfalls with a big money sale, as they did with Ruud van Nistelrooy in 2001, sold to Manchester United for €28.5 million, or Arjen Robben in 2004, sold to Chelsea for €18 million. However, this is becoming the exception rather than the rule, following the Bosman ruling. As the president of the Dutch football association (KNVB), Michael van Praag said, “Dutch sides have become feeder clubs – that is the only way to put it. Everything changed after the Bosman ruling.”

"Orlando Engelaar - can the big man deliver?"

This was most clearly seen when PSV transferred promising midfielder Ibrahim Afellay to Barcelona for a bargain €3 million in the January transfer window, as they would have had to let him go on a free transfer in the summer. Interestingly, some have speculated that this transaction was rather short-sighted by the club, as they might have maintained their lead in the Eredivisie if they had kept one of their main driving forces, thus qualifying for the much more lucrative Champions League.

Either way, it’s not entirely true that PSV cannot make good money from player sales any more, as demonstrated by last month’s sale of leading scorer Balázs Dzsudzsák to the ambitious Russian side Anzhi Makhachkala for €14 million. Similarly, PSV made good money in 2009, when selling Farfán to Schalke 04 for €10 million and Gomes to Tottenham for €9 million. Nevertheless, this is no longer the cash cow that it used to be for the Boeren (farmers), as seen by the feeble €4.2 million profit on player sales in 2010, mainly from the sale of Serbian forward Danko Lazović to Zenit Saint Petersburg.

It is much more difficult these days to get young players to commit to long-term contracts, as they know that if they do not, then they are more attractive financially to the leading clubs. These are the ones that receive the real monetary benefit from a subsequent sale, as they do have the muscle to insist on long-term arrangements, e.g. Afellay signed a five-year contract with Barcelona.

As we have seen, PSV’s biggest challenge comes from their low revenue, which can clearly be seen from a comparison with the Deloittes Money League. Although PSV have the second highest revenue in the Netherlands, only behind Ajax, they are miles behind the top 20 clubs, though the gap would obviously be smaller with the benefit of Champions League money.

The bottom club in the Deloittes table, Aston Villa, earns more than twice as much revenue a season with €109 million, while Real Madrid, Barcelona and Manchester United generate over seven times as much revenue as PSV. That may be a spurious comparison, but what really emphasises PSV’s problem is that the team with the lowest revenue in the Premier League, Wigan Athletic, still earns more than them.

Looking at PSV’s revenue mix, what is most striking is the extremely low television revenue of €7 million, which is feeble compared to the major leagues. If we compare that with the clubs that earn most from broadcasting income in those leagues, we can see that it’s less than 4% of Barcelona’s TV revenue, but it’s also miles behind the others. Of course, part of this shortfall is due to Europe, as PSV only received €1.9 million from the Europa League, while the others all earned at least €24 million from the Champions League.

One reason why Champions League revenue is so important is the pitiful amount of money received from the domestic TV deal, which works out at around €5 million for PSV. Although the Eredivisie has the seventh highest TV rights deal in Europe at €300 million for the three years 2008/09 to 2010/11, this is lower than the previous Tele2/Talpa deal and is a long way behind the largest leagues. At €100 million a season, it compares very unfavourably to others: England €1.2 billion, Italy €900 million, France €700 million, Spain €600 million, Germany €400 million, and Turkey €250 million.

Media values are low in such a small country, as Michel van Praag, KNVB president, explained, “Holland is a country of 16 million people, while England, for example, is a country of 60 million. The difference in TV rights money the two leagues generate is huge and we can’t cope with the salaries our players are offered elsewhere.” To put this into context, West Ham finished rock bottom of last season’s Premier League, but still received around €45 million, which is nine times higher than PSV, who came third in the Dutch league. In fact, even teams in the Championship, the second tier of English football, receive more TV money than Holland’s highest level.

Match day revenue is also extremely low at PSV with only €10 million in 2009/10, comprising €7 million season tickets and €3 million gate receipts (€1 million from domestic competitions, €2 million from Europe). This was virtually unchanged from the previous season, as ticket prices were not raised. Ajax’s match day income of €30 million is much higher, mainly thanks to corporate seating and executive boxes, though PSV might have classified such revenue in “Stadium Operations”, which I have wholly included in commercial revenue.

Either way, there’s no doubt that leading clubs from other countries also possess a significant competitive advantage in this revenue stream with Real Madrid, Barcelona, Manchester United and Arsenal all generating at least ten times as much revenue as PSV. Even the Italian clubs that are notorious for not maximizing the revenue opportunity from their grounds like Roma and Juventus earn nearly twice as much here.

Nevertheless, PSV’s average attendance of 33,482 in the 2010/11 season was quite impressive, being the third highest in Holland behind Ajax and Feyenoord, and filling 95% of the stadium capacity of 35,119. In fact, their attendance in 2009/10 was the 45th highest in Europe ahead of such luminaries as Porto, Paris Saint-Germain, Bayer Leverkusen and Bordeaux.

The Philips Stadium has some nice touches: not only are all the seats covered and heated, but it also features the singular attraction of a Michelin-starred restaurant called “Avant Garde”. It has been used to stage many events, including the 2006 UEFA Cup final between Sevilla and Middlesbrough and numerous music concerts. However, any plans to expand the capacity to 45,000 have been put on hold, following the failure of the joint Dutch/Belgian bids to host the 2018 or 2022 World Cups. Furthermore, the deal whereby the council bought the land under the stadium stipulated that the club could not increase the capacity in the near future.

The club’s commercial arm has been doing pretty well at €33 million, comprising sponsoring of €13 million, merchandising €3 million and stadium operations €16 million. The most important sponsor is unsurprisingly Philips, who have been the club’s shirt sponsors since the Dutch authorities first allowed such deals in 1982. That unbroken relationship is unique in Holland and the deal was extended earlier in March for a further five years until July 2016 at €5 million a year, which bears comparison with all but the largest sponsorship deals.

In fact, as part of the recent restructuring, the general manager Tiny Sanders has managed to increase sponsoring income by €5 million to €18 million, mainly through Philips pledging an additional €3.7 million, which would take the annual payment up to €8.7 million. This is all part of what Philips described as the “longest running sponsor relationship in the world.”

In addition, PSV have taken a second shirt sponsor, De Lage Landen, a global provider of asset-based financing products, who signed a three-year sponsorship deal worth €4 million, so €1.3 million a year. The logo of Freo, the company’s online label, will appear on the back of the PSV shirts from this season.

PSV also enjoy another long-term relationship with Nike, who have been the club’s kit supplier since 1995. The current six-year deal runs from 2009 to 2015 and is worth around €5 million a year. The club has numerous other official partners, including Mercedes-Benz, Rabobank and Bavaria beer. Merchandising sales improved after the club brought its FANstore in-house in 2007, locating the 800 m2 facility at the stadium.

PSV’s inability to cut their cloth according to their means is epitomised by their wage bill, which has stubbornly remained at around €33 million the past three years while revenue has dropped from €85 million to €50 million, causing the wages to turnover ratio to rise from a very respectable to 40% to a worrying 66%, approaching UEFA’s recommended upper limit of 70%.

In fairness, this is not an inordinately high wage bill, e.g. it is a lot lower than Ajax’s €49 million, which makes it difficult for PSV to compete with the higher salaries at other clubs. As an example, when Afellay was transferred to Barcelona, he arrived at a club whose wage bill is an astonishing €235 million. However, the reality is that PSV’s wages can only be supported if the club is in the Champions League.

Therefore, as part of the recent financial restructuring, the club said that it would reduce the players’ wage bill by €4 million and save another €4 million by cutting 14 jobs in other departments. Much of this may well have already been achieved through the departure of players on relatively high wages like Dzsudzsák, Afellay, Ooijer, Koevermans, Salcido and Kromkamp. Bonus schemes have also been adjusted to be more in line with performance and thus revenue.

"Ibrahim Afellay - one that got away"

This is part of a new hair shirt policy, as explained by the technical director Marcel Brands, “We will only play over €1 million for an exceptional player, which automatically means you won’t have 10 players in your team like that.” He did, however, also warn that this meant that PSV would no longer be in the market for experienced, international players.

In much the same way, the club’s non-cash expenses of €20 million do not appear to be too high at first glance, but are clearly too much for the budget to bear. Player amortisation, the annual charge of writing-down the cost of transfer fees, is around €12 million, but the club also regularly assess the value of players on its books, resulting in impairment charges of at least €3 million. Depreciation on fixed assets is also fairly chunky at €5 million (Ajax is only €1.5 million).

Although transfer fees are not expensed immediately, player amortisation will feed through into the accounts, e.g. Georginio Wijnaldum was bought from Feyenoord for €5 million on a four-year contract, so his amortisation will be €1.25 million a year (€5 million divided by four years).

One implication of player amortisation remaining more or less at the same level is limited activity in the transfer market, which is indeed the case, as there has only been €2 million net spend over the last five years. However, the point here is that PSV used to make more money through selling players, as can be seen by the net sales proceeds of €22 million in the preceding five years.

PSV have also been hit by high interest charges, due to an onerous repayment schedule for their loans. In the last six years, they have had to pay €41 million, including €4.5 million in 2009/10. This is another area where the restructuring plan will help the club, as the new money will be used to pay off expensive loans, leading to a net saving of €2 million a year on the stadium financing.

The need to restructure is underlined by PSV’s debt. Although the club has been steadily lowering the debt levels with gross debt being cut from €114 million to €69 million in five years, this paradoxically highlights the nature of their problem, as the repayment schedule was quite aggressive. Most of the debt comprises bank loans of €41 million, which are repayable in 7.5 years at Euribor + 1.75%, while there are also subordinated loans of €20 million: about €15 million of these bore interest at 8% and were repayable by 2020, while the remaining €5 million carried interest at Euribor + 2% and were repaid with 15% of net proceeds from player sales.

So, even though PSV’s cash flow was reduced, as their revenue fell, they still had to find the money to repay large slices of their loans and pay high interest charges. This has now been addressed as a result of the financial restructuring plan. Indeed, one of the conditions for the council’s support was that their money could only be used to pay off this debt.

The cash flow statement clearly demonstrates the scale of the challenge, as the club needed to make repayments of around €9 million a year, which was perfectly manageable when the cash from operating activities was over €25 million a year, but was problematic when this dropped to just €3 million in 2009/10. Indeed, the net cash outflow of €7 million last year would have been even higher without taking on a new loan of €3 million.

The difficulties were starkly described by the board in the 2009/10 annual report, “We currently have insufficient funds to finance our activities, so we are examining several options to attract more financing.” If this were not bad enough, the auditors made it even clearer, “A shortage of cash is expected over the 2010/11 season. These conditions indicate the existence of a material uncertainty over the company’s ability to continue as a going concern.”

Nevertheless, the balance sheet looks fairly solid, even though the players net book value is only €19 million, which is much lower than the market value if they were sold (estimated at €68 million by the respected website Transfermarkt). In addition, the land and buildings are valued at €65 million. The problem, of course, is that this money can only be realised via selling the assets, which might be a little short-sighted for a football club.

Of course, PSV are by no means the only club that is struggling financially in Holland. In fact, according to a report by the KNVB, they are just one of the 19 professional clubs that “need to take action”, a list which also includes Ajax. However, it’s even worse for the 13 clubs that are “in the danger zone”, including Feyenoord, who must balance their books within three years or risk losing their licence. Only four clubs are deemed to be “financially secure”: Go Ahead Eagles, FC Twente, Telstar and FC Volendam.

"Andreas Isaksson's thousand yard stare"

It may be that the Dutch authorities demand more fiscal responsibility than their counterparts in other countries, but there is clearly a structural problem in Holland, leading to suggestions to form a so-called Atlantic league, featuring clubs from Holland, Belgium, Sweden, Denmark and Scotland, or even a merger between the Dutch and Belgian leagues.

PSV’s media spokesman, Pedro Salazar Hewitt cautiously welcomed such initiatives, “We will always be open for creating a new situation”, but most fans seem to be against changing the status quo. In any case, it is debatable whether such a move would boost revenue sufficiently to challenge the major leagues, even though the market size would increase and presumably lead to more money from the sale of TV rights.

Another inducement for PSV to get its financial house in order is the advent of UEFA’s Financial Fair Play regulations, whereby clubs need to break-even before being allowed to compete in Europe. This was reinforced last month by the KNVB, who warned that clubs on their watch list because of poor finances would not be permitted to play in European competition from the 2012/13 season.

PSV’s next accounts for the 2010/11 season will still reflect their “structural deficit”, as revenue will be about the same level, and the loss is likely to be at least as much as last time at €17.5 million, though some have suggested that it could be as high as €30 million.

"Balázs Dzsudzsák - Stay Hungary"

On the bright side, improvements can be anticipated for the following season. Not only will the profit on player sales be boosted by the Dzsudzsák sale, but the club has also pledged to improve the bottom line by €20 million by increasing revenue by €10 million and cutting costs by the same amount. That would mean that the club would be profitable even without the benefit of the Champions League, which was one of the conditions imposed by the council in exchange for their funding.

In addition, the club could also make more money by selling the likes of striker Ola Toivenen, who interested Liverpool last season and would fetch around €8 million, or goalkeeper Andreas Isaksson, worth €5 million.

That said, the club still needs to invest in the squad if it wishes to still compete at the upper echelons, so has splashed out €18 million this summer on three of Holland’s most exciting prospects: Dries Mertens and Kevin Strootman from Utrecht, and Georginio Wijnaldum from Feyenoord. Although this might seem poor judgment after the club has been effectively bailed out by the local council, this looks like it might be a good investment. As technical director Marcel Brands explained, the club needed to bolster its “attacking options in order to get better results.”

Under Brands, PSV also intends to focus far more on youth development, as opposed to buying in older, more expensive players. He said, “We need a squad of 19 players and we want four to five youthful prospects in there.” There is some evidence that this is already happening with the emergence of Zakaria Labyad, Género Zeefuik and Stijn Wuytens. Of course, most other Dutch clubs are applying a similar policy these days, so PSV need to show that they will give youngsters a chance if they are to attract the best talents.

"Zakaria Labyad - here's to future days"

However, Brands also highlighted the club’s dilemma when discussing the previous regime, “It’s about ambition. PSV wanted to remain at Champions League level and needed to invest in top quality to achieve this. The bigger the club, the bigger the ambitions, the bigger the bills.” The change in attitude since then was stressed by general manager Tiny Sanders, “All clubs have to face the new reality of giving priority to sustainable financial health.” That does not necessarily mean that PSV will no longer be able to challenge, as the recent history of the Eredivisie proves that money does not guarantee success with outsiders FC Twente and AZ Alkmaar victorious in the last three years.

The reality is that PSV have often managed to outperform given their limited resources, so much so that the eminent Dutch journalist Simon Kuper once called them “the best little football club in Europe.” In truth, it’s remarkable that PSV were able to compete at the highest European levels for so long.

Tuesday, July 19, 2011

Manchester City's Amazing Deal: Know Your Rights

When Manchester City announced that their commercial agreement with existing shirt sponsor Etihad Airways was to be expanded into a 10-year deal worth up to £400 million, the reaction of most observers in the football world was one of disbelief. This hugely lucrative contract includes the renaming of the City of Manchester Stadium in a naming rights deal that is likely to be the highest ever signed in football.

Indeed, Garry Cook, City’s ebullient chief executive, described it as “one of the most important arrangements in the history of world football”, while the CEO of Etihad Airways, James Hogan, was even more effusive, employing the full range of business buzzwords, “This is a game changing partnership agreement that redefines the traditional sports sponsorship paradigm.”

Of course, many people immediately assumed that one of the principal drivers of this deal was City’s need to boost their revenue in order to cope with the imminent arrival of UEFA’s Financial Fair Play (FFP) regulations that compel clubs to live within their means (if they wish to compete in Europe). This was tacitly confirmed by Cook, when he admitted, “The backdrop, of course, is UEFA’s Financial Fair Play and this deal helps (us) to continue to make significant progress in that area.”

Exactly how much is impossible for external analysts to say, as City have yet to publish the financial aspects of the deal. Initially, most newspapers suggested that it was worth £100-150 million, but now seem to have settled on £300 million, rising to £400 million. The truth is that nobody outside the club really seems to know for sure. Indeed, City released a statement to this effect, “The financial details of the comprehensive agreement announced last week between Manchester City and Etihad Airways remain confidential and figures being speculated about are not accurate.”

"Cooking up a good story"

The lack of certainty over the value of the sponsorship has not prevented prominent figures at other clubs from criticising the deal. The first to express his doubts was Arsenal manager, Arsène Wenger, who has often lambasted the practice of “financial doping” in the past, “It raises a real question about the credibility of the financial fair play. That is what this is all about. They give us the message that they can get around it by doing what they want.”

Liverpool’s new owner, John W. Henry, quickly followed suit, when he claimed that “Mr. Wenger says boldly what everyone thinks.” The Reds’ managing director Ian Ayre was unsurprisingly of the same opinion, questioning the transparency of the arrangement, given the close relationship between the sponsors and City’s owner, “The guys from UEFA said there would be a robust and proper process about related pay transactions.”

Wenger agreed, “It looks to me that Platini is very strongly determined on this. He is not stupid. He knows that some clubs will try to get around that and I believe they are studying behind closed doors, how they can really strongly check it.”

Certainly, UEFA talked tough last year, when Andrea Traverso, their head of club licensing and financial fair play, described what would happen if clubs attempted to beat the system by taking advantage of loopholes, “Should the clubs put in place specific structures that allow them, in ways we didn't think about, to easily get around some of the principles, we could amend these rules to catch up with these situations.”

"Michel Platini: this is how FFP will work"

UEFA President, Michel Platini, ostensibly substantiated the concerns of City supporters that he was targeting their club when he specifically mentioned them last year during the announcement of the new financial measures, “Manchester City can spend £300 million if they want to, but if they are not breaking-even in three years, they cannot play in European competition.”

However, Garry Cook did not appear overly concerned, “We have a very open dialogue with UEFA. We have had several meetings with them and they are very supportive of our plans.”

Indeed, UEFA’s response to City’s mega deal was far more measured than a year ago, “We are aware of the situation and our experts will make assessments of fair value of any sponsorship deals using benchmarks.” So, City are no longer being singled out, at least publicly, with UEFA keen to stress that they will investigate all major sponsorships whatever the club, which “will then be considered by the Club Financial Control Panel, together with any relevant information the clubs present regarding the deals, when they assess the break-even requirements.”

So how will UEFA assess City’s deal?

This is effectively a three-stage process. First, they have to decide whether the deal is a “related party transaction”. If they believe that it is, then they have to estimate the “fair value” of the deal. Finally, if the actual value is higher than the fair value, the difference is deducted from the revenue included in the FFP break-even calculation.

"Every cloud has a Silva lining"

The notion of related party transactions is evidently important to UEFA, as no fewer than three pages of the FFP regulations are dedicated to defining exactly who or what is a related party. The key point here is that “close members of the family” are considered to be related parties, so long as they have “control” or “significant influence” over the club.

In this case, Etihad Airways is owned by the government of Abu Dhabi, whose ruler Sheikh Khalifa bin Zayed Al Nahyan is the half-brother of City’s owner Sheikh Mansour bin Zayed Al Nahyan. It is conceivable that City might be able to demonstrate that no influence exists, but it would appear that there is a prima facie case to answer.

It is not clear whether the fact that the majority of City’s commercial sponsorships come from the Gulf state, including the Abu Dhabi Tourist Authority, Etisalat and Aabar Investments, will have any bearing on UEFA’s ruling, but Cook himself has admitted that it is “clearly evident” that there is a strong Abu Dhabi bias. Anyway, for the purpose of our analysis, let us assume that UEFA do indeed treat this deal as a related party transaction.

In fact, the FFP regulations expressly include “sale of sponsorship rights by a club to a related party” as their first example of “transactions that require a licensee to demonstrate the estimated fair value.” This has also been verbally confirmed by UEFA’s general secretary, Gianni Infantino, who said that such transactions would be compared to similar deals already in place.

"Fast Kompany"

Again, John W. Henry expressed his scepticism, when he asked, “How much was the losing bid?” Wenger also cast doubts on the value of the deal, “If FFP is to have a chance, the sponsorship has to be at the market price. It cannot be doubled, tripled or quadrupled, because that means it is better we don’t do it and leave everybody free.”

However, Garry Cook argued, “There’s real value in that partnership. Financial Fair Play isn’t the driver, commercial growth is the driver.” That obviously makes sense for City, but how about Etihad? The airline’s executives would contend that this deal has already been superb for their profile, as evidenced by last week’s intense media exposure, and will provide them with a more than acceptable return on their investment.

Not only do City compete at the upper levels of the most viewed league in the world, but their global visibility has been dramatically enhanced by their qualification for the Champions League. Indeed, it is quite possible that the airline gets more bang for its buck with City compared to more established clubs, as the exposure is higher with such a project. Big money deals may be old hat at clubs like Manchester United or Real Madrid, but it’s a relatively new phenomenon at Eastlands, sorry, the Etihad Stadium.

"Nigel de Jong - Dutch courage"

Some have questioned how it could make sense for a loss-making company like Etihad Airways to splash out such a large sum in sponsorships, but that ignores the fact that this investment is all about “building the brand” in the same way as Emirates have done in the past.

At this stage, it’s worth pointing out that the FFP regulations refer to “fair value”, as opposed to the “market value” that is incorrectly used by much of the media. The difference can be seen by an analogy in the housing market. If you decide to sell your house and 99 people offer you £250,000, that would be considered fair value, but if one enormously wealthy individual likes it so much that he bids £500,000, that is the market value.

This is an important distinction, as market value would be easy to prove. Sports lawyer Andrew Nixon of Thomas Eggar LLP asserted, “Competition law challenges rarely succeed on sponsorship deals. There is a vast number of football teams and leagues airlines can sponsor and there are many viable market alternatives.”

Importantly, even if UEFA rules that City’s deal is above fair value, it is only the excess that would be deducted from the club’s income for the purposes of the FFP break-even calculation and not the entire agreement. In other words, if the deal is worth £30 million a year and UEFA consider the fair value to be £25 million, only £5 million would be deducted.

"Don't cry for me, Argentina"

UEFA’s difficulties in assessing the fair value of the deal are compounded by the structure of the deal, which covers far more than the stadium naming rights that were initially reported. This is just one element of a broad agreement that also includes an upgrade of the current shirt sponsorship and naming rights for the Etihad Campus, which encompasses a large part of the Sportcity site in East Manchester.

Furthermore, given the long-term nature of the contract, City could argue that they have built in uplifts, as the sponsorship market might be even more lucrative in ten years time. In addition, part of the money is almost certainly based on performance bonuses, e.g. qualifying for the Champions League or winning the Premier League, which might make it more palatable to the powers that be.

As I said earlier, nobody can honestly claim to know the actual revenue split of the deal, but we can make a reasonable working assumption that the shirt sponsorship is worth £20 million a year, the stadium naming rights £10 million and the campus another £10 million. As we assess each element for fair value, it will become clear why these values have been chosen.

An assumed shirt sponsorship value of £20 million would place City right at the top of English deals, generating the same annual revenue as Liverpool and Manchester United. Those clubs might argue that City’s historical performance should not allow them to be at the same level, but the counter-argument would be that nobody complained about Liverpool increasing their sponsorship deal by £12.5 million a season when they replaced Carlsberg with Standard Chartered last season, even though they had not qualified for the Champions League. Similarly, Tottenham managed to increase their sponsorship by nearly 50% from £8.5 million to £12.5 million (via an innovative combination of Autonomy and Investec), based on just one season in the Champions League.

If the net is cast a little wider, Bayern Munich’s sponsorship deal with Deutsche Telekom is worth around £23 million, though performance bonuses could take that above £25 million. That might seem reasonable for a club with Bayern’s tremendous record, but the value of deals at other German clubs is more debatable, particularly Schalke’s money-spinning deal with Gazprom.

Equally, the announcement of Barcelona’s first ever shirt sponsorship deal with the Qatar Foundation, a non-profit organisation, did not attract the same levels of opprobrium as City’s. This has been widely reported as €150 million over five years, but is actually worth up to €170m, as it also includes €5 million trophy bonuses and €15 million for “the concept of commercial rights”. So, it is likely to be worth €34 million a year (or just under £30 million at the current exchange rate).

"The Italian Job"

Others have pointed disapprovingly at the magnitude of the increase in City’s shirt sponsorship, but they have cited a current value of £2.3 million for the Etihad deal, which looks far too low. Deloitte and other reputable sources have said that this deal is worth £25 million over three seasons, so with uplifts, it’s around £7.5 million as we speak. Other commentators have probably confused this with City’s previous deal with Thomas Cook that was worth £2.3 million.

If UEFA genuinely want to investigate the value that companies obtain from sponsorship, it might be pertinent to ask why they don’t also take a look at Emirates, which sponsors many different clubs. Or indeed the ethicality of clubs being sponsored by gambling sites, which is a growing trend in football marketing.

Probably the most contentious aspect of the deal is the stadium naming rights, which is virtually unprecedented in football at its estimated value. There are very few decent benchmarks in the Premier League with the obvious comparative being Arsenal’s deal with Emirates, which was worth £90 million (£100 million less £10 million fees), covering 15 years of stadium naming rights (£42 million) and 8 years of shirt sponsorship (£48 million).

This works out to just £2.8 million a year for the naming rights, which is considerably lower than City’s deal, but it’s not really a fair comparison for many reasons. Not only have sponsorship values in general grown significantly since the agreement was signed, but also this particular deal is very much a special case, as Arsenal compromised on the total value so that the cash payments would be heavily front-loaded to help finance the construction of the stadium. When questioning the merits of City’s deal, Arsène Wenger drily observed, “We must have done a bad deal”, but there’s more than a grain of truth in that assertion with Emirates admitting that they “did well with Arsenal.”

"Get your Yaya's out"

It’s worthwhile looking at Germany for a more considered view on naming rights, as the market there is more than four times as large as in England, according to Sport + Markt’s 2011 Naming Rights report. Many clubs in the Bundesliga have sponsorship deals for their stadiums, including Borussia Dortmund (Signal Iduna), Hamburg (Imtech), Wolfsburg (Volkswagen), Stuttgart (Mercedes-Benz) and Eintracht Frankfurt (Commerzbank).

However, perhaps the best known is Bayern Munich, whose deal with Allianz is worth €90 million over 15 years, producing €6 million (£5 million) a year. On the face of it, this might suggest that City’s £10 million deal is over-valued at double the money, but this is far closer than the difference in overseas TV rights, which are around 14 times higher in the Premier League than the Bundesliga. Obviously, this is not quite the same thing, but it’s food for thought.

Or UEFA might look even further afield to America, where naming rights are a well-established feature of the sporting landscape. Virtually every major sports arena is now named after a sponsor that provides the club with a healthy source of income. The concept is nothing new under the sun either, as Times Square was named after the New York Times way back in 1903.

Although the link between football and American sports like baseball, NFL and NBA may seem rather tenuous, fundamentally the principle is identical and it seems quite pertinent with the influx of foreign owners into English football. Some of the stadium deals signed on the other side of the pond provide an indication of where this market may go in the future, going as high as $30 million a year paid by JP Morgan Chase for Madison Square Garden. Citigroup and Barclays both pay $20 million a season, the former to the New York Mets, the latter to the New Jersey Nets. Farmers Insurance have paid an astonishing $700 million over 30 years to name a stadium in Los Angeles where a team is not even established yet.

This does rather beg the question of how the sponsor benefits from such a deal: what’s in a name? The obvious answer is brand awareness with a raised profile, which is particularly well served if it is a new stadium. This point was seized upon by Ian Ayre, Liverpool’s managing director, who noted, “It hasn’t happened in Europe that a football club has renamed an existing stadium and it’s had real value.” This is correct, but it’s doubtful whether too many fans are attached to the name Eastlands (or even the City of Manchester Stadium). It would be a different story if this had been Maine Road. This is why it would be difficult to sell naming rights for grounds like Anfield or Old Trafford, as whatever name anybody tried to call the stadium, everyone would still use the old/real one.

One valid point about City’s agreement is that other Premier League clubs have to date been unsuccessful in securing large naming rights deals, though paradoxically this announcement could potentially help others make progress in their discussions. Chelsea have been looking to secure a partner for some time with analysts suggesting that £10 million is the objective, while Liverpool would be equally eager if they move to a new stadium, as Ayre confirmed, “We already have a very healthy dialogue in place with several leading brands regarding naming rights.”

"Hart and Soul"

That said, the Sports + Markt report confirmed that the value of stadium naming rights has been steadily rising, up over 60% from €48 million in 2007 to €78 million in 2010 with the total projected to increase to €87 million in 2011.

Given the difficulties inherent in finding solid comparatives for naming rights, it is possible that UEFA might look at this as just another commercial deal. If they did so, they could not help noticing that the bar is being constantly raised in the commercial sphere, e.g. contracts with kit suppliers. Liverpool’s recent £25 million deal with Warrior Sports is more than double the amount that they previously received from Adidas, helped by the relationship that the new owners enjoyed with the company, which already provides kit for the Boston Red Sox.

Similarly, Manchester United are in discussions to extend their deal with Nike for a record £450 million, which would be worth around £35 million a year, a £10 million increase. If you think that’s impressive, the French national team’s deal with Nike is worth €320 million over 7½ years, which works out to about £37 million a year for just a handful of matches.

In short, commercial opportunities in football are big business these days and City’s deal should be assessed in that light. In a strange way, it brings to mind the movie “The Wizard of Oz” and the famous line about not being “in Kansas anymore.”

With the exception of Manchester United (£81 million), English clubs have lagged their continental counterparts when it comes to making money from commercial opportunities, growing fatter on a diet of ever-increasing TV contracts. Not only do the Spanish giants, Real Madrid and Barcelona, earn substantially more at £124 million and £100 million respectively, but German clubs also consistently generate more income. This description does not just refer to Bayern Munich, who earn an astonishing £142 million commercial revenue a year, but also clubs like Schalke, Hamburg and Dortmund.

There’s certainly room for improvement, which is exactly what English clubs are belatedly doing. In 2010/11, Manchester United’s commercial revenue will exceed £100 million, while Liverpool’s £62 million will ultimately be boosted by £25 million growth from the Standard Chartered and Warrior deals. Likewise, Chelsea will increase their revenue by £12 million from £56 million following better deals with Adidas and Samsung.

In other words, it’s become a commercial arms race with each of the leading clubs significantly increasing their commercial revenue in their own way – and City are no exception.

Actually, I tell a lie, as City’s deal includes one unique element, the Etihad Campus, which is perhaps the cleverest and certainly the most innovative part of the agreement. This is a gigantic redevelopment project on 80 acres of land adjacent to the stadium, including a relocated training ground, youth academy, a sports science facility, office space, a call centre and City Square retail outlets. The academy will be seriously impressive, catering for up to 400 young players, with 16 football pitches, a 7,000 capacity stadium for youth matches and on-site accommodation.

"Opportunities (Let's Make Lots of Money)"

Such a development will not only benefit the community, but will bring a raft of sponsorship opportunities. Nothing like this has been done before, so it will be very difficult for UEFA to assess and almost impossible to deem unfair. In fact, this is exactly the type of expenditure that UEFA is trying to encourage with direct youth and community development costs being totally excluded from the FFP break-even calculation. For someone with pockets as deep as Sheikh Mansour, this is effectively “free” money, at least in terms of FFP.

On top of that, Annex X allows any profits from non-football operations to be included in the calculation, so long as the operations are: (a) based at, or in close proximity to, a club’s stadium and training facilities, such as a hotel, restaurant, conference centre, business premises (for rental), health-care centre, other sports teams; and (b) clearly using the name/brand of a club as part of their operations.

That sounds very familiar, so it’s a double whammy for City: the costs for this development are excluded, while the profits from the business located there are included. Not only that, but UEFA should be positively delighted, as it’s very much in the spirit of the stated objectives of FFP. Given those factors, the temptation must be to load up the sponsorship on this part of the agreement, so the deal split might be more like £10 million on shirt sponsorship, £5 million on naming rights and £25 million on the campus. We shall see.

Even with the benefit of this deal, City are still a long way from break-even, having recorded a thumping great loss of £121 million in 2009/10. The deficit is anticipated to be even higher last season, as the impact of the previous summer’s incoming players will have further increased the wage bill and amortisation. Nevertheless, City insist that matters will improve. Garry Cook stated, “Clearly our intention is to comply. FFP is on our conscience. We talk about it at every board meeting and it’s part of our long-term plan.”

Even the spendthrift manager Roberto Mancini now appears to have accepted the new financial realities, “FFP is for everyone”, saying that City would no longer “pay £10 million more than other clubs” for new players. Indeed, so far this summer, City have only signed Gael Clichy from Arsenal for £7 million and Montenegro defender Stefan Savic for a similar amount. That’s chicken feed by the Blues’ recent standards, though there’s still time for them to splash out on another big name.

That said, City are very keen to reduce their bloated wage bill by offloading players that no longer fit into Mancini’s plans, including the likes of Emmanuel Adebayor, Craig Bellamy, Wayne Bridge and Shay Given. From this season, the club’s revenue will also be significantly boosted by a Champions League campaign and, of course, the vast growth in sponsorship deals.

They will also be helped by the UEFA’s so-called “acceptable deviations”, namely the €45 million aggregate losses allowed in the first two-year monitoring period, which means that they don’t have to actually reach break-even from day one, so long as the owner covers the losses, which I think we can safely assume.

If that wasn’t enough, the glide path is made even easier by clubs being allowed to exclude wages from players signed before June 2010, so long as they are reporting an improving trend in their accounts. Granted, that “loophole” only exists for the first two monitoring periods (2013/14 and 2014/15), but it will buy City time to execute their strategic plan.

In essence, that has been to spend big in the short-term on transfers and wages in order to break into the Premier League top four, so that they can qualify for the riches of the Champions League, which is easily worth £30 million additional revenue a season. That extra income will contribute towards balancing the books while the academy can be established, producing top class players in-house, but the growth in commercial revenue is still a vital component to that strategy.

One of UEFA’s main objectives in implementing FFP was to “curb the excessive spending and inflated transfer fees and player salaries that have endangered football in recent years.” To a certain extent, there are some signs that this is happening, but new regulations often have unintended consequences and it appears that clubs are also striving to increase their revenue, as opposed to simply cutting costs.

Even though City’s revenue grew by an impressive 44% in 2009/10 to £125 million, which pushed them up to 11th place in the Deloitte Money League, this is still a long way behind other leading clubs. For example, it’s less than half of local rivals Manchester United (£286 million) and £100 million lower than Arsenal (£224 million). On the continent, both Real Madrid (£359 million) and Barcelona (£326 million) generate £200 million more than City every season.

City could look to increase their match day revenue, which they have partially addressed via a new agreement with the council, whereby the club pays them a fixed amount regardless of the attendance instead of the previous percentage. Any further growth would mean raising ticket prices, increasing the corporate seats or expanding the capacity of the stadium. The first two moves would be unpopular with fans, while the stadium expansion is longer-term in nature.

Plans exist to increase the capacity of the stadium from 47,000 to at least 60,000, but this would not be entirely straightforward, due to its awkward design. There have been some concerns that City would struggle to fill a larger stadium. Although their attendances have always been good (4th highest in the Premier League), they do not regularly achieve full capacity. That said, the crowds have risen since the move to Eastlands and continued success on the pitch should produce a further increase, as was the case with Chelsea after Abramovich’s arrival.

Television has been the big driver of revenue growth at football clubs and the latest Premier League deal for the three years between 2010/11 and 2012/13 helped increase City’s distribution from £50 million to £56 million. However, this is a tide that floats all boats with very little difference between the leading clubs. The real distinguishing factor is the honey pot known as the Champions League, so City’s qualification will have a transformational impact on their revenue, but it’s a one-step growth.

So, with match day and TV relatively fixed, it’s really down to the commercial side, notably sponsorships, to substantially close the gap with the big boys. Even before the blockbuster Etihad deal was announced, City’s revenue from commercial activities had more than doubled in 2009/10, including an increase of almost 400% in revenue from corporate partnerships up from £6.5 million to £32.4 million.

This explosive growth has inevitably raised suspicions, particularly given the provenance of the sponsors, but the criticism of City has taken on something of the nature of a moral crusade with many commentators accusing the nouveaux riches of buying success, after Sheikh Mansour ploughed close to a £1 billion into the club since acquiring them in 2008. There’s little doubt that City have contributed to the inflation in transfer fees and wages, with net transfer spend of £343 million in the last three seasons and a wages to turnover ratio of 107%, though they are hardly alone in that.

However, there are two sides to every story and there are a couple of facets of this deal that should be commended. From the point of view of the fan, it is surely better that a club tries to grow its revenue by taking more money from sponsors than raising ticket prices. This is where Arsenal’s criticisms ring a little hollow after they hiked ticket prices that were already among the highest by 6.5% for next season.

And while I yield to nobody in my admiration for Sir Bobby Charlton, his suggestion that big clubs should not think about renaming their stadium should also be considered alongside Manchester United’s stratospheric ticket price rises. Indeed, City were top of the ING Direct Value League last season, measured by comparing clubs’ season ticket costs with Premier League performance.

City’s commercial deal will also benefit the local community, which is why the council agreed to let City sell the naming rights of a stadium that is not owned by the club, but the council. In fairness, the club had already contributed £30 million to the stadium conversion costs after the Commonwealth Games, but the council’s willingness to let the deal proceed on these terms still came as a surprise to some.

However, the council will receive £20 million over the next five years, and, more importantly, their leader points to “the regeneration of the area, delivering significant community and economic benefits”, including the creation of new jobs. Faced by severe government cuts, the cash-strapped local authority have gratefully accepted City’s proposal for this deprived neighbourhood, describing it as “great news for Manchester, reinforcing our sporting, transport and economic growth.”

Of course, other clubs have also been very active in their community, but this plan is on an altogether different scale. Yes, it might feel a little like wealthy philanthropists establishing charities as a way of reducing their tax bill, but the fact is that the community will still gain.

This has not stopped other clubs from sniping, led by Bayern Munich chief executive Karl-Heinz Rummenigge, who also happens to be chairman of the European Club Association. When commenting on City’s large financial losses, “Kalle” sniffed, “Maybe they know a trick I don’t that will allow them to take part in the Champions League.” This is the same Bayern where two of their most prominent sponsors, Adidas and Audi, each own around 10% of the club.

Similarly, Wolfsburg is a wholly owned subsidiary of Volkswagen Group, who also pay for the club’s stadium naming rights and shirt sponsorship. Little wonder that Stefan Szymanski, professor of sports business at London’s Cass Business School, said, “If there’s a question of fair value in relation to an Abu Dhabi client sponsoring Manchester City, I see no reason why the same questions can’t be raised about corporate Germany sponsoring German football.”

"Gael force"

If UEFA did decide to broaden their investigations into other sharp practices, they could also take a look at the ridiculously unfair advantage enjoyed by Real Madrid and Barcelona with their huge slice of the Spanish TV pie. And while they’re about it, what about those clubs that directly inflate the transfer market by paying over the odds for average players (naming no names)?

My simple point here is that if you look hard enough, you will surely find reasons to investigate activities at numerous clubs, so it would be very harsh for UEFA to zoom in on City. There will be many such deals sailing close to the edge and there must be a better use of UEFA’s time than to review each one. Adopting a basic tenet of the English legal system, a reasonable man will know when a deal is completely ludicrous, e.g. a £200 million annual season ticket, but to my mind City’s deal does not fall into that category.

While UEFA’s credibility over FFP is at stake, there’s every indication that they will help clubs towards break-even, instead of throwing them out of Europe. Otherwise, in City’s case, it would feel like they should re-release The Clash’s seminal “Know Your Rights” with slightly modified lyrics: “You have the right to sponsors’ money, providing of course you don’t mind a little humiliation, investigation, and, if you cross your fingers, authorisation.”

"Sometimes a picture is worth a thousand words"

There may be a whiff of creative accounting around this incredible deal, but there’s also genuine substance and benefit to the community. City’s commercial growth might have been fuelled by money from companies that are at the very least “friendly” towards their owner, but when the deals are broken down the sums are not inordinately high, so are more or less in line with benchmarks.

Furthermore, the proceeds will be invested in a state-of-the-art academy with the objective of producing homegrown young players who will ultimately replace the imported “mercenaries”. It’s a well-considered plan that seems to me to be within both the letter and to a large extent the spirit of FFP.

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