Monday, April 30, 2012

The Truth About Debt At Barcelona And Real Madrid

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

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

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

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

"Pep Guardiola - Goodbye cruel world"

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

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

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

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

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

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

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

1. What is debt?

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

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

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

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

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

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

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

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

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

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

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

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

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

2. Strength of the balance sheet

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

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

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

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

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

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

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

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

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

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

3. Debt coverage

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Emirates Stadium - good debt"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Holidays in the sun"

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

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

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

"Put your shirt on it"

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

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

Caveat emptor – or something like that.

Wednesday, April 25, 2012

Champions League Revenue - The Final Countdown

Chelsea’s remarkable triumph over Barcelona in last night’s Champions League semi-final was a surprise, but no more than their old fashioned, backs to the wall display deserved. They might not have played the prettiest football, but the result made it all worthwhile in the end, as they could book their tickets to Munich for a sumptuous final against either Real Madrid or Bayern Munich. You can’t put a price on nights like that.

Well, actually you can, as we are now in a position to estimate the impact on Chelsea’s Champions League revenue compared to last season. In fact, we can now work out the increases (or decreases) in revenue for all the English clubs in Europe with a reasonable degree of accuracy.

First, we need to understand how revenue is distributed among the clubs competing in the Champions League. UEFA negotiate various TV and sponsorship deals that contribute to a pot of around €1.1 billion to be distributed to teams competing in the Champions League and Europa League – after reserving around a fifth to cover their own costs and make “solidarity” payments to associations, leagues and clubs.

The pot made available for the clubs is divided into two parts: (a) prize money based on participation and results; (b) TV (market) pool.

Prize Money – Champions League

The above table lists the participation fees and prize money payable to the 32 teams that qualify for the Champions League group stages. Right off the bat, each team is awarded €3.9 million for participation plus another €550,000 per match played in the group phase, regardless of the result. Assuming that a club fulfills its six group fixtures (a fairly safe assumption), that’s worth €3.3 million. This means that each team is guaranteed €7.2 million for qualifying for the group stage, even if it loses every single game.

There is also a performance bonus of €800,000 for each victory in the group stage plus €400,000 for a draw. So if a team really puts its pedal to the metal and manages to win all six of their group matches, it will get €4.8 million. If a team qualifies for the first knock-out round (the last 16), they are awarded a further €3 million.

There are additional performance prizes for each further stage reached: quarter-final €3.3 million, semi-final €4.2 million, final €5.6 million and winners €9 million. So if you go all the way and win the damn thing, you would earn a total of €31.5 million (not counting the TV pool share), which is serious money in anybody’s language.

"UEFA's Michel Platini - Hammer Time"

Prize Money – Europe League

The principle is the same in the Europa League, though the sums involved are considerably smaller. Each of the 48 clubs involved in the group stages receives a participation bonus of €640,000 plus €60,000 for each match played in the group, giving a total of €1 million. In addition, there is €140,000 for each win and €70,000 for each draw in the group stage.

Turning to the knock-out stages, clubs competing in the round of 32 will receive €200,000 each, clubs in the last 16 €300,000, the quarter-finalists €400,000 and the semi-finalists €700,000. The Europa League winners will collect €3 million and the runners-up €2 million. The winning club could therefore receive a maximum of €6.4 million (around 20% of the Champions League).

TV Pool

In addition to these fixed sums, the clubs receive a share of the television money from the TV (market) pool, which is allocated according to a number of variables. First, the total amount available in the pool depends on the size/value of a country’s TV market, so the amount allocated to teams in England is more than that given to, say, Spain, as English television generates more revenue.

Clubs can also potentially do better if fewer representatives from their country reach the group stage, as the available money is divided between fewer clubs. This tends to benefit clubs from smaller countries, e.g. in 2010/11 Panathinaikos received €14.4 million from the TV pool, as Greece only had one qualifier, which was much more than the €9.7 million that Lyon received, as the French TV pool was divided between three clubs.

"Pep Guardiola - can't win them all"

OK, in the case of the English clubs in the Champions League, the allocation works as follows:

(a) Half depends on the position that the club finished in the previous season’s Premier League with the team finishing first receiving 40%, the team finishing second 30%, third 20% and fourth 10%.

(b) Half depends on the progress in the current season’s Champions League, which is based on the number of games played, starting from the group stages.

In other words, success has a direct impact on the amount of money received. Qualifying for the Champions League in fourth place is obviously beneficial, but that team would not receive as much as the teams finishing above it based on the above algorithm.

Of course, fourth place has other unhappy implications, as there is potential for an awkward qualifying match at an inconvenient stage of the club’s preparation (like Arsenal having to play Udinese this season). This season could actually be even worse, if Chelsea win the Champions League, as this would guarantee them qualification into next season’s competition. They would take the place of the team finishing fourth in the Premier League, which would then be bumped into the Europa League.

TV Pool – Allocation

Let’s see the result of these factors on the allocation of this season’s TV pool, taking Chelsea as the example, which seems only fair, as they have progressed furthest. We shall assume that the size of the English TV pool remains unchanged from last season at €84 million.

Chelsea finished second in the 2010/11 Premier League, so they receive 30% of the half allocated to this element, meaning 30% of €42 million, giving €12.6 million. Including the final, they will play a total of 13 games in this season’s Champions League, which works out to 39% of the total 33 games played by the four English clubs, generating another €16.5 million. They have benefited here from the early exits of the other English clubs with the two Manchester sides going out at the group stage and Arsenal being defeated by Milan in the last 16. In total, that gives Chelsea €29.1 million from the TV pool (€12.6 million plus €16.5 million).

This is €2.1 million more than the €27.0 million they received from the TV pool in the 2010/11 season. This might seem like a relatively small increment, given that the Blues only reached the quarter-finals last year, but this is due to the way the money is allocated. In particular, Chelsea won the 2009/10 Premier League, so they received 40% of the half of the TV pool based on the previous season’s Premier League finish, as opposed to 30% this season. In other words, they receive €4.2 million less this season for this element (€12.6 million minus €16.8 million), which offsets the additional €6.3 million (€16.5 million minus €10.2 million) from progress in the Champions League.

This factor is not very well understood among the football public, but it can have a significant impact on Champions League revenue. If we look at Arsenal, yes, they qualified for Europe’s flagship tournament this season, but their fourth place was only worth €4.2 million, which is a quarter of the €16.2 million that Manchester United received for their first place in the Premier League.

Similarly, progress in the actual tournament is very worthwhile, not just for the obvious higher prize money, but also the impact that it has on the TV pool allocation. For example, both United and City did not get out of their group this season, so received €7.6 million, while Arsenal got €2.6 million more (€10.2 million) for reaching the last 16.

Prize Money – Allocation

The allocation of the prize money is thankfully a bit simpler. This season, Chelsea will receive at least €26.5 million, which is made up of €7.2 million participation, €3.2 million from the group stage (3 wins at €800,000 plus 2 draws at €400,000), €3 million for the last 16, €3.3 million for the quarter-final, €4.2 for the semi-final and €5.6 million for the final (with the conservative assumption that their injury-ravaged team finish runners-up).

Total Money

So, Chelsea’s total revenue for the 2011/12 Champions League will be at least €55.6 million, comprising €26.5 million prize money and €29.1 million TV pool. That is €11.1 million higher than last season’s €44.5 million, when they exited the competition at the quarter-final stage.

Of course, if they actually win the final, they would receive €9 million prize money instead of the assumed €5.6 million, increasing their total money by €3.4 million (€9 million less €5.6 million) to €59.0 million, €14.5 million higher than last season.

In Sterling terms, Chelsea will receive £46.4 million (if they finish runners-up) or £49.2 million (if they win the final). That would be either £9.3 million or £12.1 million more than last season.

Exchange rates obviously play a part in the Sterling sum received by the club, but I have assumed a constant rate of €1.20 to the Pound for the sake of simplicity.

Other Clubs

Let’s look at how the other English clubs have fared in revenue terms compared to the previous season: 
  • Manchester United – down £14.0 million. Although they received a minor uplift (€2 million) from being parachuted into the Europa League, this was nowhere near enough to compensate for the difference in the Champions League (did not get out of the group compared to reaching the final last season).
  • Manchester City – up £18.2 million. Qualified for the Champions League instead of the Europa League.
  • Arsenal – down £1.8 million. Virtually unchanged, as they were knocked-out in the last 16 both seasons. Only difference comes from the market pool.
  • Tottenham – down £22.2 million, as they only qualified for the Europa League, as opposed to the Champions League in 2010/11.
  • Stoke City – up £4.2 million. Reached the last 32 of the Europa League.
  • Birmingham City – up £3.7 million. Qualified for the Europa League, but did not get out of the group.
  • Fulham – up £3.7 million. Qualified for the Europa League, but did not get out of the group.
  • Liverpool – down £5.1 million. Did not qualify for Europe, but reached the last 16 of the Europa League the previous season.
My one caveat here is that the TV pool allocations for the Europa League have been estimated based on previous seasons, so will not be completely accurate.

"Sir Alex Ferguson - Mind over Money" 

Other Factors

In addition to the TV money analysed above, clubs will also benefit from additional gate receipts from staging European matches. Chelsea will receive money from UEFA for the final, but this amount is unspecified.

Finally, participation and progress in the Champions League should boost a club’s sponsorship revenue, both in the short term through contractual bonuses, and longer term by strengthening the club’s brand attractiveness through increased exposure and profile.

However, this is difficult to quantify, as a former Barcelona vice-president admitted, “What is harder to put into figures is the impact it has on your brand. That is very difficult to discern. There is no doubt we got a massive boost from winning the competition. We were on television and on the front of all newspapers all around the world, but that increased exposure and interest doesn’t lead to an immediate increase in the value of your sponsorship deals.”

There is no doubt that competing in the Champions League makes a big difference financially, especially as the equitable nature of the distribution methodology for TV money in England means that there is not a huge difference between Premier League payments to the leading clubs.

In other words, whatever the size of the increases and decreases compared to last season, it should not be forgotten that all English clubs playing in the Champions League still have a considerable financial advantage over the rest of the Premier League, as can be seen by the above analysis of TV revenue.

Nevertheless, Chelsea and Manchester City will surely enjoy their additional funds from this season’s Champions league, while Manchester United and Tottenham will have to cope with reduced revenue. All part of the fun and games aboard UEFA’s Trans-Europe Express.

Tuesday, April 17, 2012

Queens Park Rangers - Hoop Dreams

This has been a pretty good season for teams promoted from the Championship with Swansea City and Norwich City attracting many plaudits, so it is a little strange that Queens Park Rangers have not received much praise, especially as they actually won that division last year, playing some thrilling football en route to the title. In many ways, this is understandable, as they have been involved in a relegation battle for much of the season, but there’s more behind the lack of warmth than results on the pitch.

For many years, QPR were well regarded by neutrals, not least in the 70s when a team featuring the mercurial talents of Stan Bowles, Gerry Francis and Dave Thomas finished runners-up in the old First Division, only losing out to Liverpool by a single point. However, a succession of deeply unsuitable owners has tarnished the club’s image over the years, even alienating sections of its own support.

This season alone, the club’s long-suffering fans have already seen yet another change in ownership, as Malaysian entrepreneur Tony Fernandes took control in August. This was not the end of the moves, as Neil Warnock, the manager who took QPR into the Premier League for the first time in 15 years, was dismissed in January to be replaced by Mark Hughes, a man who notoriously questioned Fulham’s lack of ambition when he left them after less than 12 months.

"Mark of success?"

Although Hughes is an easy man to dislike, he did manage to save Blackburn Rovers from relegation when they found themselves in a similar predicament to QPR, and three successive home wins against Liverpool, Arsenal and Swansea have given hope that he can repeat the trick at Loftus Road.

One advantage that he will have compared to previous QPR managers is an owner that seems willing to support him, not just financially, as seen by the relatively high spending in the January transfer window, but by providing the stability that has been missing at the club for the best part of a decade.

The previous owners had also been welcomed into the club when they arrived in November 2007, as they saved QPR from “certain administration.” The consortium included some seriously affluent individuals: Flavio Briatore, Renault’s Formula One team principal (worth £150 million); Bernie Ecclestone, the F1 supremo (worth around £2 billion); and Lakshmi Mittal, the steel magnate (Britain’s richest resident, worth north of £20 billion).

The initial purchase price of less than £20 million must have seemed like small change to them. Briatore paid £540,000 for 54% (later selling a 20% stake to Mittal for £200,000), while Ecclestone’s 15% holding cost £150,000. In addition, they covered £13 million of debt and pledged £5 million in convertible loans to fund player purchases.

"England is mine and it owes me a living"

Although some believed that the acquisition would deliver untold riches, this was far from the case, as Ecclestone was quick to clarify, “QPR isn’t a wealthy club. It’s a club that’s owned by some wealthy people. No-one is going to be lashing out loads of money.” Unlike Roman Abramovich at Chelsea and Sheikh Mansour at Manchester City, the owners did not pour big money into the club, though in fairness they did bankroll some hefty losses.

Their motivation for buying into QPR was never clear. In fact, Ecclestone admitted that he first thought that Briatore was offering him an opportunity to invest in a restaurant. Mittal is thought to have invested in order to please his son-in-law, Amit Bhatia, a keen football fan, who took the family’s seat on the board of directors.

However, the new owners slowly went from heroes to villains, with fans giving Briatore and Ecclestone the wonderful nickname, “Tango and Cash.” All was revealed to the world at large in the amazingly candid documentary, “The Four Year Plan”, which in particular painted Briatore as an irritable buffoon prone to interfering in team selection and tactics.

"Briatore and Ecclestone - it takes two to tango"

As one caretaker manager, Gareth Ainsworth, diplomatically explained, “He’s the chief investor and he loves taking an active part in how his investment is going.” That’s one way of putting it. Briatore’s desire to get involved resulted in the club going through no fewer than six managers (plus two caretakers), most of whom he described as “idiots” in the documentary.

The club’s reputation as a laughing stock was “enhanced” by a series of embarrassing episodes: Briatore threatening to sell the club if he did not receive the names of thousands of fans that heckled him at one game; the sight of supermodel Naomi Campbell sporting a QPR scarf, while appearing bored stupid in the directors’ box; and the club’s traditional badge being replaced by a tacky new version. At one stage, Briatore’s status as a “fit and proper person” to own a football club was brought into question following the F1 ban for his part in “crashgate”, when he was accused of instructing one of his drivers to seek advantage for the team by deliberately crashing.

Even last season’s promotion party was soured when QPR were found guilty of fielding a player, Alejandro Faurlin, who was owned by a third party, which was strictly forbidden after the Carlos Tevez affair at West Ham. Fortunately, the club was only fined, instead of suffering a points deduction, but it reflected badly on management, especially the controversial chairman, Gianni Paladini.

"Faurlin - Don't cry for me, Argentina"

Fans were equally dismayed at the lack of funds provided for transfers with Warnock complaining that he had only been given £1.25 million to strengthen the squad, but they were incandescent with rage at the massive rise in ticket prices that followed the elevation to the Premier League, which seemed like a real slap in the face to people that had stuck with the club through thick and thin.

This was just one of the decisions that led to Bhatia’s departure, though he was also unhappy at the removal of his friend Ishan Saksena as chairman. In addition, the rejection of his bid to buy out the partners must also have played a part in his reasoning. This was a blow to the club, as he had been one of the few to emerge from the documentary with any credit.

However, even though the broadcast was cringeworthy, it is important to note that they did actually deliver on the primary objective, namely promotion to the Premier League within four years. In fact, without the money that Briatore and Ecclestone put in, it is possible that the club might not be here at all. As Warnock said, “When they came in, the club was in a mess. We shouldn’t forget that altogether.”

"Anton Ferdinand - he's not heavy, he's my brother"

The truth is that QPR had been in financial difficulties ever since their relegation from the Premiership in 1996, which meant that they missed out on the boom years in the world’s most lucrative domestic league and were hit by the collapse of ITV Digital.

The club went into administration in 2001 under music mogul Chris Wright as it dropped into the third tier and were only saved by a £10 million loan from the mysterious ABC Corporation, a company registered in Panama, though this came at a price, as the interest rate was a whopping 11.76%. The annual charges of more than a million were crippling for a club whose 2003 turnover was around £7 million. It was also surprising that the loan was so high, as Wright was only paid £3.5 million in full settlement for his loans.

The injection of cash did help QPR secure promotion back up to the second tier, but the sting in the tail was that the lenders were also given the option to acquire the stadium (used as collateral to secure the loan) for £10 million if the club failed to repay the debt, even though it was valued at more than twice that amount.

"Paladini - suits you, sir"

Our old friend Gianni Paladini arrived in 2005, when he introduced Antonio Caliendo, like him a former football agent. Although Caliendo’s reputation was hardly unblemished, having been convicted of corruption in Italy, the club somehow managed to keep its head above water, albeit hit by numerous scandals, such as the memorable court case when seven men were acquitted in a court case after Paladini had alleged that he had been threatened at gunpoint before a match against Sheffield United.

Nevertheless, Paladini’s services were retained by Briatore, proving that he was supremely adept at the art of survival, if nothing else. The finances remained unstable, as seen by the auditors comments in the 2009 accounts, which noted, “the existence of material uncertainties regarding the group’s ability to continue as a going concern… unless sufficient funding (was) forthcoming.”

This was not the first example of the auditors expressing concern, as the accounts published for the 2004/05 financial year had been shown to be different from those approved at the annual general meeting.

These were symptoms of QPR’s underlying financial problems, amply demonstrated by the club’s growing debt, which rose from £14 million in 2006 to £56 million in 2011, including £22 million in the last 12 months alone. This was largely funded by various loans from shareholders, including £15.8 million from Sarita Capital Investments (believed to be a Briatore vehicle), £12.3 million from Sea Dream Ltd (a company owned by the Mittal family), £11.4 million from Ecclestone; and £10 million from Amulya Property Ltd (a company connected to Briatore and Bhatia).

The Amulya loan replaced the infamous ABC loan “at a more favourable rate of interest”, though it is worth noting that the interest rate was still on the high side at 8.5%, before being extended in 2010 at zero interest. It also still gave the lenders the option to acquire Loftus Road on the cheap in certain circumstances. More positively, the other shareholder loans were all made at zero interest with both Ecclestone and Mittal advancing a further £10 million apiece in 2011.

QPR had also used £4.9 million of their £5 million overdraft facility with Lloyds Bank, while £2.1 million of the debt was unexplained. As a technical aside, the analysis of net debt in Note 24 of the 2011 accounts does not equal the figures listed in the Creditors Notes (15 and 16), either in total or the split between debt due within one year and after one year.

Of course, this is all largely irrelevant, as Tony Fernandes and his partners have since bought a majority shareholding (66%) in the club. The Mittal family retained a 33% stake and Amit Bhatia was brought back as vice-chairman.

"Wright-Phillips - chip off the old block"

The purchase, reportedly costing £45 million in total, included the re-assignment of the loans made by Briatore and Ecclestone to Tune QPR Sdn Bhd, a company controlled by Fernandes, and the repayment of the bank overdraft. This was nowhere near the £100 million that the previous owners had been seeking, but largely covered the money that they had put in.

Bhatia confirmed that the gruesome twosome were no longer involved with QPR, “They have no ties with the club left. Balance sheet, debt, amounts owed – all of it.” That included ownership of the stadium. The takeover also resulted in Paladini’s eight-year association with the club ending three months later.

New chief executive Philip Beard announced, “The reality is that the club has no debt”, but he must have meant that it had no external debt, as the shareholder loans have simply been taken on by the new owners.

"Fernandes - come fly with me"

The arrival of Fernandes hopefully heralds a new dawn. The affable founder of Air Asia and principal of the Lotus Formula One team has a good business record and has already been much more communicative with the fans than his predecessors, making good use of his Twitter account. Although perceived as a nice guy, he is not afraid of taking tough decisions, hence his replacement of Warnock with a man he considered more likely to avoid the dreaded drop.

That said, QPR fans should not be expecting Fernandes to be a benefactor like Abramovich or Mansour, as he said, “I’m not someone who can whip out the cheque book like them. That’s Disneyland stuff. I’m not a sugar daddy. Maybe a sugar baby.” He continued, “This is not a black hole of Calcutta or a trophy asset. This has to be run as a business.” That might sound like pie in the sky, but he likened the situation in football to his other sporting experience, “I got into Formula One when the cost cutting came in. And you know, crazy budgets were slashed into much, real profits.”

The extent of his immediate ambition is to survive in the Premier League, which he deemed “realistic”. Bhatia added that they needed to achieve this aim “without throwing large amounts of money at it.”

This all sounds rather admirable, but Briatore said much the same thing after his arrival, “These deals will allow QPR to move towards our objective of ensuring that QPR is financially self-sufficient”, which was subsequently followed by three years of considerable losses.

This culminated in a deeply worrying £25.4 million loss in 2011 (in QPR Holdings Limited), which was £11.7 million (85%) higher than the previous year’s £13.7 million deficit, meaning that the club lost nearly £500,000 a week. It actually would have been £2 million worse without the reinstatement of a provision for a liability that was in place due to the sale of the club to a previous owner.

Unlike many clubs, the figures are not really impacted by profits on player sales, which were only £0.5 million last year. Indeed, the highest recorded in the last six years was only £2.1 million in 2008, largely as a result of the sale of Lee Cook to Fulham.

Clearly, these accounts are the last before the Fernandes takeover, so next year’s figures will be very different. In particular, promotion to the Premier League will mean significantly higher revenue (and expenses).

There’s certainly room for improvement, as it is ages since QPR achieved break-even. The losses really exploded in the Briatore/Ecclestone era with £58 million being racked up in the last three years alone. Even the relatively small 2008 loss of £6 million was artificially boosted by Caliendo waiving £4 million of his outstanding loans. Excluding this once-off factor, there would have been another double-digit loss in 2008 of £10 million. In fact, excluding all exceptional items, the total loss under the previous owners amounted to a colossal £70 million in four colourful years.

Of course, the vast majority of clubs in the Championship lose money with only three of the 24 contenders making money in 2010/11 (Watford, Scunthorpe United and Leeds United) and nine losing more than £10 million. This is partly a result of low TV money in England’s second tier, but also due to many clubs over-spending in order to reach the promised land of the Premier League.

QPR obviously managed to clear this hurdle, but their £25 million loss was by far the biggest in the Championship. As a comparison, Norwich City and Swansea City were also promoted, but made much smaller losses, £7 million and £11 million respectively.

The reason for QPR’s huge loss is blindingly obvious if we look at the factors behind their worsening deficit in the last five years, when the loss widened by £22 million from £3 million in 2006 to £25 million in 2011. In this period, revenue only grew by £7 million, but wages surged by £23 million. Other costs (£6 million) and player amortisation (£3 million) also increased, but the real damage was done by the booming wage bill.

Although QPR’s revenue grew 13% in 2011 from £14.4 million to £16.2 million, this was only mid-table in terms of the Championship. Leeds United were top of the tree with £33 million, due to very high gate receipts (thanks to Ken Bates’ ticketing policy) and a prosperous commercial operation. The next three clubs in the revenue league (Burnley, Middlesbrough and Hull City) all benefited from £15 million parachute payments after relegation from the Premier League.

Based purely on revenue levels, QPR did well to secure promotion, though Swansea’s achievement in doing the same on turnover of less than £12 million is even more remarkable.

One area where Briatore and Ecclestone should be applauded is the new commercial deals that they negotiated in 2009, which increased revenue by 60% from £9.2 million to £14.8 million. Even that pales into insignificance compared to the growth this season in the Premier League, when I estimate revenue will rise around 240% to £55 million, almost entirely due to the TV deal which should deliver at least £40 million on its own.

Unhelpfully, QPR stopped providing an analysis of their revenue after the 2008 annual report, so I have estimated the split since then using various assumptions. The accounts inform us that ticketing was 34% of total revenue in 2010 (42% in 2009), which would give £4.9 million match day revenue. Strangely, the same accounts also state that match day revenue is £2.5 million in the Business Review, but this seems very low. However, I have used the increment for this figure in the 2011 accounts of £0.4 million (£2.9 million less £2.5 million) as the basis for 2011 match day income of £5.3 million. This year assumes a 25% increase in the top flight.

The TV revenue is mainly per the distributions made to all clubs in the Championship, e.g. in 2010 this was £3.8 million, comprising central distribution of £2.5 million plus a £1.3 million solidarity payment from the Premier League. In 2011 this increase to £5.2 million, as the solidarity payment rose to £2.2 million and each club was given an additional £0.5 million as their share of the parachute payments for Newcastle and WBA, because they went straight back up to the top tier. The remaining TV money is for live broadcasts and progress in the cup competitions.

That just leaves commercial income as the balancing figure in years 2009 to 2011 with 2012 growth in the Premier League estimated at 25%, which does not seem unreasonable.

Of course, this season is all about the revenue from the Premier League’s TV deal. Many people refer to promotion being worth around £90 million, which is a little misleading, as it is not all received in one fell swoop, but it’s still a magnificent prize. Even if QPR do come straight back down, they would receive £40 million TV income plus £48 million parachute payments over the next four years (£16 million in each of the first two years, and £8 million in each of years three and four) plus additional gate receipts and commercial revenue.

Furthermore, if Rangers finish higher in the Premier League, they would receive even more TV money with every season survived adding another £40+ million to the coffers. Given the spectacular difference in revenue compared to the Championship, it is understandable why clubs like QPR push themselves to the absolute limit to secure promotion, though it’s a dangerous game, as only three clubs go up every year, leaving another 21 disappointed.

One concern is that the club might eat into that higher revenue by increasing wages and other costs, but the net effect is still likely to be positive. If we look at the three teams that were promoted to the Premier League in 2009/10, we can observe this phenomenon with Newcastle United, WBA and Blackpool, as all three clubs dramatically improved their operating profitability, even though wages increased.

Although £55 million revenue must seem like a huge sum to QPR, after averaging around £15 million for the last three years, it is still relatively low in the Premier League, e.g. only Blackpool and Wigan Athletic generated less revenue last season. For some perspective, QPR’s recent defeat to Manchester United was against a team whose £331 million revenue is six times as much as their own. As Sky used to say, “it’s a different ball game.”

Nevertheless, the allocation of TV money is reasonably equitable, ranging from £40 million to £60 million, with 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£17.9 million) shared out equally. Facility fees are allocated based on the number of matches shown live on TV (minimum of ten for each club), while the merit payment is worth £757,000 for each place.

Match day revenue of around £5 million is QPR’s real Achilles Heel. Clubs like Manchester United and Arsenal generate more revenue in just two games than QPR achieve in a whole season. This is partly down to Rangers’ low crowds with last season’s average attendance of 15,635 being only the 14th highest in the Championship.

This actually represented something of a recovery, as the previous season the average had only been 13,349. In fact, during the darkest days QPR’s crowds fell below 13,000. Although attendances have increased this season to over 17,000, this is still the smallest in the Premier League, even behind Wigan Athletic, whose crowds are notoriously low.

Part of the problem is the capacity at Loftus Road, which is only 18,360. This was one reason why QPR raised their prices so much following promotion, as the lovable Paladini explained, “QPR is a small ground, so we could not survive if we did not put prices up.” However, this did not make much sense, given the relatively small sums involved, especially as this increase understandably caused so much ill will among the supporters.

Season ticket prices were raised by around 40%, but the real increase was even higher, as there are four fewer matches in the Premier League, while match day prices doubled. This was the ghastly result of Briatore’s desire to create a “boutique stadium.” In fairness, most promoted teams do increase ticket prices, but this was excessive.

At least it presented Tony Fernandes with a PR open goal and he duly thumped the ball into the back of the net by quickly revising the pricing structure, so season ticket holders were given “significant” refunds; a cheaper match day pricing category was introduced; and under-eights were allowed in free of charge if accompanied by an adult.

Although Loftus Road can be an intimidating arena for visiting teams, it is far from ideal for a club with aspirations of competing at the top level. Given the current ground’s proximity to nearby housing, it would be too difficult to expand it, so a move to a new stadium has been mooted. Although it is not clear how this would be funded, Fernandes seems enthused by the idea and Philip Beard has emphasised its importance, “Football will be the bedrock of that stadium and a place where we can generate additional revenues from other activities so that the business plan for the club is sustainable.”

The club would like to stay close to where they are, as Fernandes explained, “It makes no sense to move out from where the fan base is.” Aided by the possibilities opened up by the BBC’s relocation to Salford and the massive Westfield shopping development, the club has reportedly identified three possible sites in the White City area.

However, the obvious question is whether Rangers would be able to fill a new stadium. Fernandes’ “gut feel” is for a 40,000 to 45,000 capacity, even though that would be more than twice the current attendance. That’s a big ask, especially with so many other teams on the doorstep.

"Running up that Hill"

Some of the costs might be reduced with a ground share, especially as QPR have plenty of previous here. Not only did Fulham share Loftus Road for two seasons between 2002 and 2004 while Craven Cottage was being redeveloped, but Wasps rugby union club also played home matches there for a while.

QPR’s commercial income of £5-6 million is not too bad, comparing favourably with many established top flight clubs like Bolton Wanderers and Blackburn Rovers, though it is only half of the £12 million generated by neighbours Fulham. Indeed, the club has stated that it “believes that its Premier League status will help it to significantly increase its commercial revenue.”

The previous owners had already demonstrated commercial acumen by making once-off payments in 2008 to extricate themselves from “poor value” sponsorship agreements with Car Giant and Le Coq Sportif. These were replaced by a three-year deal with Gulf Air worth £2.3 million a season and a five-year kit supplier agreement with Lotto Italia worth £20 million, which was a record for the Championship, though the full value would only be attained with promotion to the Premier League.

Last summer a joint shirt sponsorship deal was signed with Malaysian Airlines for the home kit and Air Asia for the away kit and third jersey for the next two years. The value was not divulged beyond a “multi-million pound deal”, though the respected Sporting Intelligence website estimated £2.3 million a year in line with the previous sponsor, while the Malaysian press estimated that it could be as much as £3 million. Beard said that “attracting two major Asian companies to come on board shows the global appeal QPR has as a brand”, though his argument is weakened by the fact they are both part-owned by Fernandes.

In any case, the money is not too bad at all, though it is still a fair bit less than the £20 million earned by Liverpool from Standard Chartered, Manchester United from Aon and (reportedly) Manchester City from Etihad. If the £4 million a season for the kit supplier are accurate, that’s even more impressive, e.g. it would be higher than Aston Villa’s new deal with Macron, but again it is small beer compared to the £25 million deals for Liverpool with Warrior Sports and Manchester United with Nike.

Of course, the burning issue at QPR has been the wage bill, which has more than quadrupled in the last five years, rising from £6.3 million in 2006 to £29.7 million in 2011. This has resulted in a dreadful wages to turnover ratio of 183%, significantly higher than UEFA’s recommend upper limit of 70%. To place that into context, big spending Manchester City’s ratio is “only” 114%.

In fact, QPR’s ratio has been above 100% in each of the last four years, which they partly ascribe to the imposition of transfer windows, claiming that this means they have to recruit a larger squad. In addition, the figures have been inflated by numerous termination payments to former managers.

While the wage bill looks awful, a couple of points should be acknowledged: (a) the 2011 figures have been inflated by bonus payments for promotion; (b) this is far from unusual in the Championship, where nearly half the clubs have a wages to turnover ratio over 100%.

Nevertheless, QPR’s wage bill of £29.7 million was easily the highest in the Championship last season (having pro-rated Middlesbrough’s figures, as their last accounts covered 18 months). Only three clubs in that division had a wage bill over £20 million, while QPR’s payroll was £11-12 million higher than the other two promoted clubs. Put another way, it was almost twice as much as clubs like Leicester City, Nottingham Forest and Leeds United.

However, before we stray too much into “shock, horror” territory, it was still a lot lower than every Premier League club in 2010/11 with the exception of Blackpool. Clearly, the wage bill will have increased this season with the likes of Joey Barton, Djibril Cissé and Nedum Onuoha being recruited on £60-80,000 a week, but this is unfortunately the price of dining at the top table. As the 2001 accounts put it, “The Group operates in a highly competitive market for talent and the market rate for transfers and wages is, to a varying degree, dictated by competitors.”

The other expense impacted by investment in the squad is player amortisation, which has been on the rise, but only reached £3.2 million in 2011. For those unfamiliar with this concept, amortisation is simply the annual cost of writing-down a player’s purchase price, e.g. Shaun Wright-Phillips was signed for around £6 million on a 3-year contract, but his transfer will only be reflected in the profit and loss account via amortisation, booked evenly over the life of his contract, so £2 million a year (£6 million divided by 3 years).

In this way, amortisation will rise significantly in the next couple of seasons in line with the recent higher expenditure in the transfer market. That said, QPR will still have a long way to go to match Manchester City’s £84 million.

Over the years, QPR have hardly been big spenders. Indeed, they had net sales proceeds of £1.2 million in the five years up to 2007. Only £14.8 million was spent during the four years under Briatore, as the club largely relied on free transfers and loans. Even in the promotion season, Warnock’s net spend was just £1.5 million.

However, things have changed since Fernandes’ arrival with £20.6 million being splashed out in the last two transfer windows, including £11 million in January alone on Bobby Zamora, Cissé and Onuoha plus loans for Samba Diakité, Federico Macheda and Taye Taiwo.

As the Malaysian said, “We have made a significant investment in relation to bringing new players to QPR.” In fact, only four clubs have spent more in that period (Chelsea, Manchester City, Manchester United and Liverpool), though Fernandes was at pains to emphasise that they had only been spent as much as “half a Man City player.” To an extent, the expenditure is predictable, as explained by Beard, “We are new to the Premier League. To stay up, we have had to invest in the squad.”

QPR’s balance sheet is not very robust with net liabilities of £40 million, having enjoyed net assets up to 2006 (as high as £10 million in 2000), though player values are under-stated in the books at £8 million, when their worth in the real world is much higher. The Transfermarkt website estimates the current value to be £70 million, taking into consideration the recent influx.

This deficit explains the need for support from the club’s shareholders and creditors, which is further demonstrated by the cash flow statement. In the last four years, this shows net cash outflow from operating activities of £47 million, rising to £68 million after interest payments and investment in players and infrastructure. This deficit required £64 million of new financing, made up of £30 million additional share capital and £34 million new loans.

It is therefore crucial that Fernandes and Mittal continue to provide support. Some concern has been expressed over the fact that Fernandes is not a QPR fan (he supports West Ham), though he did actually grow up in the area. Mittal could be seen as a somewhat reluctant owner, but Beard’s understanding is that the shareholders are “100% committed to this club in the short, medium and long term.” Bhatia has also said that his family “remains passionate about QPR.”

In any case, Fernandes has explained that apart from the emotional pull of owning a football club, he was also attracted by good, old-fashioned business reasons, especially QPR’s strength as a marketing vehicle for his companies. “Many people do not realise the power of sport to market a brand,” he said. “You can spend £40 million on advertising and have nothing like the same effect. Around the world, everybody watches Premier League football.”

Fernandes even believes that QPR could be profitable one day: “Yes, without a doubt. Otherwise I wouldn’t have got involved.” That makes sense, as he is reportedly worth “only” £200 million, which is big money for the likes of you and me, but does not go very far in high-level football. This is why he is so committed to the idea of the club finally paying its own way. As he neatly summarised, “It can’t be about one benefactor. I might be hit by a bus.”

"Shaun Derry - All cats are grey"

In the long-term, there are ambitious plans to build a new training ground, which would help improve the youth system. Fernandes said, “I’m keen to create a good academy, so that there’s a constant supply of players. We’re in a fantastic part of London and we should be bringing kids through.”

More immediately, the objective is clear, “The main thing is to avoid relegation.” Even though the blow would be softened by parachute payments, there would still be a tremendous financial hit, especially as it is rumoured that some top earners do not have relegation clauses in their contracts. Older fans would need no reminding that the last time that happened it took 15 years for QPR to get back...

Maintaining Premier League status for a couple of seasons would also provide some badly needed stability at the club, which might just loosen Mittal’s purse strings. Even if not, it would make QPR a more attractive opportunity for other investors.

"That's Zamora"

QPR fans have endured enough drama to last a lifetime, but there is potential here, especially under the guidance of Fernandes, who achieved a spectacular turnaround with Air Asia. When he bought that company, it was “a kind of unpolished diamond” with just two planes and a lot of debt, but he transformed it into a success story with 100 aircraft and profits of $400 million.

Could he achieve something similar at QPR? History would suggest not, but Fernandes has already beaten the odds once in his career, so it’s not impossible that West London’s version of Hoop Dreams could become reality. Westway to the World? Time will tell.

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