Wednesday, September 19, 2012

Genoa - Strange Relationship

It’s fair to say that last season was not particularly enjoyable for Genoa. They only just managed to avoid relegation, while their defence was the worst in Serie A, conceding a horrific 69 goals. Matters came to a head when a group of their fans staged a protest during the 4-1 home defeat to Siena, throwing flares and demanding that the players gave them their shirts, leading to a 45 minute suspension of the match.

That evening Genoa’s volatile president Enrico Preziosi sacked the coach Alberto Malesani, replacing him with Luigi De Canio, who will be hoping to get the fans back on board this season with his own brand of attacking football. Of course, he may not be helped by the huge amount of player movements (in and out), which has become the normal state of affairs at the Luigi Ferraris.

In particular, Genoa sold their leading scorer, the Argentine striker Rodrigo Palacio, to Inter, while they also let Alberto Gilardino move to Bologna on loan. In their place, they brought in last season’s Serie B top scorer, the unfortunately named Ciro Immobile, from Pescara and former striker Marco Borriello, who has strutted his stuff with limited success for numerous clubs, but in fairness did net an impressive 19 goals for Genoa in the 2007/08 season.

"Borriello - return of the prodigal son"

More positively, this is Genoa’s sixth consecutive season in Italy’s top flight, which represents a major improvement after all the time spent in the lower leagues in the preceding years and is virtually unprecedented post-war. Although Genoa have a glorious past, winning the Italian title no fewer than nine times, the last of these victories came in 1924, so it’s somewhat ancient history.

Preziosi took over the club in 2003, just after the club had been relegated to Serie C1, though Genoa were saved by the Italian Football Federation’s controversial decision to expand Serie B to 24 teams after the infamous Caso Catania. Two years later Genoa became Serie B champions, but were demoted to C1 after they were found guilty of match fixing the vital final game against Venezia. Despite being given a three-point penalty, Genoa finished as runners-up the next season, securing an immediate return to Serie B after winning a play-off against Monza.

The following season Genoa achieved a second successive promotion, reaching Serie A in 2007, a testament to Preziosi’s support during this turbulent period. Until the last troubled season, Genoa have been comfortable in the top tier, finishing in the top half of the table four years in a row, including a memorable fifth place in 2008/09, when they narrowly missed out on Champions League qualification, largely thanks to the efforts of two players brought in from the Spanish league, the prolific Diego Milito and a rejuvenated Thiago Motta.

"Preziosi - buy or sell?"

However, Preziosi is a man who divides opinion. The former Como owner is a successful businessman, making his money from one of the world’s largest toymakers, and it is clear that he has calmed the waters at Genoa while providing substantial financial support. Indeed, he acquired the club from the liquidator of Genoa’s parent company after they had suffered from having three different owners in the previous six years.

On the other hand, he has been involved in countless clashes with the authorities. Only last week he was banned from attending football stadiums for six months as a much-delayed punishment for the 2005 match fixing case.

Preziosi’s Genoa have also been heavily involved in the “bilanciopoli” case, a false accounting scandal whereby football clubs inflated the value of their players in order to improve the balance sheet. In particular, the fiscal authorities targeted Genoa’s 2004 and 2005 accounts, resulting in fines and bans, though a few years later the club was half-cleared with the tribunal ruling that there were no false invoices, but that the accounts were manipulated in some way.

Hence, the raised eyebrows at Genoa’s frenetic transfer activity. Since 2008 the club’s net spend in the transfer market is only €8 million, but this disguises a key point, namely the enormous turnover of players coming in and out. So that net €8 million actually represents a barely credible €272 million of purchases and €264 million of sales in just five seasons.

Not for nothing is Preziosi known as the “king of the transfer market”, though he has pointed out that it does not matter how the club performs on paper and he should be judged by displays on the pitch. Clearly, such a massive movement of players each season makes it difficult for the squad to gel, but this business model is imperative for the club’s fortunes. In short every player is for sale at the right price with most of the funds reinvested in cheaper alternatives that are (hopefully) then sold for a fat profit at a later date.

The club has been trading players like stocks or commodities for the last few years, but there has been a modification in their approach recently. After the promotion to Serie A, Preziosi splashed the cash with a net outlay of €57 million in three seasons, but the last two seasons Genoa have looked to sell more players, the latest big money departures being Miguel Veloso to Dynamo Kiev and Mattia Destro to Roma (a paid loan with option to buy). In fact, in that period only Udinese, the acknowledged masters of player trading in Italy, have higher net sales proceeds than Genoa’s €49 million.

The harsh reality is that Genoa simply do not have the financial resources to hang on to their star players, as can be seen by looking at their profit and loss account. At first glance, it does not seem too bad with the club just about breaking even and actually making a pre-tax profit of €1.8 million in 2011 (though they made a hefty loss of €17 million the previous year), but this is heavily impacted by player trading through player sales and co-ownership deals.

Excluding player trading, the club makes massive operating losses: a frightening €156 million in the last three years, including €67 million in 2011 alone. This includes non-cash expenses such as player amortisation and depreciation, but even EBITDA (Earnings before Interest, Taxation, Depreciation and Amortisation) is strongly negative, e.g. €23 million in 2011.

It should be noted that Genoa changed their accounting close in 2008 from 30 June to 31 December, so the accounting year now straddles two seasons, e.g. 2011 includes the second half of the 2010/11 season and the first half of 2011/12. This is a somewhat bizarre feature of a few Italian clubs, though is sometimes done to be in line with the parent company’s reporting timetable.

Regardless of the accounting close, the impact of player trading on Genoa’s accounts is undeniable. In fact, the club would have reported a loss of €73 million in 2011 without the money made from player sales (€58.8 million) and co-ownership deals (€13.8 million).

Profit from player sales is simple enough, being the difference between sales proceeds and the remaining value of the players sold in the accounts, though the slight twist is that the €58.8 million comprised €62.2 million of plusvalenze (profitable sales) less €3.8 million of minusvalenze  (loss-making sales including settlement of player contracts, such as Anthony Vandenborre €1.5 million).

Co-ownership deals are a little more complex, though such arrangements are very common in Italy, whereby two (or more) clubs share the ownership of a player’s rights. This is regarded as a good way to lower costs and reduce risk when purchasing a player, though the practice is banned in England and France. Astonishingly, Genoa had 24 co-ownership deals on their books in 2011.

"Granqvist - handy Andy"

When such a joint ownership agreement is terminated, any payment higher than the amount on the balance sheet is treated as a gain (“un provento”), while any lower payment is shown as an expense (“un onere”). In Genoa’s 2011 accounts, this produced a net gain of €13.8 million, made up of a €17m gain, mainly Andrea Ranocchia (Inter) €6 million, Bosko Jankovic (Palermo) €3.5 million, Giuseppe Sculli (Lazio) €3 million, Raffaele Palladino (Juventus) €2 million and Kevin-Prince Boateng (Milan) €1.75 million, less €3.2 million expenses.

The sums involved in player trading were not quite as high in earlier years, but they were still significant with profit on player sales of €38 million in both 2009 and 2010 plus gains from co-ownership deals of €3.2 million in 2009 and €7.1 million in 2010.

Genoa also received €3.7 million of revenue from player loans in 2011, largely from Robert Acquafresca going to Cagliari (€1 million) and Mattia Destro to Siena (€750,000). This was one of the highest loan revenues in Serie A, which should not be too surprising, given the large number of players Genoa have out on loan to other clubs (26 for the 2012/13 season). On the other hand, they paid out €2.5 million on inward player loans (mainly Antonio Floro Flores from Udinese €1.5 million) and €2.1 million on player development costs.

Despite these vast sums from player trading, Genoa have struggled to balance the books, reporting only one profit in the last 41 years (€1.5 million in 2008). In particular, they spent big when they were in Serie C1 and Serie B in a (successful) attempt to get promoted, leading to large losses in both 2005 (€14 million) and 2006 (€11.5 million). Since their return to Serie A, they have basically managed to keep their losses under control via their expert use of player trading with the exception of 2010’s sizeable deficit.

That 2010 loss of €17 million was used in the Serie A profit league presented by La Gazzetta dello Sport earlier this year for the 2010/11 season and was only surpassed by the “big four” clubs who reported enormous losses, as has been the case in Italy for many years: Juventus €95 million, Inter €87 million, Milan €70 million and Roma €31 million. In fairness to the rossoblu, only 8 clubs in Serie A managed to make money that season, and they did substantially improve their position to a tiny loss in 2011.

We also need to recognise that Genoa have done well with their finances if we take into consideration their relatively low recurring revenue streams (match day, television and commercial income). Their annual revenue of €48 million is only the 11th highest in Italy and a long way behind the leading clubs. The two Milanese clubs generate more than four times as much (Milan €220 million, Inter €211 million), while Juventus (€154 million), Roma (€144 million) earn three times as much, while Napoli (€115 million) have to be content with twice as much.

Even Lazio, Fiorentina and Palermo all receive at least €20 million more a season than Genoa. Interestingly, the club that is closest to Genoa in revenue terms is Udinese, who have also focused on player trading as a way to generate funds.

In this way, Genoa’s plusvalenze represent a hefty chunk of the club’s revenue. In 2010 the €38.9 million was equivalent to 68% of the club’s revenue, a proportion bettered only by Parma 81% and Udinese 77%. In 2011, Genoa’s plusvalenze was worth an amazing 110% of their revenue.

The above analysis also highlights the differences between how revenue is reported in Italy and other European countries. The European definition used by Deloitte in their annual money league amounts to €48.1 million for Genoa in 2011, while the club itself announced record revenues of €118.8 million. The €70.7 million difference is due to: (a) player loans €3.7 million; (b) gate receipts given to visiting clubs €0.1 million; (c) increase in asset values €4.7 million; (d) profit from player sales (plusvalenze only) €62.2 million.

Taking a closer look at the plusvalenze Genoa has reported over the last few years reveals that much of this has come from sales to Inter and Milan. In 2011, of the total €62 million, nearly €32.7 million was from Milan (on sales proceeds of €57.9 million), while a further €12.8 million was from Inter (for Juraj Kucka on sales proceeds of €16 million). The sales to Milan involved no fewer than eight players contributing profits as follows: (deep breath) Stephen El Shaarawy €19.8 million, Matteo Chinellato €3.5 million, Alberto Paloschi €2.3 million, Gianmarco Zigoni €1.8 million, Tuncara Pele €1.7 million, Nnamdi Oduamadi €1.6 million, Rodney Strasser €1.1 million and Marco Amelia €0.9 million.

In 2010 Genoa also made €16.8 million from Milan (Sokratis Papastathoupolus €12 million and Kevin-Prince Boateng €4.8 million) and €11.3 million from Inter (Andrea Ranocchia), while 2009 featured €28.6 million from Inter (Diego Milito €18.5 million and Thiago Motta €10.1 million).

Genoa’s relationship with the rossoneri in particular has been mutually beneficial with Milan’s profit and loss account similarly being boosted by profit on sales of players to Genoa to the tune of €24.4 million in 2010 and €17 million in 2011. In particular, Milan sold a 50% share in several youngsters (Oduamadi, Beretta, Zigoni and Strasser) to Genoa in 2010, realising a handy profit in their books, only to buy all of them back (with the exception of Beretta) the following season.

Preziosi has been quoted as saying, “Our club must have good relations with the big clubs”, but this very close relationship does seem a bit strange, exemplified by Genoa buying Kevin-Prince Boateng from Portsmouth on 18 August 2010 and loaning him to Milan on the very same day. The contract was later switched to co-ownership before Milan purchased Boateng’s full economic rights in May 2011.

Those of a cynical nature might wonder about all the money earned from plusvalenze on both sides, especially after the many investigations in the past into manipulated accounts, but it may just be the case that there are few clubs that Genoa can sell to in Italy. As sporting director Stefano Capozucca said, “There are only two clubs, three at the most, who can afford to spend (these days).”

The importance of player trading to Genoa’s business can be seen once again in the above graph with profit on player sales and gains from co-ownership deals providing the only “revenue” growth in the last three years. The last time that ongoing revenue grew meaningfully was in 2008 after the promotion to Serie A, when it virtually doubled from €22 million to €38 million, but since 2009 it has been effectively flat at around the €50 million level.

Of the traditional revenue streams, television is by far the most important with €32 million in 2011, compared to €10.4 million of commercial income and just €5.7 million of match day revenue.

Genoa’s TV revenue of €32 million is far lower than the leading Italian clubs with Juventus, Inter and Milan all earning around €80 million, while other Italian clubs also receive a fair but more, e.g. Napoli and Roma get around €60 million; Lazio about €50 million; and Fiorentina, Palermo and Udinese around €40 million.

It is anticipated that the new collective agreement that started in the 2010/11 season, but was only half reflected in Genoa’s 2011 accounts, should produce a small increase of €3-4 million, as the allocation benefits the mid-tier clubs to a certain extent. Under the new methodology, 40% is divided equally among the Serie A clubs; 30% is based on past results (5% last season, 15% last 5 years, 10% from 1946 to the sixth season before last); and 30% is based on the population of the club’s city (5%) and the number of fans (25%).

The improvement also reflects the fact that the total money negotiated in the new deal is approximately 20% higher than before at almost €1 billion a year. This cemented Italy’s position as the second highest TV rights deal in Europe, only behind the Premier League, which continues to sign ever more lucrative contracts, but significantly ahead of the other major leagues, despite the Bundesliga increasing its rights by over 50% for the next four-year deal.

That’s particularly impressive, given how little is received for foreign rights (at least compared to the Premier League), though it was recently announced that the incumbent rights holder, MP & Silva, will pay an additional 30% for these rights for the three years starting from the 2012/13 season (up from €90 million a year to €115-120 million). Domestic rights are now worth €829 million a season, with €561 million from Sky Italia and €268 million from Mediaset.

Of course, Genoa could really grow their television revenue if they were to somehow qualify for the Champions League. This might seem a bit of a pipe dream, especially now that Italy have lost a place to Germany after their deteriorating UEFA co-efficients, but as recently as 2009 they finished fifth, only just missing out on a seat at Europe’s top table because Fiorentina had a better head-to-head record.

They did manage to qualify for the 2009/10 Europa League, the first time they had reached Europe in 17 years, and earned €1.6 million from the central TV distribution in the process, but this is peanuts compared to the riches available from Europe’s flagship tournament, e.g. in 2011/12 the Italian representatives earned an average of €33 million (Milan €39.9 million, Inter €31.6 million and Napoli €27.7 million). In addition, they would benefit from higher gate receipts (a €2 million increase in 2009) and improved sponsorship terms.

Like all Italian clubs, Genoa’s match day income is on the low side at around €6 million. In 2010/11 only six clubs in Serie A took in more than €10 million a season: Inter €33 million, Milan €30 million, Napoli €22 million, Roma €18 million and Juventus €12 million. That’s considerably more than Genoa, but pales into insignificance compared to the top European clubs like Real Madrid €124 million and Manchester United €120 million.

Genoa’s average attendance of 21,995 in 2011/12 was the eighth highest in Italy, utilising around 60% of the stadium capacity, just behind Fiorentina 23,402 and ahead of Palermo 20,945. Crowds rose in line with their ascent through the leagues, but have dipped alarmingly in the past two seasons since the peak of 26,802 in 2009/10. Part of this decline can be attributed to the poor economic environment, but it is likely that some is also due to the supporters’ unhappiness with Genoa continually selling their best players.

In the past few years there have been many initiatives to improve the stadium. The Stadio Luigi Ferraris is shared with Sampdoria and is located in a heavily built-up area, leading to initial thoughts that a new stadium would have to be constructed elsewhere with a site at the marina di Sestri Ponente being tentatively identified as one possibility. However, this was rejected by the council, so the idea of renovating the current stadium once again took shape with plans presented by the Fondazione Genoa 1893 in late 2009.

The aim was to transform the old ground into a modern stadium that could generate revenue seven days out of seven, emphasising the commercial possibilities and installing premium seats including 28 “skyboxes”. The capacity would be reduced from 36,600 to 33,000, but the revenue would be considerably higher. The project would cost less than €50 million.

However, the plans were not supported by the Italian football federation, so were once again put on the back burner. Last summer, another initiative was raised, whereby Genoa and Sampdoria would take over the management of the stadium from the council, leaving a specialist company to handle the commercial aspects. However, despite Preziosi’s admiration for Juventus’ new stadium, yet again these plans fizzled out, though last month the stadium management was taken over by a new consortium of four Italian companies, so perhaps all is not yet lost.

There is also room for growth in the club’s commercial revenue, which actually slightly decreased in 2011 to €10.4 million from €11.5 million. This is understandably a lot lower than the big boys (Milan €80 million, Inter and Juventus both €54 million), but is also less than clubs like Palermo €18 million and (more painfully) local rivals Sampdoria €15 million.

Genoa earned €1.8 million from their shirt sponsorship deal with Iziplay, a betting company, in 2011, which was around double the €0.9 million they received the previous year. This is a lot less than many other Italian clubs: Milan – Emirates €12 million, Inter – Pirelli €12 million, Juventus – BetClic €8 million, Roma – Wind €7 million, Napoli – Acqua Lete €5.5 million and Fiorentina – Mazda €4 million.

Those clubs also receive higher sums from their kit suppliers than the €1.1 million Genoa booked in 2011 from Asics (Inter – Nike €18 million, Milan – Adidas €17 million, Juventus – Nike €12 million, Roma – Kappa €5 million and Napoli – Macron €4.7 million).

Genoa will be hoping that their six-year arrangement with Infront will boost their commercial income. They have already brokered the higher sponsorship deal with Iziplay and this summer signed a new four-year deal with Lotto Sports running until June 2016 to replace Asics as kit supplier. Infront’s president, Marco Bogarelli, said, “Our principal objective will be to contribute towards a better balance in the revenue, which is currently over-reliant on television.”

Something needs to be done to improve revenue, as Genoa are facing a real battle to contain their staff costs. Although their wages were more or less unchanged from the previous year at €52 million in 2011, they have risen 87% (€24 million) since they returned to Serie A in 2007/08, while revenue has only grown by 32% (€12 million) in the same period. Genoa’s annual report explained that the significant increase in costs in 2010 was due to “an important investment in players, both youngsters with potential and more experienced internationals.”

Using the standard definition of revenue, i.e. excluding profit from player trading, the wages to turnover ratio has been a worrying 109% for the last two years, up from 86% in 2009. As sporting director Capozucca acknowledged, “Nobody is denying that errors have been made at the management level. We have spent more than we should.”

The wages to turnover ratio is the worst in Serie A, even higher than Milan, Inter and Juventus, who all hover around the 90% mark, and way above UEFA’s recommended upper limit of 70%. That said, Genoa’s wage bill of €52 million is considerably lower than the leading clubs: Milan (€193 million) and Inter (€190 million) pay almost four times as much as Genoa, while Juventus (€140 million) are nearly three times as much and Roma (€107 million) are more than €50 million higher. On the other hand, Genoa’s wage bill is about the same as Napoli and nearly twice as much as Udinese, who both qualified for the Champions League that season, so they have arguably under-performed.

As per the 2011 accounts, the €52.3 million wage bill included the following: player salaries €38.8 million, coaches and technical staff salaries €4.9 million (probably including sacked coaches on gardening leave), bonus payments €2 million, other staffs €3.8 million and social security €2.9 million.

"Kucka - Slovakian steel"

According to the annual salary survey published by La Gazzetta dello Sport, the wage bill for Genoa’s first team squad has been cut from €36 million last season to €29 million for the 2012/13 season, so it looks like Preziosi has finally decided enough is enough (though the newspaper figures come with a health warning regarding accuracy). The same report stated that only four players at Genoa earn more than €1 million a season: Borriello €1.4 million, Frey €1.3 million, Vargas €1.2 million and Tozser €1 million.

The other element of staff costs impacted by Genoa’s player trading strategy, especially the very large roster of players, is player amortisation. This is the way that a club’s accounts reflect transfer purchases, i.e. by not expensing the full cost immediately, but instead writing it off over the length of a player’s contract. As an example, defender Luca Antonelli was signed for €7.35 million on a 4½-year contract, but his transfer was only reflected in the profit and loss account via amortisation, booked evenly over the life of his contract, i.e. €1.6 million a year (€7.35 million divided by 4½ years).

Genoa’s player amortisation has surged from just €4 million in 2007 to €41 million in 2011, a figure only surpassed in Italy by Milan €52 million, Inter €50 million and Juventus €47 million. Perhaps a better comparative is Udinese, who have much the same revenue as Genoa and also focus on player trading, but their player amortisation is only €17 million. Admittedly, this is not a cash expense, but it does reflect the cash outlay on player purchases.

This has been reflected in ever-increasing liabilities, which have shot up from €35 million in 2007 to €285 million in 2011, including a 38% increase in the last 12 months alone. Furthermore, since 2007 financial debt has surged from €7 million to €109 million, comprising €22 million of bank debt with Banca Unicredit and Banca Cariga, €59 million owed to factoring companies (Banca Cariga and l’Istituto per il Credito Sportivo) based on future income plus €28 million of shareholder loans.

Of course, Genoa are not unique in facing growing debts in Italy, as the last football federation report noted, with the total liabilities in Serie A growing 40% since the 2007/08 season, notably bank debt, commercial debt and outstanding transfer fees.

As might be expected, the latter factor is significant for Genoa, who owed €98 million to other football clubs for transfer fees in 2011, though this is more than offset by the €119 million owed to Genoa by other clubs.

The balance sheet has net assets of €1 million, one of the weakest in Serie A, with net current liabilities rising from €119 million in 2010 to €153 million in 2011. Once again, it is dominated by the effects of player trading with the assets including an incredible €123 million for player registrations. To put that into context, it is not much less than Inter €143 million and Milan €136 million, but is much more than Juventus €71 million and Roma €37 million. The other experts of the “buy low, sell high” game, Udinese, are also much lower at €48 million.

Genoa’s assets also include €31 million for co-ownership, which is equivalent to half the value of players transferred in co-ownership deals. This includes three players sold to Milan (Stephen El Shaarawy €10 million, Matteo Chinellato €1.75 million and Tuncara Pele €0.95 million), Juraj Kucka to Inter (€8 million), Federico Rodriguez to Bologna (€3 million) and Francesco Acerbi to Chievo (€2 million).

Similarly, the liabilities include €25 million for co-ownership: four players bought from Milan (Alexander Merkel €5 million, Giacomo Beretta €4 million, Nicola Pasini €1.65 million and Mario Sampirisi €1 million), Emiliano Viviano from Inter €5 million and Andrea Esposito from Lecce €2.8 million.

Nevertheless, Preziosi has needed to provide a great deal of financial support to the club with the amount of money he has put in over the years approaching €70 million. He summed up his approach last year, “With me Genoa will always be in Serie A and if that is not enough for some fans, they should look for a Qatari sheikh. I will try to strengthen the squad, but I must also look at balancing the books, otherwise there is no future.”

"Antonelli - his name is Luca"

The president has hinted on many occasions that he might sell the club with rumours of a few possible buyers circulating in recent months, including the inevitable representatives from the Middle East and (more plausibly) the industrialist Vittorio Malacalza, with a potential takeover price of €40 million.

However, Preziosi has seemed reinvigorated this season. It had looked like he would take a step back when he hired Pietro Lo Monaco from Catania in the summer as general manager to handle all aspects of the club’s activities – with the important exception of transfers. However, after some disagreements over, you’ve guessed it, the transfer market, Lo Monaco exited stage left after just two months, leaving Preziosi as once again indisputably the main man.

A few months ago, Preziosi suggested that there would be less buying and selling of players in the future, “The fans will be happy, as there will no longer be such a whirlwind of trading and less (player) turnover.” Of course, that would require two things: (a) a leopard (that would be Preziosi) to change its spots; (b) a serious improvement in the club’s operating losses, meaning an increase in revenue or (more likely) a reduction in costs. Whether these are possible, only time will tell.

European qualification would obviously help, though only the Champions League would make a real difference to the club’s finances, but that now requires clubs to meet the criteria of UEFA’s new Financial Fair Play (FFP) regulations, which will ultimately exclude from European competitions clubs that continue to make losses.

However, Genoa look to be in pretty good shape, assuming that they continue to make good profits from player trading, as wealthy owners will be allowed to absorb aggregate losses (“acceptable deviations”) of €45 million, initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions.

To be more sustainable, they would need to deliver on their plans to grow commercial revenue, increase gate receipts from a refurbished (or new) stadium and lower their wage bill, which is out of proportion for a club of their size.

"Jankovic - spreads his wings"

The awful dilemma for Genoa is that the only thing that keeps the club relatively stable financially is their frenetic player trading, which is also the thing that hurts their chances of progressing on the pitch. Given their financial weaknesses, it is certainly understandable that they have chosen to go down this path, but the question is how do they find their way back to a more “normal” strategy and reduce their reliance on player sales (mainly to Milan)?

As sporting director Capozucca conceded this month, “We cannot think of developing a great Genoa team… when we don’t have the economic resources to do so.” That comment may be harsh, but, after looking at the club’s finances, it’s also very fair.

Wednesday, September 5, 2012

UEFA's FFP Regulations - Play To Win

So the transfer window is finally over after the customary twists and turns and, as always, has raised some intriguing questions. Perhaps most perplexing is the decision of previously big spending Manchester City to slam on the brakes (by their own recent standards) much to the disappointment of manager Roberto Mancini. On the fairly safe assumption that this is not due to Sheikh Mansour struggling for cash, the culprit is likely to be UEFA’s Financial Fair Play (FFP) regulations, a particularly delicate issue for the blue side of Manchester.

Given that looming threat, it is equally puzzling to see that Chelsea, who have had their own problems in reaching self-sustainability, have once again started to splash the cash, laying out £32 million on the supremely talented Eden Hazard and £25 million on the precocious Oscar – all in apparent blithe disregard of FFP. It therefore might be interesting to revisit these rules in an attempt to understand clubs’ behaviour in the new era of tighter financial regulation. Will they have a profound impact on the face of European football or merely act as a “speed bump”, as predicted by Premier League chief executive Richard Scudamore?

At its simplest FFP is trying to encourage clubs to live within their means, i.e. not spend more money than they earn. This is UEFA’s response to the poor financial health of many clubs, as evidenced by their most recent benchmarking report, which revealed that in 2010 over half of Europe’s top division clubs lost money with total losses surging 30% to €1.6 billion and debts standing at €8.4 billion. Many clubs have experienced liquidity shortfalls, leading to delayed payments to other clubs, employees and tax authorities.

"Eden Hazard - everything counts"

Gianni Infantino, UEFA’s general secretary, described this as “really the last wake-up call.” He added, “There was a great risk of crisis, of the bubble bursting. You can see from the losses and the debts that the situation is not healthy and we cannot go on like this. We had to do something and financial fair play is the way we designed it.” UEFA’s president, Michel Platini, is even more evangelical, considering FFP “vital for football’s future.”

The aim is to introduce more discipline within club finances, encourage responsible spending and investment and to curb the excesses and individual gambling on success, which has brought many clubs into financial difficulties.

While Infantino conceded that over-spending “may be sustainable for a single club, it may be considered to have a negative impact on the European club football system as a whole.” He explained, “The problem is that all clubs try to compete. A few of the biggest can afford it, but the vast majority cannot. They bid for players they cannot afford, then borrow or receive money from their owners, but this is not sustainable, because only a few can win.” In other words, the richest clubs drive up players’ salaries and transfer costs, forcing smaller clubs to over-stretch their budgets to compete.

We’ll explore the moral issues surrounding FFP later, but let’s first look at how it will work in practice. The first point to note is that clubs do not actually have to break-even in the early years of FFP to meet the target, thanks to the concept of “acceptable deviations”, which is one way UEFA has attempted to facilitate the move towards a sustainable model.

The first season that UEFA will start monitoring clubs is 2013/14, but this will take into account losses made in the two preceding years, namely 2011/12 and 2012/13. Wealthy owners will be allowed to absorb aggregate losses of €45 million (£36 million), initially over those two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million (£24 million) from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

This approach was explained by Infantino, “You can have losses for one year, because perhaps you had one bad season and you did not qualify (for Europe). So we are looking at losses over a multi-year basis. So one year you can make a loss, but not over three years.” This makes sense, though some clubs might simply make operating losses every year and get within the break-even target by hefty player sales in one year.

UEFA’s willingness to give the clubs every chance to meet FFP is also seen by the decision to have only two years in the first monitoring period, as this means that the annual average loss can be higher than future monitoring periods.

"Santi Cazorla - you don't have to spend big"

It is important to note that these are the acceptable deviations only if the owner is willing and able to put money in. If not (as is the case for many clubs), then they are significantly lower at just €5 million (£4 million). For the likes of Abramovich and Mansour, this will obviously not be an issue, but their ability to cover large deficits will be much reduced, as noted by Infantino, “I wouldn’t say the era is dead, but I would say what is over is the sugar daddy who can put hundreds of millions into the clubs. This will no longer be possible.”

Note that the rules do not actually force a club to become profitable. All that UEFA are saying is that clubs will not be allowed to compete in their competitions (Champions League and Europa League) if they do not break-even, but clubs making losses could continue to compete in their domestic league. The first sanctions for clubs not fulfilling the break-even requirement can be taken during the 2013/14 season and the first possible exclusions relating to break-even breaches would be for 2014/15 season.

OK, that’s the theory, so what’s the current state of play for the leading English clubs?

The last published accounts available are those for the 2010/11 season, in other words the one before the first season included in the FFP calculation. Nevertheless, this should still give us a strong indication of how close clubs are to meeting the FFP target.

Taking those clubs that qualified for Europe this season as our examples, four clubs made a pre-tax profit (Newcastle £33 million, Manchester United £30 million, Arsenal £15 million and Tottenham £402,000), while three clubs reported large losses (Manchester City £197 million, Chelsea £67 million and Liverpool £49 million). So, on first glance, those three face a severe challenge to get their finances in order to meet FFP.

However, there are two major adjustments that need to be made to a club’s statutory accounts to get to UEFA’s break-even template: (a) remove any exceptional items from 2010/11, as they should not re-occur (by definition); (b) exclude expenses incurred for “healthy” investment, such as improving the stadium, training facilities or academy, which would lead to losses in the short-term, but will be beneficial for the club in the long-term.

Let’s be very clear here: so-called exceptional costs will be included in the break-even calculation, but it is unlikely that they will be at similar high levels to 2010/11, when clubs could take the opportunity to clean house in the last accounts not to be included for FFP.

This was a significant factor for all three clubs that reported large losses with Liverpool booking £59 million (mainly writing-off stadium development expenses), Chelsea £42 million (largely management compensation paid to the sacked Carlo Ancelotti and the cost of buying-out André Villas-Boas from Porto) and Manchester City £34 million (mostly writing-down the remaining book value of certain players).

Excluding exceptional items, Liverpool would have reported a £10 million profit, while the losses at Chelsea and Manchester City would have come down to £26 million and £163 million respectively, so things would already look better for them in a “normal” year (though Chelsea’s manager pay-offs have been a fairly regular occurrence and the 2011/12 figures will again be hit, this time by AVB’s departure).

Next, there can be significant costs excluded for the FFP calculation, which is best illustrated by looking at Arsenal’s accounts. The costs of building the Emirates stadium are deducted, namely the depreciation charge on the tangible fixed assets of £12 million and possibly interest on the bonds of £14 million (though the latter is a bit questionable, now that the asset has been constructed). In addition, they will be able to deduct costs on youth and community development. Unfortunately, these are not separately identified in club accounts, but we can estimate £10 million and £2 million respectively for these activities. So, in total Arsenal’s relevant expenses for the FFP break-even calculation will be around £39 million lower than the published accounts.

However, Arsenal will presumably also have to exclude the £13 million profit from their property development business, as revenue and expenses from non-football activities are not relevant for FFP - unless it is allowed, because it is "in close proximity to the club's stadium". In our calculations, we shall adopt a conservative approach and exclude it.

Not all interest expenses can be excluded, e.g. Manchester United’s annual £40-45 million is taken into consideration, as their debt was incurred to help finance the Glazer’s leveraged takeover, as opposed to positive investment in the club. Incidentally, if the club ever pays dividends to their owners, these would also be included. Fortunately for United, these hefty interest payments are more than covered by their huge operating profits.

After all these adjustments, most of the English clubs look to be well placed for FFP. Even Chelsea’s FFP loss has come down to only £8 million, which is well within the acceptable deviations and helps explain why they felt that they could continue spending in this summer’s transfer window, especially as their income will be boosted by more revenue from their Champions League triumph.

The only club that looks vulnerable is Manchester City, whose loss for FFP is still a frightening £142 million. Indeed, the club’s sporting director Brian Marwood admitted, “We’ve got a huge amount of work ahead of us to make sure we are sustainable.” They will benefit from rapid revenue growth, both in terms of distributions from the Champions League and (especially) new commercial deals, but the chances are that their losses will still be well beyond UEFA’s limits in the short-term.

"Roberto Mancini - it's not about the money, money, money"

However, a safety net might be provided by yet another exemption in the FFP rules, whereby UEFA will not apply sanctions, if: (a) the club is reporting a positive trend in the annual break-even results; (b) the aggregate break-even deficit is only due to the annual 2011/12 break-even deficit, which is in itself due to player contracts signed before 1 June 2010 (thus excluding wages for the likes of Carlos Tevez, Gareth Barry, Vincent Kompany, Joleon Lescott and Kolo Toure). Even that might not be enough, though UEFA will surely take note of City’s £100 million investment in their academy, plus their relative restraint in the transfer market this summer.

The other point that should be highlighted is the potential importance of profits on player sales to a club’s accounts, e.g. Liverpool’s 2010/11 figures were boosted by £43 million (mainly Fernando Torres to Chelsea) and Newcastle’s by £37 million (largely Andy Carroll to Liverpool). Excluding these sales, Liverpool’s FFP result would actually have been a £20 million deficit, so it’s not quite plain sailing for them.

By the way, Arsenal’s FFP figures for 2011/12 and 2012/13 should be hugely positive, thanks to major profitable sales of Cesc Fabregas, Samir Nasri, Robin Van Persie and Alex Song. This has been a key element of Arsenal’s self-sustaining strategy in recent years.

Of course, Manchester City are by no means the only major club that face a major challenge to meet FFP (though you might think so from the media) with the leading Italian clubs also having much to do, especially Milan, Inter and Juventus, whose last reported losses averaged more than £70 million (before FFP adjustments). Indeed, Milan vice-president Adriano Galliani admitted, “FFP hurts Italy. There will no longer be patrons that can intervene. Until now people like Berlusconi and Moratti would be able to support us, but with the fair play it will no longer be possible.”

This helps explain much of this summer’s activity in Serie A, especially at Milan, who have effectively been forced to sell Zlatan Ibrahimovic and Thiago Silva to the nouveaux riches at Paris Saint-Germain, while spending very little on replacements. Clearly, there are other factors here, not least the economic crisis in Italy and Fininvest’s own financial difficulties, but FFP certainly played a part in this strategy. In addition, it provides a rationale for Inter selling a 15% stake in the club to China Railway for €75 million, as this will help fund a new stadium with these costs being excluded for the purposes of FFP.

"Robin Van Persie - jumping someone else's train"

At the other side of the spectrum, clubs like Real Madrid and Bayern Munich will have absolutely no problems with FFP, as they are consistently profitable year-after-year. Bayern have been well-known supporters of FFP, but even Jose Mourinho has commented on the likely impact, “The club produces its money by itself, so Real Madrid will be in a much better position when FFP comes.” Barcelona’s figures are a bit more up and down, but they recently announced record profits of €49 million for 2011/12, so they’re also looking good.

The stated objective of UEFA’s regulations is, “to introduce more discipline and rationality in club finances and to decrease pressure on players’ salaries and transfer fees” and it is true that there has been a general reduction in transfer spending in European football, particularly Italy and Spain.

However, the £490 million spent by Premier League clubs on transfers in this summer is actually slightly higher than last summer and second only to the £500 million record outlay in 2008. Of course, it is arguable that this expenditure would have been higher without the presence of FFP, but what does seem clear is that some clubs have opted to try to increase revenue rather than cut costs – a classic example of the economic law of unintended consequences.

Thus, most leading clubs have managed to substantially grow their revenue since UEFA approved the FFP concept in September 2009, e.g. the revenue at Barcelona, Real Madrid and Manchester United rose £76 million, £71 million and £53 million respectively, though the 76% increase in Manchester City’s revenue from £87 million to £153 million is perhaps even more striking (with much more to come).

Let’s look at how clubs have grown (and will hope to grow) their revenue streams in future.

The main driver of higher revenue in England has been the Premier League television deal. For an individual club, this is partly down to its own success on the pitch, but is far more due to the ever-increasing amounts negotiated centrally.

This is because the distribution methodology is fairly equitable with the top club (Manchester City) receiving around £60.6 million, while the fourth club (Tottenham) gets £57.4 million, just £3.2 million less. You will see that the lion’s share of the money is allocated equally to each club, meaning 50% of the domestic rights (£13.8 million in 2011/12) and 100% of the overseas rights (£18.8 million), with merit payments (25% of domestic rights) only worth £757,000 per place in the league table and facility fees (25% of domestic rights) fairly similar, based on the number of times each club is broadcast live.

What has really helped clubs’ top line is the Premier League’s ability to secure top dollar deals for its TV rights, as once again shown with the amazing £3 billion Premier League deal for domestic rights for the 2014-16 three-year cycle, representing an increase of 64%. If we assume (conservatively) that overseas rights rise by 40%, that would mean that the total annual TV deal from 2014 would be worth £1.7 billion compared to the current £1.1 billion.

Under current allocation rules, that would imply an additional £30 million revenue a season for the leading English clubs, not only strengthening their ability to compete with overseas clubs, especially Madrid and Barcelona, who benefit from massive individual TV deals, but also providing a significant boost in their FFP challenge in the future – assuming that they don’t simply pass all the extra money into the players’ bank accounts.

With revenue from the Premier League much of a muchness for the leading English clubs, the importance of finishing in the top four and qualifying for the Champions League is very evident. Although it may not be a huge percentage of a club’s total revenue, it is clearly a significant competitive advantage.

The Europa League is small compensation financially, as can be seen by the sums received in last year’s campaign, where Stoke City’s €3.5 million (the highest for an English club) was considerably lower than the sums received by the Champions League entrants: Chelsea €60 million, Manchester United €35 million, Arsenal €28 million and Manchester City €27 million.

This is the great dilemma for clubs like Manchester City. For their commercial strategy to work, they absolutely have to be playing in the Champions League, but the expenditure required to get there places them at great risk of failing UEFA’s regulations. It’s a vicious circle, made worse by the possibility of exclusion from Europe’s flagship tournament, which would then make it even more difficult to meet the FFP target, as the club would lose at least £25 million revenue.

In terms of match day revenue, here are a number of ways of increasing revenue, the best of which is to be successful, which should result in more games played, due to cup runs, Champions League, etc. A somewhat less palatable tool has been for clubs to raise ticket prices, though the current economic climate means that this has slowed right down this season with prices frozen at Arsenal, Chelsea, Liverpool and Manchester United. Championship side Derby County has even introduced demand based pricing services for single match tickets for the 2012/13 season.

Of course, a real quantum leap in match day revenue can only be achieved via stadium expansion or building a new stadium. This can be very clearly seen with Arsenal’s revenue rising by nearly £50 million a season since they moved from Highbury to the Emirates. It’s not just the higher capacity, but also many more premium customers and indeed higher prices. The Glazers’ willingness to raise ticket prices plus the completion of the upper quadrants at Old Trafford (and, yes, more of the “prawn sandwich” brigade) has also helped Manchester United to substantially increase their match day revenue to well over £100 million.

This has resulted in United and Arsenal both earning much more than their peers per game: £3.7 million and £3.3 million compared to Chelsea £2.5 million, Tottenham £1.6 million and Liverpool £1.5 million. This explains why all of those clubs have been looking at stadium moves for some time, though their struggles have highlighted how difficult this is. On the bright side, if they found the right site, any costs associated with a move could be excluded for FFP – though there would then be the small matter of actually finding the money to finance the project.

Another interesting factor here is that the FFP regulations explicitly include membership fees within relevant income, which is a major benefit to clubs like Barcelona and Real Madrid, who take in around £20 million a year from their members. Arguably, this is a form of capital injection from the club’s owners, so should not be treated as relevant revenue, but UEFA have decided that this is different from one large payment from a wealthy owner.

Traditionally English clubs have not focused much on the commercial side of operations, as they have been able to sit back and rely on the TV money, but that has been changing. Many have made great strides recently, most notably Manchester United who have broken the £100 million barrier, but they are still left in the shade by their continental peers, especially Bayern Munich £161 million, Real Madrid £156 million and Barcelona £141 million.

Nevertheless, there has been a significant increase in the value of shirt sponsorship deals in England with Liverpool and Manchester City both going from £7.5 million deals to £20 million with Standard Chartered and Etihad respectively. Tottenham have introduced an innovative split of their shirt sponsorship between software company Autonomy (now Aurasma, one of their products) for the Premier League and asset management group Investec for all cup competitions worth a total of £12.5 million, much better than the previous £8.5 million deal with Mansion.

However, United are still undoubtedly the daddy when it comes to sponsorship deals. They switched to Aon from AIG in 2010/11, increasing the annual value from £14 million to £20 million, but have recently announced a truly spectacular deal with Chevrolet. Not only will this rise to an astonishing £45 million ($70 million) in 2014/15, but the sponsor will also actually pay them £11 million in each of the previous two seasons – while Aon are still the sponsors. Amazing stuff, but this is the club that has racked up numerous secondary sponsors and persuaded DHL to pay £10 million a season to sponsor their training kit.

Even the noble Barcelona have been forced to take shirt sponsorship, switching from the unpaid UNICEF to a very lucrative £24 million a year with the Qatar Foundation. Other clubs have also been keen to get in on the act with Newcastle’s £10 million Virgin Money deal being £7.5 million higher than Northern Rock and Sunderland’s barely credible £20 million Invest in Africa deal being just the £19 million more than the previous Tombola deal.

All of this is leaving Arsenal way behind the rest with a measly £5.5 million Emirates deal, a legacy of a deal that helped finance the stadium construction. There will no doubt be a major increase in 2014 when the deal runs out, but you can’t help thinking that the club’s commercial team should have done more, especially when you compare their tiny revenue growth to United’s.

"John W Henry - FFP's No. 1 fan?"

Similarly, clubs have done well in improving their kit supplier deals, e.g. Liverpool’s £25 million kit deal with Warrior is more than twice the amount received from Adidas and is about the same level as Manchester United, Real Madrid and Barcelona. United themselves are in discussions to extend their deal with Nike, looking for an increase of at least £10 million a season.

Merchandising, retail, hospitality and overseas tours can all swell the coffers, but the Holy Grail for football clubs is stadium naming rights. The only club that has (reportedly) inked such a deal for a meaningful sum is Manchester City, as an element of their long-term Etihad sponsorship, while clubs like Chelsea have to date failed to secure a deal, despite many years of searching.

Many have expressed scepticism over City’s Etihad deal, including Liverpool’s owner John W Henry, who asked, “How much was the losing bid?” and Arsenal manager Arsene Wenger, “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.”

UEFA tackle such deals by assessing whether they represent “fair value” and then deducting any excess (not the entire agreement) from the club’s income for the purposes of the FFP break-even calculation. Given the rate of change of such sponsorship deals, my view is that they are unlikely to exclude this deal.

"Arsene Wenger makes his point"

If they do, the lawyers will be out in force, asking UEFA to also look at other clubs, such as Chelsea’s sponsorship deal with Russian energy company Gazprom, who bought Roman Abramovich’s stake in Sibneft in 2005. Questions could even be asked of squeaky-clean Bayern Munich, where two of the most prominent sponsors, Adidas and Audi, each own around 10% of the club.

Clearly, any egregious attempts to get round the regulations, such as an owner buying £200 million of replica shirts or paying £50 million for a super-VIP executive box, will be thrown out, but, as we have seen, there is still scope for some serious revenue improvement in commercial operations.

There have been some interesting developments that clubs may use to boost revenue, such as Real Madrid’s $1 billion resort island in the United Arab Emirates and Trabzonspor’s plan to build a hydroelectric power station. On the face of it, any revenue from such activities would have to be excluded from FFP, as “it is clearly and exclusively not related to the activities, locations or brand of the football club.” However, the same clause does confusingly allow the inclusion of revenue from non-football operations if those operations are “clearly using the name/brand of a club as part of their operations” with no reference to location. Another one for the lawyers.

UEFA’s hope, of course, was that FFP would act as a soft wage cap, though there has been little sign of this up to now at the leading English clubs, especially Manchester City where wages have surged from £36 million to £174 million in just four years, resulting in a wages to turnover ratio of 114%. As well as recruiting new players, the wage bill is under pressure from better deals for current players (to avoid sales on a Bosman) and bonus payments (which can sometimes end up costing more than the additional revenue from success on the pitch).

Some clubs have spent a lot of time trying to reduce their wage bill by offloading deadwood, but this is easier said than done, given the high wages they tend to be on, leading to cut-price sales or elaborate loan deals where much of the wages are subsidised (raising more questions in terms of FFP).

Although English clubs have high wage bills, they are not actually the highest in Europe, an “honour” that belongs to Barcelona and Real Madrid. A root cause of the Italian clubs’ problems with FFP can be seen with the bloated wage bills at Milan and Inter, hence the release of so many experienced (expensive) players in the last two seasons. However, it is difficult to compare across countries because of differing tax rates, which mean that clubs in England and Italy have to pay higher gross salaries for their players to receive the same net salary.

Given the prevalence of third party ownership in many countries, there is a risk that a club’s overall wage bill could be massaged by a sponsor paying part of a player’s package. This is addressed in the FFP guidelines, but it might not be totally straightforward for UEFA to identify any such arrangements.

The impact of transfer fees on a club’s accounts is not easy to understand for many non-accountants, as the full expense is not booked immediately, but instead is written-down (amortised) evenly over the length of the player’s contract. The reasoning is that the player is an asset, but could potentially leave for nothing at the end of his contract on a Bosman, when the value would be zero. So, if a club like Chelsea signs a £40 million player on a four-year contract, the annual amortisation is £10 million, i.e. £40 million divided by four years. Incidentally, the accounting treatment is the same regardless of when the cash payment is made (all up front or in stages).

In this way, a club’s accounts will not show the full extent of major transfer activity immediately, though it will be reflected in growing player amortisation. This can be seen very clearly with Chelsea, where amortisation rocketed from £21 million to a peak of £83 million after Abramovich’s initial burst of expenditure, but then fell to £40 million after the taps were closed. Manchester City’s 2010/11 amortisation was £84 million, but they would hope that this would fall after their recent parsimony.

It stands to reason that wealthier clubs can reduce their annual amortisation by signing players on longer contracts, but this can also be achieved by extending player contracts. For example, if our £40 million player were to extend his contract after the first two years of his initial four-year contract by a further two years, the remaining £20 million valuation in the books would then be amortised by the new four years remaining (original two plus extended two), leading to annual amortisation falling from £10 million to £5 million.

The impact of third party ownership should not be underestimated here, as it enables clubs in many countries, notably Portugal and Spain, to acquire players at a fraction of their total cost. This places Premier League (and Ligue 1) clubs at a disadvantage, as they have outlawed this practice, so they have lobbied UEFA to adjust the FFP rules to take this into consideration. Apparently, they have agreed, but it is not clear how this will work in practice.

Returning to the intricacies of player trading, it is also important to note how clubs report profit on player sales, which is essentially sales proceeds less any remaining value in the accounts. This means that a club can potentially book an accounting profit on sale even when the cash value of the sale is less than the original price paid, e.g. if our £40 million player is sold after three years for £15 million, then the cash loss would be £25 million, but the accounting profit would be £5 million, as the club has already booked £30 million of amortisation.

Up to now, this has surely only interested accountants, but it’s become very relevant for FFP. Furthermore, any players developed through a club’s academy have zero value in the accounts, so any sales proceeds represent pure profit.

There are other angles addressed by the new regulations. For example, many clubs these days have an intricate inter-company structure and there were fears that a club might argue that the football club itself was profitable, while large expenses such as interest payments were paid out of a different company. Clearly, that does not make sense to any reasonable man and UEFA have caught that one, “If the licence applicant is controlled by a parent or has control of any subsidiary, then consolidated financial statements must be prepared and submitted to the licensor as if the entities were a single company.”

"Our finances are special"

On the other hand, the exclusion of non-football operations might benefit clubs like Barcelona, as they would presumably deduct the losses made on other sports, such as basketball, handball and hockey, which amounted to around €40 million in 2010/11.

Clearly, the introduction of FFP will not be without difficulties with Platini himself admitting, “It is not easy, because we have different financial system in England, France and Germany.” Just one example is the £167 million paid by the Premier League in parachute payments, solidarity payments and football development, which might be treated as £8 million of (allowable) charitable deductions for each club if they were not top-sliced from central payments.

Although the FFP regulations explicitly state that adverse movements in exchange rates will be taken into account, it is not explained how this will work. This is important for English clubs, as the weakening of the Euro means that any Sterling losses will be higher in Euro terms than when the rules were first drafted.

While the majority of clubs are in favour of FFP’s attempts to tackle football’s economic woes, there is a concern that far from making football fairer, all this initiative will achieve is to make permanent the domination of the existing big clubs: survival of the fattest, if you will. The argument goes that those clubs that already enjoy large revenue (like Real Madrid, Barcelona, Manchester United and Bayern Munich) will continue to flourish, while any challengers will no longer be able to spend big in a bid to catch up.

In almost any business, you have to invest before the revenues start flowing and in football this means brining in new players and paying high wages in a bid to reach the lucrative Champions League. Critics have asked whether there really is any difference between contributions from wealthy owners and corporate sponsors. This is one of the reasons why the Premier League has reservations with chief executive Richard Scudamore saying that he was opposed to any limits being set on the ability of owners such as Sheikh Mansour to invest money in their clubs.

In any case, UEFA have now announced a sliding scale of sanctions for clubs that breach FFP rules, which works like this: a warning, fine, points deduction, withholding of prize money, preventing clubs from registering players for UEFA competitions and ultimately a ban. This implies that a ban is the last resort, but UEFA has recently banned two Turkish clubs, Bursaspor and Besiktas (suspended), AEK Athens and the Hungarian club Gyori for FFP breaches. These decisions were backed by the Court of Arbitration for Sport (CAS).

"Qu'est-ce que c'est, ce FFP?"

UEFA were also given some comfort by the European Commission’s confirmation that there is consistency between FFP and EU State Aid policy, though this has not been fully tested in the courts. There is still plenty of scope for a powerful club to pursue a competition law case, if it was banned

Some have questioned whether the regulators will have the bite to go with their bark. Expelling teams from the Champions League works fine on paper, but would UEFA really risk damaging their main cash cow? If, for example, they banned Manchester City, Milan, Inter, PSG and Juventus, they would risk killing the goose that lays their golden egg and increase the prospects of a European Super League.

Indeed, key proponents of FFP have expressed doubts over UEFA’s willingness to act, such as John W Henry, “The question remains as to how serious UEFA is regarding this. It appears that there are a couple of large English clubs that are sending a strong message that they aren’t taking them seriously.” Even Arsene Wenger admitted, “UEFA want to create a situation where clubs with deficits cannot play in the Champions League, but I question whether they will be able to force it through.”

"Hulk hears of an incredible deal"

That said, UEFA’s credibility would be severely compromised if a major club that was in breach of the rules was not effectively punished. Listening to public pronouncements, they have consistently said that this will not be the case. Only last week, Platini was unequivocal, “We are never going back on Financial Fair Play. I want the clubs to spend the money they have, not the money they don’t have. We will be enforcing these rules.”

It’s certainly an interesting challenge for UEFA, not least with the arrival on the scene of big-spending Paris Saint-Germain and Zenit St Petersburg (who this week splashed £64 million on the Brazilian striker Hulk and the Belgian midfielder Axel Witsel), but, as we have seen, they have cleverly built a fair bit of leeway into their regulations (and sanctions), so the vast majority of clubs should be just fine with FFP, particularly those in England.
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