Monday, August 12, 2013

Arsenal - Money Don't Matter 2 Night

Arsenal’s transfer strategy this summer has left the vast majority of their fans perplexed. While the seemingly interminable Luis Suarez saga has grabbed most of the attention, allied with the failure to secure Gonzalo Higuain when the deal appeared done and dusted, the stark reality is that Arsenal have not bought anybody yet, let alone the marquee signing that the supporters crave. Yes, they have acquired the services of French U20 international, Yaya Sanogo, but he arrived on a free transfer from Auxerre in the French second division..

At the same time, there have been many departures from the Emirates, including the likes of Gervinho, Mannone, Arshavin, Djourou, Coquelin, Santos and Chamakh plus a veritable plethora of youth team players. Although most of these individuals did not feature a great deal in the first team last year, leading to the unfortunate “deadwood” label, it’s still a fair amount of experience for the squad to lose with no replacements coming in.

In fairness, Arsenal’s excellent run in the latter stages of last season was pretty encouraging, though the final Champions League spot was only secured in a nerve-jangling final game of the season, when Arsenal beat Newcastle 1-0 away from home (to the apparent astonishment of Lord Sugar, who, quite brilliantly, imagined a non-existent equalising goal from the Toon Army).

"I wanna dance with Koscielny"

Although Arsenal performed creditably, the fact is that they never threatened a challenge in the major competitions and were dumped unceremoniously out of the domestic cups by lower league opposition. Therefore, the need to strengthen was obvious to all and sundry. A couple of injuries to key players would highlight the threadbare nature of the squad, which would then have to rely on youngsters, who may well be talented, but are untested in the heat of battle, pre-season friendlies not being the best indicator.

As INXS once said, it’s enough to mystify me, especially given the bullish comments from Ivan Gazidis in June. Ah, those heady days of (early) summer, when Arsenal’s chief executive boasted, “This year we are beginning to see something we have been planning for some time, which is the escalation in our financial firepower.” He continued, “We have a certain amount of money which we’ve held in reserve. We also have new revenue streams coming on board and all of these things mean we can do some things which would excite you.”

But specifically what could this mean? For example, could Arsenal now pay a £25 million transfer fees and wages of £200,000 for one world class player? Gazidis pulled no punches, “Of course we could do that. We could do more than that.”

And he’s not kidding. When you look at the club’s cash balances – there in black and white in the accounts for all to see – Arsenal’s spending capacity is evident.

As at the end of the 2011/12 season (the latest year when football clubs have published their accounts), Arsenal had an incredible £154 million of cash, which is significantly higher than any of their competitors with Manchester United the closest with £71 million (less than half the Gunners’ cash pile). An even more amazing statistic is that Arsenal have almost as much cash as the rest of the Premier League’s other 19 clubs combined (£181 million).

The story is little different on the continent, where Europe’s leading clubs also retain less cash than Arsenal, preferring to invest most of their available funds into the squad. As might be expected, the financially astute Bayern Munich had £95 million, while, perhaps more surprisingly, Real Madrid had almost as much with £94 million – though both these clubs still held around £60 million less than Arsenal. Barcelona had much less cash at £31 million, while clubs with smaller revenue generation, like Borussia Dortmund and Juventus, were barely in the black with £4 million and £1 million respectively.

Although the club has only really started beating its chest about its financial strength this year, it has been obvious for a while that the club could have spent big. As far as back as 2005, former chief executive Keith Edelman observed, “There are sufficient funds available to the manger for transfers”, before upping the ante a couple of years later, “We have got plenty of financial firepower to make the transfers Arsène wants to make. We had over £70 million of cash at the end of the year and if Arsène wants to spend that money, we will make it available.” Sound familiar?

Gazidis has been singing from the same song sheet as his predecessor ever since his arrival, claiming that “The resources are there. We’ve got a substantial amount of money that we can invest”, before his now infamous comment about the club keeping its “powder dry” for future player investment. Although he made this sound like some sort of grand plan from the club, its cunning appeared to be of the variety that would only have been recognisable to those who appreciated Baldrick’s schemes in Blackadder.

There has been a steady upward trend over the last few years in Arsenal’s cash balances, which have grown from £74 million in 2007 to £154 million in 2012. The figure of £123 million announced at the Interims in November 2012 was lower, but this merely reflects the seasonal nature of cash flows during the year, e.g. the May balance will always be high following the influx of money from season ticket renewals, while November is lower as annual expenses, notably wages, are paid. However, the rising trend can be seen by the fact that November 2012 figure was £8 million higher than the previous year.

However, this does highlight the fact that not all of Arsenal’s cash balance is available for transfers. It’s not quite that simple, due to many factors, including the need to pay those pesky expenses.

Of course, other money will also flow into the club during the season, such as TV distributions and merchandise sales, though not all of the reported revenue is necessarily converted into cash, e.g. all of the £55 million from Nike’s initial seven-year kit supply deal from 2004 to 2011 had been paid by July 2006 (to help with financing the construction of the Emirates Stadium).

The debt incurred for the new stadium continues to have an influence over Arsenal’s strategy. Although Gary Neville, amongst others, may believe that this is no longer an issue, it is clearly a factor with Arsenal’s gross debt standing at £253 million at the end of 2011/12, comprising long-term bonds that represent the “mortgage” on the stadium (£225 million) and the debentures held by supporters (£27 million). In fact, only Manchester United have a higher debt in the Premier League as a result of the Glazer family’s highly leveraged takeover.

Although this has come down significantly from the £411 million peak in 2008, it is still a heavy burden, requiring an annual payment of around £19 million, covering interest and repayment of the principal.

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

Importantly, as part of the bond agreements, Arsenal have to maintain a debt servicing reserve, which was £24 million in the Interims. In plain English, this portion of the cash balance is not available to spend on new players. Similarly, Arsenal also have to maintain a small reserve that is restricted to use for property development, but that is only £1 million.

Speaking of property development, Arsenal’s interims mentioned that they would be getting an additional £20 million of cash from Queensland Road, though this would be “receivable in instalments over a two year period.” There should also be more money from the two remaining “smaller projects” on Hornsey Road and Holloway Road, which could be worth another £20 million (estimate), depending on planning permission.

"We have a rather large German"

The amount of cash available is also influenced by outstanding transfer fees, though this is not a major issue for Arsenal at the moment: in the Interims Arsenal owed other clubs £31.6 million, but were in turn owed £31.4 million by other clubs, so this basically netted out.

In addition, the club has so-called contingent liabilities, where payments are made to a player’s former club based on certain conditions being met, e.g. number of first team appearances, trophies won, international caps, etc. These amounted to £7.8 million in the Interims, but are by no means certain to be paid – that’s why they are described as “contingent”.

Finally, at least in terms of transfer activity, we would have to add in the net funds from the last two windows, but again this is not a particularly large factor. This summer, Arsenal have raised around £10 million from the sales of Gervinho to Roma and Vito Mannone to Sunderland, but they paid out £8 million to Malaga in January for Nacho Monreal, producing a positive net impact of £2 million.

The new £150 million commercial deal with Emirates (shirt sponsorship and stadium naming rights) will have an impact, even though it does not commence until 2014, with talk of up to £30 million being frontloaded. Indeed, Gazidis explicitly stated, “We’ll have additional money this financial year, which will be available to invest in the summer.”

He added, “The deal is all about football, it’s all about giving us the resources to be able to invest in what we put on to the field for our fans.” To which, the response that comes to mind is “actions speak louder than words”.

Gazidis also said, “Our revenues will grow to put us into the top five revenue clubs in the world”, which was somewhat confusing, given that Arsenal have been fifth highest in the Deloitte Money League in four out of the last six years, ever since the move to the Emirates stadium. They were overtaken by Chelsea last season, mainly due to their fellow Londoners’ Champions League triumph, i.e. a direct result of success on the pitch.

In truth, Arsenal have benefited from higher revenues than the vast majority of other clubs for many years. Their £235 million turnover was the third highest in England in 2011/12 and is likely to rise to more than £300 million in two years time. The aforementioned Emirates sponsorship is more than £20 million higher than the current deal, as is the new Puma kit 2014 supply deal (widely reported, though not yet officially confirmed), while the astounding new Premier League 2013/14 TV deal should generate at least £30 million more for a top four club.

In addition, most transfers are funded by stage payments, so Arsenal would not necessarily need to find all the cash upfront – though other clubs, aware of the North Londoners’ resources, may insist on most being paid immediately. In that sense, Arsenal are victims of their own financial success.

Furthermore, Arsenal could always “speculate to accumulate” by taking on some additional short-term borrowing, which should be no problem, given the strength of the balance sheet and future cash flows. I’m not saying that this would be advisable (or even necessary), but it would be a possibility.

So, what is the magic figure Arsenal have as a transfer fund? Given all of the variables described above, it's safest to quote David Bowie, "It ain't easy", when trying to pin this down, but the oft-quoted £70 million is a reasonable estimate. If funds from property development and future commercial deals are also made available, then it could be as high as £100 million.

Arsenal have long been considered the poster child for financial success, consistently reporting large profits. Not only did they register the highest profit before tax (£37 million) in the Premier League in 2011/12, but they have also made an incredible £190 million of profits in the last five years. In fact, the last time that the club made a loss was a decade ago in 2002. This is virtually unparalleled in the cutthroat world of professional football.

However, the headline figures do not tell the whole story, as much of this excellent performance has been down to profits from player sales (e.g. £65 million in 2011/12) and property development (e.g. £13 million in 2010/11). Excluding those once-off factors would mean that Arsenal actually made losses in the last two years: £4 million in 2010/11 and an apparently worrying £31 million in 2011/12.

In fact, the operating profit from the football business has been steadily declining since 2009 with the club actually reporting an operating loss of £16 million last season.

So that explains Arsenal’s reluctance to splash the cash?

Not so fast, big boy, there’s another layer of complexity to add here, as the accounting profit includes non-cash items, such as player amortisation, depreciation and impairment of player values. Without wishing to get overly technical, we need to add these back to the operating profit and then make an adjustment for working capital movements to get the cash profit.

Once we do that, Arsenal’s cash flow from operating activities was an impressive £28 million in 2011/12, a figure that was only bettered by two clubs in the Premier League. The problem is that Arsenal have spent very little of this on improving their squad: that season the net expenditure on player purchases was just £2 million – with only four clubs spending less than the Gunners.

Most of the available funds instead went towards financing the Emirates Stadium: £13 interest and £6 million on debt repayments. A further £9 million was invested in fixed assets for enhancements to Club Level, more “Arsenalisation” of the stadium and new medical facilities and pitches at the London Colney training ground.

Since 2007 Arsenal have generated a very healthy £376 million operating cash flow. Although they had a small negative cash flow of £7 million in 2011/12, this followed many years of positive cash flow, e.g. 2010/11 £33 million, 2009/10 £28 million, 2008/09 £6 million, 2007/08 £19 million and 2006/07 £38 million.

However, it’s instructive how Arsenal have used this spare cash. They have spent £71 million on capital expenditure, £110 million on loan interest and £64 million on net debt repayments. Astonishingly, only 1% (one per cent) of the available cash flow has been spent in the transfer market. Although Arsenal have laid out a fair bit of cash on buying players in the last couple of seasons (over £100 million), this has been more than compensated by big money sales, leaving a negative net spend.

The other notable “use” of cash in that period is, er, nothing, as cash balances have risen by £118 million.

That begs the rather obvious question: why not spend the cash? There’s no one magic answer to this, but let’s take a look at the usual arguments:

(a) Impact of new signings on the wage bill

One point that people often raise when discussing the transfer fund is that it would also have to fund a new signing’s wages, so if the club bought a player for £25 million on a five-year contract at £100,000 a week, that would represent a commitment of £50 million. That is undoubtedly true, but it is a little disingenuous, as it ignores the fact that this could be at least partially offset by the departure of existing players. This is particularly true this summer, when Arsenal have offloaded so many players.

There is no doubt that the rising wage bill has been a cause for concern at Arsenal. Since 2009 wages have grown by 38% to £143 million, while revenue has only increased by 5% in the same period – though this is where the commercial department could be justifiably criticised for their failure to add secondary sponsors. The wage bill will have increased again in 2012/13 following revised contracts for the “Brit Pack” (Wilshere, Walcott, Gibbs, Oxlade-Chamberlain, Ramsey and Jenkinson) to over £150 million.

On the other hand, there will be plenty of room going forward, as the growth in revenue to £300 million implies a sustainable wage bill of £180 million (representing a safe 60% wages to turnover ratio). To place that into context, Chelsea’s current wage bill is £176 million, while Manchester United’s is £162 million, leaving only Manchester City out of sight at £202 million.

However, these clubs might be impacted by the new Premier League regulations, which have restricted the amount of money clubs can spend from the new TV deal on wages. Specifically, clubs whose total wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years. However this restriction only applies to the income from TV money, so Arsenal’s additional money from the new sponsorship deals can still be spent on wages.

(b) Cover a potential failure to qualify for the Champions League

Many have speculated that Arsenal may be holding cash back as a “rainy day” fund to cover a revenue shortfall from any failure to qualify for the Champions League. This has been a lucrative source of funds for Arsenal, who earned €31 million in 2012/13 from the TV distribution alone, but Gazidis himself has quashed this theory many times, most recently in June, “The Champions League qualifier in August won’t affect our plans. It’s never been an issue when we’ve discussed with players before and it doesn’t affect our planning.”

(c) Players not available

One of the most fundamental laws of economics is the one relating to supply and demand and that is relevant here. In other words, it does not matter if you have money, if there aren’t any quality players to buy. Gazidis referred to this in his June interview, “It doesn't only require our decision, it requires the player’s decision and other clubs' decisions, so there is a market that has to move not just dependant on one party, but dependant on a number of parties and many of those parties have been in a period of uncertainty.”

That’s perfectly valid, but has not prevented other clubs doing business, e.g. Manchester City have already bought Stevan Jovetic, Fernandinho, Jesus Navas and Alvaro Negredo, while Spurs have acquired Paulinho, Roberto Soldado and Nacer Chadli.

Less justifiable was Wenger’s complaint that “Some clubs acted very early so the choices were reduced”, as if the transfer window were some kind of handicap race and those clubs had been given a head start.

"Cavani - the price is not right"

(d) Valuations are too high

Nobody wants to over-pay, but this is where Arsenal’s cash-rich position should work to their advantage. There’s no point in having more money than most other clubs if you don’t make it work for you. As an analogy, Arsenal may not have quite enough funds to buy in Harrods, but they could comfortably afford to shop in Waitrose, instead of wasting time haggling in Aldi.

Some have argued that Gazidis did Arsenal no favours with his “loadsamoney” speech, but, while this might have weakened the club’s negotiating stance, it is difficult to believe that executives at other clubs were not already aware of the Gunners’ financial position.

"Olivier's Army"

(e) Other clubs willing to spend more

Even if Arsenal are well positioned, some clubs still have more cash to spend. As Gazidis said, “I can’t compete with somebody who has an unlimited budget.” This echoed the thoughts of former chairman Peter Hill-Wood, who lamented, “At a certain level, we can’t compete.”

Fair enough, that’s certainly true, especially with the arrival of Paris Saint-Germain and Monaco on the scene – “more competition coming from France”, as Wenger drily observed. However, that still does not explain why the likes of Manchester United, Liverpool and Tottenham have outspent Arsenal in recent years.

(f) Implications for Financial Fair Play

Under FFFP, UEFA will look at aggregate losses, initially over two years for the first monitoring period in 2013/14 and then over three years, so Arsenal’s recent record of large profits would hold them in good stead, even if they were to temporarily slip into losses before the new revenue streams came on board. In addition, certain costs such as depreciation on fixed assets, stadium investment and youth development can be excluded from the break-even calculation, so this should not be a problem.

In fact, Arsenal hope that UEFA’s FFP regulations will reward their prudent approach, as these aim to force clubs to live within their means, thus restricting the ability of benefactor-funded clubs to spend big on players. Indeed, Gazidis stated that the advent of FFP meant that “football is moving powerfully in our direction.”

"You make me feel (mighty Monreal)"

(g) Lack of a proper transfer structure

As Monaco’s former chief executive, Tor-Kristian Karlsen, noted, when commenting on Manchester City and Tottenham’s transfer activity this summer: “I for one doubt it's a coincidence that the only two teams in the Premier League with genuine sporting directors (or technical directors or directors of football, if you like) are the ones who have appeared the most prepared, structured and with clear strategies in their work in the summer transfer market.”

If there is a modern, coherent transfer structure in place at Arsenal, then it seems remarkably well hidden. There may well be a great deal of activity behind the scenes, but the results speak for themselves.

(h) Will be used to pay dividends to the owner

Although the club’s owner, Stan Kroenke, has no record of taking dividends from his numerous sports clubs, there is still suspicion among some sections of the support that his game plan for Arsenal includes this possibility. When Kroenke was asked at the 2012 Annual General Meeting whether he intended to take dividends out of Arsenal, his response was hardly unequivocal, as he merely said that it was a decision for the board.

He added, “I have never said in any meeting that money wasn't available” and “our goal is to win trophies”, but the feeling remains that he is content with the status quo of fourth place in the Premier League, while topping the unofficial table for cash balances.

"Kroenke - the sound of silence"

(i) Makes it easier to sell the club

Having such a high cash balance obviously strengthens the balance sheet, but the club would arguably fetch a bigger price if it were successful. Moreover, most investors in football teams do not appear to be greatly interested in a financial return. Kroenke himself has said, “The reason I am involved in sport is to win. It's what it's all about. Everything else is a footnote.”

Indeed, if we look at this purely from the financial perspective, there is also the opportunity cost of not investing, as this reduces the chance of success on the pitch. As the presentation of the bond prospectus in 2006 put it, “the move to the Emirates Stadium should increase revenues and the ability to sustain a better playing squad – a virtuous circle.”

Gazidis echoed these thoughts in the summer, “you need the financial platform in order to create the sporting success, but you need the sporting success in order to supply the financial platform as well.”

This is why the bond structure includes a Transfer Proceeds Account, which had the objective of ensuring a high quality playing squad. This states that 70% of net player sales proceeds must be reinvested in players, but (crucially) also “other football assets or prepayment of debt”.

Regardless of how that account has been used, Arsenal’s cautious approach has cost them money. The TV distribution in the Premier League is relatively egalitarian with each place only worth an additional £0.8 million, but there is a significant upside in the Champions League, best seen in the 2011/12 season when Arsenal received €28 million for reaching the last 16, while Chelsea earned €60m for winning the competition.

In addition, a relative lack of success on the pitch cannot have helped Arsenal’s commercial team when they have tried to secure new deals. We already know that the new shirt sponsorship deal contains a number of clauses relating to performance, e.g. if Arsenal were to fail to qualify for the Champions League, the £150 million headline figure (over five years) would be somewhat less.

"Gazidis - brave boys keep their promises"

The other logical result of Arsenal’s many years of reported profits is that they are one of the few Premier League clubs that pay corporation tax: £4.6 million last season (the highest in the league). From a community aspect, this is a noble thing, but it is money that could have helped fund a new striker.

This is not a question of whether Arsenal have under-performed or not. Most neutral observers would agree with Gazidis’ assertion that “We have outperformed our spend, in virtually any metric you can look at, consistently for the last 15 years.” You can agree with that opinion, while still being unhappy that the club has not made the best use of its resources.

Arsenal are by no means a poor side, as they have shown in some encouraging pre-season displays, including a win against Manchester City, but they will find it difficult to maintain any sort of title challenge without strengthening. Obviously, there is still time to make important signings before the transfer window closes, but that’s not really the point, as the season will be well underway before Jim White embarrasses himself on Sky Sports News, including two Champions League qualifiers and the North London derby.

"Oh, Mickey, you're so fine"

No Arsenal supporter in his right mind would want the club to “do a Leeds”, but they are a considerable distance from that nightmare scenario. Equally, nobody should expect the promised big spending to guarantee an end to the recent trophy drought, but it would give the club the best opportunity to compete for honours, especially at a time when their main rivals have all gone through various degrees of management upheaval: nothing ventured, nothing gained.

At the very least, it would provide some substance to Gazidis’ statements that Arsenal are “extraordinarily ambitious” and “ready to compete with any club in the world”. As the well-known Arsenal fan, Spike Lee, once said, it’s time to “Do the right thing.”

Thursday, August 1, 2013

Championship Finances 2011/12 - Numbers

Back in April I posted a summary of the 2011/12 Championship finances on Twitter, but since then I have received a few requests to post them in a blog as a useful resource for fans of those clubs, so here we go.

I’m not going to provide detailed analysis at this stage, just the key figures from the accounts plus some graphs for comparisons against others.

All these figures have been taken from the clubs' published accounts, though I have made a couple of presentational adjustments in order to prepare like-for-like comparisons between clubs. In particular, not all clubs use the same revenue classification, so I have had to make estimates on the revenue split for Barnsley, Blackpool, Crystal Palace, Hull City and Peterborough United (though obviously leaving the total revenue unchanged).

The split should be reasonably accurate, given that the Championship TV distributions are the same for all clubs (excluding parachute payments), while match day revenue has been estimated based on factors like average attendances.

In such comparisons, there is also the question of which accounts to use, as some clubs have more than one set, e.g. accounts for the football club and a holding company. I have opted for the accounts that have been most widely publicised, i.e. on the club website or in the local press, but appreciate that this may cause some differences in the rankings.

Obviously, the 2011/12  figures are now a whole season out-of-date, but this is the last year in which clubs have published their accounts, so it is the latest available, if not the greatest.

Finally, neither Coventry City nor Portsmouth published accounts in 2011/12, due to their ongoing financial difficulties. May they enjoy better times in the future.

Despite all these caveats, I hope that the comparisons are still of some use.


An overview (in alphabetical order) of the club's profit and loss accounts.

Profit/(Loss) before Tax

Only six (out of 24) clubs made profits before tax in 2011/12: Birmingham City and Blackpool led the way with around £16 million, followed by Peterborough £4 million, Burnley £3 million, then Leeds United & Barnsley just breaking even.

Profit/(Loss) after Tax

A similar story for profit/losses after tax, though Middlesbrough benefited from £3 million of tax credits, while Blackpool's £4 million tax bill brought their net profit down to £12 million.


The highest revenue came from: West Ham £46 million, Birmingham City £39 million, Leeds United £31 million, Blackpool £29 million, Hull City £24 million and  Burnley £23 million. At the other end of the spectrum, two clubs generated less than £10 million: Barnsley and Doncaster Rovers.

Revenue (excluding parachute payments)

Of course, those total revenue figures are heavily influence by parachute payments received when clubs are relegated from the Premier League. If these were to be excluded, a slightly different picture emerges with Leeds United top of the pile. West Ham and Birmingham City  are still right up there, but are then followed by Leicester City, Southampton and Brighton.

This disparity will be even more evident from next season (2013/14), when the parachute payments will increase by 23% from £48 million to £59 million (over four years). That will be split as follows: £23 million in year one, £18 million in year two, then £9 million in years three and four.

Note – Reading’s “Other Revenue” refers to income from their hotel.

Match Day Revenue

Only three clubs earned more than £10 million revenue (West Ham £13.6 million, Southampton £11.8 million and Leeds  United £11.4 million).

Media Revenue

The clear importance of parachute payments is again highlighted here. Most clubs receive the same annual sums from the Football League pool (£2.5 million) and Premier League solidarity payment (£2.2 million). It should be noted that clubs receiving parachute payments do not also receive solidarity payments.

Commercial Revenue

Perhaps unsurprisingly, the highest commercial revenue came from traditional, long established clubs like Leeds United £14.4 million, West Ham £12.8 million, Birmingham City £8.8 million, though they were closely followed by the ambitious Brighton £8.6 million.

Profit on Player Sales

Only two clubs made more than £10 million from player sales: Birmingham City £21.7 million and Southampton £12.4 million. Following relegation, Birmingham “had to raise funds through the sale of players”, including Roger Johnson, Craig Gardner, Liam Ridgewell and Jean Beausejour. Indeed, without these player sales, the Blues would actually have reported a loss in 2011/12.

It is interesting how important profit from player sales can be to a club's business model with earnings from this activity worth more than 50% of a club's recurring revenue at four clubs: Birmingham, Southampton, Watford and Peterborough.


West Ham had by far the highest wage bill at £42 million, followed by Southampton £29 million, Leicester City £28 million, Reading £27 million, Birmingham City £25 million and Middlesbrough £22 million.

So the three promoted clubs in 2011/12 had the highest, second highest and fourth highest wage bills. Make of that what you will.

Wages to Turnover

Incredibly nine Championship clubs had a wages to turnover ratio above 100%: Bristol City 157%, Reading 135%, Leicester 130%, Southampton 125%, Ipswich 119%, Middlesbrough 119%, Nottingham Forest 119%, Doncaster Rovers 113% and Cardiff City 103%.

Given the massive financial prizes available on promotion to the Premier League, this willingness to push the boat out is understandable to a certain extent, but is also one of the reasons that Championship clubs have embraced Financial Fair Play

At the other extreme, fans of Blackpool (42%) and Leeds United (57%) might feel that their clubs could have shown a little more ambition. Peterborough's low 57% ratio reflects their sustainable business model.

Other Expenses

Excluding wages, the highest other expenses were reported by West Ham £26 million, Leicester City £19 million and Birmingham City £18 million, largely due to higher player amortisation (the annual charge for writing-off players’ transfer fees).

In terms of other expenses excluding player amortisation and depreciation, Leeds United and Brighton were easily the highest at £14 million, largely due to high stadium costs.


In comparison to their annual revenue, many clubs have significant debt, though it is invariably provided by the owners, as opposed to the bank: Brighton £120 million, Leicester £86 million, Nottingham Forest £85 million, West Ham £73 million, Ipswich Town £73 million and Cardiff City £72 million.

Net Interest Payable

The highest net interest payable recorded in the accounts were from Leicester City £5.3 million, Ipswich Town £3.5 million, Cardiff City £3.3 million, West Ham £3.2 million and Hull City £2.1 million. It should be noted that interest paid is not necessarily equal to the interest payable figure in the profit and loss account, as it is sometimes only added to debt (and so not actually paid), as was the case with Leicester, Ipswich and Cardiff.

Furthermore, the debt at some clubs is interest-free, e.g. Brighton.


For the sake of completeness, I have included average attendances, though most clubs do not formally publish these figures in their accounts. These figures have been taken from the excellent Soccerway site and show some pretty solid attendances in England's second tier with West Ham attracting nearly 31,000.

That concludes the voting of the Swiss jury for the financial overview of the Championship in the 2011/12 season. Numbers on their own are not that interesting (unless Soft Cell are singing about them) and are certainly not meant to suggest that one club is, in some way, “better” than another club.

That said, a club’s finances often go a long way to predicting how the team will fare on the pitch, so they’re not to be completely ignored either, especially with the Championship implementing its own version of financial fair play.

Sunday, June 30, 2013

FIFA World Cup - Everybody Wants To Rule The World

The article below covers the financial impact of the 2010 World Cup in South Africa and was first published a couple of years ago in Issue One of The Blizzard, the thinking fan’s football magazine of choice.

Each issue can be purchased on a pay-what-you-like basis and includes some of the finest writing in the world of football, so I would encourage you to visit their website and invest some of your hard-earned cash. Trust me, you won’t be disappointed.

Although this is an old piece, I thought that it might be worth republishing on my blog, as it seems very timely given the recent criticism aimed at FIFA over the money it will make from the World Cup in Brazil – in stark contrast to the billions invested by the host country. As you will see, many of the concerns are nothing new and would surely find resonance with many of the South African people.


When Iker Casillas raised the World Cup trophy in Johannesburg’s Soccer City last July, everyone congratulated Spain on their victory, but arguably the man who gained most from the tournament was the one standing next to him, beaming with pride. That man was Joseph “Sepp” Blatter, the long-standing President of FIFA, whose bold decision to award the most prestigious competition in world football to South Africa had paid off – in every sense.

Blatter could be forgiven for heaving a huge sigh of relief, as his organisation had to a certain extent gambled when deciding to take the World Cup (excuse me, the 2010 FIFA World Cup™) to Africa for the first time. Many experts had confidently predicted that FIFA would make a loss on the event in contrast to the large profits generated in Germany in 2006, but the results were fantastically good off the pitch, even if some of the football on display was disappointing.

Last year’s accounts revealed that total revenue for the four-year cycle from 2007 to 2010 had increased a very impressive 65% to $4.2 billion, leading to a healthy surplus of $631 million that allowed FIFA to increase its reserves to a record level of $1.3 billion. Little wonder that Blatter reacted with his customary satisfaction, “I am the happiest man. It’s a huge, huge financial success.”

Although Blatter spoke movingly in Soccer City of “a dream coming true” and “the spirit of Mandela”, he had revealed his priorities a few weeks earlier when he boasted that FIFA’s excellent financial report justified awarding the World Cup to South Africa as a “good financial and commercial decision.” You can say that again.

The World Cup is clearly the jewel in FIFA’s gilded crown, providing the vast majority of its revenue and profits. In fact, 87% ($3.7 billion) of their turnover is derived from one of sport’s “greatest shows on earth”, which resulted in a considerable profit of $2.4 billion for the event.

Great stuff, but, as all football fans know, for every winner, there has to be a loser and in this case it was the host country – at least from the financial perspective. The World Cup was a great deal for FIFA, as they pocketed the lion’s share of the massive sums raised by the sale of TV rights and sponsorship deals, while South Africa had to foot the colossal bill for infrastructure improvements, which was estimated at $3.5 billion by the South African Public Service Commission.

In fairness, FIFA did provide $526 million to the Local Organising Committee, including $226 million in direct support and $300 million from ticket sales, but this is small change compared to the money needed to fund new stadiums, improved transport networks and better security. The cost would have been lower if FIFA had accepted the South Africans’ plans to revamp exiting stadiums, but instead they forced the locals to build expensive state-of-the-art facilities in order to project the right image for their tournament (and their corporate sponsors).

This financial imbalance has given the expression “a game of two halves” a whole new meaning in Johannesburg, though it should maybe be tweaked to “a game of haves and have-nots”. Looking at the figures makes one of Blatter’s outbursts before the World Cup seem even more bizarre, “Colonialists over the past 100 years have only gone to Africa to exploit it, to take out all the best things. There’s no respect. FIFA is giving back to Africa.”

"Golden Years"

While admiring FIFA for taking the risk of breaking new ground in staging the World Cup in Africa, it is evident that it managed to reduce the dangers to its bottom line as much as possible. The media and marketing revenue that they keep is contracted well in advance, while the ticketing income that is allocated to the host country is the only uncertain revenue stream. On top of that, the billions of dollars worth of playing talent is provided by football clubs free of charge. OK, it’s not quite free, but the compensation from FIFA, described as “a share of the benefits” was a derisory $38 million.

To be fair to our friends in Zurich, FIFA’s financial success is almost totally dependent on the successful staging of the World Cup and the profits from this event have to cover all their expenses over for the four years in between tournaments, as explained by General Secretary Jérôme Valcke, “We are not rich. We are making quite good money thanks to the World Cup, but that’s the only money we have.”

A key executive obviously has a vested interest in under-playing their large profits, but the independent analysts Sportcal have supported this view, “FIFA is quick to point out that its profits from the World Cup go towards funding its many other activities over the four-year cycle between World Cups, including less lucrative competitions such as junior and women's World Cups and the quadrennial Confederations Cup between continental national teams champions.”

These tournaments tend to make losses, which are only covered by the profits from FIFA’s flagship competition. For example, in the last two years, FIFA incurred significant expenses of $223 million for other events, including the Confederations Cup in South Africa ($44 million), the U-17 World Cup in Nigeria ($43 million), the U-20 World Cup in Egypt ($21 million) and the U-20 Women’s World Cup in Germany ($21 million) plus many others.

Back to the money-making machine, FIFA’s largest revenue element is the sale of television rights, which has increased by an astonishing 85% for this World Cup to $2.4 billion. A good example of the growth came from improved contracts in the USA with the Walt Disney company (which owns ABC and ESPN) and Univision paying a combined $425 million for exclusive broadcasting rights for 2010 and 2014, about three times the combined bids last time.

These are considerable sums of money, but the television companies do get a lot of bang for their buck. According to FIFA, more than 26 billion viewers watched the World Cup. As Kevin Alavy of international analysts, Initiative Futures Sport + Entertainment, said, “No other media property delivers the same spikes in audience delivery, day after day, sustained over a month as the World Cup.” FIFA expected more than 700 million viewers to watch the final, which would make it the most watched live televised event in history – surpassing the Beijing Olympics opening ceremony in 2008.

FIFA’s second largest source of income comes from the marketing of the World Cup rights, which has virtually doubled to $1.1 billion. The new commercial strategy of classifying marketing partners into three categories (Partner, World Cup Sponsor and National Supporter) has been a great success.

Partners enjoy the highest level of association with FIFA, which means that they own international rights to a broad range of FIFA activities as well as exclusive marketing assets. The six partners are Adidas (responsible for the Jabulani ball), Coca-Cola, Emirates, Hyundai, Sony and Visa, paying an annual fee of $24-45 million for the privilege. The eight Sponsors, including the likes of McDonald’s and Budweiser, pay $10-25 million a year over the same period, but their rights are limited to the World Cup. The lowest tier, National Supporters, pay $4.5-7 million a year, but their rights are only available in the host country.

"A load of balls"

As Blatter said, “Although we are in challenging financial times, multinational companies still seek to identify with football in general and with the FIFA World Cup in particular.” Indeed, Coca-Cola, McDonald’s and Budweiser all claimed that their costly sponsorship had proved a resounding success, boosting sales.

Before we get too carried away with the idea that FIFA is full of commercial geniuses, it is worth noting that after Visa signed their $200 million sponsorship deal in 2006, the former partners MasterCard sued them for breaching their agreement, before reaching a settlement out of court. As usual, Blatter glossed over this minor inconvenience, “We managed to end the contractual dispute with MasterCard, thus opening the doors to partnership with Visa and completing our pool of partners”, conveniently failing to mention that the resolution cost FIFA more than $90 million.

Similarly, the collapse of FIFA’s former marketing partner ISL (International Sport & Leisure) in 2001, leading to losses of at least $42-46 million, was recently presented by Blatter as beneficial to the organisation, “It was for us, I would say, a very positive moment. We are masters of our own rights and we do not need any agency to work for FIFA. Our partners like the direct contact with us.” Right. You get the impression that he only just stopped himself from saying “masters of the universe” à la Bonfire of the Vanities, but he’s probably correct to cut out the middle man, even though the circumstances were not the cleanest.

FIFA goes to extraordinary lengths to defend its rights, which culminated in 36 female fans being ejected from the match between Netherlands and Denmark for wearing figure hugging short orange dresses that were part of an “ambush marketing” campaign by a Dutch brewery. This heavy-handed approach was condemned as ridiculous by a company representative, “FIFA does not have the monopoly on orange.”

"Walk on by"

In fairness, FIFA does need to generate a lot of money to pay for its vast cost growth. Total expenses for the latest four-year cycle amounted to $3.6 billion, which represents an 87% increase over the $1.9 billion in the previous period – even higher than the 65% revenue growth.

Almost half of the expenses are event-related at $1.7 billion, most of which were for the World Cup, including prize money of $380 million. The winners pocketed a cheque for $30 million with $24 million going to the runners-up. Every team at the World Cup received at least $9 million: $1 million as a contribution to preparation costs plus $8 million even if they were eliminated at the group stage.

FIFA is keen to emphasise that the majority of its expenditure is on football, though it would be fairly surprising if that wasn’t the case. Valcke stressed this, “Just to be clear, we are not sitting on profit. All the money is going back to football.” In fact, the accounts note that 70% of overall expenditure was invested directly in football – defined as the World Cup, other events and development.

This is entirely consistent with FIFA’s stated objective of “organising international competitions as well as constantly improving and promoting football.” Of course, that’s not enough for President Blatter, who went much further in a recent magazine article, when he pompously wrote, “FIFA is no longer merely an institution that runs our sport. It has now taken on a social, cultural, political and sporting dimension in the struggle to educate children and defeat poverty.”

So how well has FIFA done in its attempt to emulate Mother Theresa? To be fair, they dedicated $794 million to the development of football in the latest four-year period. Indeed, they take great pains to highlight the fact that spending on development programmes in 2007-10 was 57 times greater than the $14 million in 1995-98. Impressive stuff, but I can’t help noting that total expenses have risen by $1.6 billion since the 2003-06 period with only $0.4 billion of this increase attributed to development.

It’s difficult to know how to react to this. On the one hand, there is no doubt that FIFA has spent a lot on development, but on the other hand, there is a feeling that it could have done a lot more with the funds available. Although there is no shortage of worthy-sounding projects, it does feel a little like this merely camouflages the relatively low investment and certainly not enough to support Blatter’s outlandish claims, “We resolved to instigate a range of projects designed to aid the entire African continent. Football is a force for change. For Africa, for the game, for the world.”

"Hands off... it's mine"

The snappily titled “Win in Africa with Africa” initiative is designed to leave the continent with a proper football legacy, including laying many artificial pitches, and has a hefty $71 million budget, but other projects seem to attract more scepticism. Any observer of last year’s World Cup could not have avoided “20 Centres for 2010”, a laudable project to build Football for Hope Centres in African communities, but the sad truth is that only four had been completed by 2010.

Then there’s the Goal programme ($120 million over four years), which was set up a year after Blatter first became president to finance development projects around the world. Again, no reasonable man could condemn its objectives, but this initiative is widely regarded as the means by which votes are secured in the presidential election.

Similarly, the Financial Assistance Programme provided $209 million to the member associations so that they may “finance development activities and football activities.” This is serious money for many of the poorer nations, but just in case they were feeling the pinch last year FIFA found another $144 million to make an extraordinary FAP payment ($5 million to each confederation and $550,000 to each member association). Blatter smilingly explained, “It is a gift, if we can say this.” While others might find different words to describe these payments, Blatter was unperturbed, “The whole family of football is happy.”

Blatter has frequently declared that FIFA can make a difference, but I would suggest that it could have an even stronger impact if it cut back its own costs. After all, the organisation spends more on itself ($0.9 billion) than football development ($0.8 billion), if you include $0.7 billion operating expenses and $0.2 billion for “governance” (mainly congress and committees).

This will come as no surprise to those who have seen FIFA’s palatial new offices in Zurich, which cost around $200 million. Of course, we cannot say whether FIFA’s 387 employees are over-paid, as they do not publish details of their salaries, but what is clear is that they are handsomely rewarded for their efforts, as the annual wage bill of $65 million implies an average salary of $169,000 — an inflation-busting increase over 2009 of 23%.

That’s pretty good, but pales into insignificance next to the 56% increase achieved by the 24 members of the Executive Committee, who shared $33 million between them (an average of $1.3 million). How on earth can they incur so many costs? The Guardian gave a clue last year when they revealed that Executive Committee member Vitali Mutko had managed to claim expenses for five breakfasts a day during a 20-day trip to watch the Winter Olympics.

FIFA is classified as a non-profit organisation in Switzerland, though, as we have seen, it has a highly commercial outlook, e.g. it has its own official range of FIFA branded merchandise. Its status allows it to enjoy a tax-free lifestyle, though this does oblige it to spend its profits on fulfilling its football objectives. This is probably why they do not describe the surplus from the World Cup as profit, but as a “result” to be added to reserves to insulate the organisation from any unexpected events that may arise.

Fair enough, but do they have to sit on quite so many reserves? From $76 million in 2003, they have risen every year since and now stand at $1.3 billion, a level FIFA describe as “solid”, while others might call it obscene. Franco Carraro, chairman of the internal audit committee, defended this amount, “While equity of over a billion dollars seems high, it is necessary as the financial risks exceed it many times over.”

The biggest risk to the financial position would clearly be the cancellation of the World Cup, as almost all contracts with commercial partners are related to this event, so FIFA has an insurance policy in place. However, since 9/11, it has been practically impossible to fully cover the risk, so their $650 million policy now only covers the cost of postponement and/or relocation of the event in the case of natural disasters, war and acts of terrorism. As the event’s cancellation is not fully covered by the insurance, it would have to be compensated by FIFA’s own reserves, so the caution is understandable to a certain extent, but they could still spare more money on developing the game.

Or they could give the poor host country some more cash, which in fairness they have done via an additional $100 million contribution to a Legacy Trust, so that “South Africans would continue to benefit from the 2010 tournament long after the final whistle had been blown.” However, as we have seen, this is a drop in the ocean compared to the massive cost of hosting the event.

"Free Nelson Mandela"

The South Africans do not share in the colossal television or marketing deals - the World Cup’s main money-spinners – and their only direct funding comes from the predetermined contribution from FIFA and net revenue from ticket sales.

Around three million tickets were made available for the 64 matches of the World Cup and while FIFA’s eternally optimistic general secretary, Jérôme Valcke, claimed that the tickets were 97.5% sold out, anybody with a pair of functioning eyes would have witnessed many empty seats in the sparkling new stadiums. This has been attributed to poor transport systems, but there is a suspicion that many tickets were sold to international agencies who were simply unable to shift them.

Even Valcke had to admit that FIFA had made mistakes in its ticketing procedures, most notably granting the Match agency the exclusive rights to sell tickets for the 2010 and 2014 tournaments. The high commission charged by Match to travel agents and hotels has been a spectacular failure, which should cause Sepp Blatter some discomfort, as the company is part owned by his nephew, Philippe.

As a popular supermarket’s advertising campaign would say, every little helps, but the South African government spent considerably more preparing its country for this footballing extravaganza. They incurred major costs on building five new stadiums and refurbishing the same number, while every aspect of their transport network has been upgraded, including a new international airport in Durban and a high-speed train link between Johannesburg airport and the city centre. Even though FIFA has thrown a few meaty scraps their way, there is understandable resentment in South Africa that FIFA made so much money while their own country ends up with a huge debt.

Clearly, some of this expenditure will deliver a legacy of sorts to the rainbow nation, but the most visible examples of this investment are the stadiums, which have been described as white elephants, due to the unhappy combination of high running costs and small crowds, leading to their long-term financial viability being questioned.

Of course, it is difficult to place a monetary value on the boost to the country’s self-image arising from hosting such a global festival, though former South African president Thabo Mbeki suggested that the 2010 World Cup would be the moment when the African continent “turned the tide on centuries of poverty and conflict.” Archbishop Desmond Tutu was even more lyrical in his enthusiasm, “We are the caterpillar that has become the beautiful butterfly.”

"Smile like you mean it"

There’s no doubt that many were galvanized by this feel-good factor, but some of the country’s residents managed to resist the World Cup’s charms such as the outraged Sowetan journalist who complained, ““The World Cup is a colonial playground for the rich and for a few wannabes in the South African elite.”

In addition, local street vendors did not appreciate FIFA’s strong-arm tactics in protecting their precious brand, while the limited availability of tickets for Africans was another source of anger, as the lack of internet access and credit card ownership presented difficulties for online purchases.

The current South African president Jacob Zuma was rather more pragmatic than his predecessor, “we have an opportunity to promote foreign investment, tourism and trade”, as he focused on the boost to South Africa’s image worldwide.

In the past, host countries have relied on growth in tourism to help compensate the additional costs, but this tournament failed to attract as many foreign visitors as expected. Marthinus van Schalkwyk, South Africa's tourism minister, said just 309,000 foreign fans attended the tournament, compared to predictions of 450,000.

"FIFA HQ - Welcome to the House of Fun"

In fact, many now believe that the economic benefits of hosting major sports events are limited. Stefan Szymanski, co-author of the respected “Soccernomics” book, pointed out the opportunity costs to an economy, “The gain in sport is a loss on spending in cinemas.” While criticising FIFA’s excessive expenditure, he asserted, “There’s so much evidence that there’s not even an argument any more – mega events don’t deliver the financial extravaganza that is promised.”

Highly paid consultants always produce ludicrous over-estimates of the financial gains arising from such events, safe in the knowledge that it’s almost impossible to calculate the real impact. In 2004 when FIFA awarded the World Cup to South Africa, Grant Thornton predicted an uplift in Gross Domestic Product of $2.9 billion, but growth actually slowed during the two quarters covering the tournament. John Saker, chief operating officer of KPMG Africa, confirmed: "The big boost didn't happen.”

So why do so many countries desperately want to host the World Cup? Apart from the unsound economics, you have to ask why anyone would want to go through such a humiliating, squalid process, where corruption and collusion appear to be the order of the day.

"The winner takes it all"

During the bidding for the 2018 and 2022 World Cups, FIFA suspended two members of its executive committee, Nigeria’s Amos Adamu and Tahiti’s Reynald Temarii, after both were filmed by the Sunday Times allegedly trying to sell their votes. Apart from the two members caught on camera, FIFA’s Executive Committee features other disagreeable characters, so a bidding country’s great and good also have to suck up to the likes of Jack Warner, the infamous president of CONCACAF, whose previous record brings to mind the old saying that if you dine with the devil, you should bring a long spoon.

And if a country somehow manages to win the bid, then it has to suspend a number of its laws for FIFA, including “comprehensive tax exemption”, unrestricted entry visas, no limit on import and export of cash and free public transport on match days. All in all, it could be argued that the taxpayers in the countries that missed out have had a narrow escape.

Those expecting change anytime soon should not hold their breath. Yes, FIFA has an ethics commission, but three months ago, a leading German lawyer resigned from this  group in protest at the apparent failure of the governing body to tackle alleged corruption in its ranks.

"U Got the Look"

Of course, there might be a change at the top this year, as Blatter is facing a challenge in the presidential election from Mohammed Bin Hammam, the president of the Asian Football Confederation, who promises to make FIFA more transparent and less bureaucratic. However, he is a long-term FIFA insider and also wants to double future payments from the Financial Assistance Programme, which, as we have seen, is something of a double-edged sword.

In the meantime, Blatter continues to hold the reins and he has no doubts over the success of the World Cup in South Africa, “2010 was a love story. A love story between the African continent and me.” That may be true, but it was a very one-sided relationship, and the South Africans might just beg to differ with the most powerful man in football.


As a postscript, since this article was originally published, FIFA’s reserves have continued to grow and now stand at a mighty $1.4 billion.

Their last annual report confirmed that FIFA continued to spend more on itself in 2012 ($241m, comprising $188 million operating expenses $53 million of governance) than football development ($177m). These “governance” costs included $32m on committees & congress (i.e. meetings) plus $21m on legal matters.

The annual report also revealed that in 2012 FIFA’s personnel costs rose from $89 million the previous year to $91 million (with key management up from $29.5 million to $33.5 million), while development was down from $183 million to $177 million.

Plus ça change, plus c'est la même chose.
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