Monday, January 12, 2015

Chelsea - Hey Hey, My My (Into The Black)

By the standards of most clubs, Chelsea’s 2013/14 season was pretty good, as they finished 3rd place in the Premier League and were semi-finalists in the Champions League, but it must have felt a little disappointing after capturing silverware in each of the previous two seasons: the Europa League in 2012/13 and, most memorably, the Champions League and FA Cup in 2011/12.

However, this did not stop their progress off the pitch, as they reported record revenue of £320 million, up 25% on the prior year, and profit of £19 million (before tax), compared to a loss of £51 million in 2012/13. Equally importantly, given Chelsea’s history of being bankrolled by their owner Roman Abramovich, these results ensured that “UEFA’s break-even criteria under the Financial Fair Play (FFP) regulations continue to be satisfied.”

Chairman Bruce Buck was keen to note that the club’s new focus on its finances had not dramatically impacted their performance on the pitch, “while improving our financial figures, we remained competitive in football’s toughest competitions.”

In 2013/14 Chelsea improved their bottom line by £70 million, as they managed to convert a £51 million loss before tax to a £19 million profit. After tax, the figures improved from a £49 million loss to an £18 million profit.

The £70 million profit improvement was mainly driven by significantly higher profit on player sales (Luiz, Mata and De Bruyne), which increased by £51 million to £65 million, and revenue growth, including £39 million from the new Premier League TV deal and £29 million from sponsorship and merchandising income. This was partially offset by higher player costs with the wage bill up £20 million, amortisation (cost of expensing transfer fees) up £14 million and impairment (writing down player values) of £19 million.

This is the second profit Chelsea have made in three years and the largest since Abramovich became owner of the club in 2003. When they were making large losses, the club famously predicted that they would break-even one day and this has now become a reality, albeit a few seasons after they hoped to achieve this milestone. It should be noted that the £1.4 million profit registered in 2011/12 was largely due to £18.4 million profit on the cancellation of preference shares previously owned by BSkyB.

Of course, Chelsea have been making substantial losses in the Abramovich era, amounting to £631 million in the eight years up to 2011, including a hefty £140 million loss in 2005, as the owner poured money into the club to build a competitive squad.

Part of this is due to so-called exceptional items, which have increased costs by £121 million in the last decade, due to compensation paid to dismissed managers £61 million, impairment of player registrations £28 million, the early termination of a former shirt sponsor £26 million and tax on image rights £6 million.

However, it is profit from player sales that is having an increasing influence on Chelsea’s figures. In the seven years between 2005 and 2011, Chelsea made £73 million from this activity, but have made £108 million in just three years since then, most notably £65 million last season (up from £14 million), largely due to the sales of David Luiz to Paris Saint-Germain, Juan Mata to Manchester United and Kevin De Bruyne to Wolfsburg. In particular, Chelsea would have made a loss of £46 million instead of a £19 million profit without these sales.

Chairman Bruce Buck played this down, “we financed player purchases from sales”, but there’s a lot more to it than that. The strategy is to acquire young talent and develop it in a cost-effective way, making extensive use of the loan system, notably at Dutch club Vitesse Arnhem, which appears to be an unofficial feeder club for Chelsea.

On a few occasions, a player will succeed in establishing himself in Chelsea’s first team, one example being goalkeeper Thibaut Courtois, but most players are effectively being developed for future (profitable) sales, while being placed in the shop window at the same time. Not every player will bring in big money, of course, but the strategy only needs a couple of lucrative sales to be successful. Although it will be far from easy to sustain these profits, we already know that next season’s accounts will also be boosted by the £28 million sale of Romelu Lukaku to Everton.

This approach has been questioned by some commentators, especially as an incredible 30 players have left Chelsea on loan this season, but the Blues are by no means the first club to adopt such a “buy low, sell high” strategy with Udinese having done similar for many years. Complaints would include treating players like stocks and shares, not to mention ensuring other clubs cannot buy this promising talent, but there are no rules against it – yet.

It is undoubtedly a smart strategy in the FFP era, as the club had to wean itself off its reliance on its Russian owner to cover its operating losses. Basically, any investment in a youth academy can be excluded from the FFP break-even calculation, while profits made from player sales are included in the analysis. Furthermore, if the players are loaned, then most of the wages are covered by the loanee clubs.

It remains to be seen whether more academy players make it at Chelsea, though there are high hopes for Ruben Loftus-Cheek, Lewis Baker and Izzy Brown in particular, but either way Chelsea’s new trading strategy has helped drive the improvement in their financials.

For this purpose, it is important to note how clubs account for player trading. When a club buys a player, it does not show the full transfer fee in the accounts in that year, but writes-down the cost (evenly) over the length of the player’s contract. So, if Chelsea splash £32 million on a new player with a 4-year contract, the annual expense is only £8 million (£32 million divided by 4 years) in player amortisation (on top of wages).

However, when that player is sold, the club reports the profit on player sales, which is essentially sales proceeds less any remaining value in the accounts. In our example, if the player were to be sold 3 years later for £35 million, the cash profit would be £3 million (£35 million less £32 million), but the accounting profit would be £27 million, as the club would have already booked £24 million of amortisation (3 years at £8 million).

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 in these cases any sales proceeds represent pure profit. Chelsea are clearly highly aware of this accounting treatment. In fact, their annual report notes that the club has valued its playing staff at £353 million, while the accounts value is only £226 million.

Even Jose Mourinho has commented on Chelsea’s revised strategy: “We are making money to be able to spend money. In every transfer window Chelsea is losing players, is selling players. In the winter one we sold Mata; in the summer one we sold David Luiz and Lukaku. So Chelsea in this moment is not a spender – Chelsea in this moment is making more money in transfers than the money we spend.”

As well as player trading, Chelsea have significantly increased their ongoing revenue, which was up £64 million (25%) from £256 million to £320 million, driving through the £300 million threshold for the first time. Both broadcasting and commercial grew substantially, broadcasting up £35 million (33%) from £105 million to £140 million and commercial up £29 million (37%) from £80 million to £109 million, while match day was flat at £71 million.

In fact, since 2009 match day revenue has fallen 5% from £75 million to £71 million, while commercial more than doubled from £53 million to £109 million and broadcasting grew 77% from £79 million to £140 million.

Chelsea’s revenue of £320 million remains the 3rd highest in England, only behind Manchester United £433 million and Manchester City £347 million, though still ahead of Arsenal £299 million (in 4th place, natch).

All clubs in the Premier League have grown their revenue in the 2013/14 season, as they all benefit from the new TV deal, but the two Manchester clubs have increased their revenue by more than the others: City are £76 million up, United £70 million up, while Chelsea grew by “only” £60 million. In this way, the gap is getting bigger.

Chelsea had the 7th highest revenue in the world in 2012/13 with £260 million, according to the Deloitte Money League, which is obviously far from shabby, but was still a long way below the Spanish giants, Real Madrid £445 million and Barcelona £414 million, and Bayern Munich £370 million.

We will not know whether Chelsea’s position will change in the 2013/14 version until PSG publish their accounts, but the gap will close, partly due to Chelsea growing at a faster rate (23%) than Madrid (6%), Barca (0%) and Bayern (13%). This trend is exacerbated by the strengthening of Sterling with the exchange rate against the Euro improving from 1.1668 to 1.25.

As match day revenue barely changed in 2013/14, while both broadcasting and commercial grew significantly, its share of Chelsea’s revenue has dropped from 28% to 22%. Broadcasting is up from 41% to 44%, while commercial is up from 31% to 34%.

After finishing 3rd in the Premier League, Chelsea’s share of the new Premier League deal was £94 million, up £39 million (71%) from £55 million. All PL clubs get an equal share of half of the domestic deal and all of the overseas deals. The remaining 50% of the domestic deal is allocated based on a merit payment for finishing position and a facility payment based on number of games shown live.

Chelsea also received €43 million for reaching the semi-final of the Champions League, which was slightly higher (at least in Euro terms) than the €42 million they received from Europe the previous season: €31 million from the Champions League, despite elimination at the group stage, and €11 million for winning the Europa League, when they overcame Benfica in the final. Of course, it is not as high as the €60 million earned in 2011/12 when Chelsea beat Bayern Munich in a dramatic final to win the Champions League.

The new Champions League deal from the 2015/16 season will further increase the prize money with UEFA recently advising the European Club Association that clubs could expect a 30% increase in revenue. The uplift may be even higher for English clubs, as BT’s exclusive acquisition of UK rights is double the current arrangement.

It’s worth exploring how the TV (market) pool is allocated. Chelsea’s share of the UK market pool is dependent on both how far they progress (compared to other English clubs) and their finishing place in the previous season’s Premier League. In this way, Chelsea (€18.5 million) earned less than Manchester United (€23.8 million), even though they progressed one stage further (semi-final compared to United’s quarter-final), as they only finished 3rd in the previous season’s Premier League, while United finished 1st.

Commercial revenue rose £29 million (37%) from £80 million to £109 million, partly due to increases in the Samsung shirt sponsorship from £13.8 million to £18 million and an extension in the Adidas kit supplier deal until 2023, which increased the annual payment from £20 million to £30 million. In addition, the club signed new partnerships with Rotary, Hackett, Coral, William Lawson’s, Indosat and Guangzhou R&F Football Club.

However, Chelsea are unlikely to improve on their 9th place in the Money League, as every other leading club is also focused on growing this revenue stream. In particular, Bayern Munich have managed to increase commercial income from £203 million to £233 million, more than double Chelsea. PSG’s numbers are inflated by their €200 million deal with the Qatar Tourist Authority.

To reinforce this point, in England Manchester United have increased commercial income by 171% (£119 million) to £189 million, which is better than Chelsea’s 106% (£51 million) over the same period – and that’s before United receive the full benefit of their massive new Chevrolet and Adidas deals. Similarly, Manchester City is now up to £166 million, driven by their Etihad sponsorship. Chelsea are still way above Arsenal, though the Gunners’ PUMA deal only starts from the 2014/15 season.

Time will tell whether former Liverpool managing director Christian Purslow, who has been recruited as head of commercial activities, will manage to bring in new sponsorship deals, though he certainly talks a good match (as seen in countless TV and radio appearances).

There have been numerous reports of Chelsea switching shirt sponsors from Samsung to Turkish Airlines next season, which would increase the value from £18 million to £25 million. This would be more in line with the £25-30 million deals that most other elite clubs have (Arsenal – Emirates, Real Madrid – Emirates, Barcelona – Qatar Airways, Bayern Munich – Deutsche Telekom), though still a long way short of Manchester United’s Chevrolet deal of £47 million (depending on US$ exchange rate).

Match day income rose slightly by £0.3 million (0.5%) from £70.7 million to £71.0 million. This was no surprise, as the club explained, “with Stamford Bridge filled to capacity year after year there was no scope for significant financial growth in this area. General admission ticket prices remain frozen at 2011/12 levels.” This revenue stream peaked at £77.7 million, thanks to the success in the Champions League and the FA Cup.

Chelsea’s match day revenue is around £30 million lower than Manchester United, Arsenal, Madrid and Barca, as they have much bigger stadiums. This explains why the club has spent so much time searching nearby locations for a new stadium, but they were outbid for the Battersea Power Station and have ruled out moves to sites in Earls Court and Old Oak Common. The club now appears to be focusing on expanding Stamford Bridge’s capacity form 42,000 to 55,000, though this would be a tricky, lengthy exercise, so revenue is unlikely to meaningfully increase here for many years.

Wages increased by £20 million (12%) from £173 million to £193 million, though the wages to turnover ratio lowered from 67% to 60% following the 25% revenue growth. This ratio has improved every year from the recent 82% peak in 2010. Note that these wage figures have been adjusted for exceptional items, e.g. in 2013/14 the reported staff costs of £190.6 million have been adjusted for a £2.1 million credit for the release of a provision for compensation for first team management changes.

Chelsea therefore still have the third highest wage bill in England of £193 million, behind Manchester United £215 million and Manchester City £205 million, but ahead of Arsenal £166 million.

In Euro terms, Chelsea’s €241 million is just behind Real Madrid €250 million and Barcelona €248 million, but ahead of Bayern Munich’s €215 million – though this depends on the exchange rate used (1.25 here, as this is likely to be the 2013/14 Deloitte Money League rate).

Although Chelsea are still spending big in the transfer market, e.g. this summer saw the arrival of £32 million Diego Costa from Atletico Madrid and £30 million Cesc Fabregas from Barcelona, net spend is declining, thanks to equally big money sales, such as David Luiz £40 million and Romelu Lukaku £28 million (and, by the way, major kudos to whoever secured so much money for those sales).

That said, if we look at the last three seasons, only Manchester United have outspent Chelsea: £231 million against £137 million. Both Chelsea and Manchester City £128 million have clearly been impacted by the advent of FFP, so much so that Arsenal and Liverpool are now spending at similar levels.

Even though Chelsea still report substantial operating losses in the P&L, the operating cash flow has been positive for the last two seasons after adjusting for non-cash flow items, such as player amortisation and depreciation, and working capital movements. Nevertheless, Chelsea still require funding from the owner to cover player purchases and other investments, resulting in £51 million net financing in 2013/14.

However there is no debt in the football club, as this has all been converted into equity by issuing new shares. That said, the club’s holding company, Fordstam Limited, does have around £1 billion of debt (£984 million as of June 2013) in the form of an interest-free loan from the owner, theoretically repayable on 18 months notice.

Given Chelsea’s several years of heavy financial losses, many observers had believed that they would fall foul of FFP, but that has not been the case, as confirmed by the club: “The latest financial results combined with those from the previous two years mean that for the second monitoring period for FFP we will fall comfortably within the limits set by UEFA, who measure expenditure against the income from football-related activities. Chelsea also complied with FFP criteria over the first monitoring period.”

The club has taken advantage of some of the allowable exclusions for UEFA’s break-even analysis, namely youth development, infrastructure and (for the initial monitoring periods) the wages for players signed before June 2010. As we have seen, FFP is now being addressed by the new player trading model, but it is clear that this legislation has been at the forefront of Chelsea’s thinking.

Even the self-proclaimed “Special One” has got involved, though not without a degree of irony: “Chelsea is working in relation to Financial Fair Play, but I think it is a contradiction, because it was to put teams in equal conditions to compete and what happened really with the Financial Fair Play is a big protection to the historical, old, big clubs, which have a financial structure, a commercial structure, everything in place based on historical success for years and years and years.”

Hence, Chelsea’s new focus on living within its means. That will mean using a combination of profits from player development (and sales) and further increases in commercial income. As Bruce Buck put it, “Going forward, we have ambitious plans to build a pioneering global commercial programme, partnering with innovative and market-leading organisations from around the world. In the era of FFP, we must progress commercially to continue the circle of success to invest in the team and get results.”

In the meantime, Chelsea’s 2013/14 results are maybe best summarised by the wonderful Neil Young, “out of the blue and into the black”, as they have demonstrated that it is possible for them to remain successful while also balancing the books.


  1. Can you explain how Chelsea' broadcasting income is 139.9, when PL and CL add up to only ~128.5 -- Premier league: 94.1 and Champions league of 34.4 (=43/1.25)?

    1. Are they the only two competitions you know? Maybe FA Cup? Capital one Cup?

  2. " Basically, any investment in a youth academy can be excluded from the FFP break-even calculation, while profits made from player sales are included in the analysis. Furthermore, if the players are loaned, then most of the wages are covered by the loanee clubs."

    What does this mean?? I keep on hearing it, maybe you are the source.
    1. Academy costs. What Academy costs are covered? Buildings, coaches, running costs for the U16s perhaps. For 17 & 18 year olds, Maybe. Wages for U16s? (Well in theory there aren't any!). Wages for 17 & 18s? I doubt it. Purchase Transfer fees and agents fees - surely not.

    2. The real cost of a player from the Academy.
    No Chelsea Academy player has made an meaningful impact on the first team squad at Chelsea younger than 21 since Jody Morris and John Terry about 15 years ago. Occasionally expensive purchases have like Robben Mikel or Zouma. So to discuss "Academy Costs" in relation to strategy is pretty meaningless. The right way to tthink about it is the cost of the Academy pipeline starting from 8 to 15 year old non-wage kids and going through to 22 or 23, when players are finally in the first team or off the books.
    So we need to add the Academy costs, plus the costs of wages for 16-18 year olds, plus the wages for 18-21 year old development players plus the contracts through to around 23, since may of the promising players aged 19 will get 4 year contracts but still not make it.
    The obvious examples are Kakuta and Josh McEachran.
    Kakuta bought at 16, promised much, and would have been earning £10k a week or so then, increasing to probably £25k a week now (see this site for an independent estimate:
    He arrived in 2007, and his contract has been renewed repeatedly and now runs through to 2016 (around his 27th birthday).
    I guess some £7 or 8m for what amounts to 1 PL start (taken off at h/t).

    Josh McEachran is similar. The above site estimates he is now on £30k a week, though I have seen press reports of £35k. 1 PL start for Chelsea. At the club since the age of 8, and contracted through to 2016 when he will be 23.
    These are extreme examples, but it is pretty clear that Academy costs form almost no part of Josh McEachran's net cost to Chelsea. There are literally dozens of teenagers at the club on wages of £3 to 10k a week. And a good 15 or more players aged 19-23 on £10k to £20k. Some of these are on contracts expiring at 20 or so and will be moved on relatively early. But given the massive drop out rate from even highly promising 18 year olds, the total cost of the "Academy pipeline" is massive.

    In other words Academy costs are irrelevant compared to the wages paid to these players from 16-21.

    3. Loan fees! I have read a few of your pieces and you mostly make a lot of sense. One of two errors is more than forgiveable. Unfortunately the idea that newly promoted German Bundesliga teams will pay Chelsea U21 wages to acquire our players is nonsense. One spread mostly by the website mentioned above. He gains a great deal of credibility won from deep research into news snippets and a lot of common sense to create very good working estimates for Chelsea player costs. Then he blows it all by taking an opinion that loans fees regularly match wages, which clearly they can't.
    How many clubs out of the Premiership have 5 or more players on £20k a week? Perhaps 20. And many of them re in the Championship. The idea that ordinary German, Dutch & Spanish teams will pay £10 to £25k a week for loan players who then often never play is just weird. Nevertheless a lot seem to believe it because respectable people like you say it.

  3. 4. Pipelines.
    There are 3 main pipelines at Chelsea. And a lot of confusion comes from not recognising this.
    a) The Academy and anyone bought with little first team experience. (huge failure since around 2003)
    b) Young players bought with already 50+ first team appearances in their countries top league. Cech & Robben in 2004. Oscar, Courtois, Lukaku, Hazard, Zouma, Atsu, De Bruyne.
    This has been massively successful, but of coursed is wholly divorced from the Academy as all of these players have gone either into the first team squad or on loan to biggish clubs.
    c) buying of older established players (22+), also successful.

    There is a good point to be made that Chelsea have been very good in buying players who are on open display, and their skill has to been to outbid rivals for assets where a working valuation has been established by the market. And been very bad in buying assets where valuation is difficult.

    I also need to discuss your idea that FFP is driving the timing of transactions (another false meme), but I'll have to come back later.

  4. It does appear that CFC's ability to make money will diminish as they run out of players to sell. They won't have many more £30m plus players to sell without it harming the squad. Maybe over the next two or three seasons they could definitely buy to sell and do it well because they still have an Ambromovich squad regardless of it being an FFP compliant side.

    Even the commercial revenue from shirt sales is a result of the players Roman bought so they are still riding the Roman wave, and will be for at least five years.

    I do wonder if they have any 'sponsers' such as Gazprom, I believe are one, that are similar to Man City and PSG deals. Pure bullshit.

    The Chavs have definitely bought their way onto the top table and to an extent that they will stay there. However, as the players sales diminish, the squad gets older, I believe they will become more and more attainable. In fact, I wouldn't be surprised if Arsenal are ahead of CFC in five years and pretty much stay there.

    1. Not bitter at all, no, sir. Honest.

      The Gazprom deal is very small & they are not primary partners either.

    2. Arsenal may overtake Chelsea next year with the new Puma deal, if they can match Chelsea in the CL. Last year Chelsea eared approx. £25m more from gate/tv money for their CL run (4 more games than Arsenal). Chelsea's commercial revenue will grow as well but not by as much so it will be close, really depends how far each go in the CL.

      Will be interesting to see Mourinho try to compete for a long period without spending much, this will prove whether he is indeed 'special' or just a decent manager with a lot of spending power.

  5. 'That said, the club’s holding company, Fordstam Limited, does have around £1 billion of debt (£984 million as of June 2013) in the form of an interest-free loan from the owner, theoretically repayable on 18 months notice.'

    This is a very interesting paragraph. Would not the saving on interest be a cost that could have an impact on FFP ?

    1. Interest calculated on what basis(fair market value?) when the holding company can argue it's outside of UEFA's jurisdiction as to how they conduct their business? Any court would dismiss the case first hand.

      Besides the interest free loan repayable on an 18 months notice is largely for a time when things go Pete Tong. If you are going into a venture you also carve an exit strategy ready just for being safe. Does not really mean much, certainly less so for the amount of investment RA has done for Chelsea & still doing re possible purchase of a stadium for the reserve team & SB expansion...

  6. Chelsea are joke of a club and so is FFP. Only club who will suffer are clubs with not so sugar daddies like Athletico, Arsenal, Spurs and Pool.

    1. Arsenal dont have a sugar daddy ? Deluded mate!

    2. Liverpool were the original sugar daddy team, living off John Moores who owned Littlewoods pools.

    3. Ever checked how much Joe Lewis is worth? Not even considering others. Atletico is practically Jorge Mendes FC now.

      But no, lets not go into doing actual research. Far easy to leave imprint of peanut size brain by using old good bad cliche eh.

  7. Great article. Seems like they desperately need a larger stadium to keep up with the big boys.

    1. Not sure they would sell many more tickets and the cost involved would be staggering, their fan base has increased much more outside of London (glory hunters) but not so much in London.

      Also how long can they keep making profits on player sales?, they are balancing the books but long term will struggle to compete with the big 4 (RM/Bar/MU/BM) without Roman throwing more money in.

      Hopefully one day he calls in the debt and Chelsea end up back where they should be - fighting it out with Milwall in the lower leagues. 1 title in 90 odd years, then 4(probably) in 12 since the oligarch, but ask any Chelsea fan and they were 'on the up' anyway. LOL.

  8. "I also need to discuss your idea that FFP is driving the timing of transactions (another false meme), but I'll have to come back later."
    Actually as I re-read I see you don't make this point (though I know some do).
    Good. Player trading occurs because someone thinks there is a 50% ROI to be made, and so player trading is intended to add massive value to the club. Of course it mostly gives a -50% ROI, but that clearly is not why it was done.

    And Uefa really make an effort to allow clubs to match net spend in one year with net cash in another. P&L accounting. 3 year averages. And a punishment system that is lenient to one off offenders and harsh to repeat offenders.

    Mind you I still have no real expectation that Uefa will achieve much with FFP. I'm just glad it is City and PSG who are pushing the boundaries right now, and if they break down the barriers I'm sure my club is ready to follow them and spend big too.

  9. Still don't understand how they can write off a billion Quid's worth of debt.
    So rich owners can pump cash in and turn that debt into interest free loan.
    Do they ever pay back this sum and why isn't it counted into FFP

  10. Great Article. Any thoughts on "player impairment at 19m GBP? My guess is this was the accountant´s way of clearing the path for Torres to leave? Do you have any info as to whether Chelsea made significant player impairnent since the arrival of "el ninjo"? I´m only guessing that most of those 19m GBP was booked against the book value of Torres so Chelsea would have had one full year of amortisation left when Torres was shipped to Milan. This would actually make better sense if Chelsea had made impairments earlier and cleared the remaining book value in one swoop, no? This would have allowed for them to book any loan fees as pure profit, right?

  11. Good stuff Swiss. In the medium term it looks as though FFP is going to make it really difficult for Chelsea to compete with the tsunami of revenue generated by Man U but still it's really interesting to see that Chelsea are now a genuine part of the European elite - no owner subsidy or friendly sponsorship deals required. It would seem that Liverpool are the only club outside the top 4 who might have enough revenue to challenge Chelsea/Arsenal for the Champions League places. It's hard to forecast a couple of years ahead but by then even Liverpool might find themselves £100m in revenue behind those too. FFP does seem to be having a perverse effect of cementing the position of the current elite. But then again I think that was really the idea.

  12. I still don't understand how PSG spent 50 millions euros on David Luis. Some deals in international football seem so strange...


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