Manchester City - The Modern World

Most football clubs would be very satisfied if they ended up with a second place Premier League finish and qualifying for the knockout stages of the Champions League, but not Manchester City. In fact, chairman Khaldoon Al Mubarak said, “it is hard to look back on the 2014/15 season without a degree of disappointment”, as there was no title to show for their efforts.

However, he did point out, “The fact that we consider last season to be below par for Manchester City is a testament to how far we have come in the last seven years”, adding “this is a level of ambition that we should not shirk or shy away from.”

Although City may not have met all the owners’ demanding objectives in terms of filling the trophy cabinet, they certainly performed off the pitch. As chief executive Ferren Soriano said, “The 2014/15 season marked a historical step in Manchester City’s journey. The club delivered an annual profit for the first time since its acquisition in 2008.”

In fact, City reported a pre-tax profit of £10.4 million (£10.7 million after tax), compared to the previous year’s loss of £22.9 million, a year-on-year improvement of £33.3 million. Revenue rose by £5 million (2%) to a record £352 million, marking the seventh straight year of revenue growth, with commercial income up £7 million (4%) to £173 million and broadcast revenue up £2 million (2%) to £135 million, though match day revenue was £4 million (9%) lower, largely as a result of the stadium expansion works.

Profit on player sales was £14 million higher, but the main driver of the better figures in 2014/15 was a reduction in costs, as the wage bill was cut by £11 million (5%) to £194 million and player amortisation was £6 million (8%) lower. Against that, other expenses rose £8 million (12%) to £76 million and depreciation was £2 million higher.

This year also benefited from having no exceptional items, while 2013/14 was adversely impacted by the £16 million settlement with UEFA for failing to meet Financial Fair Play (FFP) regulations, though this was partly offset by £7 million insurance proceeds. Finally, there was a £2 million loss on disposal of fixed assets, while other operating income was £1 million lower.

Of course, these days the Premier League is a largely profitable environment, largely thanks to the ever increasing TV deals, with City being one of just five clubs in the top flight to lose money in 2013/14. Only three clubs have to date published their accounts in 2014/15 with both City and Arsenal reporting healthy profits, though Manchester United’s absence from the Champions League contributed to them slipping into the, ahem, red with a £4 million loss.

Once-off profits on player sales can also be very important to the bottom line. While City made less than £200,000 from this activity in 2013/14, this rose to £13.8 million last season, helping the club’s return to overall profitability. This was largely due to the sales of Matija Nastasic to Schalke 04, Jack Rodwell to Sunderland, Javi Garcia to Zenit Saint Petersburg and Gareth Barry to Everton.

This has not been a great money-spinner for City recently, but next year’s accounts will benefit from a number of players leaving the club, which has generated sales proceeds of around £48 million (Alvaro Negredo to Valencia £24 million, Rony Lopes to Monaco £9 million, Karim Rekik to Marseille £3.5 million, Scott Sinclair to Aston Villa £2.5 million and Dedrick Boyata to Celtic £1.5 million) and £5 million of loan fees (including Edin Dzeko to Roma £2.9 million and Stevan Jovetic to Inter £2 million). Dzeko’s loan was made permanent in October, bringing in an additional £8 million.

After deducting accumulated amortisation, all those deals could bring in over £40 million of profits in 2015/16 with a further £10 million due if the other loan deals are made permanent (though that might only hit the 2016/17 books).

Other clubs have been generating sizeable profits from this activity, as can be seen in 2013/14: Tottenham £104 million (largely Gareth Bale to Real Madrid), Chelsea £65 million (David Luiz to PSG), Southampton £32 million (Adam Lallana to Liverpool) and Everton £28 million (Marouane Fellaini to Manchester United).

After years of heavy spending in order to build a squad and the facilities required to compete at the highest level, City’s losses have been steadily reducing since the record £197 million peak posted in 2011, effectively halving each year (2012 £99 million, 2013 £52 million and 2014 £23 million) before reaching profitability in 2015.

Al Mubarak described the transition to profitability as “a long planned milestone”, being part of “a strategy predicated on long-term sustainability and the ongoing development of momentum year-after-year.” The figures certainly seem to support this viewpoint, marking out an almost perfect v-shaped recovery.

Another impressive aspect of these results is that they have not been enhanced by some of the fancy footwork that has been seen in previous years, most notably in 2013 when the sale of intellectual property lowered the loss by £47 million.

Against that, City would actually have been close to profitability last year without the £16 million UEFA fine.

The other side of player trading is obviously player purchases, which is reflected in the accounts via player amortisation, as transfer fees are not fully expensed in the year a player is purchased, but the cost is spread evenly over the length of the player’s contract. City’s initial spending spree saw player amortisation shoot up from just £6 million in 2007 to a peak of £84 million in 2011, before falling away in the last three years to £70 million in line with less frenetic transfer activity.

In addition, City have frequently extended player contracts, so any remaining written-down value in the accounts for those players has been amortised over the term of the new contract. This has had the advantage of reducing the annual amortisation charge in recent years, but has the disadvantage of extending the period for which these players’ transfer fees are amortised.

Clubs that are regarded as big spenders logically have the highest player amortisation charges, so United’s massive outlay under Moyes and van Gaal has driven their annual expense up to £100 million. The next highest in the Premier League is Chelsea £72 million (2013/14), followed by City £70 million, while Arsenal’s relatively restrained spending has left them with £54 million of player amortisation in 2014/15.

The accounting for player trading is horribly technical, but it is important to grasp how it works to really understand a football club’s accounts. The fundamental point is that when a club purchases a player the costs are spread over a few years, but any profit made from selling players is immediately booked to the accounts, which helps explain why clubs like City can spend so much and still meet UEFA’s Financial Fair Play targets.

As a result of all this accounting smoke and mirrors, clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation) for a better idea of underlying profitability. In City’s case this metric clearly shows their improvement, as it has steadily risen from a negative £71 million in 2011 to an impressive £83 million in 2015.

This is only behind Manchester United, whose amazing ability to generate cash is reflected in their EBITDA of £120 million (and they are projecting an astonishing £165-175 million for 2015/16 following their return to the Champions League and their new kit deal).

However, to better place City’s £83 million EBITDA into context, it is still a third higher than Arsenal’s £64 million, while the next best are Liverpool £53 million, Chelsea £51 million and Tottenham £39 million (all 2013/14 figures).

City have increased their revenue by over 300% (£265 million) since 2009 from £87 million to £352 million. The majority of the growth has come from commercial income, which has surged £155 million to £173 million, so is almost 10 times as much as the £18 million in 2009.

In the same period, broadcasting income has nearly tripled from £48 million to £135 million with £54 million coming from improved Premier League TV deals and £33 million from Champions League participation. Match day receipts have more than doubled from £21 million to £43 million.

That’s very impressive, but the growth in 2014/15 was only 2% (£5 million), which is less than analysts had anticipated and also worse than Arsenal, who grew by 10% (£31 million). However, it was better than Manchester United, whose revenue fell by 9% (£38 million), due to their failure to qualify for Europe.

This should not be overly concerning for City, as there is more to come in every revenue stream: TV – through higher Premier League and Champions League deals; commercial – from renegotiating the shirt and kit sponsorship; and match day – after expanding the stadium.

Despite United’s decline, they still have the highest revenue in the Premier League in 2014/15 with £395 million, which is £43 million more than their “noisy neighbours”. However, City are the second highest in England, ahead of Arsenal £329 million, Chelsea £320 million and Liverpool £256 million (the latter two being 2013/14 figures).

City’s 2013/14 revenue of £347 million placed them 6th highest in world football as per the Deloitte Money League, though Real Madrid continued to lead the way with £460 million, followed by United £433 million, Bayern Munich £408 million, Barcelona £405 million and Paris Saint-Germain £397 million.

In their annual report City claim to have “the highest annual growth in revenues of the top 10 clubs”, but this does not automatically mean that they will overtake the leading contenders, as they too are making good progress. For example, both Spanish giants have announced good revenue growth in 2014/15: Real Madrid up 5% to €578 million, Barcelona up 16% to €561 million. Against that, their revenue in Sterling terms will be impacted by the weakness of the Euro.

Furthermore, United are estimating revenue of £500-510 million in 2015/16 following their return to the Champions League and the record Adidas kit deal, which would make them the first English club to break through the half-billion pounds barrier.

If we compare City’s revenue to that of the other nine clubs in the Money League top ten, we can immediately see where their largest problem lies, namely match day income, where City are substantially lower than their rivals, e.g. they were £61 million behind United (£47 million compared to £108 million).

On the plus side, City look to be fine on broadcasting and pretty good on commercial. City’s spectacular commercial growth means that they are ahead of most clubs, though are still lower than those that have traditionally been successful in monitising their brand: Bayern Munich £78 million, Real Madrid £28 million and Manchester United £23 million. The £108 million shortfall against PSG is largely due to the French club’s “friendly” agreement with the Qatar Tourist Authority.

Unsurprisingly, commercial income is the largest revenue stream, accounting for around 50% of total revenue, followed by broadcasting 38%. Match day income contributes only 12%, following the 2014/15 reduction.

City have grown commercially at a far faster rate than all their domestic rivals (861% since 2009) with their revenue rising to £173 million in 2014/15, but they are still behind Manchester United, whose commercial juggernaut produced £197 million – and that is before United’s blockbuster new deal with Adidas that commences in 2015/16.

However, City are miles ahead of all other English clubs commercially, e.g. even after Arsenal reported 34% growth last season, their £103 million was still £70 million lower than City. It’s a similar story at the other English clubs: Chelsea £109 million, Liverpool £104 million, then a big drop to Tottenham £42 million and Aston Villa £26 million.

Critics will argue that City’s commercial success is built on friendly deals with Arab partners, but the fact is that City are now signing up many other deals not linked to their owners with 22 additional partnerships last season alone, including Nissan, SAP, City and Coco Joy (the official coconut water partner, oh yes).

Al Mubarak argues that the commercial growth “is also in large part due to the City Football Group strategy that has been rolled out over the last two years…(that) creates global scale.” This involves joint initiatives with New York City FC, Melbourne City FC and Yokohama F Marinos.

There is obviously some truth in that, but it is also down to the fact that sponsors simply like to be associated with success on the pitch. Either way, Brand Finance have rated City as the fourth most valuable football brand globally and the second most valuable in the Premier League.

In any case, the groundbreaking 10-year £400 million deal with Etihad Airways, covering shirt sponsorship, stadium naming rights and the campus development, now looks to be behind the market, as other clubs have since raised the bar. It is estimated that the shirt sponsorship element of City’s deal is worth £20 million a season, which would put City’s deal way below their competitors: Manchester United – Chevrolet £47 million ($70 million); Chelsea – Yokohama Rubber £40 million; and Arsenal – Emirates £30 million.

In fact, there has been talk of City renegotiating the Etihad deal upwards to reflect their higher commercial value after two Premier League titles and regular Champions League participation. Some reports have speculated that the value could even double to £80 million a season.

There are also rumours that City are trying to negotiate upwards their £12 million kit supplier deal with Nike, even though their current six-year contract only started in 2013. There is certainly room for improvement, as this is now well behind other clubs’ latest deals: United £75 million (Adidas), Arsenal £30 million (PUMA) and Liverpool £25 million (Warrior).

City’s share of the Premier League television money was £98.5 million in 2014/15, up £2 million from the previous season. This was even before the increases from the mega Premier League TV deal in 2016/17. My estimates suggest that City’s second place would be worth an additional £51.5 million under the new contract, increasing the total received to an incredible £150 million. This is based on the contracted 70% increase in the domestic deal and an assumed 30% increase in the overseas deals (though this might be a bit conservative, given some of the deals announced to date).

The other main element of broadcasting revenue is European competition with City receiving €46 million for reaching the last 16 in the Champions League. Although this was €11 million higher than 2013/14, in Sterling terms this was only worth an additional £2 million (£33 million compared to £31 million), due to the weakening of the Euro.

It is worth noting the importance of the TV (Market) pool to the Champions League distributions. Half of this is based on how far a club progresses in the Champions League, so City benefited from other English clubs not doing so well in 2014/15 as the prior year. The other half is dependent on where a club finished in the previous season’s Premier League: 1st place 40%, 2nd place 30%, 3rd place 20% and 4th place 10%. As City won the title in 2013/14, compared to finishing runners-up the year before, they received a higher percentage in 2014/15.

In addition, there was more money available in the UK market pool in 2014/15, as this did not have to be shared with a Scottish club in 2014/15 (as was the case in 2013/14 with Celtic). The allocation also depends on how many clubs reach the group stage from a country, which explains why Juventus received such an enormous slice of the Italian market pool, as they only had to share it with one other club, while the UK pool was split between four clubs.

The financial significance of a top four placing is even more pronounced from the 2015/16 season with the new Champions League TV deal worth an additional 40-50% for participation bonuses and prize money and further significant growth in the market pool thanks to BT Sports paying more than Sky/ITV for live games. This could be worth an additional €20 million to City.

Match day income fell 9% (£4 million) to £43 million in 2014/15, partly because of temporarily reduced seating capacity due to stadium expansion works, which reduced the average attendance from 47,091 to 45,365, and two fewer home games following shorter campaigns in the domestic cups.

Although this revenue stream had been on a rising trend, City’s £43 million is less than half the money generated by Arsenal £100 million and United £91 million, partly due to City season tickets being among the cheapest in the Premier League.

For the 2015/16 season the Etihad Stadium capacity has been increased by 7,000 seats to 55,000 after adding a third tier to the South Stand and adding three new rows of pitchside seats, which should result in higher match day income. The club sold out its full allocation of more than 35,000 season tickets with a 9,000 waiting list. City have also received planning permission for potential further expansion up to 62,000 by doing the same for the North Stand.

City’s wage bill decreased by 5% (£11 million) from £205 million to £194 million, the second year in a row that wages have been cut. A large part of the decrease was due to smaller bonus payments, as no silverware was secured, with chief executive Ferran Soriano renegotiating a number of contracts with a lower basic salary, but higher bonus payments.

This lowered the wages to turnover ratio to a “healthy” 55%, the fourth successive year that this metric has improved from the peak of 114% in 2011. In fact, this is now one of the lowest in the premier League, better than Arsenal’s 58%, but still higher than United’s 51%.

The magnitude of City’s wages reduction has raised a few eyebrows, especially as the number of football staff was slashed from 222 to 112 in 2014. This is essentially due to a group restructure, where some staff are now paid by group companies, which then charge the club for services provided.

Whatever the rights and wrongs of City’s reported wages, they have been overtaken by United, whose wage bill was £203 million in 2014/15. It is striking how the wage bills at the leading clubs are converging around the £200 million level with Arsenal up to £192 million in 2014/15 and Chelsea £193 million in 2013/14. It should be noted that one of the clauses in UEFA’s FFP settlement with City stated that they could not increase their wage bill during the next two financial periods (2015 and 2016) – though performance bonuses are not included in this calculation.

Of course, there is a big gap to the other Premier League clubs with the nearest challengers (in 2013/14) being Liverpool £144 million, Tottenham £100 million and Newcastle £78 million.

Although there is a natural focus on wages, other expenses also account for a considerable part of the budget at leading clubs, especially at City with £76 million, now ahead of United and Arsenal (both £72 million). These cover the costs of running the stadium, staging home games, supporting commercial partnerships, travel, medical expenses, insurance, retail costs, etc.

In City’s case, there is also the impact of the restructure whereby some staff are now paid by group companies with the costs included in external charges, as opposed to wages. This helps explain the steep growth in external charges, which have risen from £42 million in 2013 to £69 million in 2015.

After an initial period of major investment following the club’s purchase by Sheikh Mansour, which peaked with £155 million of gross spend in 2010/11, City had been reducing their activity in the transfer market (relatively speaking), as explained in the annual report: “Consistent with the commitment made in 2009/10 that transfers of the scale seen in previous years would be unlikely to be repeated, the club is continuing to benefit from greater stability in the first team squad.”

Well, yes, that may have been the case – until this summer’s £142 million outlay, when City brought in Kevin De Bruyne (£54 million from Wolfsburg), Raheem Sterling (£44 million from Liverpool), Nicolas Otamendi (£28.5 million from Valencia), Fabian Delph (£8 million from Aston Villa) and Patrick Roberts (£5 million from Fulham). These purchases are not included in the 2014/15 accounts.

Interestingly, City’s gross spend in the last five years of £462 million (averaging £92 million a season) is almost exactly the same as the £456 million spent in the previous five years – though most of this (£407 million) was incurred in the three years after the new regime arrived in September 2008.

Of course, there are two sides in a market and City managed to recoup £41 million through player sales, giving a net spend of £101 million. Obviously this is still on the high side and most clubs can only dream of such a level of expenditure, but it’s not quite so dramatic as the gross spend figure widely reported. It is also worth noting that this is the highest annual player sales figure achieved to date by City.

To an extent City have been playing catch up this summer, as UEFA had imposed restrictions on their transfer spending last year. Nevertheless, City still have the highest net spend over the last two season of £151 million, though Manchester United are pretty much at the same level with £145 million, as Moyes and Van Gaal have both endeavoured to reinvigorate their squad following the departure of Sir Alex Ferguson.

Both Manchester clubs are a long way ahead of the other Premier League clubs in terms of net spend with the closest challengers being Arsenal £74 million (around half as much), Newcastle United £62 million and Liverpool £57 million.

City have stated that they are “operating with zero financial debt”, which is true, but their own net debt calculation includes £67 million of debt from finance leases (for future obligations under the lease of the Etihad Stadium). Nonetheless, this is not a problem, especially as it is covered by £75 million of cash to give net funds of £8 million.

However, it is worth noting the impact that the transfer market has had on City’s liabilities. They owe an additional £29 million in transfer fees to other clubs, though this is more than compensated by the £42 million that other clubs owe City.

The really prominent figure is the £113 million that City have included for contingent liabilities (up from £42 million in 2012), which is for “additional transfer fees, signing-on fees and loyalty bonuses… that will become payable upon the achievement of certain conditions contained within player and transfer contracts”, i.e. number of appearances, success on the pitch, etc. To place this enormous sum into perspective, contingent liabilities at other leading clubs are significantly smaller: United £26 million, Arsenal £9 million and Chelsea £3 million.

Where City are doing well compared to their peers is on net financing costs, as their annual payment of £5 million (mainly stadium finance lease charges) is a lot lower than United £35 million and Arsenal £13 million. For context, it’s around the same as Everton, West Ham and Liverpool.

Similarly, other clubs have to carry the burden of sizeable debt, especially United who still have £411 million of borrowings even after all the Glazers’ various re-financings and Arsenal, whose £234 million debt effectively comprises the “mortgage” on the Emirates stadium. There were four other clubs with debt above £100 million in the Premier League in 2013/14, namely Cardiff City £135 million, Newcastle United £129 million, Liverpool £127 million and Aston Villa £104 million.

The turnaround in City’s financial performance n the last two years is underlined in the cash flow statement, which shows that the club is now generating cash. In 2014/15 they generated an impressive £103 million from operating activities, spending a net £66 million on transfers, £62 million on capital expenditure (i.e. infrastructure investment in the stadium expansion and the City Football Academy) and £5 million on interest/lease payments. This produced a cash deficit of £31 million that was funded by issuing £84 million of new shares, leading to an increase in cash balances of £53 million.

Of course, City’s development has been largely funded by Sheikh Mansour, who has put in around £1.2 billion since the takeover in August 2008 through £0.9 billion of new share capital and £0.3 billion of loans (subsequently converted to shares). Most of this has gone into the squad (£679 million) with a further £288 million invested into the club’s infrastructure. Around 10% (£121 million) of the money has been used to finance loans and leases with a further £76 million required to fund (cash) operating losses. This leaves £65 million that has simply increased the club's cash.

City now have a very healthy cash balance of £75 million, but this is still a lot lower than Arsenal £228 million and United £156 million.

Although some might believe that this is evidence that City have bought success, it is in stark contrast to United, whose owners have cost the Red Devils around £850 million in interest payments, debt repayments and professional fees, thus restricting the amount they have been able to spend on improving the squad and the club’s infrastructure.

"Hand in Glove"

As the Manchester United Supporters' Trust said, “If it were a race, then United are dragging their owners behind them like a tractor, while Manchester City's owners are providing rocket fuel.”

Financial Fair Play has obviously been one of the most important challenges for Manchester City, including a €20 million (£16 million) settlement in 2013/14. The failure to meet UEFA’s break-even targets had actually resulted in a €60 million (£49 million) fine, but €40m (£33 million) of this was suspended.

"Captain Sensible"

City would now appear to be out of the woods with Al Mubarak confirming that there are “no outstanding restrictions”, though UEFA have noted that this was “subject to ongoing additional controls and audits”, adding, “the club remains under strict monitoring and has still to meet break-even targets and is therefore subject to some limitations in 2016.”

In any case, City are already looking to the future with the opening of the City Football Academy in December 2014. This has been built on 80 acres featuring a 7,000 capacity stadium and 16.5 pitches with two thirds of the site dedicated to youth football.

Al Mubarak observed, “The signs are all positive. Our Academy enjoyed one of its most successful years to date with accomplishments at every age group.” Importantly, he was keen to note that “ten players from our development system earned first team debuts in 2014/15.”

"Pablo Honey"

It has been a long journey for City, but they have rarely put a foot wrong in executing their Masterplan. As Soriano said, “Manchester City is now a profitable, self-sustainable club competing at the highest level in world football.”

That’s already a fine achievement, but, echoing famous City fan Noel Gallagher (“I'm part of the greatest band in the world. Am I happy with that? No, I'm not. I want more!”), Soriano is eager for further progress, talking of “the potential that exists for Manchester City to reach even greater heights in the future.”

The other elite clubs might have something to say about that, but it is fair to say that this version of City is considerably different from the one that used to suffer from what Joe Royle once called “Cityitis”. They are well placed to win more honours, but it’s now up to manager Manuel Pellegrini to deliver.