Just a few weeks ago, everything looked wonderful at Barcelona. They had won La Liga for the second season in a row, once again finishing ahead of Real Madrid. Despite their bitter rivals breaking the world transfer record twice last summer when buying Kaka and Cristiano Ronaldo, they could not match the talents of Xavi, Iniesta and Lionel Messi, who was voted FIFA World Player of the Year.
Although they could not repeat the previous season’s Champions League triumph, being unable to find a way past the defensive wall built by Jose Mourinho’s Inter in the semi finals, Barcelona did subsequently provide most of the players for the Spanish team that won the World Cup in South Africa.
“Glory days”, as Springsteen once sang.
However, July was not so kind to the Catalan club – at least from the financial perspective. Early in the month came the surprising news that the club had been forced to seek a sizeable bank loan of €150 million in order to overcome short-term problems with their cash flow. Incoming president Sandro Rosell was quick to explain that the credit request had initially been made by the previous Barcelona board under Joan Laporta’s presidency, “knowing that there were insufficient resources.”
Rosell blamed the former regime for this sad state of affairs, “We have taken over a club in debt and with liquidity problems, but we are resolving them.” Worse still, he claimed that the money was needed “to pay the important commitments such as the salaries of the players, coaching staff and employees.” Failing to pay the players is serious stuff, which was highlighted when the club sold defender Dmytro Chygrynskiy back to Shakhtar Donetsk for €15 million, which was €10 million less than they had paid for him only a year earlier, with Rosell confirming that the sale was motivated by financial requirements as well as sporting considerations.
As if that were not bad enough, the club then shocked the sporting community when they announced a major restatement to the accounts previously published at the AGM for the year up to 30 June 2010. The new vice-president for economic affairs, Javier Faus, said that an audit had revealed a series of adjustments that turned the €9 million profit declared by the former treasurer, Xavier Sala I Martin, into a massive loss of €80 million – that’s a huge difference of €89 million. The auditors’ proposed changes reduced revenue from €446 million to a still impressive €409 million, while increasing costs from €429 million to an unprecedented €478 million.
How can this be? What on earth is happening with Barcelona’s finances? This is mes que un loss by anyone’s standards.
The first point to make is that even in an age where we have International Financial Reporting Standards (IFRS), accounting is not quite as black-and-white as people might imagine. There is a considerable degree of judgment applied over which revenue and costs should be recognised in the accounts. Even Faus admitted that the old accounts were not “fixed”, but the new board had simply taken a far more conservative approach, “We opted for caution.”
"Laporta and Rosell - best of friends?"
One of the fundamental accounting conventions is prudence and it does look like Laporta had a tendency to count his chickens before they hatched. On the other hand, you can be too careful. As an analogy, if you believe that it’s going to rain, you might take an umbrella with you when you go out, but you probably wouldn’t refuse to leave the house just in case you get wet.
In fairness to the previous board, their results were unaudited. In fact, it’s a great achievement for the club to release draft accounts just a few days after the books closed. Most companies do not do this, as there are invariably numerous discussions with the auditors before the final figures are agreed. By the way, Deloittes are not new to the club, but have been auditing the accounts for many years, so there’s nothing too sensational about their role in the restatement.
There are three categories of adjustment to the accounts, which relate to television (€56 million), player transfers (€12 million) and land (€21 million). The largest is a €38 million provision for a legal dispute with TV company Sogecable, which the new board has decided to fully cover, even though they believe that they have a strong legal case. This is a long-running dispute, but, interestingly, Deloittes did not require a full provision in last year’s accounts.
Still on television, two adjustments were made for payments from current TV rights holder Mediapro, totaling €18.5 million. The first one is for a €16 million bonus payment that Laporta booked, even though it comprises four annual payments of €4 million until 2013. The auditors decided to only include this year’s money, leading to a €12 million adjustment. This could be argued either way, but given the long-term nature of the payments and Mediapro’s well-publicised difficulties, this correction is probably fair enough. Barcelona also have a legal dispute (another one) with Mediapro worth €13 million, which the auditors have only included at 50%, as it is not certain that the case will be won, leading to a €6.5 million adjustment.
Similarly, there are two adjustments for player transfers. In the case of Thierry Henry, even though his free transfer to the New York Red Bulls was only finalised in July, Faus claimed that the contract was signed before the end of last season, meaning that the remaining €8 million amortisation should be booked in the 2009/10 accounts. In yet another legal dispute (how much do Barcelona spend on lawyers?), the club is owed €4 million from Espanyol for the transfer of midfielder Raul Baena, which the auditors have not included, again because payment is far from guaranteed.
"Happy days"
Like animals boarding Noah’s Ark, the land adjustments also came in “two by two”. Very little of the proceeds from the sale of the Sant Joan Despi land has been received to date, despite the contract being completed, so the auditors have reduced this income by €15 million. Unless they seriously believe that the money will not be paid, this looks a bit too cautious to me. Usually, you do not wait until the money is received before recognising the income. In addition, two valuations were provided for the land at Viladecans: Laporta’s expert suggested €17 million, while Rosell’s appraiser estimated €5.7 million. Using the wisdom of Solomon, the auditors split the difference, producing a €5.7 million adjustment.
Without examining all the details behind these adjustments, it is impossible to say whether they are justified or not. My gut instinct is that they are overly prudent. What we can say with confidence is that none of these adjustments impact the club’s cash flow, as they are simply accounting entries for provisions and revaluations.
Given the striking drop in profitability, you have to ask whether Barcelona set a completely unrealistic budget for 2009/10.
On the face of it, looking at the projected growth from the 2008/09 results, you would have to say no. Revenue was only budgeted to increase by €20 million from €385 million to €405 million and almost all of that growth was due to €40 million profit on sales of assets (players €25 million, land €15 million). Yes, that’s the same land sale that the auditors adjusted this year. All other revenue streams were largely unchanged with marketing revenue actually forecast to decline, as they did not anticipate a repeat of the previous season’s spectacular trophy wins.
They also forecast €13 million cost growth from €362 million to €375 million, but this looks less reasonable. Player amortisation was budgeted to increase by almost 30% (€16 million), reflecting the impact of new players, but salaries were hardly increased at all. This never made sense to me and, as we shall see, this proved to be hopelessly optimistic. There was also an attempt at cost containment with other expenses cut by €6 million. All in all, former economic vice-president Joan Boix described this as “a very balanced and austere budget.”
So how did the actual 2009/10 results compare to this budget?
Using the figures after the audit adjustments, we can see that the revenue was pretty much in line. In fact, it was actually €4 million better than budget, as the negative variance due to the non-booked profit from the land sale was more than compensated by the core revenue. Marketing revenue was €7m above budget, thanks to more royalties from Nike and higher merchandise sales, while television revenue, the source of so much concern, ended up €16 million better than budget (11% higher than last year), mainly due to more money from the Champions League, following the 30% increase in the total pool. Although match day income was slightly lower than budget, it rose by 3%, helped by a 7% increase in the number of members.
However, the stand-out variances against budget were in the costs, which were an awful €103 million worse, coming in at a grand total of nearly half a billion Euros. The audit provisions are the reason for the €66 million adverse variance in other expenses, but the real damage is done in salaries. Adding together all staff (sports and administration) produces a jaw-dropping figure of €263 million, which is €36 million worse than budget. Put another way, the budget was out by 16%, which is a hell of a lot in just 12 months. It’s not as if they’re trying to forecast the lottery numbers, for heaven’s sake.
"Is the club down for the count?"
In fact, after all the audit adjustments, the total shortfall against budget is a round €100 million. Ouch. The solid revenue growth of 6% has been obliterated by terrifying cost growth of 32%. Granted, a considerable chunk of this is the result of once-off provisions, but much of it is down to player expenses – amortisation and salaries.
The wages were already very high, but €263 million is a scary figure. To place that in context, big-spending Real Madrid “only” paid out €187 million in staff costs last year (though it may have increased since then). The club identifies three reasons for the increase: new signings, contract improvements and variable compensation. The bonus payments were worth around €40 million, so Barcelona are, to some extent, victims of their own success.
As you would expect, the wages to turnover ratio has been on a rising trend and now stands at 68% (using Deloitte’s definition of revenue). This is by no means terrible, being within UEFA’s suggested maximum of 70%, but must be a concern. As a comparison, it’s about the same as Chelsea, though it is much worse than Manchester United (44%) and Arsenal (46%). It’s also lower than 13 clubs in the Premier League, though these clubs do not have anything like a €400 million turnover. Whatever. But what is indisputable is that the increase in salaries is the logical result of their (how shall we put it?) “generous” transfer policy.
As indeed is the increase in player amortisation to €71 million, which is even higher than Real Madrid (€64 million) and a lot more than even the most profligate English club (Chelsea €59 million), though Manchester City (€47 million) might get close after their third summer spending spree in a row. Of course, Barcelona have been no slouches in that department, splashing out around €90m last summer on bringing new players to the Camp Nou, including the unpredictable forward Zlatan Ibrahimovic, that man Chygrynskiy and two Brazilians: the veteran full-back Maxwell and the promising striker Keirrison. This year, they picked up Valencia’s prolific striker David Villa for €40 million, but the amortisation on his transfer fee will only be reflected in next year’s accounts.
Enough about the P&L, what about the balance sheet?
The major concern is obviously the debt, which Javier Faus said was “the biggest in the club’s history.” We’ve not been given the full details yet, but the adjusted figure released by the club was gross debt of €552 million (net debt €442 million). However, we do know that this represents total liabilities and is thus misleadingly high, as it includes trade creditors, accruals and even provisions. In fact, Rosell and his cohorts should be ashamed of this needless scaremongering, which is not consistent with standard accounting practice – or, indeed, UEFA’s definition, which explicitly states, “net debt does not include trade or other payables.”
As an example of how absurd the total liabilities definition is, just look at how high other clubs’ gross debt would be using this measure: Real Madrid €683 million, Liverpool €578 million and Manchester United €1.1 billion. Even Arsenal, which is regarded as the template for financial sustainability, would have “debt” of €767 million (though it’s come down a lot since the last annual accounts). This places Barcelona’s €552 million firmly into context. To use an old adage, you have to compare apples with apples.
Under UK accounting practice, net debt includes bank overdrafts and loans, owner and/or related party loans and finance leases less cash and cash equivalents. Under this definition, Barcelona’s net debt in last year’s accounts was actually only €20 million, compared to Rosell’s total liabilities of €489 million.
The truth is that Barcelona’s real debt lies somewhere between the narrow UK accounting definition and the new board’s widest possible measure.
"Keep your eye on the ball"
In fact, UEFA’s definition of net debt also includes the net balance owed on player transfers, which is probably the most reasonable approach to take, as this is an important part of Barcelona’s business model. Again, we have no way of knowing how much Barcelona owe to clubs for other players, though last year’s books included just under €90 million. This is why Laporta could truthfully claim last year that “the ultimate proof that Barca has a solid economic base is that we didn’t have to make any new debts when signing new players this summer”, as he was only referring to bank loans. However, this is not the whole story if money is still owed to other clubs on those transfers.
Whichever way you look at this, what is very clear is that net debt has increased by well over €100 million in a year, which is obviously not something to be proud of. The previous board gave two reasons for this significant increase: €65 million for outstanding taxes and €60 million for the transfers of Ibrahimovic, Villa and Chygrynskiy.
Since the accounts were closed, Barcelona have secured an additional €155 million loan from a group of banks led by La Caixa and Banco Santander, but this is unlikely to have greatly increased their total debt, as my guess is that this was largely used to pay off existing liabilities like the tax bill and some transfer payables. It would make sense for them to pay off short-term liabilities with longer-term debt. Often, when clubs have problems with debt, it’s not so much the magnitude that’s the issue, but the timing of the repayments. That’s why Arsenal’s long-term debt is not a concern, but Liverpool’s short-term debt is.
Even with this new credit, Barcelona’s bank loans are relatively low. Laporta’s AGM presentation gave a figure of €114 million, though for some reason this included a €57 million tax credit, so presumably the real bank loan was (coincidentally) €57 million. If the additional €155 million were to be added to that, the total bank loans would be €212 million. This is all speculative in the absence of a detailed balance sheet, but the point is that such a bank loan is eminently serviceable with annual revenue of over €400 million.
This has effectively been confirmed by Rosell, “The club is not bankrupt, because it generates income. The banks know that we have a business plan that will allow them to recover the money.” That confidence is supported by the club’s recent record, as it made profits six years in a row before this year’s loss. Faus confirmed that this is “not a dramatic issue”, as Barcelona has hidden assets worth over €250 million that are not reflected in the balance sheet, such as youth players and real estate. He also pointed out that the club has on its books the best player in the world plus eight players who have been world cup winners, so it’s not all doom and gloom.
The reality is that Barcelona can always tap into credit from Spanish banks. You simply cannot imagine a scenario where a local financial institution would be responsible for making the emblem of Catalonia bankrupt, given that its customer base is largely made up of the club’s supporters. Indeed, this loan has been given at a very low rate of interest (Euribor plus 2.5%, by all accounts), which indicates the positive credit rating that the club still enjoys with the banks, though this may well be a “friendly”, somewhat political rate.
On the other hand, there has to be some concern that the club is experiencing any financial problems at all after two years of fantastic success on the pitch, especially as so many of the first-team has emerged from their own academy (the famous La Masia). It makes you wonder what would happen to their numbers if the team suddenly stopped performing. Then, there are the generic economic difficulties in Spain, as the country faces one of the worst recessions in Europe with spiraling unemployment and a genuine credit crunch.
"Shout, shout, let it all out"
This is epitomised by the problems affecting Mediapro, who have a seven-year deal, due to expire in 2013, worth over €1 billion for Barcelona’s TV rights. These are so severe that the company has sought bankruptcy protection over a dispute with Sogecable, who, you might remember, are also in litigation with Barcelona. Last year, Laporta described the agreement with Mediapro as “the best contract on the market” regarding TV rights, but Rosell might well disagree. Although the new president said that Barcelona had been given assurances that the money would be paid, this was only a “verbal guarantee of payment”, unlike the bank guarantee supporting Real Madrid’s contract with Mediapro. If that’s true, that’s astonishingly inept.
However, in the event that Mediapro went under, “the cancelling of the contract would be immediate” and it is difficult to believe that another television channel would not want Barcelona’s broadcasting rights. They might pay less, but it is extremely unlikely that the club’s TV revenue would disappear altogether.
Of course, there’s a broader danger here, as the other clubs in La Liga attempt to implement collective bargaining with the potential negative implications for the business models of the “big two”. Clearly, both Barcelona and Real Madrid will resist this with all their might, as it would obviously mean a hefty reduction in their revenue, but such a change might not be catastrophic.
"How do you spell DNA?"
First, even with the Premier League’s collective model, the big clubs still enjoy by far the highest share of the total pool, as the distribution model is geared towards those finishing higher and the number of times a team is shown live on television (inevitably the top clubs). Second, if the Spanish league becomes more competitive, then it may become a more marketable product globally, which would increase the fees paid for overseas rights. Indeed, Real Madrid president, Florentino Perez, has already been pushing for an earlier kick-off for some La Liga games, so that they are more convenient for Asian TV audiences, “The change is vital if the Spanish league is to compete with the English.”
But are Barcelona too dependent on TV revenue? Well, it’s definitely very important, but it actually accounts for only 39% of their total income. As a comparison, only three clubs in the Premier League have a better (lower) proportion than that: Arsenal 34%, Manchester United 36% and Chelsea 38%. In fact, Barcelona enjoy a very balanced mix of revenue: television €151 million, commercial €121 million and match day €116 million. So, even if they were to lose 100% of their TV income (hardly a realistic assumption), they would still receive €237 million, which is not much less than clubs like Chelsea (€248 million) and Arsenal (€270 million).
The club’s revenue growth has been mightily impressive, up from €123 million in 2003 to €387 million in 2010. So their revenue has more than tripled in seven years with Xavier Sala i Martin describing this year’s revenue as “the largest income of any club in the world including the United States.” However, as the old saying goes, “turnover is vanity, profit is sanity.”
"Say hello, wave goodbye"
That’s absolutely correct, but another expression is even more important, namely “cash is king”. The reason why companies fail is cash flow problems. It does not matter how large your revenue (or profits are), if you do not have the cash to pay suppliers, the tax man or your players, then you are going to hit the rocks. In Barcelona’s case, the latest cash flow statement we have is from the 2008/09 accounts and this did not indicate any difficulties. There was a net cash inflow of €6 million, entirely consistent with the €7m reported profit, with net financing of only €16 million (the €29 million bank loan less €13 million repayments).
It does not take a genius to realise that there must have been a degree of financial mismanagement, if not downright incompetence, over the last 12 months, if you move so far from that healthy position that you need to take out a loan in order to pay your players. OK, this was exacerbated by the fact that Barcelona pay their players’ salaries twice a year, and this July’s payment was inflated by the high bonus payments, but even so.
The club’s cash flow predicament may have been brought about by doubts over when the Mediapro payments would be received (40% of the annual fee is due at the beginning of the season), but frankly it could have been for any number of reasons.
"Laporta warmly welcomes Rosell"
Some have speculated that Laporta only left Rosell enough funds to either make the payroll or buy new players, but not both, thus forcing the new president to not make any marquee signings in his first summer. Others have attributed the shortfall to the purchase of David Villa, when Barcelona for once had to pay the entire transfer fee upfront, due to Valencia’s own financial travails. On the other hand, some have claimed that the liquidity crisis was caused by Rosell’s decision to cancel the scheduled price rise in season tickets, as the previous board’s (unpublicised) request for a bank loan had assumed this additional revenue as part of their business plan. This meant that Rosell had to re-submit a modified loan request.
It has surely become obvious by now that there is more than a hint of politics in this whole mess with FC Barcelona caught in the middle of a deeply personal battle between the incoming and outgoing presidents. Although Laporta and Rosell were colleagues on the board between 2003 and 2005, they have famously fallen out and now only communicate through lawyers. Rosell was elected on a platform of sorting out the financials, so he is hardly going to say that everything is “hunky dory” once he’s put his feet under the desk. Having said that, it is equally clear that Laporta would like to go out with a bang: financial stability as well as sporting success.
"Yes! We've been paid!"
To my mind, the generous provisions made by Rosell smack of what the Americans call “big bath” accounting, which is a very common occurrence in the business world. What happens is the newly appointed CEO attempts to get all the bad news out of the way in his early days, which has two advantages. First, he can blame any problems on his predecessor; second, it gives him a lot of flexibility to demonstrate future profit improvements, as and when the provisions are released. We have seen many examples of this in the banking sector, but we don’t have to go that far to see a precedent: this is exactly what happened in 2003 the last time that there was a change in Barcelona’s president. This may be overly cynical, but it would not surprise me at all if Rosell painted a very different picture in 12 months time (after the first glorious year of his presidency).
Although Laporta has not responded publicly to the accusations made by the new board, perhaps mindful of his ambitions in regional politics, one of his former deputies, Xavier Sala i Martin, has said plenty, including an ironic analogy for the accounting adjustments where he thought that the new board should take the credit for the 2009/10 La Liga triumph, as the trophy had not yet been delivered. This is possibly a bit harsh on Rosell, who did after all gain a resounding majority of members’ votes in the presidential election, but the former treasurer went further, claiming that this might be an elaborate plan for the new board to make excessive profits in their first year, which would apparently allow them to get back the enormous bank guarantees deposited as part of the presidential campaign. I have no idea whether this is true, but it certainly demonstrates the level of antipathy between the two sides.
In fact, there have been so many contradictory statements coming out of Barcelona, that it’s almost impossible to distinguish the wheat from the chaff. How can a club need a €150 million loan to pay its wages, but the next minute also have a transfer budget of €50 million (sorry, €89 million after player sales)? That’s some transfer pot for a club with cash flow problems. Until we can examine the comprehensive financial statements, it’s difficult to get to the bottom of this, but something doesn’t add up.
"I'm heading that way"
What is clear is that Barcelona need to somehow improve their financials. The most immediate action should be to cut costs and they have plenty of scope to do this with a couple of obvious targets. They have already started the process of reducing the enormous wage bill by offloading Thierry Henry and Rafael Marquez to the New York Red Bulls and selling Chygrynskiy to Shakhtar and Yaya Toure to Manchester City. The latter two sales also provided the double whammy of bringing in €39 million of sale proceeds. There may be more to come here with Alex Hleb and Martin Caceres likely to go on loan, though it now seems unlikely that the high-earning Ibra will leave this summer.
It’s also surely not beyond the club to negotiate a bonus scheme that pays out less than the additional revenue generated from any success. Portsmouth also fell into the trap of losing money after their FA Cup win, but you would hope that Barcelona’s executives were slightly more competent than the miserable shower at "pay up" Pompey.
On the revenue side, they could re-introduce the idea to increase season ticket prices, though this would admittedly be tricky in the current economic climate, especially as the stadium is already not filled to capacity.
But there is a far more obvious opportunity in commercial revenue, where the club has already agreed that there is “scope for future growth.” In particular, they could sign a lucrative sponsorship deal. Barcelona have famously never had a shirt sponsor, instead paying UNICEF for the privilege of having their name on the kit, but Rosell has already raised this idea during the election campaign. As a comparison, Real Madrid receive €20 million a year for shirt sponsorship, while Liverpool have secured a €24 million deal, despite their decline. I would think that Barcelona could charge a premium for the privilege of being the first corporate name on the blaugrana shirt, so this could be worth €25-30 million.
"We've got Cesc Fabregas"
Of course, there are many that would like to see Barcelona fail after their unseemly pursuit of Arsenal captain, Cesc Fabregas, which has dominated this summer’s transfer talk. This culminated in an extraordinary statement last week, where they admitted that none of their bids “exceeded €40 million”, which is either massive disrespect to a player of Cesc’s talent or demonstrated a new-found sense of financial prudence. Take your pick.
In a way, the desire for Barcelona’s future prospects to be hamstrung by financial woes is perfectly understandable, as they have undoubtedly sullied their saintly image with their constant tapping-up and inability to shut up about Cesc’s Barcelona DNA, but it looks like reports of their demise might be a little premature. After all, if things get really desperate, they could always raise €100 million by selling Messi.
So are Barcelona going bankrupt? No way, José.
