Liverpool – The Kop’s Commercial Weakness

Liverpool FC released their financial results recently to great fanfare, record profits, growing revenue and a competitive wage structure were all reasons for Liverpool fans to get excited. Among all this excitement the composition of their revenue went under the radar.

Roughly half of their revenue was from TV money and prize money, which although shows success in a season, isn’t something that can be relied upon each year. Unless your Real Madrid or Barcelona, Champions League finals/trophies are a rare occurrence due to the strength of the competing rivals.

Roughly a fifth of Liverpool’s revenue came from matchday earnings which has remained fairly stable but is increasing as the capacity of Anfield increases.

This leaves around a third of Liverpool’s revenue being from commercial revenue. Commercial revenue is made up of sponsorship deals and merchandise sales. This is the area where Liverpool are below Europe’s top table and an area that has significant room for improvement.

The Problem

The graph above shows the potential Liverpool have to grow this area of revenue and boost income significantly to boost their financial muscle. Liverpool’s commercial revenue is the 8^th highest in Europe according to Deloitte and is less than half the amount Real Madrid command. Although no one is saying Liverpool are as big a club as Real Madrid, the difference is much bigger than it should be.

Liverpool lag their northern rivals in Manchester significantly too, by more than £100m in Manchester United’s case. This gap needs to shrink if Liverpool are serious about mixing with Europe’s finest.

Mr. Popular

The reason Liverpool have so much potential and are currently under achieving when it comes to commercial revenue is the growth the club has experienced in popularity and appeal worldwide under Klopp.

Liverpool have struggled over the past couple of decades to ‘get with the times’ and match their rivals in digital popularity as football moved into the modern era. Manchester United perfectly exploited and channelled the new commercial era and as a result saw their finances explode with Liverpool playing catch up ever since.

However, Liverpool are catching up and are ahead of many in terms of social media followers. The club have the 6^th highest number of twitter followers of the twenty teams to make up the Deloitte Money League. They also have 9^th highest number of followers on Instagram which could be improved upon with more engagement and is an area for growth.

The club only has the 10^th highest number of Facebook ‘likes’ and should look at these platforms as areas that could grow significantly. In all these areas they aren’t far of moving further up the social media chain as the club engage to a greater extent with the fans and their success on the pitch attracts more digital fans.

The importance of this nowadays cannot be underestimated, a club’s social media pull gives companies a great way to advertise directly to their target market being football fans or geographical location. A greater number of followers makes it much easier to negotiate lucrative sponsorship deals, especially the smaller club partners who can make up a considerable amount of a club’s commercial revenue.

Kitted Out

Liverpool currently earn roughly £28m from their kit manufacturer New Balance annually. This is almost a third of the amount Manchester United attract in their £75m deal with Adidas and 5 times less than Barcelona’s high of £140m from Nike.

Liverpool are (and should be) entertaining offers from the likes of Adidas and Nike as they look to match, if not exceed the amount earned by Manchester United when their deal with New Balance runs out at the end of next season.

Liverpool should be able to increase their kit deal significantly as Manchester United negotiated their deal a few years ago so by now, this should be well within the grasp of Liverpool considering the growth in popularity the club has sustained of late.

Their current deal is also below the likes of Chelsea and Manchester City, clubs of a similar stature social media wise however Liverpool also have a larger fan base outside of this and would therefore hope to command at least in excess of the £50m Manchester City recently negotiated with Puma.

Getting More Shirty

Liverpool have stayed loyal to their shirt sponsors historically, seemingly married to Carlsberg until they parted ways a few years ago and Standard Chartered took their place. Liverpool chose wisely and have recently renegotiated their deal on £40m a year for four years, up from £30m. This was a shrewd move and Liverpool are doing well in terms of their shirt sponsor and there is not much room to improve in this area.

The club should focus on maintaining a good working relationship with Standard Chartered and negotiate at the appropriate time to improve the terms, maybe by incentivising additional performance related bonuses that will reward the club on the back of successes on the pitch.

Opportunity Knocks

Liverpool have many additional areas that could enhance commercial revenue with some controversial and others just sensible.

Sleeves

Liverpool currently have a 5-year deal with Western Union as their sleeve sponsor, mainly in line with their rivals. Arsenal are currently leading the way with an £8m-a-year deal, something Liverpool should consider exceeding considerably when their current deal expires in 3 years, something for the future.

Training kits

Liverpool’s training kit is sponsored by BetVictor and their current deal expires at the end of the season, making it an opportunity to bring in a more lucrative deal. For comparison, Barcelona have reportedly the highest training kit deal (with Beko) at around £16m a year, which offers a sizeable boost in revenue should Liverpool get anyway near that figure, either by improved terms of a new sponsor.

Naming Rights

Stadium naming rights are a controversial topic in England among fans with many opposed to the idea of ruining club traditions all for the sake of a few quid. However, recent studies have shown it is no longer a few quid with valuations in excess of £10m being placed on Anfield and other famous stadiums. A boost of even £10m in commercial revenue would by over 5%.

Club Partners

Liverpool could attempt to go a different way and go for volume with sponsors. Club partners can add small multi-million-pound deals here and there however if this was scaled up, could run to the tens of millions. The main drawback here is the time it may take and the devaluing of their main sponsor who may not be best pleased to see all these deals that take the shine of their large deals.

Go Strange

What if Liverpool find the newest trend like the sleeve sponsor? This is an option for the creative. How about shorts sponsors? Press conference sponsors? These are all options and many more. The club could also develop a new medium to share their content that substantially boost their social media following and attracts more lucrative deals.

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February 18, 2019February 18, 2019

Liverpool 2018 Financial Review – Klopping Profits

Liverpool came off age last year under Klopp and returned as a European powerhouse, securing a top 4 place for the second consecutive year and coming within a goalkeeping performance and Salah arm of winning the Champions League. Domestic cup performance was the only blot on an otherwise promising season.

It has already been documented that the Reds have achieved recording-breaking level of profits, recording a profit of £125m (£106m after tax). This may seem amazing however the finances detail that the profit, although impressive, may not be all that it seems, with it predominately due to transfers.

Let’s delve into the numbers.

Revenue Analysis

Liverpool saw their revenue shoot up significantly on their return to the Champions League. Revenue rose from £364.5m to £455.1m (25%) with their success in the Champions League and consistent Premier League performance the main reason.

Broadcasting rose by the largest amount, increasing from £154.4m past the £200m barrier to £220.1m (43%). This huge boost was due to the £70m the club earned from their European exploits as they maintained their 4^thplaced finish in the league and suffered early exits in the domestic cups.

Commercial rose a disappointing amount, increasing from £136.6m to £154.3m (13%) as the club hopefully have yet to see the full benefit of their Champions League exploits and general goodwill/popularity they have begun to generate.

Matchday revenue rose from £73.5m to £80.7m (10%) on the back of a greater number of home games from their Champions League participation.

Looking ahead, revenue is likely to increase as Liverpool enjoy (or try to) a title race for the ages that should see a boost in Premier League prize money. It will be a tough ask to equal or better their Champions League campaign of last year which will see a drop-in prize money here. However, any rise will depend largely on the success of the commercial team to monetise the increasing popularity of the club.

Costs Analysis

Liverpool saw a rapid rise in their costs this year, increasing from £357.8m to £447.8m (40%) as they looked to compete to a greater extent with their rivals. Interestingly despite the large profit recorded, profitability actually fell as their costs rose a greater rate than their revenue.

Amortisation rose by a third, increasing from £58.4m to £77.3m (32%) as player investment increased significantly due to a notable departure. It seems the investment is already paying off.

Liverpool also had stable lease costs of £2.6m in the year.

Net interest expense rose by 13% to £6.0m in the year as overdraft interest rose by £300k and notional interest on transfers rose in the back of increased transfer activity.

Liverpool also paid tax of £19.1m, an effective tax rate of 15% which is largely in line with the tax rate of 19% with a few adjustments.

It has been well publicised that Liverpool wages have grown significantly, and they grew 27% to £263.6m from £208.3m in 2018. This was due to both new higher earners as well as a whole host of contract renewals. Liverpool also incurred an increase in bonuses due to a hugely successful campaign. The wage rise works out as an eye-watering extra £1,063k a week, making the club have one of the highest wage bills in Europe.

Liverpool also paid directors £2,276k, up from £1,649k due to a boost in performance.

Looking ahead, wages are likely to continue rising but at a slower rate unless a trophy comes home in which case bonuses may bump wages significantly. The club are likely to see a large rise in amortisation after a summer of significant investment.

Transfer Analysis

Liverpool were very active in the transfer window in 2018, spending and receiving over £150m in each direction.

Arriving at Anfield were Van Dijk (£70.9m), Salah (£37.8m), Oxlade-Chamberlain (£34.2m), Robertson (£8.1m) and Gallacher (£0.2m) for a combined £151.2m.

Departing Liverpool were Coutinho (£121.5m), Sakho (£25.4m), Origi (Loan – £5.9m), Lucas (£5.1m), Stewart (£4.1m), Wisdom (£2.1m) and Sturridge (Loan – £2.1m) for a combined £166.1m.

This meant that for the second successive season Liverpool had a net transfer inflow, this year of £14.9m. Despite this the club had a successful season and belatedly spent the cash built up this summer on the likes of Keita and Alisson.

The signings were all fantastic additions, even the Ox who was viewed by many as a poor signing initially. Van Dijk and Salah have been world class and repaid their large transfer fees already.

Now, Liverpool fans were rightfully worried when Coutinho was sold mid-season however the club performed admirably without him. Liverpool fans do not wish to thank Coutinho for much, but they do have this record-breaking profit due to his departure. Liverpool recorded a profit on player sales of £123.8m, pretty much the whole amount of their profit this year. This shows that the profit recorded is primarily due to transfers and not performance, however this isn’t something that should be looked at poorly due to the transfer fee being used to invest back into the club which should see revenue continue to rise as a result.

Liverpool are owed a huge £168.6m in transfers while they owe £151.6m which should give the club little to worry about despite the huge sums involved.

Liverpool may also owe another £38.6m in contingent transfer fees should certain clauses be met and may be owed £35.7m themselves if certain clauses are met elsewhere.

Liverpool also saw a net cash outflow of £49.2m despite a net transfer inflow as they gave clubs more favourable terms to pay for transfers than they negotiated themselves. Liverpool spent cash of £154.1m and only received cash of £104.9m.

Debt Analysis

Liverpool had loaded up on debt a little due to the redevelopment of Anfield and took out loans in order to finance this expansion. Their cash levels are usually low as a result as they use all their capital in order to improve the stadium and their training facilities.

Cash levels were at their highest levels in recent times, rising from £4.1m to £10.3m (158%). This is largely due to transfer fees received and rising revenue that allowed them to repay loans to banks and their owners of £29.9m and invest a further £15.9m in facilities and the stadium.

Debt levels hence fell due to the repayments, falling from £181.6m to £151.1m (15%) as they repaid £17m to the bank and £12.9m to FSG. Liverpool’s loans have a fairly low rate of interest to both the bank (1.73%) and FSG (2.44%). Liverpool are due to repay the bank loan in 2020 which is just around the corner now and may hamper future transfer plans while the FSG loan has no repayment date.

Net debt hence fell from £177.5m to £140.8m (19%) as the club come towards the end of their bank loan which will release a significant financial burden on the club and allow greater investment once completed as Liverpool look to become less of a selling club and more of a powerhouse with promising signs already.

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January 29, 2019January 29, 2019

Arsenal 2018 Financial Review – Wenger Out, Cash Still In

2018 was a year that finally brought change for Arsenal being their final season under legendary manager Arsene Wenger, who many feel out-stayed his welcome. His final season wasn’t how things were meant to end with a 6^thplaced finish in the league and a trophy less cup campaign (other than the Community Shield).

This year also represented Arsenal’s first season without Champions League football since 1998 and it began to show in their finances. Arsenal did in fact make a huge profit of £56.6m, up 60% on last year, but the underlying finances tell a different story with the profit solely due to player sales and the sale of a property (bet you didn’t see that coming).

This article analyses Arsenal’s financial status in detail, now let’s delve into the numbers.

Revenue Analysis

Arsenal saw revenue down from last year due mainly to the lack of Champions League football. Revenue was down from £427.1m to £406.4m (5%).

Matchday revenue fell from £100.0m to £98.9m (1%) as the pricing of tickets for Europa League games were lower than those for the Champions League, this combined with no FA Cup run meant that matchday takings took a slight hit, despite more home games.

Broadcasting revenue also fell, falling from £198.6m to £180.1m (9%) as Arsenal felt the lack of Champions League football despite reaching the semi-finals of the Europa League and only reaching the last 16 of the Champions League last time out. They also lost approximately £1.9m from falling one place in the Premier League.

Commercial revenue also took a hit which may be the most disappointing and unexpected. Commercial revenue fell from £117.2m to £106.9m (9%). Commercial income was down due to fans spending less on merchandise as they became angrier towards the end of Wenger’s era and the global brand of Arsenal fell as the club’s results continued to decline, leading to lower sponsorship opportunities.

‘Other’ revenue rose sharply, increasing from £8.1m to £17.3m (114%). Arsenal also operate a property business alongside football (for reasons I’m not sure of) and have done pretty well from it. Of the £17.3m, £15.0m relates to the sale of a property next to Holloway Road Station. The rest is related to ‘player trading’.

Looking forward, I would expect revenue to remain at a similar level to this year, possibly falling even due to the lack of property sales likely as the club has pretty much cleared its property portfolio. For revenue to rise a Europa League victory is necessary and a solid commercial campaign.

Cost Analysis

While Arsenal’s revenue is falling, its costs are rising, significantly hurting their profitability, now relying on player sales to return a profit. Costs rose from £372.0m to £445.3m (20%), a hefty increase.

A big part of this was a rise in amortisation, which increased from £77.1m to £91.8m (19%) as the club replaced some old timers such as Walcott (who no longer attracted amortisation due to being at the club for so long) with new, expensive blood. Normally a rise in amortisation indicates investment whereas in this case it’s just reinvestment of funds as the net spend was negative.

For the property sold mentioned earlier, Arsenal also had costs of £9.4m that were incurred on the property, leading to a net profit of £5.6m.

Wages were also on the rise, increasing from £199.4m to £240.1m (20%) as Arsenal abandoned their strict wage control to tie down Ozil to a bumper new contract and also to sign Aubameyang.

Many will see this as a step in the right direction however the haphazard nature of their wages now may unsettle the squad and has clearly impacted their current ability to buy players with only loans seen as being financially viable at the moment.

Of the huge increase in wages, it is worth noting that £16.8m relates to ‘exceptional costs’ which likely relate to Wenger leaving the club and a nice package for him to take away.

The increase in wages works out as an extra £783k a week which is an astronomical figure considering Arsenal also had many outgoings.

Elsewhere, Arsenal directors ‘earned’ £4.3m, up 26% on last year’s £3.4m total despite a poor season.

Arsenal saw net finances charges fall… thanks to Brexit! Arsenal’s underlying interest was similar to last year however a £3.3m gain due to favourable FX movements meant that their interest charges fell from £14.7m to £8.8m (40%).

Arsenal’s profits meant they paid tax of £13.7m, an effective tax rate of 19.5, broadly in line with the corporation tax rate of 19%.

Going forward, costs are likely to stay at similar levels as wages are likely to rise slightly again however such a rise will be offset by the lack of exceptional costs so we may even see a slight fall in costs and wages.

Transfers Analysis

Transfers are usually a sensitive subject for Arsenal fans due to the lack of ambition showed in the transfer market and it was no different this year.

In came Aubameyang (£57.4m), Lacazette (£47.7m) and Mavropanos (£1.9m) for a combined £107m, while Mkhitaryan joined in a swap deal with Sanchez.

Out went Oxlade-Chamberlain (£34.2m), Walcott (£20.3m), Giroud (£15.3m), Coquelin (£12.6m), Szczesny (£11.0m), Paulista (£9.9m) and Gibbs (£6.8m) for a total of £110m.

This led to a net transfer surplus of £3.0m compared to a net spend of £87m last year, a £90m swing. This huge drop off in spending has meant that fans are once again disgruntled as the club show again, they lack ambition to push on despite losing their top 4 spot and falling behind their rivals.

The new signings did well with Aubameyang and Lacazette adding much needed firepower however the back line is severely in need of investment.

Those leaving the club were not particularly missed however fans will be annoyed to have lost Szczesny, Coquelin and Paulista for fairly cheap given the state of the transfer market currently.

All these departures led to a profit on player sales of a remarkable £120m (£6.8m last year). This means that had the club not sold any players, a loss of £50.2m before tax would have occurred, before taking into account the property sale of an extra £5.6m in profit. These player sales are clearly masking a club whose finances are declining.

From these transfers Arsenal did pay net cash out of £28.6m as they have negotiated to receive transfer fees over a longer period, in contrast last year there was a net cash outlay of £102.5m.

Arsenal are also owed another £61.5m in transfers over next couple of years while they are owed £100.2m, meaning they are owed net £38.2m which further confuses on why they are so constrained in the transfer market currently. This will become even more confusing in the next section.

On top of this, Arsenal may also owe another £7.6m in contingent transfer fees should players meet certain clauses.

Debt Analysis

Arsenal incredibly saw cash levels increase this year which will perplex fans due to the insistence the club has no money to spend and only loans will currently do. Cash levels grew from £180.1m to £231.3m (28%) as the club decided not to spend any of the cash coming in from transfers and elsewhere and instead watching it sit pretty in the bank.

At best this is cautious, at worse it is negligent. Any business needs to reinvest its cash to expand and improve, Arsenal are not doing this and instead are letting the money go to waste by not using it to for any good purpose.

Even stranger is the fact that Arsenal have outstanding debt of £216.5m (down from £227.4m) which could at least be paid down to reduce interest charges if the club feel they don’t want to spend on transfers. All the debt is external debt and most likely could be paid down early to boost the club sustainability however the owners do not see it that way.

The above has led to Arsenal at least positively being in a net cash position of £14.8m compared to net debt of £47.4m. Arsenal’s owners seem wary to spend and this may be compounded by their worsening finances with the owners deciding to cautiously create a large buffer should their finances continue to worsen.

However, this feels to be a self-fulfilling prophecy and a lack of investment will see them perennially finish 6^thif they don’t start investing or at least spending sensibly and smartly like their North London rivals.

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January 28, 2019January 28, 2019

FA Cup Finances – Why The Magic has Gone

The FA Cup Fourth Round is officially over and only 7 Premier League teams are in the draw for the next round. Neutrals have triumphed this as a sign that the ‘magic of the cup’ is still alive with a raft of giant killings occurring, however the reality is unfortunately a bit different.

The motivation of teams in the FA Cup is at an all-time low for Premier League clubs with weakened teams and poor performance across all but a few due to the slipping importance of this once great cup financially.

At the end of the season when all is said and done, the trophy itself is of great pride to the winner however, there can only be one such winner with everyone else believing their efforts were a waste of time due to the lack of money (and trophy) to show for it.

This article analyses why Premier League clubs are disregarding the FA Cup by comparing the finances on offer to those in the other, higher-priority competitions.

FA Cup – Booby Prize

The FA Cup sees most Premier League clubs enter at the Third Round stage to great excitement of those in the lower leagues looking for a big payday and 90 minutes of fame.

For Premier League clubs and their owners, it is looked at as another fixture in a congested festive period. The winnings for such a fixture? A mere £180k which goes nowhere to funding anything in this day and age. These winnings only start to accumulate to any degree at the Quarter-Finals stage where a win earns you £720k. Cumulatively, the only rounds that earn you above £1m is the semi-finals and final, with the winner earning a decent sized £6.8m and the prestigious trophy.

However, getting to the final is no easy feat for any club with a fixture congestion to deal with, other good teams and injuries that can ruin any cup campaign. This means the risk to reward is fairly poor compared to what’s offered elsewhere…

Premier League – Lion Size Loots

As shown above, Premier League clubs earn roughly an incremental £1.9m per league position in Premier League prize money (merit payments). This pay-out is larger than any FA Cup win other than a victory in the final (£3.6m). What makes this even more interesting is that the difference in points between 8^th(£25.1m) and 15^th(£13.5m) in 2018 was 9 points and a mouth-watering £13.5m, nearly double the total for an FA Cup victory despite taking only 3 games compared to 6 needed (at minimum) to win the FA Cup, not taking into account the added difficulty of navigating a cup run than picking up an extra 3 wins.

This showcase why resting players in cup games to be fresh for a Premier League game is becoming the wiser decision financially with the added rewards available.

Relegation – The Penny (lots of them) Drops

Premier League Relegation Cost 2015 - 2017

Not only is the Premier League important due to the differential of £1.9m per position, more importantly is survival which sees those near the bottom forego potential cup glory in the quest for preserving their Premier League status. Last year only 9 points separated 15^thand 20^thand 3 points between 17^thand 18^th.

Since 2015 (for those to release their financial data), the average revenue drop following relegation was £40.6m, ranging from as high as £61.2m to the lowest drop of£22.7m. The average is a crazy six times the winnings for the FA Cup, and such a revenue drop can be hard to come back from even if against all odds a relegated team wins the FA Cup (Hi Wigan).

Wigan fans may say they treasure that victory and they would be right in saying so, however the owners may have a slightly different view now it has all blown over.

Europa League – FA’s Big Brother

Another benefit to going full out on only the Premier League is potential European qualification, starting first with the Europa League.

Seventh place seems to always be up for grab in the race to be the ‘best of the rest’ and will secure a Europa League place (unless the League Cup and FA Cup winners aren’t already qualified).

It is worth noting that an FA Cup will gain a club entry to the Europa League as an added benefit however for this still seems like an unrewarding venture due to the difficulties in winning the cup and most likely having to beat one of the top 6 in the process.

The Europa League also offers better financial reward after coming through the early stage and is the closest in prize money to the FA Cup. A million pound plus prize money is available with every win from the Last 16 onwards and the massive prize of £7.4m to the winners and a Champions League place, make it a more enticing competition to the two of the Top 6 who missed out on the Champions League in the previous season.

Cumulatively, A Europa League victory will net you nearly double that of an FA Cup win, not taking into account the Champions League qualification earned in the process.

Champions League – The Money Shot

The pinnacle of European football and there is not much need to vindicate the reasons why the Premier League top dogs would prioritise this over the FA Cup. £14m is available in the group stage alone with a maximum pot of around £74m available to the winner plus more in commercial sponsors and additional prize money given to all clubs.

The finances on offer dwarf the FA Cup by more than ten-to-one and no fan would even want their club to jeopardise European glory for the FA Cup.

Conclusion

The FA Cup is a great cup of tremendous prestige however its importance is waning as the finances available elsewhere outshine the FA Cup in its current format, not only this but participation in it can jeopardise the finishes and finances earned elsewhere with the ever-increasing demands of players, opening clubs up to the kind of shocks we have seen this year.

Here is to a return of the magic and a hope that you enjoyed this article.

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January 16, 2019April 4, 2019

Chelsea FC’s 2018 Finances – Russian Roulette

Chelsea followed their Premier League title winning campaign with a poor defence of that title after Conte clashed with the board and players, eventually leading to his departure.

Despite a 5^thplaced finish and hence no Champions League football this season, Chelsea won the FA Cup to end Conte’s reign on a high and also reached the League Cup Semi-Finals.

Despite these highlights a poor Premier League season and Champions League campaign (out in round of 16), was not good enough and their ruthless Russian showed as much.

Despite these shortcomings, Chelsea recorded a profit of £24.9m, a huge swing from the loss of £14.2m incurred in 2017. This was predominately due to a huge increase in income from player sales.

Let’s delve into the numbers.N

Revenue Analysis

Chelsea reached record levels of revenue despite a disappointing league and European campaign.

Revenue rose from £367.7m to a record breaking £448.0m (22%), primarily due to a return to the Champions League.

Matchday revenue rose from £65.5m to £73.9m (13%) with Chelsea having more home games due to a return to European football following a 1-year hiatus.

This was boosted by fans also spending more money at games and the higher pricing of Champions League games.

Chelsea’s inability to reach the latter rounds meant the rise was less pronounced then it would have been hoped for.

Broadcasting revenue rose significantly from £162.4m to £204.2m (26%) as a return to the Champions League after a season of no European football boosted revenue substantially.

This increase was reduced by a drop in Premier League prize money as they moved from Champions to 5^th. This negative effect however was slightly offset by their fantastic FA Cup triumph.

Commercial revenue rose from £139.8m to £169.9m (22%) after new deals with Nike and Sony came into effect, having a large, positive effect on revenue.

This was supplemented by many smaller deals as the commercial team had another good season of growth while fans also continued to increase spending on merchandise.

Looking ahead, we expect revenue to most likely flatline as positive and negatives from this season offset each other.

A demotion to Europa League football will probably see broadcasting revenue fall unless they win it (similar situation to Manchester United a couple seasons ago).

This demotion will also affect matchday income as ticket prices will be lower however, Chelsea are still in the Europa League and have a good chance of winning the competition which may boost next year’s revenue.

Therefore, the key to any increase in revenue will most likely be whether commercial revenue increases.

Costs Analysis

Chelsea saw record breaking costs in the same season as record breaking revenue. Costs rose from £439.5m to £523.6m (19%). This rate of growth being less than the growth in revenue enhanced profitability, building the foundation of their profit this year and also show an improved cost control while still delivering financial growth.

Amortisation rose significantly from £90.0m to £127.3m (41%) due to substantial player investment last season.

The significant investments made didn’t pay off last season with fans not having much hope it will long term either unfortunately.

Chelsea also had exceptional costs of £6m due to the club buying back some licensing rights for future exploitation which may enhance commercial revenue going forward.

Wages rose by a much smaller amount, increasing form £220.9m to £244.1m (11%) as their new signings replaced players on comparatively high wages. The extra wages worked out as an extra £446k a week for Chelsea which is relatively small for a club the size of Chelsea.

The West Londoners also had net interest expense of £1.5m, a sizeable increase from last year’s £0.1m.

Chelsea also paid tax of £5.4m, giving them an effective tax rate of 18%, in line with the statutory rate of 19%.

Looking ahead, Chelsea are likely to see a rise in costs after their two marquee signings in the summer and only Courtois departing permanently. This may see profitability decline as we expect cost growth to outstrip revenue growth this year.

Transfers Analysis

Chelsea had a busy season in the transfer market as 9 players arrived and 11 departed Stamford Bridge.

In came Morata (£59.4m), Bakayoko (£36.0m), Drinkwater (£34.1m), Rudiger (£31.5m), Zappacosta (£22.5m), Emerson (£18.0m), Giroud (£15.3m), Barkley (£15.2m) and Ampadu (£2.5m) for a combined eye-watering £234.5m.

Out went Costa (£59.4m), Matic (£40.2m), Ake (£20.5m), Cuadrado (£18.0m), Begovic (£10.4m), Traore (£9.0m), Zouma (Loan – £7.0m), Atsu (£6.8m), Chalobah (£5.7m), Musonda (Loan – £2.3m), Batshuayi (Loan – £1.4m) for a nearly as eye-watering £180.5m.

This meant Chelsea more than doubled their net spend from £21.9m to £54.0m (147%), which is still relatively small compared to some of their rivals.

The signings have not yet lived up to their billings (and seem unlikely to), especially Morata and Drinkwater/Bakayoko who seem like downgrades to both Costa and Matic.

Rudiger has proven to be a good signing while Ampadu and Barkley still have an abundance of potential, with the latter coming into his own this season. Giroud has proven to be a good back-up option since his arrival too.

Despite this, Chelsea successfully let go of some deadwood at good prices. This led to Chelsea making a huge £113m (2017: £69.2m) profit on player sales, leading to their hugely profitable year. Without the significant departures at Chelsea, they would have surely made a loss.

With no such major overhaul this season, profits are likely to be much smaller, if not a loss.

From a cash perspective, Chelsea spent £191.7m in actual cash while only receiving £91.8m themselves, a net cash outlay of £99.9m which depleted Chelsea’s cash reserves.

Chelsea also owe £150m in transfer fees, of which £92.4m is due this year.

However, Chelsea are owed a larger amount of £169.4m, of which £136.2m is due this year meaning Chelsea will have no issues paying off these transfer fees without extra cash injections.

In addition to this, Chelsea may also owe an additional £4.7m in contingent transfer fees.

Debt Analysis

Roman Abromovich bank rolls the Chelsea machine and has invested huge sums to turn them into the European powerhouse they are today. The Russian billionaire provided an additional £69.1m of debt to Chelsea in 2018.

This takes Chelsea’s debt owed to Roman to £1,155.4m from £1,086.3m (6%), an astronomical figure. Chelsea fans need not worry however about this debt, despite being repayable on demand, it will only be paid back to Roman when and if he sells the club, at which point the total takeover fee will be used to repay him.

Chelsea are valued at well over £2bn and as such Roman will be confident he will make a good return on his investment of nearing on £1.2bn (plus the initial acquisition cost) all those years ago.

Cash wise, Chelsea saw cash levels remain fairly stable, falling from £33.0m to £31.7m (4%) due mainly due to a large transfer outlay which used the additional revenue made this year.

As such, net debt rose from £1,053.3m to £1,123.7m (7%) which as mentioned should not be too much of a concern to Chelsea fans.

Roman has had his difficulties with the UK as of late after being refused a visa etc., however this should not be enough to see him sell the club.

The only concern is the time it is taking to make Chelsea self-sufficient. Roman will be hoping that additional revenues will soon mean that his cash injections will be less frequent which is not yet the case.

This is unlikely to be the case for a while with their squad in desperate need of significant investment to bring it up to the standards set by Liverpool and especially Manchester City.

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November 16, 2018

Financial Fair Play – The Loopholes

This is the second instalment of our Financial Fair Play Series. In this article we will discuss the key issues for clubs complying with Financial Fair Play going forward and the loopholes that can be used to exploit Financial Fair Play rules.

The key message from UEFA for Financial Fair Play is ‘living within your means, spending should not exceed income by more than a minimal amount (€5m over 3 years). This puts budget constraints on clubs looking to grow, as these clubs can only increase spending if income is growing. Normally, income only grows if spending grows first (if spent wisely), making the whole situation like a dog trying to catch its tail. Think Manchester City, their revenue is has only in the last few seasons begun to catch up with their spending after their successes have led to increased income from sponsors, merchandise, prize money and gate receipts.

As the graph above shows, Manchester City had an initial sharp increase in spending which was lagged by income with the % rise catching up later. Without that initial large spending the subsequent rise in income would not have occurred and Manchester City would not have the large income figures they have today. In a Financial Fair Play world, such spending would not have been allowed and Manchester City would not have been able to compete with the big boys at that time, leading to one less big team then we have currently.

Southampton, a club who were at once aspiring to greater things in the Premier League have identified this as a problem. Cortese, the club chairman said “we will grow our commercial income but if we cannot close the gap commercially, which will probably be the case for all time, we have to use other aspects [such as youth development].”

Big clubs income usually grows quicker than small clubs meaning the gap will keep growing over time. Small clubs are then posed with the difficulty of making their income go further. The options are clear: spend on youth development, make shrewd signings or become commercially astute to increase income through shirt sales, sponsors and match-day sales.

The Loopholes

On to the most controversial aspect of Financial Fair Play, loopholes. Due to the tough constraints on clubs to comply with Financial Fair Play, many free-spending clubs have sought ways to by-pass the rules or at least make them easier to comply with.

There are many ways to comply without seeking loopholes. Some spending is exempt from Financial Fair Play such as spending on youth development, community development and women’s football, all of which can help boost income (discussed here). Good youth development can bring through talented youngsters who can improve the club’s performance on the pitch, helping to increase prize money, shirt sales and match receipts, or through selling them for large fees. Community development can help enhance the fan base, increasing match day receipts and shirt sales. Women’s football is becoming more and more popular, meaning a good women’s football team can bring in larger revenues than ever before.

Transfers are also key to complying with Financial Fair Play. Profit on player sales is calculated differently to the straightforward sale value – cost (for me details click here). Some players with low book value can hence be sold at significant fees to allow for spending to increase.

However these options are all long term, the benefits will not be seen immediately which in a modern football world where patience is no longer a virtue, is not good enough for footballers, managers and owners. Meeting Financial Fair Play rules in the short term when spending is high is a challenge, many clubs have used related parties to boost income. Related parties are any companies with strong links to the owners of the clubs, these companies can be used to bring in money to artificially pass Financial Fair Play.

UEFA allows related party transactions as long as they are at fair value, such that if they were not related, a similar price would be charged. So for instance, Etihad have a £350m, 10-year contract to sponsor Manchester City. To see whether this at fair value, UEFA would compare this funding to similar deals where clubs were not related to sponsoring company with a similar stature to Manchester City at the time of the agreement. Newcastle also have a similar arrangement with their stadium named the Sports Direct Stadium, a company owned by their owner Mike Ashley.

There are obvious difficulties in measuring fair value as there are not always similar transactions from other clubs to compare, and the club can always argue their case that it is fair representation. This makes related party transactions a significant difficulty for UEFA when applying Financial Fair Play rules. Ex-Chelsea Chairman Buck Buck is hopeful that such issues do not arise: “Uefa now has to wrestle with third party sponsorships. We are all hopeful Uefa will apply these rules in a fair and equitable manner.”

We hope you enjoyed this article please share if so and check back for the final instalment of this Financial Fair Play series and other news when we get it, sign up here and we will notify you when new articles are published!

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November 16, 2018November 16, 2018

Financial Fair Play – The Rules

Since its announcement in September 2009, Financial Fair Play (FFP) has divided opinion. The ever polarising Platini remarked “Fifty per cent of clubs are losing money and this is an increasing trend. We needed to stop this downward spiral. They have spent more than they have earned in the past and haven’t paid their debts. We don’t want to kill or hurt the clubs; on the contrary, we want to help them in the market. The teams who play in our tournaments have unanimously agreed to our principles…living within your means is the basis of accounting but it hasn’t been the basis of football for years now.”

So promoting sustainable spending was the aim, with excessive spending a thing of the past, this was the message Platini was sending. Fast forward to 2018 and PSG and Manchester City are being reinvestigated for past transgressions.

This series will explore what exactly Financial Fair Play aims to achieve, its rules and how they have been enacted and bypassed to date. We will first look into the rules to gain a better understanding into

UEFA’s thinking behind this regime.

The Break Even Requirement

Financial Fair Play rules are fairly broad, the main financial requirement is the break even requirement. This is a requirement to limit losses incurred by clubs, it is based on a clubs income and expenses, with the aim of encouraging sustainable spending such that clubs ‘break-even’ and don’t over extend themselves.

All clubs in UEFA competition must comply with the rules, which are based over a rolling three-year period (e.g for 2018 it will be based on the 15/16, 16/17 and 17/18 seasons).

The break-even requirement is that relevant expenses must not exceed relevant income by more than €5m over the rolling three-year period. This loss can be increased to €30m if the excess (€25m) is contributed by a related party.

Club must also avoid having overdue payments to other clubs for transfers, employees and Government.

As an example if the Break even results 15/16 was +10m, 16/17 was +5m and 17/18 was -20m the club would still be within the requirements as the net result would be -5m. The result could be anywhere up to 25m if and only if the extra above the -5m was covered by contributions from related parties.

Below is a breakdown of what is included in ‘relevant income’ and ‘relevant expenses’, which from now on we will just call income and expenses respectively:

Technical Points

The main technical area around this is profit on disposal of players, this is a bit more complex than just taking taking the difference between transfer fee paid and transfer received.

Players are (rightfully so) treated as assets for football clubs, they are therefore assumed to depreciate over the time they are at the football club. The profit is then the transfer fee received minus the depreciated value of the player.

For more details on the technical side of this, check out this post explaining player disposals Here.

This is an area that can be very useful in complying with Financial Fair Play. Players can sometimes be sold who have a depreciated value that can be sold for a large fee due to their value actually increasing, making a large ‘profit’ on that player and potentially saving the company from breaking (pardon the pun) the break-even requirements.

Another area that causes controversy for Financial Fair Play is related party transactions. An obvious deceitful way to pass Financial Fair Play is to use a company that the mega-rich club owner owns and plug money into the club through a ‘sponsorship’ which will increase income and meet break-even requirements.

In an effort to stop that, UEFA have stated that related party transactions must be at their fair value, such that if they were not related the payment would be the same. This is difficult to prove however as what exactly is fair? Often comparisons will be made with other similar deals, however this is not always available and fair value is open to debate so as of now is still a grey area for Financial Fair Play and UEFA.

The same scenario may play out with expenses, where the related party charges the club a lower fee than otherwise would be ‘fair’ for instance stadium maintenance costs or other services.

Expenditure on youth development, community development and women’s football are all taken off the expense figure to encourage spending in these areas. Youth development will aid sustainable growth for clubs and help bring through more youth players with more of a focus on homegrown talent. Community development will help keep clubs in touch with their local community and fans which is harder than ever with the growing money in the game. A focus on women’s football is essential to building the game to higher level and encouraging girls to take up the sport.

Clubs may also be proactive and choose to voluntarily sign up to Financial Fair Play and break-even requirements. You may wonder why clubs would risk the extra burden of these rules, clubs with aspirations to qualify for UEFA competition may want to be proactive in meeting the requirements to avoid a shock once qualified. Clubs may also want to self-impose financial discipline in order to achieve sustainability.

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February 12, 2018February 12, 2018

Financial Football News Round-Up Edition 13

Financial Football News Weekly Round-Up 13

Here is your weekly financial football news round-up to keep you up to date with all things financial football! This is your round-up for the week commencing 5th February 2018, featuring the Premier League, Champions League, Bayern Munich, Manchester United, Alexis Sanchez, Liverpool and Hartlepool.

Premier League TV Deal First Round

The deadline for the first round of bids for Premier League TV rights for 2019 – 2022 passed this Friday with technology giants Facebook, Google and Netflix declining to bid, seeing this bold step into televised football as a step too far currently.

There is growing speculation of an Amazon bid for one of the smaller packages, however the usual suspects Sky and BT are expected to lead the way in live games taken. There is a record 200 Premier League live games available each year for the next 3 seasons.

Football Fans Save Hartlepool

Football fans united to remarkably save Hartlepool’s future by raising the £48k necessary to pay overdue taxes to HMRC to avoid a winding up order coming into effect.

Hartlepool fan Rachel Cartwright set up a just giving page which was promptly filled as Hartlepool fans contributed before it gained publicity and football fans worldwide all came together to help a club in need, and ended up raising nearly double the £48k needed.

Hartlepool will be hoping the worst is behind them now after a terrible twelve months where they were relegated from League 2, dropping to the conference for the first time in 96 years.

Priceless – Mastercard Renew Champions League Deal

Mastercard continue their synonymous partnership with the UEFA Champions League by renewing their deal for 2018 – 2021.

This is the fourth cycle that the two companies will be intertwined with their partnership starting as early as 1994 and are the exclusive payment partner of Europe’s biggest cup competition.

They join Pepsi, Heineken, Nissan and Satander in agreeing commercial deals with UEFA for 2018 – 2021.

North American 2026 World Cup Economic Study Supports Bid

Boston Consulting Group have released a report stating that a North American 2026 World Cup could bring in $5bn of economic activity to the area.

The United States, Mexico and Canada are combining to bid for the 2026 World Cup and such news will excite these countries officials with the competition expected to be able to support 40,000 jobs across the region.

The 2026 World Cup is to be the biggest in history with a record 48 teams competing for the World’s most prestigious football trophy.

Bayern Check-In with Marriott Hotels

Marriott Hotel, the largest hotel chain in the world have become the Official Hotel Partner of the Bundesliga giants Bayern Munich until 2020.

Bayern are perhaps surprisingly the most commercial club in the world, bringing in the most commercial revenue of any club and this will only enhance that by joining forces with another leading brand in their industry.

The partnership will involve the build of a custom-built executive box at the Allianz Arena as special offers for Bayern fans and Marriott club members.

Neymar Electrifies TCL

Brazil’s £200m Superstar Neymar has signed a new endorsement deal to be a brand ambassador for Chinese electronics company TCL.

This is another commercial success for the ever-growing Neymar brand, who is also enjoying a stunning year on the pitch after signing for PSG who are romping to the French Ligue 1 and our one of the favourites for the Champions League.

Manchester City Transfer In AvaTrade

Manchester City and AvaTrade have announced a multi year sponsorship where AvaTrade will become Manchester City’s Official Online Trading Partner in China, Asia and Latin America as Manchester City look to grow their presence worldwide.

AvaTrade is a leading online brokerage and will gain brand exposure through exclusive offers and giveaways for Manchester City experiences to their customers.

This is just one of a number of recent commercial deals signed by the Premier League Champions in waiting as they look to grow commercially and financially.

Adidas Win From Sanchez Deal

Manchester United have announced that the signing of Alexis Sanchez has smashed their previous record shirt sales by 3 times the prior record.

The huge domestic transfer has undoubtedly cause a buzz with Manchester United beating their Manchester rivals to the signing of their domestic rivals best player, creating a huge demand in shirts with the No.7 on the back.

It is an even more outstanding feat being mid season, with most fans purchasing their kits at the beginning of the season.

This news will be music to the ears of Adidas who will profit the most from the deal, gaining most the shirt sale revenue as part of their £75m a year deal with Manchester United, and will be hoping to recoup a sizeable portion as part of this deal.

MediaPro Win Serie A Race

Spanish Media Company MediaPro have won the race for the Italian Serie A rights for 2018 – 2021, paying €1.05bn the minimum threshold required by Serie A who will be slightly disappointed but also relieved the process is over.

Sky Italia missed out and not one to go quietly are calling on Serie A to reject the deal as they claim MediaPro will not act as the actual broadcaster, with MediaPro rumoured to be planning to help Serie A launch its own channels, taking care of scheduling and editorial matters, making them a glorified intermediary.

Sky will be hoping their challenge is successful as they look to continue their stranglehold on televised football.

Alexis Sanchez Avoids Prison Time

Alexis Sanchez is the latest player to fall foul of Spanish tax law after accepting a 16 month suspended jail sentence for tax fraud, avoiding a trial in the process.

The case relates to unpaid taxes amounting to £886k from image rights deals in 2012 and 2013 during his time in Spain at Barcelona. The Chilean’s agent has denied his client any wrongdoing and had “fully obeyed” laws and his image rights income “has been declared”.

Liverpool Petro-Canada Lubricants

Liverpool have announced a three-year deal with Petro-Canada Lubricants with the Canadian lubricant manufacturer being able to offer exclusive Liverpool offers for its customers.

Manchester United Second Quarter Financial Results

Manchester United announced their second quarter results this week, with revenue up 4% on last year due mainly to increased broadcasting revenue (up 17%) from a return to the Champions League and more Premier League live games than last season at this stage.

Profits before tax were down nearly 5% due to rising costs suffered by the Manchester Club despite record revenues.

Debt levels were down 20%, leading to financing costs falling an incredible 64.2% which will seem to be a step in the right directions for the heavily financed Premier League giants.

As a publicly listed company in America, Manchester United are required to report their financial performance every 3 months, with an annual financial performance review in the final quarter of their financial year.

For a detailed review of their second quarter performance click here.

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December 4, 2017

Financial Football News Round-Up Edition 3

Financial Football News Weekly Round-Up Edition 3

Here is your weekly financial football news round-up to keep you up to date with all things financial football! This is your round-up for the week commencing 27th November 2017, featuring the Champions League, Manchester City, the London Mayor and Celtic. Stay tuned for further analysis of these developments over the coming week.

Pay day for Eagles as Allardyce Flies North

Allardyce this week joined Merseyside strugglers Everton on 18-month contract. Everton have been lifted by the announcement, recording 2 wins since Big Sam was given the job to move up the table. Also lifted by the news was Crystal Palace owner Steve Parrish, who’s club will net £2m from the deal with Allardyce triggering a clause having moved to another club after his resignation in the summer, supposedly to retire.

Santander Banks Champions League Deal

The Santander Bank is to become an official sponsor of the UEFA Champions League from the 2018/19 season for 3 years, joining Heineken and Nissan as part of commercial sponsorship process currently ongoing for the next 3 seasons. This is a change in sporting direction for Santander, with the deal ending their 11 year association with Ferrari in F1 racing.

West Ham, There is a New Mayor in Town…

And we are not talking about Moysey! Sadiq Khan will from this week take control of the operation of the London Stadium in a bid to get a grip with the stadium’s finances. The London Stadium deal agreed with West Ham under the former Mayor Boris Johnson’s watch, looks set to cost taxpayers £24m in 2017-2018, with West Ham paying just £2.5m-a-year to rent the 60,000 seater stadium. More analysis to follow…

Thai Airways Fly to EFL

The English Football League (EFL) have announced a season-long sponsorship deal with Thai Airways, giving the airline a large stadium presence for the EFL Play-off finals at Wembley, as well as the Carabao Cup final. No figures have yet to be announced as the EFL continue to build their presence overseas. More analysis to follow…

Celtic Looking to Invest Down Under

Scottish Champions Celtic are interested in purchasing an Australian top flight club, with Brisbane Roar and Central Coast Mariners both mooted as possible targets. The move signals a change in business strategy for Celtic as they look to build their global presence by investing in Australia and gaining first-option on any bright young players to come out of the club they acquire. More analysis to follow…

Puma pounce to sign Manchester City

Manchester City have agreed a huge £50m a year deal to replace current kit supplier Nike with Puma. The new deal represents another commercial win for the Premier League leaders, dwarfing their current £20m-a-year deal with Nike agreed in 2012. The Nike deal expires at the end of the current season and Manchester City have moved quickly to exploit their growing global presence after a strong start to the season. Further Analysis to follow…

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