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Malaga's Champions League journey clouded by financial crisis

By Andy BrassellEuropean football expert

When Malaga's status rocketed following a takeover from the Qatari royal family, it appeared that theroute to the promised land of Champions League football would be a smooth one.But the Andalusians head to Athens for the return leg of their Champions League play-off withPanathinaikos on the back of a journey that has taken a twist or two more than even the most thrill-seeking fan would have hoped for.Financial problems have meant La Liga's biggest spenders of last season have become the only teamin Spain not to sign a single player this summer.With little money in Spain outside the Barca and Madrid duopoly, there was a real chance for Malagato become a powerful presence in La Liga following Sheikh Abdullah bin Nasser al-Thani's initial bigimpression.

A net 50m was spent on players last summer - more than either Barcelona or Real Madrid - and12m was pledged to build a smart new facility for the club's youth academy.

Arrival in the group stage - and potential ties against the likes of Chelsea, Manchester United andBayern Munich - have been the aim ever since summer 2010.

And after scraping home in fourth spot on the final day of last season, it seemed like they had takenthat chance.

So the club's current financial troubles have come as a shock to many, at least outside Spain. WhenMalaga should have been strengthening to ensure Champions League progression, they have beenselling to stay afloat with the owners' interest waning.Of course, Arsenal were one of the first beneficiaries of Malaga's problems. Star manSanti Cazorlawas sold to the London club for 15m- 1.5m less than the Andalusian club paid Villarreal for theSpain midfielder last summer.When talented young forward Salomon Rondon and experienced Netherlands defender JorisMathijsen followed him out the door, it looked like a full-blown exodus. High-earning coach ManuelPellegrini's position was also questioned as rumours grew of the club's impending sale.In reality, the warning signs have been there for months. Former Manchester United striker Ruud van

Nistelrooy and Cazorla were among a handful of players to threaten legal action over unpaid wageslast season.The LFP (Liga de Futbol Profesional) hadimposed a transfer ban in January after the club misseda payment to Osasuna for Spain full-back Nacho Monreal.

As the club's staff in Spain struggled to establish a working line of communication with Qatar, matterswere left in disarray by the sudden death of the board's chief advisor Jose Carlos Perez in February,following a stroke.

Another example is Spanish team Malaga, which has gone from La Liga also-rans to European

Champions League qualifiers in just two years thanks to the riches of Sheikh Abdullah Bin Nasser Al-

Thani.

The Qatari spent a reported $80 million in 2012 assembling a squad containing big names like Spain's

double European champion Santiago Cazorla and Dutch defender Joris Mathijsen.

Are footballers on a par with bankers?

In May, Al Thani's expensively assembled team, ably led by former Real Madrid coach Manuel

Pellegrini, completed Malaga's best ever season, finishing fourth in Spain's top division and qualifying

for Europe's top club competition for the first time.

"It is riches to rags in a very short amount of time," Spanish football journalist Tim Stannard told CNN.

"No one has actually given a reason; it has been very, very quiet."

After a single season at the club, Cazorla and Mathijsen havedeparted to Arsenal and Feyenoord

respectively.

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The pair, along with veteran Dutch striker Ruud van Nistelrooy and top scorer Jose Rondon of

Venezuela, launched a complaint with the Spanish football authorities regarding unpaid wages.

Aston Villalost 54m in the year from 1 June 2010 to 31 May 2011, the club has announced. That is a

record loss since the American credit card magnate Randy Lerner bought Villa in 2006, and the club's

losses have deepened every year since. In the previous year, 2009-10, Lerner's UK-based holding

company which owns Villa, Reform Acquisitions, lost 38m, so losses worsened 42% in 2010-11.

Lerner himself continues to fund the club, via an ultimate holding company also called Reform

Acquisitions, registered in the US, and Villa said Lerner has invested a further 25m into the club.

Companies House documents show the total Lerner has invested in return for shares is now 133m;

he has also put money in as loans, but Villa did not release full figures, only the headlines of their

financial results, so the total Lerner has invested is not yet known.

Despite that investment, Villa sit 15th in the Premier League table and with attendances at 42,582-

capacity Villa Park generally in the low 30,000s for matches against all but the biggest clubs. They

announced they spent 12m in "exceptional charges" in 2010-11 relating to changing the club's"management personnel". That apparently refers to Martin O'Neill, who left in August 2010 and

subsequently achieved a financial settlement at a tribunal, and also compensation paid to the

departing Grard Houllier and to Birmingham City for Houllier's replacement, Alex McLeish, although

that change happened in June 2011 after the date of these latest accounts.

Villa pointed to a slight increase in the club's annual income to a record 92m as a pleasing

development: "This was achieved despite a backdrop of instability as the 2010-11 season constituted

one of the most turbulent in the club's recent history," the club said.

In the summer of 2011, Villa sold Stewart Downing to Liverpool for 20m and Ashley Young to

Manchester United for 17m, a total of 37m, with Charles N'Zogbia, for 9.5m and Shay Given, for3.5m, 13m altogether, the major arrivals.

The scale of losses and of subsidy paid in by Lerner, at a time when clubs are seeking to move

towards breaking even to comply with Uefa's "financial fair play" rules, partly explains why Villa

decided they could not refuse the offers for Downing and Young. Since then, the club have tried to

bring down the wage bill, although the figures for spending on wages were not released.

Robin Russell, Villa's chief financial officer, said: "The board is confident that the actions taken since

the end of the 2010-11 financial year have galvanised the longer-term sustainability of the club and

have given us a better financial platform on which to build for future success."

Spanish club Real Zaragoza have applied for voluntary administration despite retaining their Primera

Division status for the 2011-12 campaign.

Zaragoza have a net debt of 110 million and tried to get backing from creditors, but seem to have

failed in their endeavour.

"[The club] is faced with the reality of a cash flow imbalance," Zaragoza said in a statement on their

official website on Wednesday. "The principal origin [of the problem] lies in the losses the entity

suffered when they were relegated three seasons ago, and in the economic effort made to achieve an

immediate return to the Primera division one year later.

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Michel Platini was born on 21 June 1955 in Joeuf, Lorraine, in eastern France.

He enjoyed a distinguished career as a footballer, captaining the France team that won the 1984

UEFA European Football Championship on home soil, and holding the record for the number of goals

in a EURO final round, scoring nine times.

He also took part in three FIFA World Cups, in 1978, 1982 and 1986, reaching the semi-final of the

latter two competitions. In 72 international appearances for France 49 as captain he scored 41

goals, an achievement that stood as a record for a number of years.

Michel Platini played for three clubs AS Nancy-Lorraine (1973-79) and AS Saint-Etienne (1979-82)

in France, and Juventus (1982-87) in Italy. In a career spanning 501 matches, he scored 265 goals,

and won the Ballon d'Or for European Footballer of the Year three successive times, in 1983, 1984

and 1985.

He was then coach of the French national team from 1988 to 1992 before embarking on a career as a

football administrator. From 1992 to 1998, he was co-president of the FIFA World Cup Organising

Committee for the 1998 World Cup in France, and vice-president of the French Football Federation

(FFF) from 2000.

Within world football's governing body FIFA, from 2002 Michel Platini was a member of the FIFA

Executive Committee, chairman of the Technical Development Committee, vice-chairman of the

Football Committee and vice-chairman of the GOAL project. He was a member of the FIFA World Cup

Organising Committee for the 2006 final round in Germany.

From 1988 to 1990, Michel Platini was a member of the UEFA Technical Development Committee.

From 2002, he was a member of the UEFA Executive Committee, and represented the Executive

Committee on the UEFA Technical Development Committee. He also served on the UEFA working

group on clubs and leagues.

Michel Platini was elected as the sixth president of UEFA at the XXXI Ordinary UEFA Congress in

Dusseldorf on 26 January 2007, and was re-elected by acclamation for a second four-year term at theXXXV Ordinary UEFA Congress in Paris on 22 March 2011. He is also a vice-president of FIFA.

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The Union des Associations Europennes de Football (UEFA) was founded in Basle, Switzerland, on

15 June 1954, bringing to fruition the pioneering vision of a handful of key football administrators of

the time.

Since then, the parent body of European football - one of six continental confederations of world

football's governing body FIFA - has grown into the cornerstone of the game on this continent,

working with and acting on behalf of Europe's national football associations and other stakeholders in

the game to promote football and strengthen its position as arguably the most popular sport in the

world.

The guiding principle of the initiators in the early 1950s was the fostering and development of unity

and solidarity among the European football community. Now, over 50 years later, UEFA's mission

remains very much the same. But it has also become the 'guardian' of football in Europe, protecting

and nurturing the well-being of the sport at all levels, from the elite and its stars to the thousands who

play the game as a hobby.

In 1960, UEFA had a full-time staff of just three people. That figure has risen steadily through the

years as the organisation has reacted to changing circumstances. Today, over 340 people of more

than 29 different nationalities administrators, secretaries, IT specialists, coaches, journalists,

translators are employed at UEFA's administrative HQ located in the town of Nyon, on the shores of

Lake Geneva in western Switzerland.

Over the decades, UEFA has developed from a mainly administrative body into a dynamic

organisation that is in tune with the vast requirements of modern-day football. UEFA is a sporting

authority which does not have the powers of a government; it represents Europe's national football

associations, and can only act in accordance with the wishes of these associations.

When UEFA was founded, the body comprised 25 national associations. The number of member

associations rose gradually until the beginning of the 1990s, when political developments in eastern

Europe and the fragmentation of the USSR led to a rapid growth in the number of new associations.Consequently, there are now 53 associations under UEFA's wing.

UEFA's FFP Regulations - Play To Win

So the transfer window is finally over after the customary twists and turns and, as always, has

raised some intriguing questions. Perhaps most perplexing is the decision of previously big spending

Manchester City to slam on the brakes (by their own recent standards) much to the disappointment

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of manager Roberto Mancini. On the fairly safe assumption that this is not due to Sheikh Mansour

struggling for cash, the culprit is likely to be UEFAs Financial Fair Play (FFP) regulations, a

particularly delicate issue for the blue side of Manchester.

Given that looming threat, it is equally puzzling to see that Chelsea, who have had their ownproblems in reaching self-sustainability, have once again started to splash the cash, laying out 32

million on the supremely talented Eden Hazard and 25 million on the precocious Oscar all in

apparent blithe disregard of FFP. It therefore might be interesting to revisit these rules in an

attempt to understand clubs behaviour in the new era of tighter financial regulation. Will they

have a profound impact on the face of European football or merely act as a speed bump, as

predicted by Premier League chief executive Richard Scudamore?

At its simplest FFP is trying to encourage clubs to live within their means, i.e. not spend more

money than they earn. This is UEFAs response to the poor financial health of many clubs, as

evidenced by their most recent benchmarking report, which revealed that in 2010 over half of

Europes top division clubs lost money with total losses surging 30% to 1.6 billion and debts

standing at 8.4 billion. Many clubs have experienced liquidity shortfalls, leading to delayed

payments to other clubs, employees and tax authorities.

"Eden Hazard - everything counts"

Gianni Infantino, UEFAs general secretary, described this as really the last wake-up call. Headded, There was a great risk of crisis, of the bubble bursting. You can see from the losses and the

debts that the situation is not healthy and we cannot go on like this. We had to do something and

financial fair play is the way we designed it. UEFAs president, Michel Platini, is even more

evangelical, considering FFP vital for footballs future.

The aim is to introduce more discipline within club finances, encourage responsible spending and

investment and to curb the excesses and individual gambling on success, which has brought many

clubs into financial difficulties.

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While Infantino conceded that over-spending may be sustainable for a single club, it may be

considered to have a negative impact on the European club football system as a whole. He

explained, The problem is that all clubs try to compete. A few of the biggest can afford it, but the

vast majority cannot. They bid for players they cannot afford, then borrow or receive money from

their owners, but this is not sustainable, because only a few can win. In other words, the richest

clubs drive up players salaries and transfer costs, forcing smaller clubs to over-stretch theirbudgets to compete.

Well explore the moral issues surrounding FFP later, but lets first look at how it will work in

practice. The first point to note is that clubs do not actually have to break-even in the early years

of FFP to meet the target, thanks to the concept of acceptable deviations, which is one way

UEFA has attempted to facilitate the move towards a sustainable model.

The first season that UEFA will start monitoring clubs is 2013/14, but this will take into account

losses made in the two preceding years, namely 2011/12 and 2012/13. Wealthy owners will beallowed to absorb aggregate losses of 45 million (36 million), initially over those two years and

then over a three-year monitoring period, as long as they are willing to cover the deficit by making

equity contributions. The maximum permitted loss then falls to 30 million (24 million) from

2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

This approach was explained by Infantino, You can have losses for one year, because perhaps you

had one bad season and you did not qualify (for Europe). So we are looking at losses over a multi-

year basis. So one year you can make a loss, but not over three years. This makes sense, though

some clubs might simply make operating losses every year and get within the break-even target by

hefty player sales in one year.

UEFAs willingness to give the clubs every chance to meet FFP is also seen by the decision to have

only two years in the first monitoring period, as this means that the annual average loss can be

higher than future monitoring periods.

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"Santi Cazorla - you don't have to spend big"

It is important to note that these are the acceptable deviations only if the owner is willing and able

to put money in. If not (as is the case for many clubs), then they are significantly lower at just 5

million (4 million). For the likes of Abramovich and Mansour, this will obviously not be an issue,but their ability to cover large deficits will be much reduced, as noted by Infantino, I wouldnt say

the era is dead, but I would say what is over is the sugar daddy who can put hundreds of millions

into the clubs. This will no longer be possible.

Note that the rules do not actually force a club to become profitable. All that UEFA are saying is

that clubs will not be allowed to compete in their competitions (Champions League and Europa

League) if they do not break-even, but clubs making losses could continue to compete in their

domestic league. The first sanctions for clubs not fulfilling the break-even requirement can be

taken during the 2013/14 season and the first possible exclusions relating to break-even breaches

would be for 2014/15 season.

OK, thats the theory, so whats the current state of play for the leading English clubs?

The last published accounts available are those for the 2010/11 season, in other words the one

before the first season included in the FFP calculation. Nevertheless, this should still give us a

strong indication of how close clubs are to meeting the FFP target.

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Taking those clubs that qualified for Europe this season as our examples, four clubs made a pre-tax

profit (Newcastle 33 million, Manchester United 30 million, Arsenal 15 million and Tottenham

402,000), while three clubs reported large losses (Manchester City 197 million, Chelsea 67

million and Liverpool 49 million). So, on first glance, those three face a severe challenge to get

their finances in order to meet FFP.

However, there are two major adjustments that need to be made to a clubs statutory accounts to

get to UEFAs break-even template: (a) remove any exceptional items from 2010/11, as they should

not re-occur (by definition); (b) exclude expenses incurred for healthy investment, such as

improving the stadium, training facilities or academy, which would lead to losses in the short-term,

but will be beneficial for the club in the long-term.

Lets be very clear here: so-called exceptional costs will be included in the break-even calculation,

but it is unlikely that they will be at similar high levels to 2010/11, when clubs could take the

opportunity to clean house in the last accounts not to be included for FFP.

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This was a significant factor for all three clubs that reported large losses with Liverpool booking 59

million (mainly writing-off stadium development expenses), Chelsea 42 million (largelymanagement compensation paid to the sacked Carlo Ancelotti and the cost of buying-out Andr

Villas-Boas from Porto) and Manchester City 34 million (mostly writing-down the remaining book

value of certain players).

Excluding exceptional items, Liverpool would have reported a 10 million profit, while the losses at

Chelsea and Manchester City would have come down to 26 million and 163 million respectively,

so things would already look better for them in a normal year (though Chelseas manager pay-offs

have been a fairly regular occurrence and the 2011/12 figures will again be hit, this time by AVBs

departure).

Next, there can be significant costs excluded for the FFP calculation, which is best illustrated by

looking at Arsenals accounts. The costs of building the Emirates stadium are deducted, namely the

depreciation charge on the tangible fixed assets of 12 million and possibly interest on the bonds of

14 million (though the latter is a bit questionable, now that the asset has been constructed). In

addition, they will be able to deduct costs on youth and community development. Unfortunately,

these are not separately identified in club accounts, but we can estimate 10 million and 2 million

respectively for these activities. So, in total Arsenals relevant expenses for the FFP break-even

calculation will be around 39 million lower than the published accounts.

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However, Arsenal will presumably also have to exclude the 13 million profit from their property

development business, as revenue and expenses from non-football activities are not relevant for

FFP - unless it is allowed, because it is "in close proximity to the club's stadium". In our

calculations, we shall adopt a conservative approach and exclude it.

Not all interest expenses can be excluded, e.g. Manchester Uniteds annual 40-45 million is taken

into consideration, as their debt was incurred to help finance the Glazers leveraged takeover, as

opposed to positive investment in the club. Incidentally, if the club ever pays dividends to their

owners, these would also be included. Fortunately for United, these hefty interest payments are

more than covered by their huge operating profits.

After all these adjustments, most of the English clubs look to be well placed for FFP. Even

Chelseas FFP loss has come down to only 8 million, which is well within the acceptable deviations

and helps explain why they felt that they could continue spending in this summers transfer

window, especially as their income will be boosted by more revenue from their Champions League

triumph.

The only club that looks vulnerable is Manchester City, whose loss for FFP is still a frightening 142

million. Indeed, the clubs sporting director Brian Marwood admitted, Weve got a huge amount of

work ahead of us to make sure we are sustainable. They will benefit from rapid revenue growth,

both in terms of distributions from the Champions League and (especially) new commercial deals,

but the chances are that their losses will still be well beyond UEFAs limits in the short-term.

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"Roberto Mancini - it's not about the money, money, money"

However, a safety net might be provided by yet another exemption in the FFP rules, whereby UEFA

will not apply sanctions, if: (a) the club is reporting a positive trend in the annual break-evenresults; (b) the aggregate break-even deficit is only due to the annual 2011/12 break-even deficit,

which is in itself due to player contracts signed before 1 June 2010 (thus excluding wages for the

likes of Carlos Tevez, Gareth Barry, Vincent Kompany, Joleon Lescott and Kolo Toure). Even that

might not be enough, though UEFA will surely take note of Citys 100 million investment in their

academy, plus their relative restraint in the transfer market this summer.

The other point that should be highlighted is the potential importance of profits on player sales to a

clubs accounts, e.g. Liverpools 2010/11 figures were boosted by 43 million (mainly Fernando

Torres to Chelsea) and Newcastles by 37 million (largely Andy Carroll to Liverpool). Excluding

these sales, Liverpools FFP result would actually have been a 20million deficit, so its not quiteplain sailing for them.

By the way, Arsenals FFP figures for 2011/12 and 2012/13 should be hugely positive, thanks to

major profitable sales of Cesc Fabregas, Samir Nasri, Robin Van Persie and Alex Song. This has been

a key element of Arsenals self-sustaining strategy in recent years.

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Of course, Manchester City are by no means the only major club that face a major challenge tomeet FFP (though you might think so from the media) with the leading Italian clubs also having

much to do, especially Milan, Inter and Juventus, whose last reported losses averaged more than

70 million (before FFP adjustments). Indeed, Milan vice-president Adriano Galliani admitted, FFP

hurts Italy. There will no longer be patrons that can intervene. Until now people like Berlusconi and

Moratti would be able to support us, but with the fair play it will no longer be possible.

This helps explain much of this summers activity inSerie A, especially at Milan, who have

effectively been forced to sell Zlatan Ibrahimovic and Thiago Silva to the nouveaux riches at Paris

Saint-Germain, while spending very little on replacements. Clearly, there are other factors here,not least the economic crisis in Italy and Fininvests own financial difficulties, but FFP certainly

played a part in this strategy. In addition, it provides a rationale for Inter selling a 15% stake in the

club to China Railway for 75 million, as this will help fund a new stadium with these costs being

excluded for the purposes of FFP.

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"Robin Van Persie - jumping someone else's train"

At the other side of the spectrum, clubs like Real Madrid and Bayern Munich will have absolutely no

problems with FFP, as they are consistently profitable year-after-year. Bayern have been well-

known supporters of FFP, but even Jose Mourinho has commented on the likely impact, The clubproduces its money by itself, so Real Madrid will be in a much better position when FFP comes.

Barcelonas figures are a bit more up and down, but they recently announced record profits of 49

million for 2011/12, so theyre also looking good.

The stated objective of UEFAs regulations is, to introduce more discipline and rationality in club

finances and to decrease pressure on players salaries and transfer fees and it is true that there

has been a general reduction in transfer spending in European football, particularly Italy and Spain.

However, the 490 million spent by Premier League clubs on transfers in this summer is actually

slightly higher than last summer and second only to the 500 million record outlay in 2008. Of

course, it is arguable that this expenditure would have been higher without the presence of FFP,

but what does seem clear is that some clubs have opted to try to increase revenue rather than cut

costs a classic example of the economic law of unintended consequences.

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Thus, most leading clubs have managed to substantially grow their revenue since UEFA approved

the FFP concept in September 2009, e.g. the revenue at Barcelona, Real Madrid and Manchester

United rose 76 million, 71 million and 53 million respectively, though the 76% increase in

Manchester Citys revenue from 87 million to 153 million is perhaps even more striking (with

much more to come).

Lets look at how clubs have grown (and will hope to grow) their revenue streams in future.

The main driver of higher revenue in England has been the Premier League television deal. For an

individual club, this is partly down to its own success on the pitch, but is far more due to the ever-

increasing amounts negotiated centrally.

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This is because the distribution methodology is fairly equitable with the top club (Manchester City)

receiving around 60.6 million, while the fourth club (Tottenham) gets 57.4 million, just 3.2

million less. You will see that the lions share of the money is allocated equally to each club,

meaning 50% of the domestic rights (13.8 million in 2011/12) and 100% of the overseas rights

(18.8 million), with merit payments (25% of domestic rights) only worth 757,000 per place in the

league table and facility fees (25% of domestic rights) fairly similar, based on the number of times

each club is broadcast live.

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What has really helped clubs top line is the Premier Leagues ability to secure top dollar deals for

its TV rights, as once again shown with the amazing 3 billion Premier League deal for domesticrights for the 2014-16 three-year cycle, representing an increase of 64%. If we assume

(conservatively) that overseas rights rise by 40%, that would mean that the total annual TV deal

from 2014 would be worth 1.7 billion compared to the current 1.1 billion.

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Under current allocation rules, that would imply an additional 30 million revenue a season for the

leading English clubs, not only strengthening their ability to compete with overseas clubs,

especially Madrid and Barcelona, who benefit from massive individual TV deals, but also providing asignificant boost in their FFP challenge in the future assuming that they dont simply pass all the

extra money into the players bank accounts.

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With revenue from the Premier League much of a muchness for the leading English clubs, the

importance of finishing in the top four and qualifying for the Champions League is very evident.

Although it may not be a huge percentage of a clubs total revenue, it is clearly a significant

competitive advantage.

The Europa League is small compensation financially, as can be seen by the sums received in last

years campaign, where Stoke Citys 3.5 million (the highest for an English club) was considerably

lower than the sums received by the Champions League entrants: Chelsea 60 million, Manchester

United 35 million, Arsenal 28 million and Manchester City 27 million.

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This is the great dilemma for clubs like Manchester City. For their commercial strategy to work,

they absolutely have to be playing in the Champions League, but the expenditure required to get

there places them at great risk of failing UEFAs regulations. Its a vicious circle, made worse by

the possibility of exclusion from Europes flagship tournament, which would then make it even

more difficult to meet the FFP target, as the club would lose at least 25 million revenue.

In terms of match day revenue, here are a number of ways of increasing revenue, the best of which

is to be successful, which should result in more games played, due to cup runs, Champions League,

etc. A somewhat less palatable tool has been for clubs to raise ticket prices, though the current

economic climate means that this has slowed right down this season with prices frozen at Arsenal,

Chelsea, Liverpool and Manchester United. Championship side Derby County has even introduced

demand based pricing services for single match tickets for the 2012/13 season.

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Of course, a real quantum leap in match day revenue can only be achieved via stadium expansion

or building a new stadium. This can be very clearly seen with Arsenals revenue rising by nearly 50

million a season since they moved from Highbury to the Emirates. Its not just the higher capacity,

but also many more premium customers and indeed higher prices. The Glazers willingness to raise

ticket prices plus the completion of the upper quadrants at Old Trafford (and, yes, more of the

prawn sandwich brigade) has also helped Manchester United to substantially increase their match

day revenue to well over 100 million.

This has resulted in United and Arsenal both earning much more than their peers per game: 3.7

million and 3.3 million compared to Chelsea 2.5 million, Tottenham 1.6 million and Liverpool

1.5 million. This explains why all of those clubs have been looking at stadium moves for some

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time, though their struggles have highlighted how difficult this is. On the bright side, if they found

the right site, any costs associated with a move could be excluded for FFP though there would

then be the small matter of actually finding the money to finance the project.

Another interesting factor here is that the FFP regulations explicitly include membership feeswithin relevant income, which is a major benefit to clubs like Barcelona and Real Madrid, who take

in around 20 million a year from their members. Arguably, this is a form of capital injection from

the clubs owners, so should not be treated as relevant revenue, but UEFA have decided that this is

different from one large payment from a wealthy owner.

Traditionally English clubs have not focused much on the commercial side of operations, as they

have been able to sit back and rely on the TV money, but that has been changing. Many have made

great strides recently, most notably Manchester United who have broken the 100 million barrier,

but they are still left in the shade by their continental peers, especially Bayern Munich 161

million, Real Madrid 156 million and Barcelona 141 million.

Nevertheless, there has been a significant increase in the value of shirt sponsorship deals in Englandwith Liverpool and Manchester City both going from 7.5 million deals to 20 million with Standard

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Chartered and Etihad respectively. Tottenham have introduced an innovative split of their shirt

sponsorship between software company Autonomy (now Aurasma, one of their products) for the

Premier League and asset management group Investec for all cup competitions worth a total of

12.5 million, much better than the previous 8.5 million deal with Mansion.

However, United are still undoubtedly the daddy when it comes to sponsorship deals. They

switched to Aon from AIG in 2010/11, increasing the annual value from 14 million to 20 million,

but have recently announced a truly spectacular deal with Chevrolet. Not only will this rise to an

astonishing 45 million ($70 million) in 2014/15, but the sponsor will also actually pay them 11

million in each of the previous two seasons while Aon are still the sponsors. Amazing stuff, butthis is the club that has racked up numerous secondary sponsors and persuaded DHL to pay 10

million a season to sponsor their training kit.

Even the noble Barcelona have been forced to take shirt sponsorship, switching from the unpaid

UNICEF to a very lucrative 24 million a year with the Qatar Foundation. Other clubs have also been

keen to get in on the act with Newcastles 10 million Virgin Money deal being 7.5 million higher

than Northern Rock and Sunderlands barely credible 20 million Invest in Africa deal being just the

19 million more than the previous Tombola deal.

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All of this is leaving Arsenal way behind the rest with a measly 5.5 million Emirates deal, a legacy

of a deal that helped finance the stadium construction. There will no doubt be a major increase in

2014 when the deal runs out, but you cant help thinking that the clubs commercial team should

have done more, especially when you compare their tiny revenue growth to Uniteds.

"John W Henry - FFP's No. 1 fan?"

Similarly, clubs have done well in improving their kit supplier deals, e.g. Liverpools 25 million kit

deal with Warrior is more than twice the amount received from Adidas and is about the same level

as Manchester United, Real Madrid and Barcelona. United themselves are in discussions to extend

their deal with Nike, looking for an increase of at least 10 million a season.

Merchandising, retail, hospitality and overseas tours can all swell the coffers, but the Holy Grail for

football clubs is stadium naming rights. The only club that has (reportedly) inked such a deal for ameaningful sum is Manchester City, as an element of their long-term Etihad sponsorship, while

clubs like Chelsea have to date failed to secure a deal, despite many years of searching.

Many have expressed scepticism over Citys Etihad deal, including Liverpools owner John W Henry,

who asked, How much was the losing bid? and Arsenal manager Arsene Wenger, If FFP is to have

a chance, the sponsorship has to be at the market price. It cannot be doubled, tripled or

quadrupled, because that means it is better we dont do it and leave everybody free.

UEFA tackle such deals by assessing whether they represent fair value and then deducting any

excess (not the entire agreement) from the clubs income for the purposes of the FFP break-even

calculation. Given the rate of change of such sponsorship deals, my view is that they are unlikely to

exclude this deal.

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"Arsene Wenger makes his point"

If they do, the lawyers will be out in force, asking UEFA to also look at other clubs, such as

Chelseas sponsorship deal with Russian energy company Gazprom, who bought Roman

Abramovichs stake in Sibneft in 2005. Questions could even be asked of squeaky-clean BayernMunich, where two of the most prominent sponsors, Adidas and Audi, each own around 10% of the

club.

Clearly, any egregious attempts to get round the regulations, such as an owner buying 200 million

of replica shirts or paying 50 million for a super-VIP executive box, will be thrown out, but, as we

have seen, there is still scope for some serious revenue improvement in commercial operations.

There have been some interesting developments that clubs may use to boost revenue, such as RealMadrids $1 billion resort island in the United Arab Emirates and Trabzonspors plan to build a

hydroelectric power station. On the face of it, any revenue from such activities would have to be

excluded from FFP, as it is clearly and exclusively not related to the activities, locations or brand

of the football club. However, the same clause does confusingly allow the inclusion of revenue

from non-football operations if those operations are clearly using the name/brand of a club as

part of their operations with no reference to location. Another one for the lawyers.

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UEFAs hope, of course, was that FFP would act as a soft wage cap, though there has been little

sign of this up to now at the leading English clubs, especially Manchester City where wages have

surged from 36 million to 174 million in just four years, resulting in a wages to turnover ratio of

114%. As well as recruiting new players, the wage bill is under pressure from better deals for

current players (to avoid sales on a Bosman) and bonus payments (which can sometimes end up

costing more than the additional revenue from success on the pitch).

Some clubs have spent a lot of time trying to reduce their wage bill by offloading deadwood, butthis is easier said than done, given the high wages they tend to be on, leading to cut-price sales or

elaborate loan deals where much of the wages are subsidised (raising more questions in terms of

FFP).

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Although English clubs have high wage bills, they are not actually the highest in Europe, an

honour that belongs to Barcelona and Real Madrid. A root cause of the Italian clubs problems

with FFP can be seen with the bloated wage bills at Milan and Inter, hence the release of so many

experienced (expensive) players in the last two seasons. However, it is difficult to compare across

countries because of differing tax rates, which mean that clubs in England and Italy have to pay

higher gross salaries for their players to receive the same net salary.

Given the prevalence of third party ownership in many countries, there is a risk that a clubs

overall wage bill could be massaged by a sponsor paying part of a players package. This is

addressed in the FFP guidelines, but it might not be totally straightforward for UEFA to identify any

such arrangements.

The impact of transfer fees on a clubs accounts is not easy to understand for many non-accountants, as the full expense is not booked immediately, but instead is written-down

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(amortised) evenly over the length of the players contract. The reasoning is that the player is an

asset, but could potentially leave for nothing at the end of his contract on a Bosman, when the

value would be zero. So, if a club like Chelsea signs a 40 million player on a four-year contract,

the annual amortisation is 10 million, i.e. 40 million divided by four years. Incidentally, the

accounting treatment is the same regardless of when the cash payment is made (all up front or in

stages).

In this way, a clubs accounts will not show the full extent of major transfer activity immediately,

though it will be reflected in growing player amortisation. This can be seen very clearly with

Chelsea, where amortisation rocketed from 21 million to a peak of 83 million after Abramovichs

initial burst of expenditure, but then fell to 40 million after the taps were closed. Manchester

Citys 2010/11 amortisation was 84 million, but they would hope that this would fall after their

recent parsimony.

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It stands to reason that wealthier clubs can reduce their annual amortisation by signing players on

longer contracts, but this can also be achieved by extending player contracts. For example, if our

40 million player were to extend his contract after the first two years of his initial four-year

contract by a further two years, the remaining 20 million valuation in the books would then be

amortised by the new four years remaining (original two plus extended two), leading to annualamortisation falling from 10 million to 5 million.

The impact of third party ownership should not be underestimated here, as it enables clubs in many

countries, notably Portugal and Spain, to acquire players at a fraction of their total cost. This

places Premier League (andLigue 1) clubs at a disadvantage, as they have outlawed this practice, so

they have lobbied UEFA to adjust the FFP rules to take this into consideration. Apparently, they

have agreed, but it is not clear how this will work in practice.

Returning to the intricacies of player trading, it is also important to note how clubs report profit onplayer sales, which is essentially sales proceeds less any remaining value in the accounts. This

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means that a club can potentially book an accounting profit on sale even when the cash value of

the sale is less than the original price paid, e.g. if our 40 million player is sold after three years

for 15 million, then the cash loss would be 25 million, but the accounting profit would be 5

million, as the club has already booked 30 million of amortisation.

Up to now, this has surely only interested accountants, but its become very relevant for FFP.

Furthermore, any players developed through a clubs academy have zero value in the accounts, so

any sales proceeds represent pure profit.

There are other angles addressed by the new regulations. For example, many clubs these days have

an intricate inter-company structure and there were fears that a club might argue that the football

club itself was profitable, while large expenses such as interest payments were paid out of a

different company. Clearly, that does not make sense to any reasonable man and UEFA have caught

that one, If the licence applicant is controlled by a parent or has control of any subsidiary, then

consolidated financial statements must be prepared and submitted to the licensor as if the entities

were a single company.

"Our finances are special"

On the other hand, the exclusion of non-football operations might benefit clubs like Barcelona, as

they would presumably deduct the losses made on other sports, such as basketball, handball and

hockey, which amounted to around 40 million in 2010/11.

Clearly, the introduction of FFP will not be without difficulties with Platini himself admitting, It is

not easy, because we have different financial system in England, France and Germany. Just one

example is the 167 million paid by the Premier League in parachute payments, solidarity payments

and football development, which might be treated as 8 million of (allowable) charitable

deductions for each club if they were not top-sliced from central payments.

Although the FFP regulations explicitly state that adverse movements in exchange rates will be

taken into account, it is not explained how this will work. This is important for English clubs, as the

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weakening of the Euro means that any Sterling losses will be higher in Euro terms than when the

rules were first drafted.

While the majority of clubs are in favour of FFPs attempts to tackle footballs economic woes,

there is a concern that far from making football fairer, all this initiative will achieve is to make

permanent the domination of the existing big clubs: survival of the fattest, if you will. The

argument goes that those clubs that already enjoy large revenue (like Real Madrid, Barcelona,

Manchester United and Bayern Munich) will continue to flourish, while any challengers will no

longer be able to spend big in a bid to catch up.

In almost any business, you have to invest before the revenues start flowing and in football this

means brining in new players and paying high wages in a bid to reach the lucrative Champions

League. Critics have asked whether there really is any difference between contributions from

wealthy owners and corporate sponsors. This is one of the reasons why the Premier League has

reservations with chief executive Richard Scudamore saying that he was opposed to any limits being

set on the ability of owners such as Sheikh Mansour to invest money in their clubs.

In any case, UEFA have now announced a sliding scale of sanctions for clubs that breach FFP rules,

which works like this: a warning, fine, points deduction, withholding of prize money, preventing

clubs from registering players for UEFA competitions and ultimately a ban. This implies that a ban

is the last resort, but UEFA has recently banned two Turkish clubs, Bursaspor and Besiktas

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(suspended), AEK Athens and the Hungarian club Gyori for FFP breaches. These decisions were

backed by the Court of Arbitration for Sport (CAS).

"Qu'est-ce que c'est, ce FFP?"

UEFA were also given some comfort by the European Commissions confirmation that there is

consistency between FFP and EU State Aid policy, though this has not been fully tested in the

courts. There is still plenty of scope for a powerful club to pursue a competition law case, if it was

banned

Some have questioned whether the regulators will have the bite to go with their bark. Expelling

teams from the Champions League works fine on paper, but would UEFA really risk damaging their

main cash cow? If, for example, they banned Manchester City, Milan, Inter, PSG and Juventus, they

would risk killing the goose that lays their golden egg and increase the prospects of a European

Super League.

Indeed, key proponents of FFP have expressed doubts over UEFAs willingness to act, such as John

W Henry, The question remains as to how serious UEFA is regarding this. It appears that there are

a couple of large English clubs that are sending a strong message that they arent taking them

seriously. Even Arsene Wenger admitted, UEFA want to create a situation where clubs with

deficits cannot play in the Champions League, but I question whether they will be able to force itthrough.

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"Hulk hears of an incredible deal"

That said, UEFAs credibility would be severely compromised if a major club that was in breach of

the rules was not effectively punished. Listening to public pronouncements, they have consistently

said that this will not be the case. Only last week, Platini was unequivocal, We are never goingback on Financial Fair Play. I want the clubs to spend the money they have, not the money they

dont have. We will be enforcing these rules.

Its certainly an interesting challenge for UEFA, not least with the arrival on the scene of big-

spending Paris Saint-Germain and Zenit St Petersburg (who this week splashed 64 million on the

Brazilian striker Hulk and the Belgian midfielder Axel Witsel), but, as we have seen, they have

cleverly built a fair bit of leeway into their regulations (and sanctions), so the vast majority of

clubs should be just fine with FFP, particularly those in England.