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Grant Thornton- Focus on football finance


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Pulling together the different
themes covered in this newsletter
gives us a vision of the possible
future for football, in England
and beyond.

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Grant Thornton- Focus on football finance

  1. 1. Focus on football financeMarch 2012
  2. 2. Focus on football financeThis is a game oftwo halves: the havesand the have nots.And the haves want more… Contents 03 2020 Vision 04 Football finance fair play 08 Club versus country 09 Eastern mystery 10 Where does the money go? 14 Is the Sky falling in? 16 Investment in youth is changing 18 TV rights 21 About Grant Thornton2
  3. 3. 2020 VisionPulling together the different We look at the reasons behind could generate increased income fromthemes covered in this newsletter Manchester United’s decision to seek to sponsors and advertisers. Why play 60gives us a vision of the possible sell shares in Singapore, and conclude matches each season if you could playfuture for football, in England that the Glazers may actually see Asia just 50 but still generate more revenue?and beyond. as a major source of future revenues Why play in your home town every for the Club. We believe Chelsea, other week when you have millions ofPicture the scene: Manchester United Liverpool, Manchester City and the overseas fans, in Asia or the rest of thev Barcelona; the final of the World top European clubs share this vision. world, keen to pay premium prices toChampions League, played before a And we comment on the monies that watch their favourite teams live?full house in the Beijing National the Premiership Clubs receive from the For the bigger clubs the temptationStadium in China. There are 100,000 sale of media rights. Are the top clubs of the additional monies that could befans, 50,000 each from Manchester really happy with their share? earned on a world stage must surely,United and Barcelona, watching the If we put all these factors together, at some point, become irresistible. Butgame live, and all are Chinese residents. we can see the background to what we when? 2020? Is that a realistic timescaleThe game is also being broadcast live think may be the next big contest in for the Manchester United v Barcelonaaround the world, with 750 million international football. Not Manchester vision sketched out above toviewers paying $10 each on pay-per- United v Barcelona in China, but become reality?view. It is football’s biggest game, UEFA versus one of our top clubs. We Certainly, if it did happen, it wouldproducing revenues of $7.5 billion. wonder what would happen if one, or give rise to a whole series of furtherSounds unlikely? Let’s see how it more, of the top European clubs were questions. What would be the impactcould happen. to fall foul of UEFA’s Financial Fair on those clubs left behind? What TV In this brochure we talk about Play Regulations, prompting UEFA deal would these non-Super LeagueUEFA’s Financial Fair Play Regulations. to exclude them from the Champions clubs be able to command? And whatThese will seek to bring stability to League. Would the clubs simply accept sort of state would their finances be in?the game by restricting the spending UEFA’s ruling and be content to And who would want to lend to them?of clubs to match their income. We pass up the prize of Champions All points to ponder….support this initiative strongly as it League money?will encourage clubs to develop young We suggest that would be unlikely.players rather than spending their way Such a move by UEFA could thereforeinto financial trouble. be the catalyst for something truly We consider FIFA’s increasing epoch-making: the break-up of thedemands on the clubs to release their game in Europe as we know it. Thishighly-paid players for international might happen if a defaulting club For the biggerduties in an already fixture-packed tempted others to break away andseason. These clubs are also required to clubs the temptation form a European Super League, ortake part in domestic cup competitions, a World Super League. This might of the additional moniessuch as England’s FA Cup and Carling eventually lead to a league of perhaps that could be earned on aCup. The weakened sides fielded by 16-20 teams from Spain, Italy, France, world stage must surely,the Premiership Clubs in the early Germany, England, Argentina, Brazil, at some point, becomerounds of these competitions already Asia and North America. Breakaway irresistible.send a clear message about how they clubs, with the best brands and theview them. biggest supporter bases, could demand a greater share of media rights, and 3
  4. 4. Focus on football financeFootball financial fair playIt was in September 2009 that More than one in eight club auditors sporting values we have in Europe,” saidUEFA’s Executive Committee expressed uncertainty about whether UEFA President Michel Platini.approved unanimously a concept certain clubs could continue as going The financial fair play objectivescalled financial fair play. The concerns. Those clubs with wealthy are to:background to its decision was as backers were able to out-spend their • improve the economic and financial competitors, forcing transfer fees and capability of clubs, increasingfollows: many clubs were reporting wages into a spiral that risked the future transparency and credibilityfinancial losses in worsening of the clubs, and the very fabric of • ensure clubs settle their liabilities on amarket conditions in the 2009 the sport. timely basisfinancial year. Total revenues UEFA decided that action was needed • introduce more discipline andfor top division clubs reached a to level the playing field. The fair play rationality in club football financesrecord €11.7 billion but increased concept was its answer: an attempt to • encourage long-term investment incosts had created net losses of force clubs to live within their means the youth sector and infrastructure€1.2 billion, almost double the by limiting spending to the income they • encourage clubs to operate on theprevious record. Many clubs were were generating. “Financial Fair Play is basis of their own revenuespaying enormous bills for crucial in order to promote the long- • protect the long-term viability ofplayers’ wages. term sustainability of European football European club football. and is entirely consistent with the At Grant Thornton we endorse and support the objectives of financial fair play as we have campaigned for some time for football clubs to be operated with the same level of financial discipline UEFA general secretary applied by other business models, rather than relying on the deep pockets Gianni Infantino summed up of their chairmen and other directors. Introducing the new regime, UEFA the situation rather memorably. general secretary Gianni Infantino ‘What kind of healthy business summed up the situation rather memorably. “What kind of healthy is it that waits for a white knight business is it that waits for a white on a horse with lots of money knight on a horse with lots of money to throw round and then, from one day or to throw round and then, from another, he could jump on his horse and one day or another, he could ride away?” UEFA’s Executive Committee jump on his horse and approved the UEFA Club Licensing ride away?’ and Fair Play Regulations in 2010. The Regulations introduced the fair play4
  5. 5. measures that will be implementedover a three-year period, requiringclubs to operate on a break-even basis.The first season that a club could beexcluded from European competitionfor non-compliance is 2014-15, butthe first break-even assessment will beundertaken during 2013-14. The period in which the assessmentis made is termed the ‘monitoringperiod’, and the assessment is based aggregate losses in a monitoring period, Monitoring is the role of the Clubon the aggregate results of the three it can use profits from the two years Financial Control Panel, headed by theprevious reporting periods. For example, prior to T-2, (T-3 and T-4) to reduce the former Prime Minister of Belgium, Jean-in monitoring period 2015-2016 the aggregate loss. Luc Dehaene. Its first task was to lookreporting periods will be those for the Whilst clubs are being challenged to at all transfer and employee payables infinancial years ending in 2015 (T), 2014 ensure they do not spend more the summer of 2011. Transfer spending(T-1) and 2013 (T-2). The exception than they earn, they will be given some made over the summer of 2011 willto this rule will be for the 2013-14 flexibility if the trend is moving in the impact on the break-even results of themonitoring period, which will assess the right direction. Accordingly, in the financial years ending 2012 and 2013, thereporting periods ending in 2013 and 2013-14 and 2014-15 monitoring first financial years to be assessed under2012, (2012, of course, being the periods, if a club’s deficit arises because the break-even rule. All payments duecurrent season). of over-spending on players’ wages on transfers, and to employees, will be The Regulations are applicable in the 2012 reporting period, then the assessed by the Panel. So, Mr Dehaeneonly to those clubs with income and expenditure on players’ wages arising and his colleagues will have beenexpenditure of over 5 million euros. The from contracts signed before 1 June watching with interest the summer 2011maximum deficit that such clubs will be 2010 can be excluded from the break- transfer window business conducted byallowed to incur will be 5 million euros even calculation. the Premiership Clubs, especially thefor the aggregate of the three reporting Clubs will still be able to spend on big four net spenders, Manchester Cityperiods (T, T-1 and T-2). This aggregate long-term ventures such as infrastructure (£52.5m), Manchester United (£42.9m),can be exceeded in the early years – but or academy projects, and this spending Chelsea (£41.75m) and Liverpoolonly if the excess is made good by equity will not count towards the break-even (£34.1m).injections. The allowable deficits will calculation. This is to ensure that the Consideration has also been givenbe 45 million euros for the combined other aims of the Regulations, such as to the possibility of clubs attempting toseasons 2013-14 and 2014-15, falling to youth development and improving/ circumvent the regulations by artificialan aggregate 30 million euros for seasons upgrading sports installations, are not means. Provision is made to adjust2015-16 to 2017-18. Where a club shows affected adversely by financial fair play. income and expenses from related parties 5
  6. 6. Focus on football financeThe spectre of to reflect the fair value of any such transactions. One deal, which is sure break-even calculation for financial fair play. Arsenal manager, Arsene to be considered closely, is Manchester Wenger, has already suggested that ifthe financial fair City’s 10-year sponsorship deal with Etihad Airways announced in July 2011, Manchester City’s sponsorship deal is accepted by UEFA, then the financialplay regulations and said to be worth up to £400 million. fair play rules will be blown apart. City successfully increased its revenue According to Wenger, “The credibility from sponsors and partners by 400% to of Financial Fair Play is at stake. Theraises some £32.4 million in 2009-10, thanks to the agreement with Etihad and other Abu sponsorship cannot be doubled, tripled or quadrupled because that means it iskey questions. Dhabi based companies, such as Etisalat, better if we leave everybody free. But if Aabar Investments PJSC and the Abu they bring the rules in they have to Dhabi Tourism Authority. This latest be respected.” deal, the largest of its kind in sport, is The spectre of the financial fair play certainly a huge step towards a return to regulations raises some key questions. profitability for Manchester City, which What will be their effect if they work? incurred a £194 million loss in 2010/11. And will UEFA really expel one or more And given that City does not even big clubs out of European competition if own its stadium, and that Etihad has they do not comply? never made a profit, the deal is even With regard to the first question, more extraordinary. France gives a possible indication of the City, of course, is owned by Sheikh impact of financial fair play. The DNCG Mansour bin Zayed al-Nahyan of Abu (Direction Nationale du Controle Dhabi and Etihad Airways. The fact de Gestion) is in its third decade of that this deal doubles the previous monitoring that nation’s strict financial record of $300 million (£187 million) regulation regime. Clubs’ expenditure for the world-famous Madison Square is tied to income. As a result Lyon is the Garden, and is way ahead of Arsenal’s only club to have finished in the top four £90 million, 15-year sponsorship deal in Le Championnat more than five times with Emirates, has already been noted, in the past 10 years. By contrast in the not least by some of City’s competitors free-spending English Premiership, four in the Premiership. The club has clubs have achieved that goal. In France, apparently already consulted UEFA if a team incurs a loss it has to make over the arrangement, which includes cutbacks, or generate compensating financial backing for infrastructure and income by selling a key player. This is regeneration projects, both types of the financial model that Michel Platini expenditure that do not count in the is so keen to impose on the rest of6
  7. 7. We believe that excluding a major club from EuropeanEurope. In terms of the financial fair concept hand-in-hand with the clubs, competition on groundsplay objectives it will “introduce more as our intention is not to punish themdiscipline and rationality in club football but to protect them.” But if it comes of financial fair play willfinances” and will “encourage clubs to the crunch and UEFA has to punish threaten the continuationto operate on the basis of their own them what will happen? UEFA’s record of the game as we know itrevenues”. But how will it affect players on enforcement to date has not beendenied pay rises, and talented managers exemplary. For a man who has been in Europe. It couldwho have worked tirelessly to build a quoted as saying “our policy on racism threaten UEFA itself.winning team? Many of them may well is one of zero tolerance” we have seenlook elsewhere, beyond UEFA’s reach. no real effort from Mr Platini or UEFA Any club gambling on winning to stamp out racism. That issue came toa Champions League spot and its the fore again in the recent England vresultant rewards, and failing, may Bulgaria Euro qualifier. Will Mr Platiniwell find itself caught out by financial take fair play all the way, or will he back of elite European League, or even afair play. Will that club be content to down and allow loss making clubs to World Super League, then would othersmake the cutbacks necessary to ensure remain in Europe if the trend of losses is follow? Liverpool, as we note elsewhereits expenditure falls back to meet the heading in the right direction? in this brochure, is one club apparentlyshortfall in revenue, as required by We believe that excluding a major unhappy with its current allocationfair play? club from European competition on of European TV monies. How many That then leads us to the question of grounds of financial fair play will others from Europe and the rest of thewhether or not UEFA will act robustly threaten the continuation of the game as world could be tempted to share in theand seek an expulsion of that club if it we know it in Europe. It could threaten inevitable riches that could be generateddoes not do so. UEFA president Michel UEFA itself. If the excluded club were from such a league? And where wouldPlatini is on record as saying “We able to persuade other clubs that their that leave the others, and the financialhave worked on the financial fair play future lay outside UEFA, in some form institutions lending to them?Will Mr Platini take fair play allthe way, or will he back down andallow loss making clubs to remainin Europe if the trend of losses isheading in the right direction? 7
  8. 8. Focus on football finance Club versus country: a memorandum of misunderstanding The memorandum of understanding elite European Super League, and between FIFA and the clubs expires in approaches would surely be made No wonder clubs, July 2014. The memorandum creates a to other clubs that demonstrate an legal requirement for the top European ability to generate revenue from their under pressure to clubs to play in UEFA’s Champions international fan-bases. These might cut losses, question the League and to release players for include Arsenal, Chelsea, Manchestercommercial sense in being international friendlies, or tournaments, City, Juventus, Roma, Ajax, Porto,forced to allow highly-paid including the World Cup. Marseille, Celtic, Rangers and others. It seems unlikely that it will be And why stop at Europe? Clubs, players to participate in renewed on the same terms. Umberto after all, are increasingly focusing their international games for Gandini, of AC Milan, and the attention on Asia. Taking into account little or no payback. European Club Association suggested the major teams in Argentina and in July 2011 that a “refusal of co- Brazil, which enjoy substantial support, operation” in respect of international as well as the growing commercial football was a possibility. The interests of American owners, surely potential riches that a Super League a World Super League is the logical could generate are best illustrated conclusion for elite clubs seeking to by the FIFA World Cup. A total of maximise their revenue potential? European clubs were told by FIFA $3.7billion of income was generated that they must release their players for from the 2010 World Cup. Yet the 13 international dates in 2011. They 400 clubs providing the players included the 10 August clash between shared a total of only £25.3million England and Holland that in compensation. Barcelona, which was cancelled due to the rioting in released 13 players, received the highest amount at £557,000. English clubs, the The English Premier London. That game would have been played just three days before the start best rewarded in the scheme, shared a League was formed combined £3.8 million. These clubs will of the English Premier League season – a state of affairs that was not exactly be wondering how much they could over 20 years ago popular with Premier League managers. In 2013, FIFA has plans for an have earned had they been in control of the revenues of a world when leading clubs unprecedented 15 international dates. club competition. broke away from No wonder clubs, under pressure to cut The English Premier League was losses, question the commercial sense formed over 20 years ago when leading the Football League. of being forced to allow highly-paid players to participate in international clubs broke away from the Football League. The commercial success of the The commercial games for little or no payback. Premiership sets an example that could be replicated by the top European success of the Europe’s leading clubs in England, Germany, Italy and Spain dream of clubs. Bayern Munich, Real Madrid, Premiership sets an Internazionale, Milan, Manchester the profits they could make from a European Super League. This, plus United, Liverpool and Barcelona have example that could the increasing demands of FIFA won 36 European Cup and Champions League titles between them. They be replicated by the for international games, mean the current status quo is unsustainable. would be the natural choice for any top European clubs. 8
  9. 9. Eastern mysteryIt is seven years since the Glazers although there are suggestions that The growth in thetook Manchester United private the valuation of the club is too high. economic power offor a purchase price of £790 Despite 2010 revenues of £286m, and the East and the resultantmillion, provoking fury amongst an operating profit of £91m (the highest increase in disposablesupporters. in the Premiership), the club reported a incomes have combined £79m loss after interest costs). The high to attract the interest interest costs reflect the fact that theIt looks like they are now moving to of western brands.offload 25% of their shares at more Glazers financed their 2005 purchasethan double the purchase price, leaving with £600 million of loans.themselves with a healthy capital gain The growth in the economic powerand the fans more outraged than ever. of the East and the resultant increase inIn June 2010 the Glazer family held disposable incomes have combined totalks with several investment banks attract the interest of western brands. These brands now include some of the downloading of football matches.with a view to listing Manchester top European football clubs. The places With UK fans currently havingUnited on the Hong Kong stock clubs visit on their pre-season tours give to watch their spending, it is noexchange. This followed a number of a clear indication of where they expect surprise that European clubs shouldrecent high-profile flotations in HongKong. Clearly the Glazers and their growth to come from. Liverpool toured see Asia as a key growth area. So aadvisers were attracted by suggestions in China, Malaysia and Singapore, listing in Singapore for Manchesterthat a listing could value the club at Chelsea in Kuala Lumpur, Bangkok and United should similarly occasion no£1.7 billion. Hong Kong, and Arsenal in Malaysia surprise. United, after all, does have a Hong Kong has been the world’s and China. Did they go there for number of advantages over its rivals.biggest Initial Public Offering (IPO) the weather, or to raise their profiles On the playing field, United is themarket for the past two years, raising amongst their growing Asian supporter most successful team in the history of$57.4bn (£35.6bn) in 2010. Recent bases? Manchester United has an English football, although, of course,listings include luggage manufacturer estimated 333 million fans, of whom Liverpool has won a greater number ofSamsonite, Macau casino operator 190 million live in Asia. European trophies, making it the mostMGM China and, in June 2011, Prada. Demand for live Premiership action successful English team in Europe.After four previously unsuccessful led to a fierce bidding war amongst The Manchester United brand wasflotation attempts, Prada recognised Asian broadcasters for the 2010-2013 rated second most valuable in 2010 bythe importance of Asia as a consumer broadcast rights. In Singapore, an island Forbes magazine behind the New Yorkof luxury goods and decided to list in with a population of only 4.8 million Yankees, and the club is one of the bestHong Kong. people, the rights are held by SingTel, supported in the world. However, it is Singapore, and not which paid £200 million - more than We believe that if its IPO doesHong Kong, that is expected to see the three times the amount paid by the succeed, Manchester United willlaunch of Manchester United shares, previous holder. In Hong Kong, i-Cable progress to another level that veryslightly later than planned due to paid £150 million, again a significant few others will be able to replicate.volatility in the world financial markets. increase on the previous arrangement. Yes, others may be tempted to followNo explanation has been provided The football-hungry younger fans United’s example. But, while Asia has afor the change of venue to Singapore, in Asia are very IT literate, and eager real and increasing hunger for football,but indications are that 25% of the for the latest computer and telephone appetite can be quickly sated. The mostshares will be offered for sale and the gadgets. This growing market offers successful clubs are likely to be thoselisting is expected to raise £600 million, new opportunities for streaming and first to market with attractive offerings. 9
  10. 10. Focus on football financeWhere does the money go? Premier League million subscribers paying players, managerial, coaching million clubs and support staff The economics of the mad house costs. Each club has a squad of 25 first team players, earning an average basic support staff. Rather than using the increasing TV monies to repay debt, it The gulf between the Premier League and the rest of football has also widened salary of £1.2 million. With bonuses seems that the clubs have preferred to significantly. The average Premiership and appearance money this could rise to pay higher wages to their players and wage is now 5 times more than theAccording to the Premiership Football Clubs ought to be among the most profitable businesses content and some Sky subscribers are also amongst the estimated 1.2 million between £1.8 million and £2.4 million. staff. In 1992-93, the first year of the average in the Championship, and 30 In addition, the clubs have Under 21 Premiership, the average Premiership times more than the average LeagueOffice of National in Britain. They have a quality product ESPN subscribers, paying another players and the associated managerial, basic annual pay was £77,000, over four Two wage. Back in 1992-93 those for which there is a seemingly insatiable £108 each year (or £144 for non-Statistics, the demand. Ticket prices increase year Sky subscribers). coaching and support staff. Manchester times the average UK wage. Ten years figures were 1.9 and 4.6 respectively. City’s wage bill in 2010-11 was £174 later in 2002-03 the average player’s Why has the gap widened so much?average UK worker on year, and the Premier League has delivered significant and incremental Sky and ESPN are paying circa £1.7 billion over 3 years to the Premiership million, £21 million more than its total pay had increased by nearly 800% to Look no further than the level of TV income of £153 million! £611,000, but the average UK wage was monies in the lower leagues.earns £24,076 per increases in TV monies with every for TV rights, equating to £567million In effect then, the hard-earned only 53% higher. By 2009-10, players’ What is more, this cash does not stay new deal. Our football clubs should each year.year, and 10.26 be awash with cash. But in 2009/10 The Premier League distributed money of the estimated 5 million Sky sports fans ends up helping to line pay had virtually doubled again, to an average £1.2 million, against a 20% in the Premiership footballers’ pockets for long. Despite the massive increasemillion of them only three Premiership clubs reported profits, and one of those (Arsenal) at least £19.6 million from domestic broadcast rights (£13.8 million equal the pockets of circa 800 players and increase for the average worker. in players’ wages, in some cases it issubscribe to Sky, would have incurred a significant loss share plus a minimum of £5.8 million had it not been the for one-off sales of facility fees) to each of the 20 Premierpaying an average £156 million worth of apartments in League Clubs in 2010-2011. Additional its Highbury residential development. appearance monies were paid to theof £535 each year. Premiership winners, Manchester clubs, depending on the number of What is surprising is that despite the massive increase in players’ wages, 1992-93Approximately half United posted losses before taxation times they featured on TV. And, of it still isn’t enough for some players of £79 million. The combined net debt course, the Premier League does make to avoid financial problems. In 1992-of these subscribers of the 20 Premier League clubs in 2010 parachute payments to relegated clubs 93, the first year of the Premiership, 2002-03 was £2.5 billion. So the questions are: and solidarity payments to the Football the average Premiership basic annualtake some How can this be? Where does the League for distribution to its clubs, as pay was £77,000, over four times the average UK wage. Ten years latersport content. money go? Let’s focus on the TV monies. well as financing youth development programmes and making various in 2002-03 the average player’s pay had increased by nearly 800% to 2009-10 According to the Office of National charitable donations. £611,000, but the average UK wage Statistics figures, the average UK So the clubs collect the TV monies, was only 53% higher. By 2009-10, worker earns £24,076 per year, and along with their other incomes from players’ pay had virtually doubled 10.26 million people in the UK ticket sales, merchandising, sponsorship again, to an average £1.2 million, subscribe to Sky, paying an average of and overseas broadcasting rights and against a 20% increase for the £535 each year. Approximately half use them to defray their expenses, the average worker. of these subscribers take some sport biggest of which is the players’ wage 1110
  11. 11. Focus on football finance reduction in disposable income as wages fail to keep pace with inflationary price rises. Can the football industry expect the public to continue paying more and more each year to finance the increased wage demands of such a limited number of individuals? Clubs cannot afford still not enough and the number of to continue to operate the same way, ex-Premiership players experiencing relying on the ongoing support of their insolvency continues to rise. fans digging ever deeper into The pressure of paying such their pockets. unsustainably high wages has resulted We call upon the clubs to in many clubs likewise succumbing to demonstrate a greater sense of morality insolvency. The ranks of the Football and show some empathy with their League include a long list of clubs that supporters, who are under increasing have entered Administration - some financial pressures. We call upon all the of them shortly after having been directors of our football clubs to live relegated from the Premiership. (These up to the fair play ethos that Monsieur include Leeds, Ipswich, Leicester and Platini and his colleagues at UEFA are Wimbledon.) Portsmouth became the eager to impose, and to ensure that their first club to enter Administration whilst clubs live within their means. We call actually in the Premier League. upon the football authorities to show HM Revenue and Customs the leadership required to ensure that (HMRC) is often blamed for forcing clubs do attain the breakeven financial clubs into insolvency. But clubs fair play standards demanded by deducting income tax and national UEFA. That will require the clubs to We call upon the insurance contributions from the be brave enough to deny the increased clubs to demonstrate a wage demands from players, to resist unsustainable wages paid to their greater sense of morality players can hardly expect HMRC (and the inevitable pressure of the fans –and show some understanding the taxpayer) to foot the bill. Any club however hard-up they themselves might to their supporters, who are that has spent the tax it has deducted be - to spend those extra millions in the under increasing from its employees on higher wages transfer windows, and use their income to reduce debts. We say: so what if the financial pressures. and transfer fees deserves no sympathy from the hard-pressed taxpayer. clubs don’t sign the expensive players There will always be football. that their fans want? Many of the clubs The present model, however, is that did gamble on spending their way not sustainable. The paying public to footballing success have entered who subscribe to satellite TV are insolvency and fallen out of sight of encountering real financial pressures, the upper leagues. Spending does not and those in work find themselves guarantee footballing success. We obliged to make sacrifices, faced with a urge the clubs to look realistically, and12
  12. 12. modestly, at their ambitions, and followthe fair play protocols. Operating Key financials for Premier League clubs at June 2010within their means will allow clubs tofind their true economic level in the Wages as Profit/league. That may well be less glamorous % of (loss)than living the dream, but club directors Turnover Wages turnover before tax Net debtand supporters must decide what they £ million £ million £ million £ millionwant from their teams: one giganticgamble that is more than likely to fail Arsenal 382 110 29 56 136and risk the very existence of the club Aston Villa 91 80 88 (38) 110they love so dearly, or a long-termsustainable future. Birmingham 56 38 68 0 16 Blackburn 58 47 81 (2) 21So we say the Blackpool 9 13 144 (7) 4.3economic model Bolton 62 46 74 (35) 93has to change. Chelsea 213 174 82 (78) 734 Everton 79 54 69 (3) 45It represents the Fulham 77 49 63 (19) 190economics of the Liverpool 185 121 65 (20) 123madhouse, and Man City 125 133 106 (121) 41cannot continue. Man Utd 286 131 46 (79) 590Surely everyone can Newcastle 52 47 90 (17) 150see why UEFA is so Stoke 59 45 76 (5) 8keen on financial Sunderland 65 54 83 (28) 66 Tottenham 119 67 56 (7) 65fair play. West Brom 28 23 82 1 10 West Ham 72 54 75 (21) 34 Wigan 43 39 91 (4) 73 Wolves 61 30 49 9 0 Total Net Debt at June 2010 = £2.5 billion 13
  13. 13. Focus on football financeIs the Sky falling in?It could be argued that Premier in the Karen Murphy case. Ms Murphy month, were too high and opted forLeague footballers and BSkyB are is the Portsmouth pub landlady who a much cheaper Greek service untilthe only players in the football appealed against her conviction for stopped by the English courts. Havingmarket who have fared well in the broadcasting illegally live Premiership paid nearly £8,000 in fines and costs Msrecession up to this point. matches by using a Greek TV signal Murphy took the issue all the way to decoder. The Football Association the ECJ. Premier League Limited (the private In essence, the legal case was aboutEven though the credit crisis has forced company which represents the whether or not a rights holder suchUK consumers to make cutbacks in broadcasting interests of the 20 English as the Premier League can license itstheir spending, it seems that many are Premier League clubs), brought the content on a country-by-country basis.reluctant to cancel or downgrade their prosecution arguing that only Sky TV Licensing in this way has allowed theSky TV subscription. Sky customers had exclusive rights to show its games League to maximise fully the value ofnow spend an average of £535 each year, in the UK. its rights.quite an increase from the average of Ms Murphy considered that BskyB’s The Premier League and Sky were£452 they were paying three years ago. charges for commercial premises in given a strong indication as to whatIncreased take-up of high definition the UK, which can be over £1,000 per the decision of the ECJ would be inservices and broadband and fixed linetelephones have been the main reasonsfor the uplift. Despite an increase of10% in revenue over last year, therecession does finally seem to becatching up with Sky. Estimates indicatethat the number of new subscribers inthe September quarter is down over Despi te 10% i an increase80% on the same period last year. n Meanwhile, footballers’ wage odemands seem to go forever onwards year, revenue ov f the re e cessio r lastand upwards. One wonders how muchmore Sky customers, some of whom finally nd s catch eem to be oesare unemployed, will be asked to pay tokeep Premiership footballers living ing upin the manner to which they have with Sbecome accustomed. ky. There may be trouble ahead for thepay-TV broadcaster, however. Andtrouble for Sky could mean difficultiesfor football clubs that depend so heavilyon their share of the seemingly ever-increasing bonanza that TV rights haveturned out to be. BSkyB is considering carefully thedecision of the European Court ofJustice (ECJ), Europe’s highest court,14
  14. 14. This decision could potentially revolutionise the way media rights are sold across Europe, and not only in the sports sector: the film industry has also • Sky may lose customers and revenue to foreign broadcasters of Premier sold rights to its products on a League football if UK fans are country-by-country basis. prepared to accept foreign language commentaries. Fewer subscribers would probably mean Sky offering less when the Premier League auctions its TV rights this year.February 2011 when the court was Union. The situation for viewers in Loss of exclusivity would almostadvised by one of its Advocate pubs and clubs is less clear. The ECJ certainly mean that bidders wouldGenerals, Professor Dr Juliane Kokott, found that the Premier League could not be prepared to offer as much forto rule that EU law does not prohibit not claim copyright over live football UK rights as they have in the past.pubs showing live Premier League matches as they are not an author’s Less money for the Premier Leaguematches from foreign broadcasters. own ‘intellectual creation’, and hence would mean a smaller payout for theAdvocate General Kokott’ s opinion ‘works’ as defined in EU copyright football clubs.was that the idea of selling on a law. ‘Works’ do, however, include • Foreign broadcasters do not faceterritorial exclusivity basis was logos, the Premier League anthem and the same restrictions on showing‘tantamount to profiting from the recorded highlights, transmission of live football that have been imposedelimination of the internal market’ which would need the permission of the on BskyB by the Premier League.and that ‘there is ... no specific right to Premier League, as they are protected Matches kicking off on Saturdaycharge different prices for a work in by copyright. So, whilst pubs and clubs at 3pm would be widely availableeach member state.’ seem to be free to purchase a decoder to watch on TV. How many empty When the judgement was delivered from anywhere, transmission to the seats will we see in the stands as fanson 4 October the ECJ, as expected, public appears to be prevented unless are tempted to watch their team onfollowed the guidance of its Advocate the transmission can exclude ‘works’. high-definition TV from the comfortGeneral, deciding that the TV rights Consequently, the High Court will of their armchairs? More armchairdeal breached EU competition law. Any need to interpret the ECJ decision and fans would mean less money throughban on the use of overseas decoders, rule on its implications. the turnstiles for the clubs. Wouldsaid the ECJ, could not “be justified This decision could potentially clubs seek to raise the cost of ticketseither in light of the objective of revolutionise the way media rights are in these economically difficult times?protecting intellectual property rights sold across Europe, and not only in the Or would they reduce their budgetsor by the objective of encouraging the sports sector : the film industry has also for salaries to players?public to attend football stadiums”. sold rights to its products on a country-The decision of the ECJ must now by-country basis. Is the sky about to fall inbe considered by the High Court in Sky has around 44,000 pub, club on football’s spiralling TVLondon, which had sought guidance and office subscribers in the UK andfrom the ECJ. It is rare for a national revenues from such subscriptions are rights valuations? Watchcourt to take a different view from thought to be about £200m a year. this space…the ECJ. Exactly how much of this will be at risk It appears from the ECJ decision is unclear.that individuals will be able to watch So what are the potentiallive TV matches using a decoder implications if the High Court followscard from anywhere in the European the ECJ decision? 15
  15. 15. Focus on football financeInvestment in youth is changingOn 20 October 2011 the 72 be good for the game? This is likely In the summer 2011 transfer windowFootball League clubs voted to depend upon the structure within this increasing investment in youngin favour of plans for radical individual clubs. At present there are players would appear to be influenced,reform of the structure of youth significant variations between clubs in as suggested in our Football Transferdevelopment in England. terms of the time and money they invest Tracker, by the Premier League’s squadOne aspect of the Elite Player in their youth development initiatives. composition rules, which provide anPerformance Plan (EPPP) will be a Consequently, the importance of incentive for investment in youth. Withsignificant change in the mechanism by developing players for promotion into players such as Jordan Henderson, Philwhich clubs are compensated for the the first team or resale to other teams Jones, Romelu Lukaku and David detransfer of their talented youngsters to tends to differ from club to club. Gea costing upwards of £15 millionother clubs. each, the prospect of being able to sign Under EPPP, clubs’ academies Investment in young talent the best prospects from around thewill be graded. The better their youth What one can say – based on the country for, say, £150,000 under EPPPdevelopment set-up is deemed to be, the monitoring of transfer activity in might be very attractive for the financialmore money they can expect to receive English football’s top three divisions powerhouses of the Premier the form of grants in the coming by Grant Thornton’s Sports Advisory Indeed, at such levels, big clubs may beyears. This theoretically incentivises Group over recent transfer windows happy to speculate on a few promisingclubs to develop their youth operations. – is that the reform comes at a time teenagers, in expectation that one orHowever, the EPPP will also bring an when Premier League clubs have been two of them will appreciate in valueend to the tribunal system for valuing raising the proportion of their transfer very considerably.the transfer of young players. Some fear expenditure spent on young playersthat this could reduce substantially a very substantially.potentially lucrative income stream formany clubs: the sale of young players to This trend is detailed in thebigger clubs. table below EPPP sets out a formulaic approachto value young players based upon the Summer transfer windowtime the selling club has invested in 2009 2010 2011their development. It does not factorin their potential. This could put an Age at transfer £m £m £mend to any prospect of major windfallsfrom the sale of the next potential star Under 21 years 21.2 59.7 130.0player. It is important to note, however,that, should the player go on to play Proportion of total spend 5% 17% 27%for the acquiring club’s first team,the EPPP rules would trigger further 21 years and above 428.2 296.5 344.8compensation payments. These could Proportion of total spend 95% 83% 73%possibly be in excess of £1 million. Not surprisingly, given that arecent ballot produced only a 46-22vote in favour of reform, the financialimplications of EPPP have alreadytriggered much debate. Will the changes16
  16. 16. Premier League to lower leagues 2010 2011 £m £m Championship 24.6 72.0 League 1 2.8 3.1 League 2 and below 0.3 0.0 27.7 75.1Championship to lower leagues 2010 2011 £m £m League 1 4.4 6.3 League 2 and below 2.1 0.9 6.5 7.2What may be the financial impact on Charlie Adam, Championship clubs would be no bad thing if clubs werethe lower league clubs? reinvested only one-tenth of these deterred from engaging in this riskyWhat has happened in practice in monies with lower league clubs. Unless practice.recent transfer windows? Our Football this situation changes, the impact of Under EPPP it will be easier forTransfer Tracker also looks at the EPPP on League 1 and League 2 clubs clubs to work out how much incomecascading funds from the Premier may be relatively slight, simply because might be generated from the sale ofLeague to the lower divisions. (It must little money has been flowing down youth team players. Initially, the levelbe noted that the data is an estimate to them under the old system. For of such income is not great. But thebased upon available information. Championship clubs, the impact of the formulaic methodology will allowTransfer fees are less widely reported new rules will bear careful scrutiny. more accurate prediction of the cashthe further down the football pyramid No doubt there will be examples of set to be generated each year. And if aone examines.) players whose transfer fees under EPPP club’s former player becomes a Premier As shown by the table, summer 2011 will be lower than they might have League regular, it will receive a bonus ofsaw some exceptional expenditure by been under the tribunal system. In these additional monies in years to come.Premier League clubs acquiring players instances the selling club could missfrom clubs in the Championship. out on a lucrative windfall. This willHowever, despite receiving large sums cause problems for clubs which rely onfor players such as Alex Oxlade- transfer income to balance the books.Chamberlain, Connor Wickham and Then again, it could be argued that it 17
  17. 17. Focus on football financeTV rightsWith the next round of Premiership rights income reported by Premiership game. Will the increase continue?TV rights to be presented to the market clubs in 2009-10 was £952 million in The trend in the Football League,in 2012, (for the years 2013-2015), and total. Six clubs earned more than £50 embracing the three divisions of Englishclubs looking to break even to meet million each, with the highest being £60 football below the Premier League,financial fair play rules, what levels million and the lowest £39 million. Each gives a possible indication of the futureof broadcasting income can the clubs round of bidding for TV rights has direction of Premiership TV monies.expect to factor into their forecasts seen an increase in the money received The bad news is that its new three-and budgets? by the Premiership. In 1992-1997 the year deal with Sky Sports is worth £69 The current SKY/ESPN three-year average TV income per Premiership million less than the current netted £1.782 billion and overseas game was £633,000. It leapt to £2.79 This appears to be because the BBCdeals produced a further £1.4 billion for million in 1997-2001 and after steady will not be providing any live coverage.the Premier League. The resultant TV increases is currently £4.3 million per Instead, Sky Sports has agreed to pay £195 million for the rights to screen 75 matches from the Npower Football League, the play-offs, the Carling Cup and the Johnstone’s Paint Trophy. The 2009– 2011 joint deal with Sky and the BBC yielded £264 million for the TV rights. This time around, however, the BBC decided it was unable to make a competitive bid following its strategic review of budgets. Whilst the new deal does show a significant reduction for the Football League, Sky’s bid is still well ahead of the £109.5m it paid for the 2006-2009 rights. In the most recent bids for the English Premiership TV rights, EU competition law prevented Sky from securing all six of the packages, and Setanta beat rival ESPN to win the sixth package. Setanta of course, subsequently failed and ESPN was invited to take its place. Owned by Disney, ESPN is a much larger operator than Setanta ever was. Indeed Disney - which owns ABC, one of America’s biggest networks and operates in dozens of countries - out-sizes News Corporation, which effectively controls BSkyB.18
  18. 18. If ESPN decides to expand further with more Premiershipgames, the competition may force Sky to increase its offerto maintain its market position. On the other hand, if ESPN iscontent with its current presence, it may simply submit a lowoffer for one of the six packages, and rely on Sky again beingprevented by the EU from winning all six packages. ESPN depended heavily on Sky bid significantly more than it did last current level. The Premier League willwhen it launched its UK business, as time, Sky would be able to retain its be anxious to make sure it continuesit had neither the infrastructure nor TV offering by submitting a similar, or to maximise its potential income.the expertise to create its own UK possibly a lower bid. That could mean The High Court has still to give itssubscription business. It has now no increase, or even a decrease, in TV judgement on the Karen Murphyestablished itself, and has a UK football income for football clubs. case. It remains to be seen, therefore,offering that includes: There is certainly profit to be earned whether the Premier League will seek to• Premier League - 23 live games from broadcasting TV matches. BskyB sell UK rights across Europe next time• Scottish Premier League - 30 live has founded its business on football. around, and whether this will tempt games, covering all 12 teams ESPN and other broadcasters can see overseas broadcasters into the UK• FA Cup - 25 live matches including the potential, but are they prepared market. one exclusively live FA Cup Semi- to challenge Sky’s dominant market Al Jazeera, owned by the Qatari Final and live coverage of the FA position, and at what cost? royal family, is one overseas broadcaster Cup Final from Wembley Potential bidders must also take which could pose a challenge to into account the impact of the Karen Sky. Qatar’s interest in football hasThe question now, is whether this taste Murphy case, considered elsewhere in increased since it won the right toof UK football has given ESPN the this brochure, in which the European stage the 2022 World Cup finals. Qatarappetite to mount a challenge to Sky Court of Justice (ECJ) ruled that the is the Barcelona shirt sponsor, and ain the next round of Premier League Premier League’s approach to selling Qatari investment firm acquired Parisbidding. Having just acquired rights exclusive TV rights breaches EC St Germain, a leading French club.for Europa League games from 2012-13 competition law. That decision will Al Jazeera has already demonstratedto 2014-15 in conjunction with ITV, certainly change the way the rights its interest in televised sports byESPN has increased its football line-up. are sold next time around, as it is purchasing some of the domestic rightsIf ESPN decides to expand further exclusivity within national boundaries to screen matches from France’s topwith more Premiership games, the that has driven the price up to the division, Ligue 1, as well as regional TVcompetition may force Sky to increaseits offer to maintain its market position. On the other hand, if ESPN iscontent with its current presence, itmay simply submit a low offer for oneof the six packages, and rely on Sky The trend in theagain being prevented by the EU from Football League, embracing thewinning all six packages. Last time, three divisions of English footballSetanta secured Package D, (comprisingmainly Saturday games at 5.15pm), below the Premier League, givesfor just £159 million, beating ESPN a possible indication of the futurein the process. This equated to £2.3 direction of Premiershipmillion per game, which was less than TV monies.half of the Sky bid. Obviously, ESPNas the under-bidder offered less thanSetanta. If ESPN is not prepared to 19
  19. 19. Focus on football financerights for the next three World Cups which would benefit from individual to start the contest, will we see theand the Champions League, with Gary negotiation of TV monies will be able same players participating, followingLineker fronting such coverage. to persuade enough of the others to the same game-plan? Or are the Because of all this, it is difficult to abandon the collective principle. Those broadcasters’ tactics about to change?assess whether the price for Premier opposing any change have highlighted And for the clubs, concerned aboutLeague rights will be driven down the expanding revenue gap between the financial fair play regulations,by the lack of exclusivity, or up by the top clubs and the others in the will they receive more or less fromincreased competition. Premiership. Allowing the bigger clubs broadcasting rights for their games? It is also possible there may be a to take a larger share of TV monies will Time will tell. It’s football, it could gochange in the allocation of TV monies only widen that gap, and jeopardise the either way!between the clubs. Last year, the unpredictability and competitiveness ofPremiership’s top club earned 1.54 the Premiership, that is at the root oftimes as much in TV monies as the its popularity.bottom club. In Spain, where clubs One final point to considernegotiate deals separately, Real Madrid is whether UEFA’s financial fairand Barcelona, Spain’s Big Two, earned play regulations will force clubs to12.5 times more than the smallest La consider for the first time allowing liveLiga clubs. The discrepancy is explained broadcasts of matches kicking off at 3by the fact that, while TV monies in o’clock on Saturday afternoons – thethe Premiership are distributed partly traditional start-time of all UK footballon League performance, the bulk is matches before the age of pay-TV.distributed equally amongst the clubs. The Premier League has fought shy of Liverpool managing director, Ian allowing 3pm live broadcasts for fearAyre, has recently been voicing his of the damage that might be caused todissatisfaction that, in his view, clubs attendances in the lower leagues. Givensuch as Real Madrid and Barcelona have the option, many fans might indeedan advantage over Liverpool because prefer to sit at home in front of theirthey are able to negotiate their own TV HD TV watching a top-flight match,rights deals separately from their rivals rather than travel to sit in a draughtyin the Spanish league. The Premiership stand with a distant view of the game.clubs share international TV monies For clubs desperate to increase revenue,equally, as the Premiership negotiates the chance to earn additional incomea collective deal on behalf of all the from broadcasting 3pm kick-offs onclubs. Liverpool is clearly unhappy Sky, their own TV channels or theabout this position. However, others internet, may just be too tempting.such as Arsenal and Manchester City So the stage is set for the next roundhave indicated that they are happy with of bidding for Premiership TV rights.the status quo. Any move to change Karen Murphy and the ECJ havethe arrangement would require the moved the goalposts. The impact ofapproval of 14 of the 20 Premiership the recession is further distorting theclubs. It seems unlikely that those clubs picture. When the whistle is blown20
  20. 20. About Grant Thornton Football focus Recovery & Reorganisation Grant Thornton is a leading business Grant Thornton Recovery & and financial adviser to football clubs Reorganisation is one of the UK’s top and recognises the priorities of key five advisers for corporate recovery, stakeholders in the sector including turnaround and restructuring club management, bankers, sports assignments to mid-size, large and agents, management companies and global businesses and their financial regulatory bodies. stakeholders. Grant Thornton Recovery We also have extensive experience & Reorganisation comprises over 50 working with distressed football clubs partners and directors and over 600 and their lenders. This means that professional staff. we are well placed to find the right We supply a wide range of services restructuring solution for clubs facing to underperforming businesses and financial difficulties. Our football their stakeholders. This is focused sector team is committed to the delivery on identifying and resolving issues of first-class advice encompassing affecting profitability, protecting restructuring, corporate finance, enterprise value and, where necessary, taxation and forensic investigation recovering value for stakeholders. Our services. Our geographic spread and team in the UK regularly leads complex network of offices across the UK allows and multi-jurisdictional assignments us to deliver the strength of a national and we continually make investments practice through local contacts with the in our international network to allow expertise as required by our clients. us to deliver on the most complex cases. Amongst others, recent assignments for our UK team include some of the largest retail, care home and hotel group restructurings. Our last 14 international and complex assignments alone involve Grant Thornton handling debts of over US$25 billion. 21
  21. 21. Focus on football financeThe international reach of our Recovery & Reorganisation practiceGrant Thornton is an organisation of We have invested heavily in training,independently owned and managed systems and infrastructure designedaccounting and consulting firms. to deliver consistent methodologyCombined, these firms have over 2,500 and processes across this and 28,000 personnel based in This means that our teams are closelymore than 500 offices in 112 countries. aligned and, where legally possible,Member firms in 52 countries are follow the same processes andauthorised by Grant Thornton methodologies allowing us to avoid theInternational to undertake Recovery legal and regulatory pitfalls of complex& Reorganisation assignments. These international restructurings.firms have 113 specialist Recovery &Reorganisation partners and over 1,500dedicated personnel. Countries with a Recovery & Reorganisation accredited member firm within Grant Thornton International Countries with a member firm within Grant Thornton International Countries with a correspondent firm of Grant Thornton International22
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  23. 23. Contact usJoe McLean Geoff Mesher Mark Byers Matt Dunham David PatonPartner Partner Partner Partner Chief Sports Advisory OfficerAdvisory Services Forensic and Investigation Services Restructuring Advisory ServicesT 0113 200 1506 T 029 2034 7547 T 020 7728 2522 T 0161 953 6495 T 020 7728 2757E E E E E Thornton offices:BelfastBirminghamBristolCambridgeCardiffEdinburghGatwickGlasgowIpswichKetteringLeedsLeicesterLiverpoolLondonManchesterMilton KeynesNewcastleNorthamptonNorwichOxfordReadingSheffieldSouthampton© 2012 Grant Thornton UK LLP. All rights reserved.‘Grant Thornton’ means Grant Thornton UK LLP,a limited liability partnership.Grant Thornton UK LLP is a member firm withinGrant Thornton International Ltd (‘Grant Thornton International’).Grant Thornton International and the member firms are nota worldwide partnership. Services are delivered by the memberfirms independently.This publication has been prepared only as a guide.No responsibility can be accepted by us for loss occassionedto any person acting or refraining from acting as a result ofany material in this