Lyon - All The Young Punks

At the beginning of the 2014/15 season very few analysts expected Lyon to be among the front-runners in Ligue 1, given that they had just changed their manager, replacing Rémi Garde with Hubert Fournier, and spent virtually no money. However, their exciting young side led the table for a lengthy period before finishing in a highly creditable second place behind the expensively assembled Paris Saint-Germain, thus qualifying for the Champions League.

Expectations were on the low side, as Les Gones had endured much disappointment in the previous two seasons, failing to reach their previous heights by only finishing 3rd and 5th in the league. This might not sound too bad, but remember that Lyon had won the league seven times in a row between 2002 and 2008.

They had also enjoyed 12 consecutive participations in the Champions League, but their recent European adventures have been restricted to the Europa League. It is true that they reached the quarter-finals of this competition in 2013/14 before being eliminated by Juventus, but last season they did not even manage to get past the qualifying stages.

After Lyon’s many years of success, based on a “buy low, sell high” model skillfully executed by their respected chairman Jean-Michel Aulas, the club decided to change their strategy in an attempt to move to the next level: “Our ambition is to move closer to the major European clubs, by putting priority on investment rather than an immediate net profit.”

"Come on, Alex, you can do it"

Initially, the plan seemed to be working as Lyon reached the Champions League semi-final for the first time in 2010, but ultimately the inflated spending on the likes of Yoann Gourcuff, Lisandro Lopez, Aly Cissokho, Michel Bastos and Bafetimbi Gomis spectacularly backfired. Far from elevating the club to elite level, this approach plunged Lyon into disarray.

The financial challenges posed by the over-expenditure have been exacerbated by the money invested in building a new stadium. While this will make a significant, positive difference to Lyon once it is finished in early 2016, it has been a substantial drain on resources and will end up costing more than €400 million.

Nor have Lyon been helped by the arrival of wealthy new owners at Paris Saint-Germain in 2011. The influx of Qatari money has produced an uneven playing field, so it is no great surprise that PSG have dominated the French league, winning the title for the last three seasons. To a lesser extent, it is a similar story at Monaco.

These difficulties have forced Lyon to change track again and they are now focusing on youth in a quest to cut costs. The club’s recent financial performance emphasises why they need to follow a more sustainable strategy, as they have reported a series of hefty losses. In 2013/14, the last season for which we have annual published accounts, the club made a pre-tax loss of €28 million (€26 million after a tax credit).

As Aulas somewhat drily commented, “We were not able to achieve our objective and return to break-even.” In fact, the result was £8 million worse than the previous season’s loss of €20 million, despite making steep cuts in personnel costs and player amortisation/impairment of €17 million.

This was largely due to two specific factors: (a) profit on player sales was €19 million lower at just €5 million, which Aulas explained thus, “we did not complete the plan to sell player registrations worth €20 million, because certain players changed their minds or were injured”; (b) other expenses were €9 million higher, including a €6 million charge for the exceptional “75% tax” on high salaries, which was voted in with retroactive effect.

The damage was limited by a €3 million increase in revenue to €104 million, largely as a result of more prize money from the Europa League, partially offset by a reduction in commercial income and domestic TV money.

This poor financial result was the worst in Ligue 1 in 2013/14. Although no fewer than 14 of the 20 clubs in France’s top flight reported losses, Lyon’s €28 million was far ahead of the closest challengers: Sochaux €18 million, Lille €16 million, Rennes €15 million and Marseille €13 million.

In fact, Lyon have the unenviable record of producing the largest loss in Ligue 1 for each of the last five years (from 2010 onwards). The chances are that Lyon will also make a reasonably large loss for the 2014/15 season, given that they reported a €9 million deficit for the first half. Although they have continued to reduce wages and player amortisation, revenue from the Europa League will be negligible, while there have been no player sales of any note to compensate.

Lyon’s P&L statement over the last decade is like the proverbial game of two halves: five years of solid profits between 2005 and 2009, as Lyon’s business model was the envy of most other clubs; then five years of large losses between 2010 and 2014, as their expansionary approach failed to deliver. That’s €110 million of profits, followed by €176 million of losses, which is a big deterioration in anyone’s books. As Elvis Costello nearly said, “Five years in reverse.”

Lyon’s profits were historically driven by profits on player sales, as noted by the annual report: “The player trading policy forms an integral part of the club’s ordinary business activities.” This usually involved selling players to clubs “with significant purchasing power” such as Real Madrid, Barcelona and Chelsea.

However, this all changed in 2010: in the preceding five years Lyon generated €245 million of sales proceeds with a profit of €181 million, but this dipped to €103 million sales proceeds in the last five years with a much reduced profit of €55 million.

The slowdown in trading activity can be attributed to a number of factors with the club itself noting the impact of “the worldwide recession and the implementation of UEFA’s Financial Fair Play (FFP) rules”, but much of this is also down to Lyon taking their eye off the ball. They are a long way from the boast made in 2007 that “revenue from player trading has confirmed its recurrent nature over the long-term.”

Two transfers to London clubs illustrate the fact that Lyon had rather lost its touch: in 2006 Aulas managed to negotiate an impressive €36 million from Chelsea for Michael Essien, but he secured less than €10 million for Hugo Lloris from Tottenham seven years later.

The last mega money transfer was Karim Benzema to Real Madrid for €35 million back in 2009, while Lyon have actually lost money on some transfers, e.g. Abdul Kader Keita was purchased from Lille for €16.8 million, only to be sold to Galatasaray for half that amount, €8.4 million; similarly Jean II Makoun was bought from Lille for €14.6 million, but sold to Aston Villa for just €6.1 million.

Once the poster boy for successful player trading, Lyon are clearly no longer one of the best in this activity. In fact, their profit from player sales of €4.8 million was only the 10th highest in Ligue 1 in 2013/14, even behind the likes of Evian and Lorient. While it might be fair to say that economic conditions have reduced the chances of French clubs making big money on player sales, that did not prevent four of them generating double-digit profits: Lille €32 million, Paris Saint-German €23 million, Saint-Etienne €20 million and Toulouse €19 million.

Things look little better for Lyon in this area in 2014/15, as noted by the report for the first nine months of the financial year: “Proceeds from the sale of player registrations totaled €3.9 million, an historic low, as the Board of Directors had decided to postpone the plan to sell registrations last summer in favour of the season’s sporting performance.” And that’s the point: it’s a tricky balance for Lyon to get their finances right, while at the same time striving to do well on the pitch.

The other side of the coin is that Lyon have significantly reduced player purchases, as shown by the sharp reduction in player amortisation from €41 million in 2011 to just €15 million in 2014.

As a reminder, player amortisation represents the annual cost of expensing player purchases. To clarify this point, transfer fees are not fully expensed in the year a player is purchased, but the cost is written-off evenly over the length of the player’s contract – even if the entire fee is paid upfront. As an example, Yoann Gourcuff was bought from Bordeaux for €22.4 million on a five-year deal, so the annual amortisation in the accounts for him was €4.5 million.

Lyon’s €15 million player amortisation was still the 4th highest in Ligue 1 in 2013/14, but miles below PSG’s €113 million, which highlights the fact that the Parisian club is at the other end of the spectrum when it comes to buying players. In the same vein, Monaco’s player amortisation was €51 million, while Marseille (perhaps a more reasonable comparison) were also ahead of Lyon with €18 million.

However, not all of Lyon’s problems are due to player trading, as the profitability of their core operations has also been declining. This can be seen by looking at the club’s EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which can be considered a proxy for the club’s profits excluding player trading, which has plummeted from €20 million in 2006 to minus €12 million in 2014. The trend is most certainly not their friend in this case.

In fairness, very few French clubs achieve a positive EBITDA, but Lyon’s is still one of the lowest. To put this into context, Manchester United’s EBITDA of €182 million was nearly €200 million higher, which is a huge difference - every season.

Lyon’s revenue rose €3 million (3%) from €101 million to €104 million in 2013/14, largely due to a €4.7 million (9%) increase in broadcasting to €56 million with Europa League receipts up €6.2 million to €13.3 million, while domestic TV money was down €4.7 million to €43 million. Ticketing revenue was up €0.7 million (6%) to €13 million, but commercial income was down €2.4 million (6%) to €35 million.

Despite the increase in 2014, revenue has fallen by a third (€51 million) from the €156 million peak in 2008 with all revenue streams decreasing: commercial by €24 million (40%), broadcasting €19 million (25%) and match day €9 million (40%). Most of the decline in commercial income has come from brand-related revenue, partly influenced by a series of once-off payments, e.g. Sportfive paid €7 million a year from 2008 to 2011 after Lyon outsourced its marketing rights to them. The decrease in broadcasting is very largely because of lower prize money from European competitions.

Lyon’s revenue of €104 million is still the 4th highest in France, behind PSG €474 million, Monaco €176 million and Marseille €132 million. PSG are miles ahead of all other French clubs, heavily boosted by their commercial deal with the Qatar Tourism Authority. Lyon themselves are a long way ahead of the clubs behind them, such as Lille €69 million, Bordeaux €67 million, Saint-Etienne €53 million and Rennes €43 million.

The Deloitte Money League is a useful barometer for Lyon’s revenue decline, as they were as high as 11th in 2006 and 12th in 2008, but are not even in the top 30 clubs in the latest edition, which features only two French clubs: PSG and Marseille (note: for some reason Monaco are not included even though their revenue per the DNCG Comptes Individuels des Clubs would place them in the top 15).

While Lyon’s revenue has decreased by €51 million since 2008, the leading European clubs have all seen their revenue grow by nearly €200 million in the same period: Bayern Munich €193 million, Manchester United €193 million, Real Madrid €184 million and Barcelona €176 million. French clubs will continue to struggle, especially compared to English clubs, as their TV deal continues to lag their colleagues across the Channel.

Nevertheless broadcasting accounted for 54% of Lyon’s revenue in 2013/14, up from 51% the previous season, with commercial income’s share falling from 37% to 34%. Match day remained unchanged at 12%.

Lyon’s domestic TV revenue was €1.5 million (3%) lower in 2013/14 at €43 million, including €41 million from Ligue 1. The distribution model for French TV money is relatively equitable with 50% allocated as an equal share, while the remainder is distributed based on league performance 30% (25% for the current season, 5% for the last five seasons) and the number of times a team is broadcast 20% (over the last five seasons). Lyon were only surpassed by PSG €45 million (due to them winning the league) and Marseille €42 million (more games shown live).

The Ligue 1 TV deal is actually 5% lower at €637 million from the 2014/15 season (the second half of the four-year agreement), comprising €604 million for domestic rights and just €33 million for international rights. A new four-year deal with Canal+ and BeIN Sports will increase domestic rights from the 2016/17 season by 24% to €748.5 million, while the international rights will rise 142% to €80 million in a new six-year deal with BeIN Sports from the 2018/19 season. That will take the total TV deal to €829 million, but this pales into insignificance compared to the new Premier League deal, which is estimated to be worth €3.8 billion a season from 2016/17.

The other element of broadcasting revenue is prize money from UEFA competitions, which rose €6 million from €7 million to €13 million in 2013/14, thanks to Lyon reaching the quarter-finals compared to the last 32 the previous season. In fact, thanks to a large TV pool payment, Lyon’s €10.2 million in prize money was the second highest received in the Europa League, only behind Sevilla’s €14.6 million. The €13.3 million booked in Lyon’s accounts also included €2.1 million for the Champions League play-off match and £0.9 million additional payment from the 2012/13 competition.

That’s not too bad, but it is a lot lower than the money clubs received in the Champions League, e.g. Marseille earned €32 million even though they lost all six of their group games. Lyon’s best performance in the Champions League came in 2010 when they reached the semi-final, which was worth €29 million in prize money. However, they have missed out on recent improvements in the TV and marketing rights, as can be seen by PSG receiving an impressive €54 million for reaching the quarter-final in 2013/14.

Unfortunately the 2014/15 accounts will include minimal revenue from Europe (€2 million in the first nine months’ accounts), as Lyon lost in the Europa League play-off.

"Take it to the Max"

After Lyon’s profits from player sales dried up, the loss of revenue from the lucrative Champions League was the final nail in the coffin. In 2012/13 the club estimated that the absence from Europe’s premier competition had cost them around €20 million, including gate receipts and the impact on commercial deals. Little wonder that the annual report stated, “Our on-the-pitch objective is to return as quickly as possible to the Champions League.”

The fact is that Lyon desperately need to play in the Champions League to generate more revenue, so the qualification for the 2015/16 tournament is massively important, especially as the new TV deal will increase revenue by more than 30% from next season.

Lyon’s gate receipts rose 6% (€0.7 million) to €13 million in 2013/14, due to the greater number of home games. This was the 3rd highest in Ligue 1, only behind PSG €39 million and Marseille €14 million and just ahead of Lille €11 million. All the other clubs earn less than €10 million a season. The last time that Lyon were in the Deloitte Money League in 2011/12 they had the second lowest match day revenue of the top 20 European clubs.

Their average attendance of 34,414 was 7% higher than the previous season’s 32,084 with the club announcing that the number of spectators at the Gerland stadium reached an all-time high in 2013/14 with more than 1 million attending.

The lack of match day revenue has inspired the club to build a new stadium at the Olympique Lyonnais Park. Aulas has emphasised the importance of this project: “The new stadium, once built, will enable the club to cross an important threshold. Like all the other major European clubs, we have decided to be owners of our new stadium, so that (we) can earn all of the revenue generated by the Park and enjoy advantages comparable to those of our major European competitors.”

The club recently quantified these advantages, stating that the new stadium “should generate additional revenues of around €70 million per annum within the next five years”, including naming rights where “discussions are underway with several large French and international companies.”

Work began in July 2013 and the stadium should be operational from early 2016, i.e. from the second half of the 2015/16 season. It will have 58,000 seats, including 6,000 VIP seats, of which 1,500 will be in 106 private boxes. There will be a training centre with 5 pitches and a dedicated sports medicine facility. Revenue generation will be helped by two hotels, restaurants, offices and an entertainment complex, while the stadium can hold up to 10 events (concerts, shows, etc) a year. It will stage six matches in Euro 2016, including a quarter-final and semi-final.

The total cost is €405 million and will be financed by a mixture of: equity €135 million, bond issues €112 million, bank borrowing €144.5 million; and €13.5 million guaranteed revenue/naming rights.

Commercial income fell 6% (€2.4 million) to €35 million in 2013/14. This comprises sponsoring and advertising, down 9% (€2 million) to €19 million, and brand-related revenue, down 3% (€0.5 million) to €16 million.

Sponsorship revenue was actually stable, excluding a €2 million once-off fee in 2012/13 related to the new stadium project. Lyon’s €19 million was the 4th highest in Ligue 1, only surpassed by Monaco €140 million, PSG €79 million and Marseille €24 million. Lyon’s main shirt sponsor is Hyundai, whose deal was extended two seasons until the end of 2015/16 for all Ligue 1 matches, while Veolia have an agreement for European and domestic cup matches until June 2016.

Lyon have a 10-year kit supplier deal with Adidas, running until June 2020. According to the club, the contract is “worth between €80-100 million”, depending on sports results in French and European competitions. Lyon lists numerous sponsors in its accounts, but it is worth noting the deal with Sportfive, who were granted certain exclusive marketing rights for a minimum of 10 years from 2012 relating to events organised at the new stadium in return for a €28 million signing fee (paid in four annual instalments of €7 million).

Lyon’s commercial income has frequently been influenced by once-off signing fees, such as €3.5 million paid by Sodexo in 2007/08, while the 2014/15 results will be boosted by a €3 million fee related to catering for the new stadium.

Lyon’s brand-related revenue of €16 million was almost identical to Marseille, but was dwarfed by PSG’s €270 million, which included the enormous deal with the Qatari Tourist Authority.

The wage bill was cut by 9% (€7.6 million) from €82.4 million to €74.8 million, reducing the wages to turnover ratio from 81% to 72%. This continued Lyon’s trend of lowering the wage bill, which has fallen by around a third (€37 million) from the peak of €112 million in 2010 (though the figures up to that year included around €20 million for image rights payments). The wages decrease is in line with the revenue reduction over the same period.

Aulas had criticised the “pharaohs and dinosaurs” who had been awarded bumper contracts when the going was good, but then failed to deliver on the pitch. After Lyon missed out on Champions League qualification, the chairman warned that the club would have to make “economic adjustments” and he wasn’t kidding.

Despite the improvement in the wages to turnover ratio, Lyon’s 72% is still above UEFA’s guideline of an upper limit of 70%, but it is by no means the worst in Ligue 1. Six clubs have ratios above 80%, the highest being Rennes 97% and Lille 90%.

Just like revenue, Lyon have the 4th highest wage bill in Ligue 1 with €75 million. Obviously, PSG are out of sight with €240 million, but Lyon are also a fair way behind Monaco €95 million and Marseille €85 million.

Lyon’s principal method of reducing the wage bill and indeed the amortisation of player registrations is to “capitalize on the potential of young players coming out of the OL Academy” rather than buy stars whose acquisition cost and salary would be significantly greater. They have well and truly learnt their lesson here.

Not only is the Academy “central to the club’s strategy”, but it is a source of much pride, as it is largely based on Lyon’s “local identity”. As Aulas says, this creates players who have “strong bonds with the club and are proud to wear the shirt”, adding, “it also generates enthusiasm among fans, who share these values.”

The excellence of Lyon’s academy, recognised as the best in France and one of the finest internationally, has not come about by chance, as the club has devoted more than €7 million a year to this area, described as “part of the club’s DNA”. Lyon have the advantage of being able to promise young players that they will be given an early chance to break into the first team. Indeed, in the 2013/14 season an incredible 22 of the 33 professional players were graduates of the Academy and eight or nine of the starting players in every match were trained at OL. The average age of the squad was a youthful 24.

Lyon’s focus on homegrown players can be seen by the dramatic reduction in player purchases after the 2010/11 season. In the six seasons up to that point Lyon’s average spend per season was €53 million, but this fell to just €8 million in the three seasons since, including a tiny €2.6 million in 2013/14.

This meant that Lyon moved from average net spend of €10 million to net sales of €15 million in these periods, even though sales proceeds themselves fell from €43 million to €22 million.

The lack of big money buys from other clubs has impacted the balance sheet with the value of player (intangible) assets decreasing from €122 million in 2010 to just €13 million today. However, the value in the books is much lower than the value that could be realised in the market if players were sold, especially as homegrown players have zero value on the balance sheet. In the 2014/15 half-year accounts (with the help of Transfermarkt), Lyon estimated that this unrealised profit was as much as €111 million, up from €79 million in 2013/14.

Around 90% of this potential capital gain relates to players who come from the Academy, which “proves that our strategy makes sense”. So, Lyon’s focus on youth has not only been a financial necessity, but will likely mark a return to the business model on which it built its success, namely profitable player sales.

The jewels in the crown are exciting forward Alexandre Lacazette, who Aulas said was worth more than €50 million, and tricky winger Nabil Fekir, who the chairman has compared to Messi. That might be considered to be promotional sales talk, but both players have now broken into the French national team. Other good prospects include the elegant midfielder Clément Grenier, the dynamic captain Maxime Gonalons and the progressive full-back Samuel Umtiti.

Lyon’s debt has obviously been greatly influenced by the borrowing for the new stadium, which is now up to €112 million after the final €10 million tranche was issued in June 2015, split between the VINCI Group €80 million and Caisse des Dépôts et Consignations €32 million. The stadium debt was €48 million in the 2013/14 accounts, but had increased to €102 million in the 2014/15 half-year accounts.

In 2013/14 other financial liabilities were €33 million, largely OCEANE bonds of €23 million and bank credit facilities of €4 million, but had risen to €56 million in the half-year accounts. In June 2014 the OL Group signed a €34 million line of credit to secure its medium-term financing needs.

Before the financing for the new stadium was required, Lyon were in the happy position of having net funds instead of debt. In fact, the club said that its “financial structure was one of the most sound in Ligue 1.” However, that has obviously changed in the last couple of years.

Much like Arsenal, who had to finance the construction of the Emirates Stadium, the impact has been felt on the playing side, with net player debt moving to net player receivables.

Lyon’s cash flow from operating activities has been consistently negative for many years. As we have seen, there has been minimal investment in the playing squad, but substantial investment in infrastructure, including €100 million on the new stadium including €74 million in 2013/14 alone.

The club’s investment has been largely financed by new bonds or increases in share capital, which contributed €138 million and €91 million respectively in the last eight years, while other loans have been repaid. The bonds issued in 2010/11 were “mainly for financing the acquisition of player registrations”, while the bonds issued recently have been to fund the new stadium.

Since the 2013/14 accounts closed, further funding has been raised: €51 million of bonds in September 2014, €10 million of bonds in June 2015 and a €53 million increase in share capital in June 2015.

The accounts state that the average annual financing rate on the new stadium bank and bond financing (which is estimated at €248.5 million) will be around 7% from the time the stadium begins operating, so that will represent a sizeable interest burden each year.

"Kick Up Ya Foot"

An important driver of Lyon’s new, cost conscious model has been the advent of Financial Fair Play, as explained in the 2013 annual report: “The strategy in place for more than two years now aims to return OL Group to structural operating break-even by the end of the 2013/14 season. These objectives comply with UEFA’s FFP.”

Even though Lyon obviously did not meet their 2013/14 break-even objective, the club confirmed in April that “no further action would be taken” following a UEFA investigation of additional information requested following the large reported losses. Presumably Lyon must have been saved by the various allowable deductions in UEFA’s break-even calculation, including “healthy” costs such as those incurred for the academy and stadium development plus the cost of players under contract before June 2010.

Given Lyon’s losses, it is perhaps no surprise that Aulas has been a vocal supporter of PSG’s push to get UEFA to amend the FFP regulations, though he makes a good point about the differences between countries: “It's not the problem of Paris Saint-Germain. It's the problem of the difference between financial fair play and the constraints of each of the clubs. There is a European rule, and other rules in each of the countries, so there has to be a move towards harmonisation.” As an example, local tax rules mean that it is far more expensive to employ a player in France than any other major European league.

"Jordan: The Comeback"

It is too early to say that Lyon are back, especially given the huge financial advantages enjoyed by PSG in France, but it is easy to get behind their new business model, based on players developed at the OL Academy. The club has already taken its first steps towards recovery by shining in Ligue 1 last season and so returning to the Champions League, which is crucial for Lyon to fully exploit the opportunities that its wonderful new stadium will provide.

Of course, the emergence of young talent can be a double-edged sword, as their success makes it more likely that wealthier clubs will tempt them away, but at least that would be true to Lyon’s previous successful business model. It is not difficult to imagine a wily old fox like Jean-Michel Aulas having the last laugh, but in the meantime let’s just enjoy the young guns going for it.

Read More

The Trade Secrets Behind Lyon's Rise

Despite their victory over Lille last weekend, Olympique Lyonnais’ start to the season has been far from convincing with manager Claude Puel reportedly being given three games to save his job. Coming off the back of two seasons where Lyon finished “only” second and third in Ligue 1, questions have been asked about whether Puel is the right man to take the team forward. Although this would have represented success for almost any other club in France, the end of domestic league dominance must have felt like failure to those supporters whose team won the League an unprecedented seven years in a row from 2002.

In fact, Lyon’s rise from relative obscurity to become the leading club in France by some distance is an amazing story. When Jean-Michel Aulas, a local software entrepreneur, bought the club in 1987, they were languishing in the second division, deeply in debt, and, in the new owner’s words, burdened with “no history and a public largely uninterested in football.” Two decades later, their finances have been revived and they are one of only four clubs to have qualified for the Champions League eleven years in a row (the others being Real Madrid, Manchester United and Arsenal), culminating in an appearance in the semi-finals last season for the first time ever.

"Jean-Michel Aulas - happy days"

This incredible transformation has not been as a result of a wealthy benefactor pumping money into the club (like Chelsea), nor is it down to a lengthy managerial dynasty (like Manchester United or Arsenal), but is the result of an exemplary strategic plan from the chairman and CEO, Monsieur Jean-Michel Aulas, which he kindly explained in the last management report, “In the first phase, from the club's purchase in 1987 until 1998, the priority was on advancing to Ligue 1 and consistent results in league play. In the second phase, beginning in 1999 when Pathé purchased a stake and lasting until 2010, the objective was to keep the club in Ligue 1's top three, and thereby take part in European championships. These objectives have been fully achieved.”

The long-term aspect of the plan has been a key element of Lyon’s improvement, as they have grown gradually. In a country famous among other things for the Tour de France, Aulas opted for a cycling analogy, “Each year we set as an objective to have progression. It’s like a cyclist: you can overtake the people just ahead of you,” though he later embraced four wheels, saying that he wants Lyon to become “the ultimate Formula 1 car, capable of shifting through the gears to cope with all types of road.”

While Aulas has received his fair share of criticism for running the club as if it were a business, his theme is that there is a virtuous circle in football: over time the more money a club makes, the more matches it will win, and the more matches it wins, the more money it will make.

Indeed, Lyon have been profitable for many years, though they suffered a large loss of €36 million in 2010 for the first time since 2004. The deficit would actually have been even higher without an €18 million tax credit, as the club reported a loss before tax of €54 million. This is somewhat of an aberration for Lyon, whose pre-tax profits had averaged an impressive €23 million in the previous four years.

Aulas has described the results as a “blip”, pointing to the generic problems facing football clubs in France, but the main reason for the changing fortunes at Lyon is obvious, as the profit made on player sales was tiny in 2010, compared to the customary €40 million or so achieved in the past few years. If this trend had continued, Lyon would once again have reported a profit in their latest accounts.

Player trading has played an important role in Lyon’s financial success with transfer fees making up a significant portion of the club’s revenue every year except the last, when the profit from player sales only reached a paltry €3 million, as no big transfer was made in the period. In the previous four years, the sale of players generated enormous proceeds of €220 million, resulting in considerable capital gains of €164 million.

"Benzema - good example of Lyon's strategy"

This is part of what the club describes as an “innovative business model”, whereby Aulas has excelled at acquiring players and selling them on for exuberant fees to more renowned clubs abroad. The list of his hugely profitable transfers is almost endless, including Mahamadou Diarra and Karim Benzema to Real Madrid, Michael Essien and Florent Malouda to Chelsea, Eric Abidal to Barcelona and Tiago Mendes to Juventus.

His skill in negotiating large transfer fees won him the grudging admiration of Sir Alex Ferguson, when the great Scot was asked about Benzema possibly moving to United, “Lyon’s president is a sharp man. He sold Essien for €38 million, Diarra for €26 million, Malouda for €19 million, Abidal for €16 million. And I congratulate him for that.”

The profits on such sales have been boosted by an increasing number of the players being sold coming up through Lyon’s training academy. In 2009 over 70% of the sales proceeds came from players trained at the academy, most notably Benzema whose transfer was alone worth €35 million. This has been assisted by the club investing €5 million in state-of-the-art training facilities, which were completed in 2008, with graduates such as Hatem Ben Arfa and Loïc Rémy being other prominent examples of the young talent graduating from the academy.

"You're having a Ben Arfa"

One of the main objectives given to Claude Puel was to smooth the transition of the young players trained at the academy into the first team and this strategy is starting to pay off with the emergence of the likes of Gonalons, Pied, Grenier and Lacazette. However, there has been a quid pro quo on the player trading, as the club has also decided to increase the stability of the squad compared with the past in order to facilitate the integration of the youth team exports with more experienced players.

Nevertheless, Lyon’s ascent has been in large part down to their ability to play the transfer market better than any other club in Europe, which was recognised by Simon Kuper and Stefan Szymanski in their thought-provoking book “Soccernomics”, where they dedicated an entire section to Lyon’s transfer market rules. These are essentially an extension of Aulas’ winning theme that was outlined above, owing more than a little to the “Moneyball” theories of Billy Beane, the legendary general manager of the Oakland Athletics baseball team.

The thinking goes like this: If you buy good players for less than they are worth, you will win more games. You will then have more money to buy better players for less than they are worth. The better players will win more matches and that will attract more fans (and thus more money).

"A lot on Puel's mind"

Lyon’s “magnificent seven” tips and tricks for the transfer market are as follows:

1. Exploit the inefficiencies of the transfer market. This means adopting an unsentimental approach whereby you sell any player if a club offers more than he is worth. As Aulas said, “Every international at Lyon is untransferable – until the offer surpasses by far the amount we had expected.”

2. Transfers should be decided by people who are at the club for the long-term. This means that Lyon’s transfers are decided by a group consisting of Aulas, the technical director, Bernard Lacombe, and whoever happens to be the current coach. As Emmanuel Hembert, head of the London sports practice of management consultants AT Kearney, explained, “A big secret of a successful club is stability. In Lyon, the stability is not with the coach, but with the sports director, Lacombe.” Lyon understand that the coach is only a “temp” better than most, as their seven consecutive titles were gained with four different coaches (Jacques Santini, Paul Le Guen, Gérard Houllier and Alain Perrin), while Lacombe has been at the club for over 20 years.

3. The best time to buy a player is when he is in his early twenties. Aulas explained, “We buy young players with potential who are considered the best in their country, between 20 and 22 years old. “ The theory is that the players are old enough to be nearly fully formed, but too young to be expensive stars. The other added benefit is that relative unknowns accept modest salaries.

"Bernard Lacombe - Lyon legend"

4. Try not to buy centre forwards. This is the most over-priced position in the transfer market in marked contrast to goalkeepers, who deliver most “bang for your buck”. In this way, the homegrown Benzema was given his opportunity and thrived on the responsibility, before making bundles for the club.

5. Replace your best players before you sell them. This avoids a panic purchase or a lengthy transitional period. This policy meant that Aulas could happily let Essien to go to Chelsea when they turned up with a wheelbarrow full of cash.

6. Buy Brazilians. Lyon have been very adept at securing footballers from Brazil, with former players including future internationals Edmilson, Juninho and Fred, while the current squad boasts Cris and Michel Bastos. The trick here was to send one of their past captains, Marcelo, to Brazil to act as an exclusive agent.

7. Help your foreign signings settle in. It is difficult to move to another country, but Lyon employ people to help their players relocate, find somewhere to live, learn French, open bank accounts and generally cope with homesickness. This sounds obvious, but many clubs did not provide such services a short while back.

Up until recently, this has proved to be extremely lucrative business for Lyon with net receipts of €21 million in the four years up to 2009 as purchases of €199 million were more than compensated by sales of €220 million. In that period, player trading generated an almost unbelievable €164 million profit. This was epitomised in the summer of 2009 when Benzema’s sale was the fourth highest in that window, though it was somewhat overshadowed by the megabucks splashed out on Ronaldo, Ibrahimovic and Kaka.

However, everything changed last season, when Lyon suddenly started to act more like Real Madrid by spending €96 million on recruiting six new players (Lisandro Lopez, Michel Bastos, Aly Cissokho, Bafetimbi Gomis, Dejan Lovren and Jimmy Briand), while only recouping €14 million, largely from the transfers of Kader Keita to Galatasaray, Fabio Grosso to Juventus and Anthony Mounier to Nice. This is a huge outlay for a club with an annual turnover of less than €150 million.

This trend continued this summer, when only Olympique Marseille came anywhere near to Lyon’s €24 million net spend in France, which included €22 million on the new glamour boy of French football, Yoann Gourcuff. All of a sudden, Aulas has loosened the purse strings and Lyon have become the big spenders.

"Lisandro - part of last summer's spending spree"

So why change the habits of a lifetime? This seemed to make no sense, especially when the policy had been working so well. Apparently, this is all about making the jump to the next level. The board explained the modified approach in the 2009 management report, “We decided to invest in experienced players in order to close the gap with the major European clubs”, as they saw an opportunity to close the disparity as other clubs were suffering more from the economic recession, given Lyon’s undoubted financial strength.

To an extent, this has not been such a bad move, if you consider the progress to last season’s Champions League semi-final, but it’s unlikely to be a permanent change in the long-term strategy, as the most recent management report re-affirmed the club’s commitment to its tried-and-trusted business model, “The trading target for 2010/11 will be to re-establish a significant excess of player registration sales over purchases.”

Whether this is as straightforward as it was a few years ago is open to debate, as the unfavourable economic conditions have definitely slowed down the transfer market with this summer’s spending in Europe’s top five leagues nearly 40% less than in the summer of 2009. OK, it is true that this may have been impacted by the World Cup starting at the same time that the transfer window opened, but there is little doubt that clubs have been hit by the financial downturn, so they now think twice about making expensive new acquisitions.

Having said that, Lyon’s focus on the transfer market remains laser sharp. This is confirmed by the club’s management report explicitly listing the market value of its players as €208 million (source – Transfermarkt), implying a potential capital gain of €74 million, after the book value is deducted. As this figure does not include an estimate for their younger players, they contend that the total value for the team is more like €220 million, which would suggest a capital gain of €86 million. It is extremely rare that clubs draw attention to this unrealised gain in their accounts, which only underlines the importance of player trading to Lyon’s strategy.

This is further highlighted when you look at the revenue from Lyon’s core business, which last year amounted to just €146 million. Not terrible by any means, but a long way behind Europe’s leading clubs, which is where they aspire to be. Lyon are the best placed French club in Deloittes Money League, based on 2008/09 results, which is one place ahead of their rivals Olympique Marseille.

However, the top Spanish and English clubs enjoy far higher revenue, while the German and Italian clubs also earn much more. Real Madrid and Barcelona generate almost three times as much revenue, while Manchester United earn more than twice as much and even a relatively unsuccessful team like Hamburg have a turnover higher than Lyon. There’s effectively a €50 million shortfall against the next tier of clubs (around €200 million turnover), which to date Lyon have traditionally made up by astute wheeler dealing in the transfer market.

This is abundantly clear when you examine Lyon’s revenue growth over the last five years – or I should say lack of growth. Their revenue has only grown 14% from €128 million in 2006 to last year’s €146 million and almost all of that growth came back in 2007. Although revenue did increase 5% this year, this was only after a steep decline in 2009. Over the same five-year period, expenses have risen by 52% from €133 million to €202 million. That’s a huge financial challenge right there and the only solution to date has been for the club to buy and sell its way out of trouble.

The importance of player trading can be seen very well in the above graph. If profit on player sales is considered as “revenue”, its contribution has been notable in the past few years, often double the money received from gate receipts. However, when that well dries up, as it did in 2010, the effect is evident and immediate.

However, broadcasting is still the largest revenue source with €78 million contributing over half of Lyon’s revenue. This is not the highest reliance on television money in the Money League, but it’s probably still a little too high for comfort. Revenue from the LFP (Ligue de Football Professionnel) and FFF (Féderation Française de Football) amounts to €49 million, while distributions from UEFA for the Champions League are worth €29 million.

Like every other club in Europe, Lyon’s broadcasting revenue is miles behind Real Madrid and Barcelona, whose ability to negotiate individual deals (for the time being at least) gives them astonishing TV revenue around €160 million, but it’s also at least €20 million behind other teams in their peer group. It’s difficult to see this situation changing any time soon (or ever), as it was touch and go whether the current French deal would even be as much as the previous one. In the end, the French TV rights were granted to Canal Plus and Orange under a four-year contract from 2008 to 2102 in a deal worth €668 million per season, which was slightly higher than the old agreement.

"Toulalan - younger than he looks"

The money is allocated as a mixture of fixed and variable components. The fixed element comprises 50% of the total media rights and is distributed equally among all Ligue 1 clubs, while the remaining 50% is distributed based on performance and media profile. This is fairly complex, so 28% is based on league position (23% for the current season and 5% for performance over the last five seasons); 19% is based on the number of games broadcast (14% for the current season and 5% for performance over the last five seasons); and 3% is intriguingly based on attacking play (“le challenge de l’offensive”).

Much of the €10 million increase in TV revenue was down to Lyon’s successful run in the Champions League with UEFA’s distribution growing from €24 million to €29 million. These payments are a combination of performance (how far the team progresses) and a variable share of the TV pool. The latter is partly dependent on the relative importance of the French TV market, but also importantly how many French clubs take part in the Champions League. For example, Lyon estimated that if only two French clubs had qualified for the group stages in 2009 (instead of three), their revenue would have been €4 million higher.

Although Aulas has argued that failure to qualify for the Champions League would not be a damaging blow to Lyon’s finances, as they have plenty of money saved for a rainy day, he has also admitted that the club’s annual budget is built on the assumption of a “podium finish” in Ligue 1 and reaching the quarter-finals in the Champions League. Over the last three years, Lyon has earned an average of €27 million a season from Europe’s premier tournament, which could potentially be even higher in the future, as UEFA’s new three-year contract for 2009 to 2012 is up 34%. Given these figures, I would argue that the Champions League is very important to Lyon – about 20% of total revenue, in fact.

"Hugo Lloris - brilliant orange"

In contrast to television, commercial revenue fell 13% (or €6 million) to €43 million in 2010, the second year in a row that it declined, following a €10 million decrease in 2009 from the high point of €59 million. Again, although this might be pretty good for a French club, it’s still not competitive on the international stage.

In fact, revenue from sponsorship and advertising was down sharply this year. This was partly due to the recession afflicting all industries, but in fairness Lyon were also impacted by a couple of exceptional factors specific to them: the repeated postponement of the French online gaming law meant that new sponsor BetClic was not authorised to place advertising on players’ shirts; and the club made a once-off €4 million payment to Umbro as compensation for the early termination of their contract to supply kit.

The decrease in commercial revenue in 2009 was similarly influenced by once-off movements, with the previous year being boosted by a €3.5 million signing fee from Sodexo for the catering contract and €1.8 million in prize money from Lyon’s victory at the Peace Cup in South Korea. In addition, the club’s restaurant business was outsourced and its brasserie discontinued, leading to a €1.3 reduction.

"Bastos keeps his eye on the ball"

However, the club do expect commercial revenue to “rise substantially thanks to new contracts”. Lyon has signed a ten-year agreement with Adidas as their exclusive kit manufacturer, starting from July 2010, with the supplier paying a basic fee plus royalties based on product sales. Merchandising revenue is likely to increase, both in France and especially abroad, on account of Adidas’ extensive distribution network. The contract could generate gross revenue between €80 million and €100 million depending on results on the pitch.

As Mangas Gaming has now been awarded a licence to operate in France, the BetClic brand can finally appear on players’ shirts in domestic football. This is a four-year deal worth €5-7 million per annum, which runs from 2009 to 2013 and replaces the long-standing agreement with Accor and Renault Trucks.

In September 2007, Lyon signed a contract with Sportfive, valid for ten years from the delivery of the new stadium, whereby Sportfive will have exclusive use of all marketing, hospitality and media rights belonging to the club. In return, Lyon receive a €28 million signing fee upfront, which is paid in four annual installments of €7 million between December 2007 and December 2010. By the way, this is the same company that has put into place a similar funding arrangement for Juventus’ new stadium.

Finally, the club has ambitious plans to grow its brand internationally through the establishment of soccer schools outside France in Northern Africa, the Far East, India, the Middle East and the USA. This will help cement the idea of Lyon as a club known for training and developing elite players.

Thanks to Lyon’s tremendous performance in the Champions League, match day revenue rose €2 million to €25 million, but this remains one of the lowest in the Money League. In fact, only three teams in the top twenty have lower revenue from this stream: Borussia Dortmund, Roma and Juventus. This is obviously constrained by the smallish capacity of their ground, the Stade de Gerland, which only holds 40,500, though the average attendance is even lower at 35,600, which means a capacity utilisation of 88%.

Despite this failure to fill the existing ground, the club has planned a new 60,000 stadium, which is due to be completed in December 2013, as this should provide a significant uplift to their revenue. In the shareholders’ meeting in December 2009, the board specifically drew attention to the impact of the Emirates Stadium on Arsenal’s match day income, which has more than doubled to around €110 million since the move.

This is because the Emirates is a more modern and commercially orientated stadium. In the same way, Lyon’s project aims not only to increase ticketing revenue significantly, partly through more corporate boxes, but also to develop ancillary revenue from a leisure centre, hotels, restaurants, offices, a shopping centre, including a dedicated OL store for merchandising, and potentially naming rights.

"Here's to future days"

The club’s initial estimates of the investment required were between €250 and €300 million, but this has reportedly risen to around €350 million. The presentation to shareholders claims that this will be 100% privately funded via “innovative financing” with very limited impact on the taxpayer, but there are reports that €180 million of public money will be used, presumably to improve transport links.

Although there has been some opposition to the new stadium, the project has been boosted by the awarding of the Euro 2016 tournament to France. The proposed stadium is one of the 12 on the short-list and should benefit from a new law that is to be introduced with the aim of enabling France to honour its commitments to UEFA, which will accelerate planning procedures.

On the cost side, the wage bill rose by a staggering 17% to €112 million, though this was explained as being primarily due to performance-related bonuses for advancing so far in the Champions League. This is the same issue that has caused Barcelona so many financial problems over the last couple of years. To be fair, French clubs are hampered by what Aulas wryly calls “Europe’s most developed tax system.”

Even so, it is clear that the wages have grown too far, evidenced by the wages to turnover ratio of 76%, which is higher than UEFA’s recommended maximum limit of 70%. This ratio has been on a steady upwards trend over the last few years from a respectable 59% in 2006.

In the management report, the board explicitly states that it “has set itself the target of significantly reducing the payroll over the next two periods, as other French clubs seem to be doing.” This does not seem to be an idle boast, as they have already offloaded many high-earning players this summer, including former captain Sidney Govou, Mathieu Bodmer, Jean-Alain Boumsong and Frederic Piquionne. These sales might not have brought in much money, but they will go a long way to reducing the wages to a more sustainable level, cutting around €12 million from the annual cost base.

The trend in player amortisation, namely the annual cost of writing down the cost of buying new players, also reflects the modified approach to the transfer market. In the three years between 2006 and 2008, it hardly changed at all, rising slightly from €24 million to €26 million. However, in the last two years it has grown to €43 million “as a consequence of the club’s substantial investments,” increasing by €9 million (a chunky 26%) this year alone. This is still much lower than those sides that have spent really big in the transfer market, such as Manchester City €83 million, Barcelona €71 million, Real Madrid €64 million and Chelsea €57 million. Furthermore, if Lyon’s board carries out the plans that it has announced, then it might well have maxed out at this level.

It should be clearly stated that in spite of this significant player investment, the club maintains that it still has a “sound financial structure with surplus cash” with the summary report for June 2010 stating that the club has positive net cash of €15 million.

Unfortunately, we don’t have any more details behind this, but we know from last year’s annual report that the club had net cash of €62 million in June 2009, so the recent player purchases must have had some effect, as the net cash has dropped by €47 million in the last 12 months. Looking at those 2009 figures, Lyon had very little financial debt at that stage with only €42 million of bank loans, which were more than covered by €104 million of cash.

We should note en passant that the club also owed €36 million to other football clubs a year ago, though this was completely offset by €62 million owed to them by other clubs, leaving a net football surplus of €27 million. So, last year’s analysis showed that Lyon had a net surplus of €89 million per UEFA’s definition, which is very impressive. This year’s figures will not have been quite as good as that, but they must still be very healthy indeed.

In addition, the club has shareholders’ equity of €131 million, which has given it sufficient robustness to pursue its ambitious growth policy. To put this into context, Lyon’s equity represents 44% of the total equity of French football clubs. Much of this is derived from the club’s successful flotation in 2007 on Euronext Paris, after a change in French law permitted sports clubs to float on the stock exchange, which raised €91 million.

Lyon’s board directors own the majority of these shares with Aulas himself having the largest stake (34%) through his holding company ICMI, followed by Pathé and OJEJ (24%), companies controlled by Jérôme Seydoux, and a further 7% held by other board members. However, the percentage of voting rights held is even higher, amounting to around 76%: ICMI 42%, Pathé and OJEJ 29%, other board members 5%.

"The only way is up"

Even with this stability, the club has plans to further strengthen its financial capacity, maybe to help raise funds for the new stadium. First, the board will subscribe to a €40 million capital increase for one of the group’s subsidiaries, OL SASP, through a partial incorporation of its shareholder loan and, on top of that, the club will issue €25 million in bonds or similar securities that could give deferred access to share capital.

The club’s presentation to shareholders concluded that theirs was “an exemplary business model.” Although that might sound a little bombastic, there’s no doubt that the model has proven itself over several years, though it’s fair to say that it has been severely tested by recent events. Having achieved the first two phases of Olympique Lyonnais’ grand plan, Aulas now talks of a “new phase of development” which will use the new stadium project to “pursue our objective of moving the club to a higher plane.” The ultimate objective, written down for all to see, is to “win a European Cup before 2016.”

Aulas once said that it is only a matter of time before his team wins the Champions League. If they managed to do that, with all the financial disadvantages they have compared to the traditional leading clubs, then they truly would be the Kings of Lyon. Is it likely? Who knows, but stranger things have happened.

Read More