Chelsea - Hey Hey, My My (Into The Black)

By the standards of most clubs, Chelsea’s 2013/14 season was pretty good, as they finished 3rd place in the Premier League and were semi-finalists in the Champions League, but it must have felt a little disappointing after capturing silverware in each of the previous two seasons: the Europa League in 2012/13 and, most memorably, the Champions League and FA Cup in 2011/12.

However, this did not stop their progress off the pitch, as they reported record revenue of £320 million, up 25% on the prior year, and profit of £19 million (before tax), compared to a loss of £51 million in 2012/13. Equally importantly, given Chelsea’s history of being bankrolled by their owner Roman Abramovich, these results ensured that “UEFA’s break-even criteria under the Financial Fair Play (FFP) regulations continue to be satisfied.”

Chairman Bruce Buck was keen to note that the club’s new focus on its finances had not dramatically impacted their performance on the pitch, “while improving our financial figures, we remained competitive in football’s toughest competitions.”

In 2013/14 Chelsea improved their bottom line by £70 million, as they managed to convert a £51 million loss before tax to a £19 million profit. After tax, the figures improved from a £49 million loss to an £18 million profit.

The £70 million profit improvement was mainly driven by significantly higher profit on player sales (Luiz, Mata and De Bruyne), which increased by £51 million to £65 million, and revenue growth, including £39 million from the new Premier League TV deal and £29 million from sponsorship and merchandising income. This was partially offset by higher player costs with the wage bill up £20 million, amortisation (cost of expensing transfer fees) up £14 million and impairment (writing down player values) of £19 million.

This is the second profit Chelsea have made in three years and the largest since Abramovich became owner of the club in 2003. When they were making large losses, the club famously predicted that they would break-even one day and this has now become a reality, albeit a few seasons after they hoped to achieve this milestone. It should be noted that the £1.4 million profit registered in 2011/12 was largely due to £18.4 million profit on the cancellation of preference shares previously owned by BSkyB.

Of course, Chelsea have been making substantial losses in the Abramovich era, amounting to £631 million in the eight years up to 2011, including a hefty £140 million loss in 2005, as the owner poured money into the club to build a competitive squad.

Part of this is due to so-called exceptional items, which have increased costs by £121 million in the last decade, due to compensation paid to dismissed managers £61 million, impairment of player registrations £28 million, the early termination of a former shirt sponsor £26 million and tax on image rights £6 million.

However, it is profit from player sales that is having an increasing influence on Chelsea’s figures. In the seven years between 2005 and 2011, Chelsea made £73 million from this activity, but have made £108 million in just three years since then, most notably £65 million last season (up from £14 million), largely due to the sales of David Luiz to Paris Saint-Germain, Juan Mata to Manchester United and Kevin De Bruyne to Wolfsburg. In particular, Chelsea would have made a loss of £46 million instead of a £19 million profit without these sales.

Chairman Bruce Buck played this down, “we financed player purchases from sales”, but there’s a lot more to it than that. The strategy is to acquire young talent and develop it in a cost-effective way, making extensive use of the loan system, notably at Dutch club Vitesse Arnhem, which appears to be an unofficial feeder club for Chelsea.

On a few occasions, a player will succeed in establishing himself in Chelsea’s first team, one example being goalkeeper Thibaut Courtois, but most players are effectively being developed for future (profitable) sales, while being placed in the shop window at the same time. Not every player will bring in big money, of course, but the strategy only needs a couple of lucrative sales to be successful. Although it will be far from easy to sustain these profits, we already know that next season’s accounts will also be boosted by the £28 million sale of Romelu Lukaku to Everton.

This approach has been questioned by some commentators, especially as an incredible 30 players have left Chelsea on loan this season, but the Blues are by no means the first club to adopt such a “buy low, sell high” strategy with Udinese having done similar for many years. Complaints would include treating players like stocks and shares, not to mention ensuring other clubs cannot buy this promising talent, but there are no rules against it – yet.

It is undoubtedly a smart strategy in the FFP era, as the club had to wean itself off its reliance on its Russian owner to cover its operating losses. Basically, any investment in a youth academy can be excluded from the FFP break-even calculation, while profits made from player sales are included in the analysis. Furthermore, if the players are loaned, then most of the wages are covered by the loanee clubs.

It remains to be seen whether more academy players make it at Chelsea, though there are high hopes for Ruben Loftus-Cheek, Lewis Baker and Izzy Brown in particular, but either way Chelsea’s new trading strategy has helped drive the improvement in their financials.

For this purpose, it is important to note how clubs account for player trading. When a club buys a player, it does not show the full transfer fee in the accounts in that year, but writes-down the cost (evenly) over the length of the player’s contract. So, if Chelsea splash £32 million on a new player with a 4-year contract, the annual expense is only £8 million (£32 million divided by 4 years) in player amortisation (on top of wages).

However, when that player is sold, the club reports the profit on player sales, which is essentially sales proceeds less any remaining value in the accounts. In our example, if the player were to be sold 3 years later for £35 million, the cash profit would be £3 million (£35 million less £32 million), but the accounting profit would be £27 million, as the club would have already booked £24 million of amortisation (3 years at £8 million).

Up to now, this has surely only interested accountants, but it’s become very relevant for FFP. Furthermore, any players developed through a club’s academy have zero value in the accounts, so in these cases any sales proceeds represent pure profit. Chelsea are clearly highly aware of this accounting treatment. In fact, their annual report notes that the club has valued its playing staff at £353 million, while the accounts value is only £226 million.

Even Jose Mourinho has commented on Chelsea’s revised strategy: “We are making money to be able to spend money. In every transfer window Chelsea is losing players, is selling players. In the winter one we sold Mata; in the summer one we sold David Luiz and Lukaku. So Chelsea in this moment is not a spender – Chelsea in this moment is making more money in transfers than the money we spend.”

As well as player trading, Chelsea have significantly increased their ongoing revenue, which was up £64 million (25%) from £256 million to £320 million, driving through the £300 million threshold for the first time. Both broadcasting and commercial grew substantially, broadcasting up £35 million (33%) from £105 million to £140 million and commercial up £29 million (37%) from £80 million to £109 million, while match day was flat at £71 million.

In fact, since 2009 match day revenue has fallen 5% from £75 million to £71 million, while commercial more than doubled from £53 million to £109 million and broadcasting grew 77% from £79 million to £140 million.

Chelsea’s revenue of £320 million remains the 3rd highest in England, only behind Manchester United £433 million and Manchester City £347 million, though still ahead of Arsenal £299 million (in 4th place, natch).

All clubs in the Premier League have grown their revenue in the 2013/14 season, as they all benefit from the new TV deal, but the two Manchester clubs have increased their revenue by more than the others: City are £76 million up, United £70 million up, while Chelsea grew by “only” £60 million. In this way, the gap is getting bigger.

Chelsea had the 7th highest revenue in the world in 2012/13 with £260 million, according to the Deloitte Money League, which is obviously far from shabby, but was still a long way below the Spanish giants, Real Madrid £445 million and Barcelona £414 million, and Bayern Munich £370 million.

We will not know whether Chelsea’s position will change in the 2013/14 version until PSG publish their accounts, but the gap will close, partly due to Chelsea growing at a faster rate (23%) than Madrid (6%), Barca (0%) and Bayern (13%). This trend is exacerbated by the strengthening of Sterling with the exchange rate against the Euro improving from 1.1668 to 1.25.

As match day revenue barely changed in 2013/14, while both broadcasting and commercial grew significantly, its share of Chelsea’s revenue has dropped from 28% to 22%. Broadcasting is up from 41% to 44%, while commercial is up from 31% to 34%.

After finishing 3rd in the Premier League, Chelsea’s share of the new Premier League deal was £94 million, up £39 million (71%) from £55 million. All PL clubs get an equal share of half of the domestic deal and all of the overseas deals. The remaining 50% of the domestic deal is allocated based on a merit payment for finishing position and a facility payment based on number of games shown live.

Chelsea also received €43 million for reaching the semi-final of the Champions League, which was slightly higher (at least in Euro terms) than the €42 million they received from Europe the previous season: €31 million from the Champions League, despite elimination at the group stage, and €11 million for winning the Europa League, when they overcame Benfica in the final. Of course, it is not as high as the €60 million earned in 2011/12 when Chelsea beat Bayern Munich in a dramatic final to win the Champions League.

The new Champions League deal from the 2015/16 season will further increase the prize money with UEFA recently advising the European Club Association that clubs could expect a 30% increase in revenue. The uplift may be even higher for English clubs, as BT’s exclusive acquisition of UK rights is double the current arrangement.

It’s worth exploring how the TV (market) pool is allocated. Chelsea’s share of the UK market pool is dependent on both how far they progress (compared to other English clubs) and their finishing place in the previous season’s Premier League. In this way, Chelsea (€18.5 million) earned less than Manchester United (€23.8 million), even though they progressed one stage further (semi-final compared to United’s quarter-final), as they only finished 3rd in the previous season’s Premier League, while United finished 1st.

Commercial revenue rose £29 million (37%) from £80 million to £109 million, partly due to increases in the Samsung shirt sponsorship from £13.8 million to £18 million and an extension in the Adidas kit supplier deal until 2023, which increased the annual payment from £20 million to £30 million. In addition, the club signed new partnerships with Rotary, Hackett, Coral, William Lawson’s, Indosat and Guangzhou R&F Football Club.

However, Chelsea are unlikely to improve on their 9th place in the Money League, as every other leading club is also focused on growing this revenue stream. In particular, Bayern Munich have managed to increase commercial income from £203 million to £233 million, more than double Chelsea. PSG’s numbers are inflated by their €200 million deal with the Qatar Tourist Authority.

To reinforce this point, in England Manchester United have increased commercial income by 171% (£119 million) to £189 million, which is better than Chelsea’s 106% (£51 million) over the same period – and that’s before United receive the full benefit of their massive new Chevrolet and Adidas deals. Similarly, Manchester City is now up to £166 million, driven by their Etihad sponsorship. Chelsea are still way above Arsenal, though the Gunners’ PUMA deal only starts from the 2014/15 season.

Time will tell whether former Liverpool managing director Christian Purslow, who has been recruited as head of commercial activities, will manage to bring in new sponsorship deals, though he certainly talks a good match (as seen in countless TV and radio appearances).

There have been numerous reports of Chelsea switching shirt sponsors from Samsung to Turkish Airlines next season, which would increase the value from £18 million to £25 million. This would be more in line with the £25-30 million deals that most other elite clubs have (Arsenal – Emirates, Real Madrid – Emirates, Barcelona – Qatar Airways, Bayern Munich – Deutsche Telekom), though still a long way short of Manchester United’s Chevrolet deal of £47 million (depending on US$ exchange rate).

Match day income rose slightly by £0.3 million (0.5%) from £70.7 million to £71.0 million. This was no surprise, as the club explained, “with Stamford Bridge filled to capacity year after year there was no scope for significant financial growth in this area. General admission ticket prices remain frozen at 2011/12 levels.” This revenue stream peaked at £77.7 million, thanks to the success in the Champions League and the FA Cup.

Chelsea’s match day revenue is around £30 million lower than Manchester United, Arsenal, Madrid and Barca, as they have much bigger stadiums. This explains why the club has spent so much time searching nearby locations for a new stadium, but they were outbid for the Battersea Power Station and have ruled out moves to sites in Earls Court and Old Oak Common. The club now appears to be focusing on expanding Stamford Bridge’s capacity form 42,000 to 55,000, though this would be a tricky, lengthy exercise, so revenue is unlikely to meaningfully increase here for many years.

Wages increased by £20 million (12%) from £173 million to £193 million, though the wages to turnover ratio lowered from 67% to 60% following the 25% revenue growth. This ratio has improved every year from the recent 82% peak in 2010. Note that these wage figures have been adjusted for exceptional items, e.g. in 2013/14 the reported staff costs of £190.6 million have been adjusted for a £2.1 million credit for the release of a provision for compensation for first team management changes.

Chelsea therefore still have the third highest wage bill in England of £193 million, behind Manchester United £215 million and Manchester City £205 million, but ahead of Arsenal £166 million.

In Euro terms, Chelsea’s €241 million is just behind Real Madrid €250 million and Barcelona €248 million, but ahead of Bayern Munich’s €215 million – though this depends on the exchange rate used (1.25 here, as this is likely to be the 2013/14 Deloitte Money League rate).

Although Chelsea are still spending big in the transfer market, e.g. this summer saw the arrival of £32 million Diego Costa from Atletico Madrid and £30 million Cesc Fabregas from Barcelona, net spend is declining, thanks to equally big money sales, such as David Luiz £40 million and Romelu Lukaku £28 million (and, by the way, major kudos to whoever secured so much money for those sales).

That said, if we look at the last three seasons, only Manchester United have outspent Chelsea: £231 million against £137 million. Both Chelsea and Manchester City £128 million have clearly been impacted by the advent of FFP, so much so that Arsenal and Liverpool are now spending at similar levels.

Even though Chelsea still report substantial operating losses in the P&L, the operating cash flow has been positive for the last two seasons after adjusting for non-cash flow items, such as player amortisation and depreciation, and working capital movements. Nevertheless, Chelsea still require funding from the owner to cover player purchases and other investments, resulting in £51 million net financing in 2013/14.

However there is no debt in the football club, as this has all been converted into equity by issuing new shares. That said, the club’s holding company, Fordstam Limited, does have around £1 billion of debt (£984 million as of June 2013) in the form of an interest-free loan from the owner, theoretically repayable on 18 months notice.

Given Chelsea’s several years of heavy financial losses, many observers had believed that they would fall foul of FFP, but that has not been the case, as confirmed by the club: “The latest financial results combined with those from the previous two years mean that for the second monitoring period for FFP we will fall comfortably within the limits set by UEFA, who measure expenditure against the income from football-related activities. Chelsea also complied with FFP criteria over the first monitoring period.”

The club has taken advantage of some of the allowable exclusions for UEFA’s break-even analysis, namely youth development, infrastructure and (for the initial monitoring periods) the wages for players signed before June 2010. As we have seen, FFP is now being addressed by the new player trading model, but it is clear that this legislation has been at the forefront of Chelsea’s thinking.

Even the self-proclaimed “Special One” has got involved, though not without a degree of irony: “Chelsea is working in relation to Financial Fair Play, but I think it is a contradiction, because it was to put teams in equal conditions to compete and what happened really with the Financial Fair Play is a big protection to the historical, old, big clubs, which have a financial structure, a commercial structure, everything in place based on historical success for years and years and years.”

Hence, Chelsea’s new focus on living within its means. That will mean using a combination of profits from player development (and sales) and further increases in commercial income. As Bruce Buck put it, “Going forward, we have ambitious plans to build a pioneering global commercial programme, partnering with innovative and market-leading organisations from around the world. In the era of FFP, we must progress commercially to continue the circle of success to invest in the team and get results.”

In the meantime, Chelsea’s 2013/14 results are maybe best summarised by the wonderful Neil Young, “out of the blue and into the black”, as they have demonstrated that it is possible for them to remain successful while also balancing the books.

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West Ham - Stadium Arcadium

Although West Ham had some trials and tribulations during the 2013/14 season, they finished up in a comfortable 13th position in the Premier League and also reached the semi-final of the Capital One Cup. In the process, the Hammers reported the highest revenue and profit in the club’s history, leading vice-chairman Karren Brady to comment, “2013/14 was a satisfactory year for the club both on and off the pitch.”

To add to the good news, the club also signed an agreement to sell their Boleyn Ground in preparation for the move to the Olympic Stadium for the 2016/17 season.

West Ham’s profit before tax of £10 million was a significant £14 million improvement on last year’s loss of £4 million, as revenue rose £25 million (28%) from £90 million to £115 million. The profit growth was almost entirely attributable to the £25 million extra income from the new Premier League TV deal, partially offset by increases in player costs: the wage bill was up £8 million, while player amortisation was £4 million higher.

The last time that West Ham managed to make a profit was £6 million in 2005/06. In the intervening seven years, they made cumulative losses of £144 million before moving into the black in 2013/14. In fairness, the small £4 million loss in 2012/13 already represented a step in the right direction, as the club had been averaging £23 million annual losses before then.

Although Brady commented, “most areas of income increased”, it is clear that the £25 million growth in 2013/14 is very largely due to the new TV deal, as broadcasting revenue rose £23.6 million (46%) from £51.8 million to £75.4 million. Match receipts increased £1.5 million (8%) from £18.0 million to £19.5 million, while commercial income was actually virtually unchanged at £20.0 million.

Since 2009, West Ham’s revenue has grown 51% (£39 million) from £76 million to £115 million. Again, the majority of this growth is down to TV money, which rose £31 Million (71%) from £44 million to £75 million, though commercial income did grow £6 million (40%) from £14 million to £20 million and match day was up £2 million (11%) from £18 million to £20 million.

The impact of relegation to the Championship is evident from the £34 million decrease in 2012 with all revenue streams being adversely impacted.

Around two-thirds (66%) of West Ham’s revenue now comes from Broadcasting, up from 58% the previous season with Match Day and Commercial both contributing 17%.

Despite significant growth, West Ham’s 2014 revenue of £115 million is still a lot lower than the Premier League elite, e.g. Manchester United’s £433 million is over £300 million higher. On the other hand, West Ham did have the 8th highest revenue in the Premier League (and indeed the 29th highest in the world) in 2012/13.

As famous investor Warren Buffett once said, “A rising tide lifts all boats”, and in this way it is clear that all Premier League clubs will benefit from the new TV deal. In fact, we already know that Everton have overtaken West Ham in 2013/14 with their revenue increasing to £121 million, largely due to Everton’s TV money increasing at a faster rate.

Although West Ham’s Premier League TV distribution rose by £25 million from £49 million to £74 million, their increase was slightly dampened by the lower league position (dropping from 10th to 13th). Everton’s share increased by £33 million, boosted by a higher finish (5th place compared to 6th the previous season) and more live televised matches (16 compared to 14). Looking forward, West Ham’s share should be higher in 2014/15 if they maintain a better league position.

Given West Ham’s enterprising start to this season, it is interesting to note how much money they might make from qualifying for Europe. Last season, English clubs in the Europa League earned an average of €4.6 million (Tottenham €5.9 million, Swansea City €4.0 million and Wigan Athletic €3.8 million), while English teams in the Champions League (an unlikely, but not impossible objective) earned an average of €38 million. On top of that, there would be additional gate receipts and higher commercial income (based on contract clauses).

This money will be even higher from the 2015/16 season when the new Champions League deal commences. UEFA recently told the European Club Association that clubs could expect a 30% increase in revenue, but the uplift may be even higher for English clubs, as BT’s exclusive acquisition of UK rights is apparently double the current arrangement.

Match Day receipts rose 8.5% (£1.5 million) from £18.0 million to £19.5 million. Even though the average league attendance fell 2% from 34,720 to 34,007, match day revenue still rose in 2013/14, largely due to season ticket price rises plus money from the Capital One Cup run.

West Ham’s match day revenue of £20 million is a long way short of leading clubs, e.g. both Manchester United and Arsenal generate more than £100 million, though a more reasonable comparative might be Tottenham, who earn twice as much (£40 million) as the Hammers.

This weakness should change with the move to the Olympic Stadium for the 2016/17 season, which is a major financial coup for West Ham. Even though the total cost of the stadium is more than £600 million, the club will only pay a once-off fee of £15 million for stadium conversion plus an annual rent of around £2.5 million. Note: the accounts include Olympic Stadium project costs in Exceptional Items: 2013/14 £0.5 million, 2012/13 £1.4 million.

This will create a number of commercial opportunities, including premium hospitality packages, where Brady has stated, “we will not have enough seats to fulfill demand.” That said, it will be interesting to see whether the club will be able to fill the 54,000 capacity stadium, but there should certainly be an increase in revenue.

Commercial revenue was essentially unchanged at £20 million. Even though retail and merchandising rose 3% (£0.2 million) to a record high of £6.3 million, other commercial activities fell 2% (£0.3 million) to £13.7 million.

Even though Brady proudly proclaimed that West Ham are “officially recognised as one of the world’s leading football brands by Brandfinance, placing us again in the top 9 of Premier League clubs in the world’s most valuable football brands”, the fact remains that their commercial income pales into insignificance compared to heavyweights such as Manchester United, who generate £189 million from this activity. That comparison might be unfair, but it is worth noting that Tottenham earned £45 million and Aston Villa £25 million (in the 2012/13 season).

West Ham’s shirt sponsorship with global foreign exchange broker Alpari is worth £3 million a season for three years until the end of the 2015/16 season. This is more than they earned from their previous sponsor SBOBET, who were signed in the 2008/09 season (on a reduced fee) as a replacement for XL.com, who went into administration and defaulted on their sponsorship. The club’s kit supplier deal is with Adidas, who replaced Macron in 2013, until the end of the 2014/15 season with a value estimated at £2 million a year.

Given the greater exposure afforded by the Olympic Stadium, the value of the next deals for shirt sponsor and kit supplier should both be considerably higher.

Wages rose 14% (£8 million) from £56 million to £64 million, but the wages to turnover ratio improved from 63% to 56%, the lowest ratio “since this was first calculated 15 years ago”, following the 28% revenue growth. Interestingly, wages have actually fallen £3 million (4%) since the peak of £67 million in 2009, while revenue has increased by £39 million in the same period.

The amount paid to the highest paid director, believed to be Brady, fell from £1.6 million to £636,000 in 2013/14, presumably as last season included a hefty bonus for securing the Olympic Stadium.

West Ham’s wage bill of £56 million was only the 14th highest in the 2012/13 season, almost exactly in line with their league placing the following season. Even though this has increased to £64 million, to place this into context, it is around a third of the two Manchester clubs (United £215 million and City £205 million), while Arsenal’s wages are over a £100 million higher at £166 million.

West Ham’s improved performance on the pitch should perhaps be no surprise, given the recent “major investment in the first team squad”, as evidenced by the increased activity in the transfer market. In the decade up to the 2011/12 season, West Ham was somewhat of a trading club with a net spend of zero, but they have significantly ramped up their purchases in the last three seasons with a net spend of £67 million.

In 2012/13 West Ham spent big on Matt Jarvis, then bought Andy Carroll and Stewart Downing at the start of the 2013/14 season before really motoring this season, purchasing Enner Valencia, Cheikou Kouyate, Diafra Sakho, Aaron Cresswell, Morgan Amalfitano and Mauro Zarate. In addition, the club has also made good use of the loan market, bringing in Alex Song from Barcelona and Carl Jenkinson from Arsenal.

In fact, over that three-year period, West Ham were the 6th highest net spenders in the Premier League, only beaten by those clubs that manager Sam Allardyce frequently refers to as “the big boys”: Manchester United, Chelsea, Manchester City, Liverpool and Arsenal.

This spending spree has been financed by the owners, David Sullivan and David Gold, putting in more money as shareholder loans, which have increased to £49 million. This is over half of the club’s gross debt of £92 million, leaving £42 million of external debt and £0.6 million of debenture loans under the Hammers Bond Scheme.

Although net debt fell £4 million from £78 million to £74 million, gross debt actually slightly increased £1 million from £91 million to £92 million with the net fall being driven by the £5 million rise in cash balances from £13 million to £18 million. Since 2010 gross debt has more than doubled from £45 million to £92 million, but external debt is down £2 million with the growth funded by the club’s owners as their loans have increased by/to £49 million.

External debt includes bank loans of £26.7 million with interest charged at 3% over LIBOR, which have been refinanced until December 2016, though the club has repaid £5.5 million after the 2013/14 accounts were finalised, and a short-term facility with Vibrac, an offshore loan corporation, secured on Premier League TV money. This arrangement was renewed for a further year for £18 million in August 2014 after the previous £15 million loan was repaid.

Karren Brady has stated that any outstanding bank debt that is secured on the club’s ground has to be repaid before the move to the Olympic Stadium. She hopes that the proceeds from the sale of the Boleyn Ground to Galliard Homes will cover the £15 million conversion fee plus “some of our bank debt”. Given current repayment patterns, this should be down to less than £20 million at that time, as this will not include the Vibrac loan. Incidentally, the owners’ loans are unsecured subordinated to the secured bank loan.

According to the profit and loss account, West Ham’s net interest payable of around £5 million is among the highest in the Premier League, albeit considerably lower than Manchester United and Arsenal. However, the cash payment is only £2 million, as the interest on the owners’ loans (6-7%) will not be paid or added to the loans until the loans are repaid. Accrued interest currently stands at £6.3 million.

Sullivan and Gold have now invested a total of £75 million into the club, including £3.5 million in 2013/14 “to allow the manager to go into the transfer market to cover our injury crisis and buy the emergency players we needed to secure our Premier League status.” The owners invested £24 million into the club during their first year in 2009/10 and, importantly, £32 million in the form of loans in 2011/12 to cover the revenue reduction in the Championship. Sullivan and Gold now own 86.2% of the club.

Of course, much of the increase in profitability is due to the Premier League’s new Financial Fair Play legislation, which ensures that the majority of the increased money from the new TV deal remains within the club and does not simply go to higher player wages (and agents’ fees), as has invariably been the case with previous increases. In summary, top flight clubs cannot make a loss in excess of £105 million aggregated over a three-season period between 2013 and 2016 and the amount of money clubs can spend from the new TV deal on wages is restricted.

Specifically, clubs whose player wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years. However this restriction only applies to the income from TV money, so any additional money from the higher gate receipts, new sponsorship deals or profits from player sales can still be spent on wages. Although Allardyce was worried that this might prevent the purchase of Andy Carroll, this turned out not to be the case.

Although it will be a wrench to leave the atmospheric Upton Park, there is little doubt that the club has secured a great deal at the Olympic Stadium. Brady enthused about its “enormous commercial and brand opportunities” and promised “a strategy to deliver sell-out crowds”. That will depend to some extent on how the team is performing on the pitch. While Allardyce’s side has played some enterprising football this season, only time will tell whether this can be maintained, allowing the club “to deliver much more in years to come” (to once again quote Brady).

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Manchester City - Roll With It

Manchester City's 2013/14 season was described, with some justification, as “another memorable year” by its chairman, Khaldoon Al Mubarak, as City won their second Premier League title in three years. They also added the Capital One Cup, which meant that the club has now won every major domestic competition at least once in the last four seasons.

The strategy off the pitch is also delivering, as City’s revenue surged through the £300 million barrier, rising 28% from £271 million to £347 million, while it further reduced losses for the third consecutive year. All three revenue streams contributed to this strong performance with broadcast revenue up 51%, match day revenue up by 20% and commercial revenue up by 16%.

The 2013/14 loss was more than halved from £52 million to £23 million. In fact, the club would have been very close to break-even without including the £16 million settlement with UEFA over disputed breaches of its Financial Fair Play (FFP) regulations and it expects to be profitable in 2014/15.

The £29 million decrease in the 2014 reported loss was mainly driven by a £39 million increase in TV money from the new Premier League deal, further growth in commercial partnerships of £23 million, a reduction in the wage bill of £23 million, which was partially offset by once-off movements such as the £16 million FFP settlement and £46 million of intellectual property sales in 2013.

Two encouraging items are worth noting: (a) the growth in EBITDA (Earnings Before Interest, Depreciation and Amortisation), which more than doubled from £36 million to £75 million; (b) the fact that City’s 2014 figures include virtually nothing from player sale profits, so there is likely to be future upside from this activity.

City’s 2012/13 numbers were boosted by £48 million of Other Operating Income, which was derived from the sale of intellectual property (£22.5 million to subsidiaries and £24.5 million to third parties). These have not been repeated in 2013/14; in fact, there have been £10 million of “recharges for costs incurred providing services for the benefit of the company”.

The last time that City made a profit was back in 2006 (£10 million). Since then they have reported a total of £628 million of losses, but, as technical analysts are prone to say, “the trend is your friend”, and City’s losses have been steadily reducing since the £197 million registered in 2011. Effectively, the losses have been halving each year.

After years of heavy spending in order to build a squad and the facilities required to compete at the highest level, City can now look forward to future profits with some confidence. The owners’ “Masterplan” appears to be firmly on track, as confirmed by Al Mubarak, “Today our club is where we hoped it would be when we began this transformation six years ago.”

Since 2009, City’s revenue has increased by around 300% (£260 million) from £87 million to £347 million, mainly driven by more commercial partnerships, up by an astonishing 821% (£148 million) from £18 million to £166 million. Broadcasting is also substantially higher, rising from £48 million to £133 million, including £31 million from the Champions League, while match day income has more than doubled from £21 million to £47 million.

Revenue grew £76 million in the last season alone, rising from £271 million to £347 million. All three revenue streams contributed: broadcasting up £45 million (51%) from £88 million to £133 million, commercial up £23 million (16%) from £143 million to £166 million and match day up £8 million (20%) from £40 million to £48 million.

This growth represents the best performance of the top four English clubs (in revenue terms) in 2013/14, both in absolute terms (£76 million) and percentage (28%). United’s absolute growth was almost as much (£70 million), while Chelsea and Arsenal both increased by 23%.

City now have 48% of their revenue coming from commercial activities, which is a higher proportion than any other leading English club, e.g. it’s 44% at United and 26% at Arsenal. Their remaining revenue is split 38% broadcasting and just 14% match day.

City’s 2013/14 revenue of £347 million is the second highest in England, behind United’s £433 million, but ahead of Chelsea £320 million and Arsenal £299 million.

Last year City were 6th in the European Money League with £271 million, which is a notable achievement, but still a long way behind the Spanish giants, Real Madrid £445 million (gap £174 million) and Barcelona £414 million.

Depending on PSG’s revenue, City will be either 5th or 6th in the new edition of the Deloitte Money League, though the gap is closing, partly due to the underlying growth and partly due to exchange rate movements. For example, Real Madrid’s 2014 revenue of €550 million equates to £440 million, so the gap to City has reduced from £174 million to £93 million.

Winning the title in the first year of the new Premier League three-year television deal helped City increase their distribution by £39 million (66%) from £58 million to £97 million. Interestingly, this was £1 million less than second-placed Liverpool received, as the Reds were shown live more often than City, leading to a higher facility fee. Nonetheless, the increased revenue arising from each Premier League deal is clear to see, rising from £21 million back in 2007.

City also received £31 million (€35.4 million) from the Champions League, which was £7 million higher than the previous season’s £24 million (€28.8 million), as they progressed further (to the last 16) and performed better in the group. City’s share of the UK market pool is dependent on how far they progress (compared to other English clubs) and their finishing place in the previous season’s Premier League. This means that 2014/15 Champions league revenue should be higher, as City won the Premier League in 2013/14.

Incidentally, some teams from other countries benefit from a high market (TV) pool, divided by fewer clubs, a good example being Juventus who received €32 million from the Italian market pool in 2013/14.

City’s commercial revenue rose 16% to £166 million in 2013/14. As Al Mubarak drolly commented, “commercial success has never been an afterthought for Manchester City.” Much of this is linked to Abu Dhabi, where the club’s ownership is based, but it is also true that the number of commercial partners has greatly increased to 35 (UK and global 25, regional 10), 133% more than the previous season.

Chief Executive, Ferran Soriano added, “The establishment of the City Football Group, with clubs in the United Kingdom, United States, Australia and Japan, has expanded the commercial potential of the organisation and has already facilitated global partnerships with companies such as Nissan, Etihad and Hays.”

Nevertheless, the club is still a long way behind Bayern Munich, whose commercial revenue increased to a barely credible £233 million last season, under-pinned by lucrative contracts with their own “triple A” investors, Adidas, Audi and Allianz. PSG lead the way in 2012/13, as their commercial revenue of £218 million was inflated by a €200 million partnership with the Qatar Tourism Authority.

Despite City’s commercial progress, they have slipped further behind Manchester United, whose £189 million is £23 million above City’s £166 million – and that’s before United’s hefty new deals (Chevrolet from the 2014/15 season and Adidas from the 2015/16 season). However, City are a long way ahead of Liverpool £98 million (admittedly the 2012/13 season) and Arsenal £77 million (before the PUMA kit deal, starting in 2014/15 season).

City’s largest commercial deal is with Etihad, which is understood to be worth £400 million over 10 years, covering shirt, stadium naming rights and campus. Of that, it is estimated that the shirt sponsorship accounts for £20 million a season, which would put City’s deal behind United’s Chevrolet agreement £47 million ($70 million) and Arsenal’s Emirates deal £30 million.

There has been press speculation that the Etihad sponsorship deal will be extended for a further five years, bringing in an additional £320 million. Given that three years of the deal have already elapsed, that would imply an annual payment of £50 million going forward.

In addition, it is understood that City will sign a further five-year deal with three partners for a total of £80 million to sponsor their new training complex, including the splendid new 7,000 capacity stadium for reserve and academy matches.

There is room for improvement with City’s kit supplier deal with Nike, which is worth £12 million a season. Although this six-year deal, signed in 2013, doubled City’s revenue compared to the previous Umbro agreement, it is now well behind other clubs’ latest deals: United £75 million (Adidas), Arsenal £30 million (PUMA) and Liverpool £25 million (Warrior).

Even though City’s match day revenue rose by 20% to £48 million, this is still less than half the money generated by United and Arsenal (both over £100 million), despite the average attendance at the Etihad Stadium of 47,091 being the highest in the club’s history and all 36,400 season tickets being sold out. The other side of the coin here is that City have the cheapest season tickets in the Premier League at £299.

City are extending the stadium to take the capacity up to 55,000 in advance of the 2015/16 season and they also have received planning permission for potential further expansion up to 61,000.

City reduced their wage bill by 12% (£28 million) from £233 million to £205 million. Allied with the steep increase in revenue, this reduced the wages to turnover ratio from 86% to a healthy 59%.

The magnitude of the reduction has raised a few eyebrows, especially as the number of football staff has been slashed from 222 to 112. This is essentially due to a group restructure, where some staff are now paid by group companies, which then charge the club for services provided.

This is undoubtedly an example of fancy footwork with some people accusing City of finding a device to get round FFP restrictions. There is likely to be a net reduction, as some of these costs will be shared among group companies, but it is difficult to believe that UEFA will not have access to the full details, so could make a judgment whether this treatment is reasonable. In any case, many of these costs will simply be booked elsewhere in City’s accounts, i.e. external charges have risen £17 million from £42 million to £59 million in 2013/14. Furthermore, it is likely that the majority of that headcount reduction refers to lower-paid staff.

In addition, there are a couple of other underlying reasons to explain the year-on-year reduction: (a) the 2012/13 figures included compensation paid to Roberto Mancini and his coaching staff – which other clubs usually report under exceptional items; (b) Soriano has renegotiated a number of contracts with a lower basic salary, but higher bonus payments.

Whatever the rights and wrongs of City’s reported wages, they have been overtaken by United, whose wage bill rose to £215 million in 2013/14. However, they are still around £40 million higher than Arsenal £166 million, while Chelsea are still to report wages for 2013/14 (£173 million in 2012/13). It should be noted that one of the clauses in UEFA’s FFP settlement states that City cannot increase their wage bill during the next two financial periods (2015 and 2016) – though performance bonuses are not included.

Interestingly, despite last season’s reduction, City now have the second highest wage bill in Europe with €256 million, ahead of both Real Madrid €250 million and Barcelona €248 million. Much of this is due to the exchange rate used (this calculation is based on the 1.25 rate that Deloitte are likely to use in their 2014 Money League) and it also depends on how clubs account for things like image rights, but it does make you think.

City have spent (net) over half a billion in the transfer market since 2007/08, but there has been a noticeable slowdown in player investment in the last few seasons. Up until 2011/12, the club spent £415 million, averaging £83 million a season, but this has reduced to £128 million in the last three seasons, halving the average annual spend to £43 million.

In fact, they have been outspent in the last three seasons by both United £231 million (around £100 million more) and Chelsea £137 million. It’s a whole new ball game at City, as their desire to curb their expenditure has also been impacted by FFP restrictions. They agreed with UEFA that they would “significantly limit spending in the transfer market for seasons 2014/15 and 2015/16”, including a €60 million limit (net) for the 2014 summer transfer window.

On top of that, their squad size for UEFA competitions has also been limited to 21 players (23 were registered in 2013/14), which, according to manager Manuel Pellegrini, was the key factor behind the departure of striker Alvaro Negredo to Valencia.

Either way, the reduced transfer activity resulted in player amortisation (the annual cost of writing-off transfer fees) falling from £81 million to £76 million.

Unsurprisingly, City have zero financial debt, though official gross debt figures include £67 million of finance leases, i.e. future obligations under the Etihad Stadium lease. However, there are £101 million of contingent liabilities (up from £54 million in 2013) for additional transfer fees, signing-on fees and loyalty bonuses that will become payable upon the achievement of certain contractual conditions.

Since his arrival in 2008, Sheikh Mansour has invested £1.1 billion into Manchester City in six years, either through new loans or issuing new share capital. Any outstanding owner loans were converted into equity in December 2009.

One of the most important issues for Manchester City has been FFP. Although the club believed that it had complied with these regulations, there was “a fundamental disagreement between the club’s and UEFA’s respective interpretations of the FFP regulations on players purchased before 2010.” Basically, the club thought that it would have been able to exclude £80 million of such costs from its break-even calculation, but this was not allowed, as the break-even deficit in 2011/12 was not entirely due to pre-June 2010 player contracts. The difference was negligible, but this meant that the entire £80 million could not be utilized.

Although City felt that the goalposts had been moved after the game had started, notably due to a 2013 change in UEFA’s guidance notes, they decided to draw a line under the matter and not contest the ruling in the courts. They were fined €60m (£49 million) of which €40m (£33 million) was suspended, assuming that the club follows the other measures, leaving €20m (£16 million) booked in the 2013/14 accounts.

This must have been particularly galling, given that PSG were fined the same amount, despite a lot more substance to City’s activities. Interestingly, UEFA did not rule against City’s Etihad deal, on the grounds that it was not a “related party transaction” and was therefore permitted.

City have also specific allowances for FFP losses of €20 million in 2013/14 and €10 million in 2014/15, as opposed to the cumulative allowance of €30 million over those two seasons for all other clubs. In practical terms, this is unlikely to have much effect on City, as their 2013/14 loss can exclude infrastructure costs and the £16 million FFP settlement, while they plan to be profitable from 2014/15 onwards. Indeed, Soriano said that the club expected to enter the 2015/16 season with “no outstanding sanctions or restrictions.”

That said, the measures restricting the net transfer spend and the wage bill must be influencing City’s approach to some extent when bidding for the top players.

Soriano concluded that City had reached “a new level of financial sustainability” in 2013/14. Given the extensive discussions that City had with UEFA when reaching their “compromise” settlement, it has to be considered likely that the club's FFP problems should now be behind them – always assuming that the team continues to perform on the pitch, especially qualification for the Champions League.

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