Monday, February 1, 2016

Money League - Oh! You Pretty Things

A couple of weeks ago Deloitte published the 19th edition of their annual Football Money League, which ranks leading clubs by revenue, this time for the 2014/15 season. On the face of it, little has changed compared to the previous year, as Real Madrid once again top the table for the 11th year in a row with annual revenue of €577 million (£439 million), and there are no new entrants in the top 10.

However, there has been some movement with Barcelona (€561 million) overtaking both Manchester United (€520 million) and Bayern Munich (€474 million) to reclaim second place, as they became only the third club to break the €500 million revenue barrier.

In turn, United fell to third place, while Bayern dropped to fifth place, the first time in 12 years that it has slipped down the table. Paris-Saint Germain (€481 million) climbed to fourth place, the highest position ever achieved by a French club, on the back of their commercial growth.

The seemingly inexorable rise of the English clubs continued apace, as the top 20 now includes nine clubs from the Premier League. Although the Spanish giants still lead the way, there are no fewer than five English clubs in the top nine: Manchester United £395 million, Manchester City £353 million, Arsenal £331 million, Chelsea £320 million and Liverpool £298 million.

Then, a fair way back, come Tottenham Hotspur £196 million, Newcastle United £129 million, Everton £126 million and West Ham £122 million.

Total revenue for the top 20 clubs rose €470 million (8%) from €6.161 billion to €6.631 billion, split between commercial €2.7 billion (41%), broadcasting €2.6 billion (39%) and match day €1.3 billion (19%).

However, individual clubs sometimes have a very different revenue mix. Within the top 20, the highest reliance on a specific revenue stream was as follows: match day – Arsenal 30%; broadcasting – Everton 69%; commercial – Paris-Saint Germain 62%.

On the other side of the coin, the clubs with the smallest share of their total revenue from each category were: match day – Milan 11%; broadcasting – Paris-Saint Germain 22%; commercial – Everton 16%.

It is worth emphasising the role that exchange rates play in these rankings, as Sterling has strengthened by 10% against the Euro (moving from 1.1958 last year to 1.3145 this year). This has greatly benefited the English clubs relative to their continental counterparts. In fact, around half (€262 million) of the €532 million year-on-year growth for this year’s top 20 clubs is purely down to this FX movement, leaving the real growth as €270 million (4%).

This effect is perhaps best highlighted with Manchester United, whose revenue increased in Euro terms by €2 million from €518 million to €520 million. However, the exchange rate movement produce a Euro increase of €51 million, so their underlying revenue actually fell by €50 million. This is backed up by looking at their figures in Sterling, where the revenue decreased by £38 million from £433 million to £395 million.

Partly as a result of this favourable movement in exchange rates, the revenue of all English clubs grew compared to 2013/14  with Liverpool €86 million and Arsenal €76 million leading the way.

It’s a slightly different story if the FX impact is stripped out, with the most impressive real growth being reported by Barcelona €76 million, Liverpool €56 million, Roma €53 million, Juventus €45 million and Arsenal €41 million. The big losers were Milan €51 million, Manchester United €50 million and Bayern Munich €14 million.

The main drivers for the revenue growth in 2014/15 were broadcasting €207 million (up 9%) and commercial €202 million (up 8%). The match day increase lagged at €60 million, but this still represented 5% growth.

The revenue growth at the leading football clubs in the last few years is remarkable, rising from below €4 billion in 2009 to the current €6.6 billion, an increase of €2.7 billion (just under 70%). Deloitte expect the €7 billion threshold to be reached next season with new TV deals driving the total towards €8 billion in 2016/17.

Perhaps surprising to some, commercial income has been the main contributor with growth of €1.5 billion (115%) from €1.3 billion to €2.7 billion, followed by broadcasting, up €1.0 billion from €1.6 billion to €2.6 billion. In the same period, match day has risen by less than €0.3 billion (25%) from €1.0 billion to €1.3 billion.

These growth rates have obviously been reflected in the revenue share. Since 2009, commercial has significantly increased from 32% to 41%, while broadcasting has eased from 42% to 39%. Match day has slumped from 26% to just 19%, its lowest ever share.

In fact, with further increases anticipated in commercial and broadcasting revenue in the coming years, the revenue that clubs generate from match day should fall in importance even more than its current record low. This trend of corporates paying more for a club’s upkeep than the match going supporters could be considered a good thing – so long as the growth elsewhere were reflected in lower ticket prices.

Real Madrid and Barcelona have the highest broadcasting revenue with £152 million apiece, as they continue to benefit from the freedom to negotiate their own lucrative TV rights deals for La Liga. Even though this is due to change next season, the new collective deal is significantly higher than the aggregate of the previous individual arrangements – and the big two will be protected from any revenue reduction.

Juventus are in third place, partly due to receiving the highest Champions League distribution of £68 million (€89 million). This is heavily influenced by their share of the Italian market pool, due to a combination of a very good TV deal and the fact that they only had to divide this with one other Italian club, Roma, as these were the only two to qualify for the group stages.

"Play to win"

The importance of revenue from European competition is highlighted by Paris Saint-Germain, whose £43 million payout was actually higher than their domestic money £38 million. Similarly, Atletico Madrid generated half of their broadcasting money from Europe. This will be further emphasised by the higher Champions League deal starting from the 2015/16 season.

The English clubs fill all the places between fourth and tenth for broadcasting income, thanks to the size of the Premier League contract. This is even before next year’s blockbuster deal, which should increase the TV revenue of the top clubs by around £50 million a season.

The relative weakness of the Bundesliga TV deal is evidenced here with the German clubs towards the lower end of the table. Their domestic money is nowhere near the English clubs: Bayern Munich £43 million, Borussia Dortmund £37 million and Schalke £33 million.

Commercially, six clubs are well above the rest: Paris-Saint German £226 million, Bayern Munich £212 million, Manchester United £201 million, Real Madrid £188 million, Barcelona £186 million and Manchester City £174 million. There then follows a big gap to Liverpool at £116 million.

Indeed, there is much work to do for many English clubs on the commercial side with three of them filling the bottom spots: in the top 20: Everton £20 million, West Ham £24 million and Newcastle £25 million.

"The Leader"

PSG benefited from renewed deals with Emirates and Nike, but the lion’s share of their revenue comes from their innovative €200 million arrangement with the Qatar Tourism Authority. Barcelona also saw a hefty commercial increase, partly due to additional sponsorship bonuses paid in their treble winning season.

There seems little sign of a saturation point being reached commercially, at least for the elite, as Manchester United’s revenue will further increase in 2015/16 following the start of their record £750 million ten-year Adidas kit deal. Moreover, in the last few days the media has reported that even this mega deal will be eclipsed by Real Madrid signing a new 10-year contract, also with Adidas, for a staggering £106 million a season.

Arsenal have the highest match day revenue in the world with £100 million, despite the Emirates Stadium having a substantially lower capacity than the Bernabéu, home of Real Madrid, and Nou Camp, Barcelona’s famous ground. This is a reflection of Arsenal’s ticket prices and a high proportion of corporate seating.

Match day revenue has more than doubled from the £44 million Arsenal generated in their last season at Highbury, which helps explain why Tottenham and Chelsea are so keen to redevelop their grounds. Even though the construction is a significant investment, football clubs still need to assess this option or risk falling further behind their rivals.

What is particularly striking is the low match day income for Italian clubs. Juventus’ move to a club-owned stadium has helped increase their revenue to £39 million, but the others’ revenue is miles behind: Roma £23 million, Milan and Inter both £17 million. It was recently reported that the average attendance in Serie A had dropped below 22,000 in the 2015/16 season.

For the fourth time in the last seven seasons the Money League top 20 clubs is wholly populated by representatives from the “Big Five” leagues, namely England, Germany, Spain, Italy and France. The number of English clubs rose from eight to a record nine, while the other leagues were unchanged: Italy four, Germany three, Spain three and France one. The only club from outside the “Big Five” last year, Galatasaray from Turkey, dropped to 21st place.

England only had six clubs in the top 20 in 2013, but funnily enough had eight back in 2006, so the current dominance is not a completely new phenomenon. The big losers are Germany, whose representation has fallen from five clubs in 2009 to three, and France, who had three clubs in 2012, but now just the one.

Turkey had two clubs in the top 20 as recently as 2013, while the last time a Scottish club made the rankings was Celtic in 2007. Portugal’s last representative was Benfica a year earlier in 2006.

The top 30 clubs is where the English strength is really reflected with the number of representatives rising from eight in 2013 to 17 in 2015 (up 3 from 14 in 2014), including three debutants: Crystal Palace, Leicester City and West Bromwich Albion. As Deloitte observed, “This is again testament to the phenomenal broadcast success of the English Premier League and the relative equality of its distributions, giving its non-Champions League clubs particularly a considerable advantage internationally.”

This has produced some notable exclusions from the top 30, including Valencia, Seville, Hamburg, Stuttgart, Lazio, Fiorentina, Marseille, Lyon, Ajax, PSV Eindhoven, Porto, Benfica and Celtic.

If we look at the growth of the highest ranked club in each of the “Big Five” leagues since 2009, the absolute growth of Real Madrid (€176 million), Manchester United (€193 million) and Bayern Munich (£184 million) is broadly similar, though the percentage growth is much smaller at Madrid (44%), compared to United (59%) and Bayern (63%).

The outlier is Paris Saint-Germain, whose revenue has shot up by €380 million from €101 million to €481 million since the Qatari takeover. Juve have recorded impressive growth of 60%, but in absolute terms the increase was “only” €121 million, which means that the gap to the other four clubs has widened.

Despite a sizeable reduction in revenue following their failure to qualify for Europe in 2014/15, Manchester United still managed to remain in the top three of the Money League, thus demonstrating the underlying strength of the club’s business model.

In England, the two Manchester clubs (United and City) continued to lead the way, but Arsenal overtook Chelsea, due to the commencement of the new kit supplier deal with Puma. Liverpool’s healthy growth was due to the Reds’ return to the Champions League, which boosted both broadcasting and match day revenue.

Since 2009 Manchester City have registered the stand-out growth of £362 million, which is around twice as much as their peers, mainly due to their commercial success, including the celebrated Etihad deal.

Despite their revenue fall in 2015 (in Sterling terms), United are still well ahead of City, while there is a bunching of the pursuers (Arsenal, Chelsea and Liverpool), whose relative positions basically depend on the timing of their principal sponsorship agreements, e.g. Chelsea’s Yokohama Rubber deal will only be included in the next set of figures.

In a similar way, the revenue at the mid-tier clubs (Newcastle United, Everton and West Ham) is also converging, albeit at a much lower level. The interesting one is Tottenham, who are stuck in the middle between the top five clubs and the rest. “Neither Fish Nor Flesh”, as Terence Trent D’Arby once put it.

In Spain, it’s essentially a case of the rich get richer, though Barcelona’s growth last year (€76 million) was much better than Real Madrid (€28 million). Nevertheless, Madrid kept their noses in front and their figures will soon be enhanced by the barely credible new kit supplier deal with Adidas.

The other Spanish clubs are so far behind that they are almost out of sight with the nearest challenger being Atletico Madrid at €187 million – exactly one third of Barca’s revenue. Valencia did not even reach the top 30 clubs, which is unsurprising given that their 2014 revenue was less than €100 million.

There will be a boost in broadcast revenue for Spanish clubs with the new collective selling regime in La Liga, but the gap will remain massive.

In Germany, the situation is even worse, as Bayern Munich are in a league of their own. Despite a dip in revenue in 2015, due to a decrease in commercial income, Bayern’s €474 million is nearly €200 million more than Borussia Dortmund’s €281 million with Schalke 04 another €61 million behind. Incredibly, there is then a further €100 million difference to the closest German clubs, namely Hamburg and Stuttgart.

Since 2009 only Dortmund have managed to keep pace with Bayern, at least in terms of growth: €175 million vs. €184 million. In the same period, Schalke only grew by €95 million, while Stuttgart’s revenue was flat and Hamburg’s actually fell.

How do you say, “mind the gap”, in German?

In Italy, it’s a similar story, as Juventus’ revenue of €324 million is €125 million more than Milan’s €199 million. The bianconeri also led the way in Italy in 2009, but since then they have increased their revenue by €121 million, while it has been a tale of woe for their rivals from Milan: in the same period, Milan’s revenue has barely moved, while Inter’s revenue has actually fallen by €32 million to €165 million.

There has been encouraging growth at Roma, largely thanks to their return to the Champions League in 2014/15 for the first time since 2010/11. Napoli suffered from the opposite effect, as they participated in Europe’s premier competition the previous season, though they have still grown revenue by €38 million since 2009 to €126 million to creep into the top 30 clubs.

These are worrying time for Italian clubs, as they struggle to match the growth of their foreign peers, largely due to the continuing lack of stadium development, which is reflected in feeble match day income.

In 2006, it was a very different story with three Italian clubs in the top seven: Juventus 3rd, Milan 5th and Inter 7th. The nerazzurri are now perilously close to falling out of the top 20. As a man who lived three years in Milan at a time when Arrigo Sacchi’s team bestrode Europe like a colossus, it gives me absolutely no pleasure to say this, but how the mighty have fallen.

Paris Saint-Germain remain the only French club in the Money League this year and have moved up a position to fourth. Marseille and Lyon have been regular representatives in the top 20 (16th and 17th respectively in 2012), but their lack of revenue growth has seen them disappear from the rankings.

A combination of PSG’s “friendly” commercial deals and healthy Champions League income means that the financial difference between them and other French clubs is not so much a gap as an abyss. Little wonder that Ligue 1 is pretty much a cakewalk for the Parisians.

After a few years when the gap between the 10th place club and 11th place club seemed to be closing, it has widened this year from €18 million to €43 million, being the difference between Juventus €324 million and Borussia Dortmund €281 million.

The gap between top and bottom, defined as 1st place to 20th place, has been constantly growing. In fact, it has more than doubled since €207 million in 2006 to €416 million in 2015, representing the difference between Real Madrid €577 million and West Ham €161 million.

That said, the financial threshold for membership of the Money League club is becoming increasingly challenging with the requirement for a place in the top 20 rising 12% from €144 million to €161 million. This has nearly doubled in the last 10 years from €85 million.

As Deloitte noted, Napoli, down in 30th position this year with revenue of €125 million, would have had a position in the top 20 as recently as two seasons ago with the same revenue.

Although Deloitte have done a fine job in adjusting the clubs’ reported revenue figures in order to enable a meaningful, like-for-like comparison, it is still worth exploring some of these adjustments, as the supporters of individual clubs might be a little puzzled over differences with the figures they might expect to see.

I have taken an example of each of the following adjustments to demonstrate that reported revenue figures are not always black and white and there is often room for interpretation, even with something as theoretically rigorous as a football club’s accounts:

  • Profit on player sales
  • Different classification of revenue types
  • Holding company vs. football club
  • Operating income
  • Change in accounting year
  • Restatement of prior year revenue
  • Calendar year 

Continental clubs often include profit on player sales in their revenue figures, as seen by Bayern Munich boasting of €524 million revenue in their 2014/15 press release. The difference between this number and the €474 million in the Money League is the €50 million they earned from selling players.

This is further complicated with Italian clubs who include profit on player sales in revenue, but any losses made on player sales are booked in expenses.

The classification between different revenue categories can be different, as seen with Everton. Commercial revenue in the club accounts rose 37% from £19 million to £26 million, comprising sponsorship, advertising and merchandising £10.4 million plus other commercial activities £15.6 million.

This always seemed a bit high with the suspicion that Everton had included the commercial element of the Premier League TV deal within commercial income, even though most other clubs classify it as broadcasting income, and Deloitte have duly reduced commercial and increased broadcasting (though the total revenue is the same).

Football’s a simple game, but clubs increasingly operate within a more complex corporate structure. In particular, sometimes there is a holding club that owns the football club with different revenue figures (usually higher).

A good example is Chelsea, where the football club (Chelsea FC plc) had revenue of £314.3 million in 2014/15, which is around £5 million lower than the £319.5 million shown in the Money League. This is almost certainly because Deloitte have used the figures from the holding company (Fordstam Limited). Although this company has not yet published its 2015 accounts, the £324.4 million reported in 2014 is exactly the same as the figure in last year’s Money League.

Football clubs usually separate non-trading income from turnover and classify this as Other Operating Income. As an example, West Ham reported revenue (turnover) of £120.7 million, but Deloitte have also included £1.7 million of Other Operating Income to give their revenue figure of £122.4 million.

Clubs sometimes change their accounting date, i.e. when they close their accounts, which means that the length of that accounting period is not the usual 12 months. For example, Swansea City changed their close from May to July in 2014/15 in order to be more aligned to the football season, so their latest accounts cover 14 months.

Their revenue was only slightly higher, as there is no additional match day or broadcasting income in June and July, but commercial agreements are evenly accrued. Thus, Deloitte have reduced the 2014/15 revenue from the £103.9 million reported by the club to £101.0 million.

The Money League occasionally restates the revenue figures used in its own report the previous year. One example of this is Paris Saint-Germain, where Deloitte reported €474.2 million last year, but have included €471.3 million as a 2014 comparative this year. This does not impact this year’s rankings, but does affect the stated year-on-year growth.

Most clubs now use the football season for their accounting period, but some use the calendar year, especially in Italy. As an example, Milan’s most recently published accounts cover the 12 months up to 31 December 2014 and the adjusted revenue is around €215 million, which is higher than the €199 million reported by Deloitte.

The main reason for the difference is that Milan’s 2014 accounts include a part of the Champions League money they earned in the 2013/14 season.

"Paint me down"

Next year’s Money League may well see Manchester United topple Real Madrid, as the English giants are projecting revenue of £500-510 million for the 2015/16 season, following their return to the Champions League and the start of the record Adidas kit deal, which would make them the first English club to break through the half-billion pounds barrier.

Beyond that, Real Madrid might well bounce back if reports of their huge new sponsorship deal with Adidas are not exaggerated.

Obviously a club’s financial performance does not begin and end with its revenue, as explained by no less an authority than the famous German actress, Marlene Dietrich, “There is a gigantic difference between earning a great deal of money and being rich.”

"Points of authority"

In the past, clubs suffered from what Alan Sugar’s described as the “prune juice effect”, whereby any increases in revenue simply fed through to higher player wages, transfer fees and agents’ commission.

This is no longer automatically the case, largely due to the implementation of various Financial Fair Play regulations, which has increased profitability, especially in England, thus making it more likely that overseas investors will explore the purchase of football clubs.

In “All The President’s Men” the whistle blower Deep Throat advised the investigative journalists to “Follow the money. Always follow the money.” The circumstances were clearly somewhat different in the movie, ultimately leading to the resignation of the President of the United States, but that is still sound advice that is more true than ever in the world of football.

In other words, money talks and is almost invariably reflected in success on the pitch. There might be the occasional exception to the rule, as we have seen with Leicester City's rise this season, but after all is said and done those clubs at the top of the Money League will usually be the ones competing for trophies.

Tuesday, January 19, 2016

Chelsea - Accidents Will Happen

After such a successful 2014/15 when they won the Premier League and Capital One Cup, very few people would have expected Chelsea to fall off the rails so spectacularly this season. However, a combination of key players losing form and manager José Mourinho struggling to find a solution, not to mention the distasteful Eva Carneiro episode, led to a string of defeats and ultimately the departure of the “Special One”.

Guus Hiddink has been installed as interim manager until the end of the season with the club hoping he can repeat the achievements of his previous stint in that role or at the very least drive the club up the table and avoid the unthinkable threat of relegation.

Although 2014/15 brought two trophies to Stamford Bridge, the news was not so good off the pitch, as the previous year’s £19 million profit was transformed into a £23 million loss – a deterioration of £42 million.

This was driven by two main factors: (a) profit on player sales fell £23 million from £65 million to a still impressive £42 million, principally due to the sale of Romelu Lukaku to Everton, Andre Schurrle to Wolfsburg, Ryan Bertrand to Southampton and Thorgan Hazard to Monchengladbach; (b) the wage bill shot up £23 million (12%) to £216 million, the highest in the Premier League, which might be considered the price of success, as it included hefty bonus payments.

Revenue fell £6 million to £314 million, largely due to a £4 million decrease in broadcasting revenue to £136 million, as the increase in Premier League distributions was more than offset by not progressing so far in the Champions League. Commercial income was slightly lower at £108 million, while match day was largely unchanged at £71 million.

Other expenses rose £7 million (10%) to £83 million, while there was a £3 million net increase in exceptional items, as this year’s figures included a £1 million loss on the disposal of investments, while last year’s accounts featured a £2 million credit for the release of a provision for compensation payments following a change in management.

The only area that improved profitability was non-cash flow expenses, as Chelsea booked a £19 million impairment charge against player values last year, while player amortisation was £3 million lower at £69 million.

Chelsea’s £23 million loss is likely to be one of the worst financial performances in England’s top flight in 2014/15. To date, nine Premier League clubs have published their accounts for last season with six reporting profits, the largest being Arsenal £25 million, Southampton £15 million and Manchester City £10 million. Manchester United and Everton have also announced losses, but much lower at around £4 million.

Although football clubs have traditionally lost money, the increasing TV deals allied with Financial Fair Play (FFP) mean that the Premier League these days is a largely profitable environment with only five clubs losing money in 2013/14.

As we have seen, once-off profits on player sales can also be very important to the bottom line, especially at Chelsea, where the 2013/14 numbers were boosted by £65 million from this activity, which was only surpassed by Tottenham’s £104 million, almost entirely due to the record sale of Gareth Bale to Real Madrid.

Chelsea’s huge profit that season was largely due to the sales of David Luiz to Paris Saint-Germain, Juan Mata to Manchester United and Kevin De Bruyne to Wolfsburg.

Of course, Chelsea are no strangers to making losses in the Abramovich era, as they have invested substantially to first build a squad capable of winning trophies and then to keep them at the top of the pile. Since the Russian acquired the club in June 2003, it has reported aggregate losses of £684 million, though there has been much improvement after the spectacular £140 million loss in 2005 with Chelsea posting profits in two of the last four years.

The first profit made under the Abramovich ownership was a small £1 million surplus in 2012, though this owed a lot to £18 million profit arising from the cancellation of preference shares previously owned by BSkyB.

On the other hand, Chelsea have consistently suffered from so-called exceptional items, which have increased costs by £127 million since 2005, 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, tax on image rights £6 million, the impairment of other fixed assets £5 million and loss on disposal of investments £1 million.

That’s an average of around £12 million year, but was particularly relevant in 2011, when £41 million of exceptionals “had a significant impact on the size of the losses”. Next year’s accounts will again be hit by Mourinho’s pay-off. Although this has been reported as various sums, most sources suggest that this will be restricted to one year’s salary, even though he signed a new four-year contract last summer, but that would still amount to £9-10 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 averaged £10 million profit from selling players, but this has shot up to an average of £38 million in the four years since then.

In particular, Chelsea’s figures have benefited from £107 million from player sales in the last two seasons. Their reliance on this activity is underlined by the fact that they would have made a loss of £46 million in 2014 instead of a £19 million profit without these transfers.

Chelsea noted that six players had been sold at a profit of £21 million since the latest accounts closed, including Petr Cech to Arsenal, Filipe Luis to Atletico Madrid and Oriol Romeu to Southampton. They also received £6 million in respect of sell-on clauses for players transferred in previous years.

"This Cesc is not on fire"

This is clearly lower than the last two years, though there could still be more to come in the January transfer window, e.g. Juventus are rumoured to want to make Juan Cuadrado’s loan deal permanent.

Chelsea’s extensive use of the loan system is also noteworthy with around 30 players currently listed as being out on loan, including four at Dutch club Vitesse Arnhem, which appears to be an unofficial feeder club.

Given that very few of these players have succeeded in establishing themselves in Chelsea’s first team, it would appear that the primary purpose of this strategy is to develop players for future (profitable) sales, while effectively placing them in the shop window.

"John, I'm only dancing"

Some of the player wages will be covered by the loanees’ clubs, though it is likely that Chelsea would still have to pay a fair amount, but from a financial perspective the real gains arise after the player is sold. Clearly, not every player will bring in big money, but this approach only needs a couple of lucrative sales to be successful. The pipeline of probable upcoming sales includes the likes of Mo Salah, Victor Moses and Marko Marin.

Although some might complain that this smacks of treating players like stocks and shares, not to mention ensuring that rival clubs cannot buy this promising talent, there are (currently) no rules against it and other clubs, such as Udinese, have operated in a similar way for many years.

It remains to be seen whether more academy players make it at Chelsea, though there are high hopes for Ruben Loftus-Cheek, Nathan Aké, Dominic Solanke, Lewis Baker and Izzy Brown.

The other side of player trading is obviously player purchases, which is reflected in the profit and loss account via player amortisation. To illustrate how this works, if Chelsea paid £25 million for a new player with a five-year contract, the annual expense would only be £5 million (£25 million divided by 5 years) in player amortisation (on top of wages).

However, when that player is sold, the club reports the profit as sales proceeds less any remaining value in the accounts. In our example, if the player were to be sold 3 years later for £32 million, the cash profit would be £7 million (£32 million less £25 million), but the accounting profit would be £22 million, as the club would have already booked £15 million of amortisation (3 years at £5 million).

The accounting for player trading is fairly tedious, but it is important to grasp how it works to really understand a football club’s accounts. The fundamental point is that when a club purchases a player the costs are spread over a few years, but any profit made from selling players is immediately booked to the accounts, which helps explain why it is possible for clubs like Chelsea and Manchester City to spend so much and still meet UEFA’s FFP targets.

Chelsea’s initial wave of purchases under Abramovich saw player amortisation shoot up to £83 million in 2005, before falling away to £38 million in 2010 in line with less frenetic transfer activity. As spending kicked in again, player amortisation steadily rose to £72 million in 2014, before falling back to £69 million in 2015.

Unsurprisingly, this is still one of the highest player amortisation charges in the Premier League, only surpassed by Manchester United, whose massive outlay under Moyes and van Gaal has driven their annual expense up to £100 million, and Manchester City £70 million.

The value of Chelsea’s squad on the balance sheet fell slightly to £223 million in 2015, though this understates how much they would fetch in the transfer market, not least because homegrown players are ascribed no value in the books. Chelsea are one of the few clubs to formally acknowledge this factor in the accounts, as they have valued the playing staff at £350 million.

As a result of all this accounting smoke and mirrors, clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation) for a better idea of underlying profitability. In Chelsea’s case this metric highlights their recent improvement, as it is has been positive for the last three years, though it did fall from the £51 million peak in 2014 to £16 million in 2015.

However, to place that into context, this is way behind Manchester United £120 million, Manchester City £83 million and Arsenal £64 million. In fact, United’s amazing ability to generate cash is reflected in their projected EBITDA of £165-175 million for 2015/16 following their return to the Champions League and their new kit deal.

Despite slipping back in 2015, Chelsea have increased their revenue by 52% (£108 million) since 2009 from £206 million to £314 million. The growth is split evenly between commercial income, which has roughly doubled from £55 million to £108 million, and broadcasting income, which has increased 71% (£56 million) from £79 million to £136 million.

Match day receipts have actually fallen from £75 million to £71 million, as this is linked to the number of home games played, which were lower due to not progressing so far in the Champions League. As the club noted, “all three sources of income are dependent on the performance of the first team.”

In terms of revenue, Chelsea were overtaken by Arsenal in 2014/15, so now have the fourth highest in England, behind Manchester United £395 million, Manchester City £352 million and the aforementioned Arsenal £329 million.

This performance was defended by chairman Bruce Buck: “To record the second-highest turnover figure in the club’s history, despite the Champions League campaign ending at the earliest knockout round, demonstrates our business is robust and is testament to good work regarding our commercial activities, our growing fan base around the world and the tremendous support the team received at home and away matches in 2014/15.”

However, the lack of growth was disconcerting, especially as Arsenal grew by 10% (£31 million) last season. Even though City’s growth was only 2% (£5 million), this was obviously preferable to Chelsea’s 2% (£6 million) decline. Manchester United’s 9% (£38 million) decrease was due to their failure to qualify for Europe.

In fairness to Chelsea’s executive team, 2015/16 will again see a rise in revenue, as the club observed, “Following our Premier League championship-winning season, we expect the current year to produce record revenues once again. These will be powered by new commercial deals, including our record-breaking partnership with Yokohama, and revenues related to this season's Champions League which improve due to entering as Premier League champions and an increase in TV revenue for English clubs.”

Chelsea’s 2013/14 revenue of £324 million (based on the holding company accounts) placed them 7th highest in world football as per the Deloitte Money League, though Real Madrid continued to lead the way with £460 million, followed by Manchester United £433 million, Bayern Munich £408 million, Barcelona £405 million and Paris Saint-Germain £397 million.

The gap to the top is likely to increase in the next edition, as both Spanish giants have announced good revenue growth in 2014/15: Real Madrid up 5% to €578 million, Barcelona up 16% to €561 million. Against that, their revenue in Sterling terms will be impacted by the weakness of the Euro.

Furthermore, United are estimating revenue of £500-510 million in 2015/16 following their return to the Champions League and the record Adidas kit deal, which would make them the first English club to break through the half-billion pounds barrier.

If we compare Chelsea’s revenue to that of the other nine clubs in the Money League top ten, we can immediately see where their largest problem lies, namely commercial income, where Chelsea are substantially lower than their rivals that have traditionally been more successful in monetising their brand: Bayern Munich £131 million (£244 million minus £113 million), Real Madrid £80 million and Manchester United £76 million. The £161 million shortfall against PSG is largely due to the French club’s “friendly” agreement with the Qatar Tourist Authority.

On the plus side, Chelsea look to be fine on broadcasting and not too bad on match day income, though there is room for improvement in the latter category.

Despite the fall in broadcasting revenue, this still accounts for the largest share of Chelsea’s revenue, though this fell from 44% to 43%. Commercial was unchanged at 34%, while match day rose slightly to 23%.

Chelsea’s share of the Premier League television money rose £5 million from £94 million to £99 million in 2014/15, largely due to higher merit payments for winning the league, as opposed to finishing third the previous season. This is likely to fall this season, as Chelsea will finish in a lower place.

However, there will be a substantial increase from the mega Premier League TV deal starting in 2016/17. My estimates suggest a place in the top four would be worth an additional £50 million under the new contract. This is based on the contracted 70% increase in the domestic deal and an assumed 30% increase in the overseas deals (though this might be a bit conservative, given some of the deals announced to date).

The other main element of broadcasting revenue is European competition with Chelsea receiving €39 million for reaching the last 16 in the Champions League, compared to €43 million for getting to the semi-final the previous season. The reduction was higher in Sterling terms, due to the weakening of the Euro. Of course, Chelsea’s European revenue peaked in 2011/12 when they beat Bayern Munich in a dramatic final to win the Champions League.

Here, it is worth noting the importance of the TV (Market) pool to the Champions League distributions. First of all, there was more money available in the UK market pool in 2014/15, as this did not have to be shared with a Scottish club (as was the case in 2013/14 with Celtic). Second, the allocation also depends on how many clubs reach the group stage from a country, which explains why Juventus received such an enormous slice of the Italian market pool, as they only had to share it with one other club, while the UK pool was split between four clubs.

Finally, half of the distribution is based on how far a club progresses in the Champions League, while the other half depends on where a club finished in the previous season’s Premier League: 1st place 40%, 2nd place 30%, 3rd place 20% and 4th place 10%. As Chelsea won the title in 2014/15, compared to finishing third the year before, they will receive a higher percentage in 2015/16.

The financial significance of a top four placing is even more pronounced from the 2015/16 season with the new Champions League TV deal worth an additional 40-50% for participation bonuses and prize money and further significant growth in the market pool thanks to BT Sports paying more than Sky/ITV for live games.

If Chelsea fail to qualify for Europe’s flagship tournament (for the first time under Abramovich), their revenue would be hit to the tune of at least £40 million (including gate receipts and sponsorship clauses).

Match day income was largely unchanged at £71 million with the number of home games staged remaining at 26 (2 more in the League Cup, 2 fewer in the Champions League). This revenue stream peaked at £78 million in 2011/12, thanks to the victories in the Champions League and the FA Cup.

Admirably, Chelsea have held ticket prices at 2011/12 levels for five consecutive seasons and this year introduced a new price bracket for U20s. In fact, Bruce Buck confirmed, “This is the eighth time in 10 seasons there has been no increase in the cost of general admission tickets at Stamford Bridge.”

Chelsea’s match day revenue is £20-30 million lower than Arsenal and Manchester United, as they have much bigger grounds, which helps explain why the club has spent so much time searching nearby locations for a new stadium. However, they were outbid for the Battersea Power Station and have ruled out moves to Earls Court and White City.

Instead, Chelsea have now submitted a planning application to increase the capacity of Stamford Bridge from 41,600 to 60,000. This would be a complex build with the plan being to lower the arena into excavated ground, but the estimated £500 million cost would be funded by Abramovich.

The hope would be to start work in 2017 with Chelsea having to find a temporary home for three years. The club is in discussions with the Football Association to play at Wembley (as are Tottenham who are also planning a stadium move), though Twickenham, the headquarters of the Rugby Football Union, has also been mentioned as a possibility. This would cost around £15 million a year, though income might be higher if the crowds increased.

Chelsea have previously highlighted “the need to increase stadium revenue to remain competitive with our major rivals, this revenue being especially important under FFP rules.” More corporate hospitality in particular could deliver significant additional revenue with additional potential revenue from naming rights or other sponsorship opportunities.

Commercial revenue fell slightly by £1 million to £108 million, which was disappointing, especially as they are the only Premier League club to date to report a decrease in this revenue category in 2014/15. It was still higher than Arsenal £103 million and Liverpool £104 million (2013/14 figure), but it was a long way below Manchester United £196 million and Manchester City £173 million.

Over the last three years Chelsea’s commercial income has grown by 61% (£41 million), which would be considered pretty impressive were it not for Arsenal growing by 97% (£51 million) and Manchester United 67% (£79 million) in the same period.

However, Chelsea’s commercial revenue will increase in the next set of accounts, as the five-year shirt sponsorship deal with Yokohama tyres started this season. This is worth £40 million a year, i.e. more than double the £18 million previously paid by Samsung. This is on top of the Adidas kit supplier deal, which was extended in 2013 to 2023, which increased the annual payment from £20 million to £30 million.

Buck specifically noted that “our program of partnering with world-renowned and innovative market leaders is accelerating”, as seen by a deal with Carabao, a leading energy drink company in Thailand, to sponsor training wear from 2016/17 for a reported figure of £10 million a year.

These deals will leave Chelsea only behind Manchester United for the main shirt sponsorship and kit supplier deals and it’s difficult to compete with their massive Chevrolet and Adidas agreements.

Wages surged by £23 million (12%) from £193 million to £216 million, reflecting bonuses paid for winning the Premier League and Capital One Cup. This means that the wage bill has risen by £43 million (25%) in the last two years.

As a technical aside, note that these wage figures have been corrected for exceptional items, e.g. in 2013/14 the reported staff costs of £190.6 million included a £2.1 million credit for the release of a provision for compensation for first team management changes, so the “clean” wage bill was £192.7 million.

The accounts also include a £1.5 million payment to a director for compensation for loss of office. He is not named, but this is likely to be Ron Gourlay, who resigned in October 2014.

All this increased the wages to turnover ratio from 60% to 69% following the slight revenue decline in 2014/15, thus reversing the trend of this ratio improving every year from the recent 82% peak in 2010. Although the wages to turnover ratio tends to worsen in the second year of the Premier League TV deal, Chelsea’s is still one of the highest with only West Brom, Fulham and Sunderland reporting worse ratios (previous season’s figures).

So Chelsea once again have the highest wage bill in the top flight at £216 million, which is the first time since 2010. This is well ahead of Manchester United £203 million, Manchester City £194 million and Arsenal £192 million. There is then a big gap to the other Premier League clubs with the nearest challengers (in 2013/14) being Liverpool £144 million, Tottenham £100 million and Newcastle £78 million.

This reflects Chelsea’s stated strategy: “In order to attract the talent which will continue to win domestic and European trophies and therefore drive increases in our revenue streams, the football club continually invests in the playing staff by way of both transfers and wages.” This ambitious approach would explain why the club has not seen fit to insert relegation clauses in the players’ contracts, as the club has finished no lower than sixth in Abramovich’s time.

Both Manchester clubs saw reduction in wages in 2014/15. United’s decrease was due to their lack of success on the pitch, as bonuses fell, while City’s is partly due to a group restructure, where some staff are now paid by group companies, which then charge the club for services provided.

Although there is a natural focus on wages, other expenses also account for a considerable part of the budget at leading clubs, especially at Chelsea where these rose £7 million (10%) from £76 million to £83 million. This means that Chelsea also top this particular league table, ahead of Manchester City £76 million, Manchester United and Arsenal (both £72 million)

Other expenses exclude wages, depreciation, player amortisation and exceptional items. They cover the costs of running the stadium, staging home games, supporting commercial partnerships, travel, medical expenses, insurance, retail costs, etc.

Chelsea’s activity in the transfer market is interesting. For the four years up to 2010 Chelsea only had average gross spend of £25 million (net spend being just £2 million), but they then returned to spending big, averaging £94 million of gross spend in the last six years. In the last two seasons alone they spent £186 million bringing in new players, including Diego Costa, Cesc Fabregas, Juan Cuadrado, Pedro, Baba Rahman, Filipe Luis and Loic Remy.

However, there is a big difference in net spend. The average annual net spend between 2010 and 2014 was £67 million, but this has fallen to only £20 million for the last two years, thanks to equally big money sales, which did not exactly ease Mourinho’s frustrations.

It may be a surprise to some, but Chelsea’s total net spend of £40 million in the last two years was only mid-table. Not only were they over £100 million behind the Manchester clubs (City £151 million, United £145 million), but they were also outspent by the likes of West Ham, West Brom and Crystal Palace in this period.

Chelsea have no financial 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 over £1 billion of debt (£1,041 million as of June 2014) in the form of an interest-free loan from the owner, theoretically repayable on 18 months notice.

Not that it makes much difference, given Abramovich’s willingness to continue to fund the club, but Chelsea noted in the accounts that they had acquired eight players at an initial cost of £69 million this summer. There were also minimal contingent liabilities of £1.5 million, suggesting that Chelsea, unlike most football clubs, pay all their transfer fees upfront, which must be an advantage in negotiations compared to other clubs that have to pay in stages.

Other clubs have to carry the burden of sizeable debt, notably Manchester United who still have £411 million of borrowings even after all the Glazers’ various re-financings and Arsenal, whose £234 million debt effectively comprises the “mortgage” on the Emirates stadium.

The advantage of having a benefactor like Abramovich is demonstrated by the annual interest payments at those clubs: £35 million for United, £13 million for Arsenal. That is money that could be spent on transfers or player wages.

Although Chelsea’s cash flow from operating activities has turned positive in the last three seasons (after adjusting for non-cash flow items, such as player amortisation and depreciation, plus working capital movements), they still require funding from the owner to cover player purchases and investment in improving facilities at Stamford Bridge and the training ground at Cobham.

That amounted to £104 million in the last two years: £47 million in 2015 and £57 million in 2014. In fact, since Abramovich acquired the club, he has put around £1 billion into the club, split between £611 million of new loans and £350 million of share capital. In that period £672 million of loans have been converted into share capital.

Most of this funding has been seen on the pitch with £744 million (77%) spent on net player recruitment, while another £130 million went on infrastructure investment. A further £73 million was required to cover operating losses with £17 million on interest payments (in the early years).

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 Buck: “Chelsea has been consistent in our intention to comply with FFP and it was a primary aim in the past financial year to be one of the clubs with a continuous record of meeting the regulations, which we have achieved.”

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.

Even though Chelsea are compliant, it is clear that this legislation has been at the forefront of the club’s thinking, hence their focus on earning more commercially. The accounts state: “FFP provides a significant challenge. The football club needs to balance success on the field together with the financial imperatives of this new regime.” In other words, Chelsea cannot simply spend their way out of trouble.

"Save a prayer"

Looking ahead, Chelsea’s 2015/16 accounts will benefit from the Yokohama shirt sponsorship (£22 million higher) and more money from the Champions League (new TV deal, market pool benefit of entering competition as Premier League champions). However, they will be hit by the Mourinho pay-off and reduced TV money for a lower Premier League finish (e.g. merit payment difference between 1st and 12th is £14 million). Against that, bonus payments should plummet, which would reduce the wage bill.

The following season (2016/17) will again be a mixed bag. Not qualifying for Europe would mean a revenue reduction of at least £40 million, though costs would also fall, e.g. staging home games, travel, bonus, etc. There would also be the cost of rebuilding the squad in the image of the new manager, More positively, Chelsea would be boosted by the new Premier League TV deal and the training sponsorship contract.

"Willian, it was really something"

Longer term, it will be all about the stadium development at Stamford Bridge, but that is very much future music. Such developments rarely go smoothly, especially in an urban environment, as opposed to a green field site.

It’s incredible what a difference a year can make: twelve months ago everything looked rosy in Chelsea’s garden, but this season has seen one problem after another. The vast majority of other clubs would still prefer to be in their position, but the Roman empire has looked shakier than at any other period in recent times.

Nevertheless, it would be a brave man that bet against a Chelsea recovery, though a lot will depend on who arrives as permanent manager in the summer.
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